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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
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For the Fiscal Year Ended December 31, 1996 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 No.)
208 West Locust Street 60115
DeKalb, Illinois (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (815) 758-7007
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
Value $.33 1/3 Per Share
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
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 3, 1997, based upon average market price at that date:
The registrant's common stock is not listed on an established exchange and is
infrequently traded. The most recent known trading price is $21.50. Based
on this price the aggregate market value of voting shares held by
non-affiliates of the registrant is $29,249,000.
The registrant had 2,074,454 shares of Common Stock outstanding as of March
3, 1997.
The following documents are incorporated by reference in this report:
1. Portions of the Annual Report to Stockholders for the year ended December
31, 1996 are incorporated by reference to Part II hereof.
2. Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
are incorporated by reference to Part III hereof.
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Part I
ITEM 1. BUSINESS
Castle BancGroup, Inc. (Company) is a registered bank holding company
organized in 1984 under Delaware law. The operations of the Company and its
subsidiaries consist primarily of those financial activities common to the
commercial financial services industry, including trust, data processing,
mortgage banking, and consumer finance services. Unless the context
otherwise requires, the term "Company" as used herein includes the Company
and its subsidiaries on a consolidated basis. Substantially all of the
operating income of the Company is attributable to its subsidiaries.
The primary function of the Company is to coordinate the policies and
operations of its subsidiaries in order to improve and expand their products
and services and to effect operating economies of scale. The Company
provides auditing, marketing, and data processing services to the
subsidiaries on a market value driven fee basis. Management services,
training, human resource and business development assistance is also provided
by the Company at no charge to the subsidiaries.
The Company is also responsible for the identification and evaluation of
potential financial industry acquisition targets within the strategic market
area, defined as the corrider bounded by Chicago's western suburbs on the
east, Interstate 39 on the west, Southern Wisconsin on the north, and
northwestern Indiana on the southeast. On May 24, 1995, the Company, through
its subsidiary Castle Mortgage, Inc., completed the acquisition of
substantially all the assets and assumed substantially all the liabilities of
Premier Home Financing, Inc. (Premier), a residential mortgage loan
originator and broker.
Sandwich State Bank (SSB), First National Bank in DeKalb (FNB), First
State Bank of Harvard (FSB) and The Bank of Yorkville (BOY) (collectively,
Subsidiary Banks) are 100% owned banking subsidiaries of the Company. The
Subsidiary Banks provide banking services common to the industry, including
but not limited to, demand, savings and time deposits, loans, cash
management, electronic banking services, trust services and credit and debit
cards. The Subsidiary Banks serve a diverse customer base including
individuals, businesses, governmental units, and institutional customers.
The Subsidiary Banks have banking offices in DeKalb, Sycamore, Sandwich,
Harvard and Yorkville, Illinois and mortgage loan origination offices in
Rockford, Sandwich, and Sugar Grove, Illinois.
Castle Finance Company, Inc. (CFC), an Illinois corporation, is a 100%
owned consumer finance company that engages in making small consumer loans,
as well as acting as an agent to sell insurance relating to those loans. CFC
is a headquartered in DeKalb, with loan origination offices in DeKalb, Plano,
LaSalle, Dixon, Rockford, Morris, and Harvard, Illinois.
Castle Mortgage, Inc. (CMI), an Illinois corporation is a residental
mortgage originator and broker that engages in the origination of residental
mortgages which are then sold into the secondary market. CMI is
headquartered in Oak Brook, Illinois and has loan origination offices Oak
Brook, Rolling Meadows, Chicago, and Naperville, Illinois and Merrillville,
Indiana. CMI also provides processing services and delivery into the
secondary market for residental mortgage loans orginated by the Subsidiary
Banks.
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COMPETITION
Active competition exists in all principal areas where the Company and its
subsidiaries operate, not only with other commercial banks, finance companies
and mortgage bankers, but also with savings and loan associations, credit
unions and other financial service companies serving the Company's defined
market area. The principal methods of competition between the Company and its
competitors are price and service. Price competition, primarily in the form
of interest rate competition, is a standard practice within the Company's
market place as well as the financial industry. Service and product quality
are also significant factors in competing and allow for differentiation from
competitors.
Deposits in Subsidiary Banks are well balanced, with a large customer base
and no dominant segment of accounts. Each Subsidiary Bank's loan portfolio
is also characterized by a large customer base, including loans to
commercial, agricultural and consumer customers, with no dominant
relationships. There is no readily available source of information that
delineates the market for financial services offered by non-bank competitors
in the Company's market.
REGULATION AND SUPERVISION
Bank holding companies and banks are extensively regulated under both
federal and state law. To the extent that the following information
describes statutory and regulatory provisions, it is qualified in its
entirety by reference to the particular statutes and regulations. Any
significant change in applicable law or regulation may have an effect on the
business and prospects of the Company and its subsidiaries.
The Company is registered under and is subject to the provisions of the
Bank Holding Company Act of 1956, as amended, and is regulated by the Board
of Governors of the Federal Reserve System (Federal Reserve Board). Under
the Bank Holding Company Act, the Company is required to file annual reports
and such additional information as the Federal Reserve Board may require and
is subject to examination by the Federal Reserve Board. The Federal Reserve
Board has jurisdiction to regulate virtually all aspects of the Company's
business. See "The Company's Subsidiaries" section of this Report for
discussion of regulators of the Subsidiaries.
The Bank Holding Company Act requires every bank holding company to obtain
the prior approval of the Federal Reserve Board before merging with or
consolidating into another bank holding company, acquiring substantially all
the assets of any bank or acquiring directly or indirectly any ownership or
control of more than 5% of the voting shares of any bank.
The Bank Holding Company Act also prohibits a bank holding company, with
certain exceptions, from acquiring direct or indirect ownership or control of
more than 5% of the voting shares of any company which is not a bank and from
engaging in any business other than that of banking, managing and controlling
banks, or furnishing services to banks and their subsidiaries. The Company,
however, may engage in certain businesses determined by the Federal Reserve
Board to be so closely related to banking or managing and controlling banks
as to be a proper incident thereto. The Bank Holding Company Act does not
place territorial restrictions on the activities of bank holding companies or
their nonbank subsidiaries.
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Deposits of all the Subsidiary Banks are insured by the Federal Deposit
Insurance Corporation (FDIC) under the Bank Insurance Fund (BIF). The FDIC also
maintains another insurance fund, the Savings Association Insurance Fund (SAIF),
which primarily insures savings association deposits. Applicable law requires
the the SAIF and BIF funds each achieve and maintain a ratio of insurance
reserves to total deposits equal to 1.25%. The BIF reached this level in 1995,
and the FDIC announced a reduction in BIF premiums for most banks. Based on
this reduction, the highest rated institutions (approximately 92% of the nearly
11,000 BIF-insured banks) paid the statutory minimum of $2,000 for FDIC
insurance in 1996. Rates for all institutions were reduced by $.04 per $100
of deposits, leaving a premium range of $.00 (the statutory minimum applies)
to $.27 per $100 of deposits instead of the previous $.04 to $.31 per $100.
The Subsidiary Banks, for deposit insurance assessment purposes, are all
classified in the highest category and all paid the statutory minimum of
$2,000 for FDIC insurance in 1996. The lower assessment rates resulted in
FDIC premiums paid in 1996 of $8,000, substantially less than the $470,958
(adjusted for rebate by FDIC) and $804,161 assessments that the Subsidiary
Banks paid in 1995 and 1994, respectively. Effective January 1, 1997, all FDIC
insured depository institutions will pay approximately $.013 per $100 pf BIF-
Assessable deposits.
The FDIC and other bank regulators have adopted supervisory reforms which
link mandatory supervisory action termed "prompt regulatory action" to the
bank's capital levels. In addition to the three categories used for
assessment determination above, the regulators have added two categories,
significantly undercapitalized and critically undercapitalized. Bank regulators
will apply increasingly stringent regulatory sanctions and restrictions on banks
that fall in the lower three capital categories. These sanctions range from
requirements for filing and operating under a capital plan to restrictions
on asset growth and interest rates paid to appointment of a receiver or a
conservator for the institution as a bank's capital decreases.
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Since September 29, 1995, adequately capitalized and adequately managed bank
holding companies have been able to acquire banks across state lines, without
regard to whether the transaction is prohibited by state law; however, they
are required to maintain the acquired institutions as separately chartered
institutions. Any state law relating to the minimum age of target banks (not
to exceed five years) is applicable. The Federal Reserve Board is not permitted
to approve any acquisition if, after the acquisition, the bank holding company
would control more than 10% of the deposits of insured depository institutions
nationwide or 30% or more of the deposits in the state where the target bank is
located. The Federal Reserve Board could approve an acquisition,
notwithstanding the 30% limit, if the state waives the limit either by statute,
regulation or order of the appropriate state official.
In addition, beginning June 1, 1997, banks will be permitted to merge with
one another across state lines and thereby create a main bank with branches in
separate states. After establishing branches in a state through an interstate
merger transaction, the bank could establish and acquire additional branches
at any location in the state where any bank involved in the merger could have
established or acquired branches under applicable federal or state law.
States may adopt legislation permitting interstate mergers before June 1,
1997. In contrast, states may adopt legislation before June 1, 1997, subject
to certain conditions, opting-out of interstate branching. If a state opts-out
of interstate branching, no out-of-state bank may establish a branch in that
state through an acquisition or de novo, and a bank whose home state opts-out
may not participate in an interstate merger transaction.
Illinois has adopted legislation permitting interstate mergers beginning
June 1, 1997. The Company is currently permitted to acquire banks located in
any state outside Illinois and any organization located outside Illinois is
permitted to acquire the Company. These provisions should not materially
affect the Company because the Company does not have any current plans to
acquire institutions located outside Illinois and because Illinois law, for
several years, has permitted institutions located in any state of the United
States to acquire banks or bank holding companies within Illinois subject to
the ability of Illinois institutions to acquire banks and bank holding
companies in such other state on similiar conditions as Illinois law. The
fact that Illinois has decided to permit interstate branching beginning
June 1, 1997, means that if the
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Company did acquire an institution outside Illinois, the Company could, if it
deemed it appropriate, convert such institution's offices into branches of
any of the Subsidiary Banks or any other banking subsidiary then in
existence. The Company, however, does not have any current plans to acquire
any banking organization outside the state of Illinois.
National banking regulations restrict the amount of dividends that a bank
may pay to its stockholders. Generally, the regulations provide that
dividends are limited to net earnings for the current and two preceding
years, reduced by dividends paid and transfers to permanent capital. At
December 31, 1996, subject to minimum regulatory capital guidelines, First
National Bank in DeKalb could, without prior approval of regulatory
authorities, declare dividends of approximately $1,452,000.
The Sandwich State Bank, First State Bank of Harvard, and The Bank of
Yorkville are subject to state banking regulations which provide that
dividends can be paid up to the amount of available undivided profits (as
defined), subject to total capital adequacy considerations.
THE COMPANY'S SUBSIDIARIES
SSB, FSB and BOY are state chartered banks. They are therefore subject to
regulation and examination by the Illinois Office of Banks and Real Estate. FSB
has obtained all regulatory approvals to convert to a nationally chartered bank
effective April 1, 1997. FNB is a nationally chartered bank and Federal Reserve
member, and is therefore subject to regulation and examination by the Office of
the Comptroller of the Currency as well as the Federal Reserve Board. All
Subsidiary Banks are also members of the Federal Deposit Insurance Corporation
and as such are subject to the provisions of the Federal Deposit Insurance Act
and examination by the Federal Deposit Insurance Corporation. The examinations
by the various regulatory authorities are designed for the protection of bank
depositors.
The federal and state laws and regulations generally applicable to banks
regulate, among other things, the scope of their business, their investments,
their reserve against deposits, the nature and amount of and collateral for
loans, and the location of banking offices and types of activities which may
be performed at such offices.
Subsidiary banks of a bank holding company are subject to certain
restrictions under the Federal Reserve Act and the Federal Deposit Insurance
Act on loans and extension of credit to the bank holding company or to its
other subsidiaries, investments in the stock or other securities of the bank
holding company or its other subsidiaries, or advances to any borrower
collateralized by such stock or other securities.
The Subsidiary Banks have unlimited statewide branching authority, without
regard to any numerical or geographic limitation.
CFC is a finance company and is therefore subject to licensing, regulation
and examination by the Department of Financial Institutions for the State of
Illinois. Examinations by this regulator are designed for the protection of
the consumer borrowers and not for the finance company shareholders.
CMI is a residental mortgage originator and broker and is therefore
subject to licensing regulation and examination by the Illinois Office of
Banks and Real Estate, as well as appropriate agencies in Indiana and
Wisconsin. Examinations by this regulator are designed for the protection of
the consumer borrowers and not for the mortgage company shareholders.
CAPITAL REQUIREMENTS
All federal bank regulatory agencies have adopted risk-based capital
guidelines. These guidelines establish required levels of capital that are
monitored by certain ratios. Capital is divided into two components; Tier 1
capital which includes common stock, additional paid-in capital, retained
earnings and certain types of perpetual preferred stock less goodwill, and Tier
2 capital that includes among other things, limited life preferred stock,
subordinated debt and the allowance for
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loan losses. These components of capital are compared to both total assets as
reported on the balance sheet and assets that have been adjusted to
compensate for associated risk to the organization. This allocation separates
assets and specified off-balance sheet commitments into four categories that
are risk-weighted from 0 percent to 100 percent according to predefined
levels of average risk. The guidelines require a tangible leverage capital
ratio (defined as Tier 1 capital to average assets) of 4.0%. The Company had a
tangible leverage capital ratio of 6.39% as of December 31, 1996. The
guidelines require a total capital ratio (defined as the total of both Tier 1
and Tier 2 capital to risk weighted assets) of 8.00%. The Company had a
total capital to risk weighted assets ratio of 10.66% as of December 31,
1996. The guidelines also require a Tier 1 ratio (defined as Tier 1 capital
to risk weighted assets) of 4.00%. The Company had a Tier 1 ratio of 9.45%
as of December 31, 1996. The regulatory requirements are considered minimums
and actual ratios should be commensurate with the level and nature of all
risks of a company (as defined by the regulatory agencies). Regulators
generally expect organizations that are experiencing internal growth or are
making acquisitions to maintain capital levels substantially above the
minimum supervisory levels and comparable to peer groups, without significant
reliance on intangible assets. Management intends to continue its emphasis on
a strong capital position.
MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings of commercial banks, finance companies, mortgage bankers and
bank holding companies are affected not only by general economic conditions,
but also by the policies of various governmental regulatory authorities. In
particular, the Federal Reserve Board influences conditions in the money and
capital markets, which affect interest rates and growth in bank credit and
deposits. Federal Reserve Board monetary policies have had a significant
effect on the operating results of commercial banks in the past and this is
expected to continue in the future. The general effect, if any, of such
policies on future business and earnings of the Company and its Subsidiary
Banks cannot be predicted.
EMPLOYEES
As of December 31, 1996, the Company and its subsidiaries had a total of
334 full-time equivalent employees. None of these employees are subject to a
collective bargaining agreement and management believes it has excellent
relations with its staff.
ITEM 2. PROPERTIES
The Company operates its executive offices at 208 West Locust Street,
DeKalb, Illinois. This facility is an approximately 2,000 square foot
refurbished residential house owned by FNB. A temporary light commercial use
zoning variance was obtained for this property and it is currently being
leased to the Company by FNB at rates and terms that are standard for the
area. The Company is currently in the process of remodeling a commercial
building owned by FNB that is located at 121 West Lincoln Highway in DeKalb.
This approximately 15,000 square foot building is leased to the company at
rates and terms that are standard for the area. This facility will house all
administrative, accounting, data processing, human resource and marketing
functions of the Company and is anticipated for full occupancy in May 1997.
FNB operates its main office at 141 West Lincoln Highway, DeKalb, Illinois.
This facility includes approximately 19,600 square feet. A drive-in facility is
located at the same address with approximately 1,200 square feet of space. FNB
also operates a remote drive-up banking facility
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with approximately 1,800 square feet located less than 1 mile north of the
main office at 1007 North First Street, DeKalb, Illinois. FNB also operates
a commercial building at 121 West Lincoln Highway and leases the entire
approximately 15,000 square feet to the Company for administrative,
accounting, and data processing operations. FNB also owns a residental house
at 208 West Locust Street, DeKalb, Illinois with approximately 2,000 square
feet that is also temporarily leased to the Company for its executive
offices. FNB owns all of these buildings as well as the underlying land. FNB
also operates a full service branch facility with approximately 9,400 square
feet located at 511 West State in Sycamore, Illinois. The Bank owns the
building and approximately 60% of the underlying land and has a long-term
lease with option to buy the remaining land. In addition, FNB operates an
automated teller machine at a local university and leases space on a
month-to-month basis.
SSB conducts its operations from its main office facility located at 100
West Church Street, Sandwich, Illinois. This facility has approximately
13,000 square feet of space. SSB owns the building as well as the underlying
land. A drive-in facility is contiguous to the main office. SSB also leases
two office spaces used for mortgage loan origination offices. Each of these
sites are less than 1,000 square feet and are located at 44 West Church
Street, Sandwich, Illinois and 91 Sugar Lane, Sugar Grove, Illinois. Both
sites are rented at rates and terms that are standard in the area.
FSB operates from its main office facility at 201 West Diggins Street,
Harvard, Illinois. This facility has approximately 11,000 square feet of
space. FSB owns both the building and the underlying land. A drive-in
facility is contiguous to the main office. FSB also operates a remote branch
facility with approximately 5,400 square feet at a local shopping center
located at 1265 Division Street, Harvard, Illinois. The Bank owns both the
building and the underlying land. FSB also leases two office spaces used for
mortgage loan origination offices. Each of these sites are less than 1,000
square feet of office space and are located at 62 North Ayer Street, Harvard,
Illinois and 695 North Perryville Road, Suite 2, Rockford, Illinois. Both
sites are rented at rates and terms that are standard in the area.
BOY operates from its main office facility at 606 Countryside Center,
Yorkville, Illinois. The Bank utilizes 50% of the approximately 22,000
square of space. BOY leases the remaining 50% of the space to medical
organizations under leases that are standard in the area as to terms and
rental income. BOY owns the building and the underlying land. A drive-in
facility is contiguous to the main office.
CFC operates offices in the following seven towns in northern Illinois:
Plano, LaSalle, DeKalb, Dixon, Rockford, Morris and Harvard. The DeKalb
office includes both CFC's executive offices as well as an operating office
and is approximately 3,500 square feet of leased space with rental costs and
lease terms that are standard for the area. Offices for the other six
locations are less than 1,000 square feet and are leased with rental costs
and lease terms that are standard for the areas.
CMI operates offices in Oak Brook, Naperville, Chicago, and Rolling
Meadows in Illinois and Merrillville in Indiana. The Oak Brook office
includes both executive and operating functions and is located at 1301 West
22nd Street, Suite 100, Oak Brook, Illinois which consists of approximately
6,300 square feet of leased space. The office in Rolling Meadows houses an
operating function in approximately 1,400 square feet of leased space at
5105 Tollview, Suite 110, Rolling Meadows, Illinois. The Chicago office is
located in a space of approximately 2,000 square feet at 2549 North Racine
Avenue, Chicago, Illinois. The Merrillville office leases approximately 3,200
square feet at 101 West 79th Avenue, Merrillville, Indiana. All the leased
offices have rental costs and terms that are standard for the areas. CMI
owns a facility at 847 North Center
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Road, Naperville, Illinois, with approximately 2,100 square feet of office
space. CMI owns both the building and the underlying land.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any subsidiary is a party to, and none of their
property is subject to, any material legal proceedings, other than routine
litigation incidental to the business of the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters, through the solicitation of proxies or otherwise, were
submitted to a vote of security holders during the quarter ended December 31,
1996.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The approximate number of holders of Common Stock of the Company on
December 31, 1996 was 900 holders.
Cash dividends on the above referenced common stock are paid annually.
Dividends for the years ended December 31, 1996 and 1995 were $0.20 and $0.18
per share, respectively.
The amount of dividends payable by the Company on its common stock is
limited by the provisions of its long-term debt agreement. Dividends are
limited to 50% of the net earnings, less dividends paid, in the previous
eight quarters. As of December 31, 1996, the Company was limited to
$1,821,000 for dividend purposes.
The Company's stock is not traded on an established public trading market.
During the period from January 1, 1995 through December 31, 1996, management
of the Company believes that there were approximately 75 trades in the
Company's common stock. Management of the Company does not have information
with respect to the prices at which all such trades were effected but
believes that the prices ranged from $12.50 to $22.50 per share on those
transactions with respect to which it does have information.
On May 24, 1995, the Company issued 45,500 common shares to Premier Home
Financing, Inc. (Premier). These shares were issued in conjunction with the
acquisition by Castle Mortgage, Inc. of substantially all the assets and the
assumption of substantially all the liabilities of Premier. This transaction
was claimed exempt from registration pursuant to Section 506 of the
Securities Act of 1933. Premier represented to the Company its
qualifications as an accredited investor.
ITEM 6. SELECTED FINANCIAL DATA
The information contained in the section entitled "Five Year Summary of
Selected Consolidated Financial Data" on page 13 of the Company's Annual
Report to its stockholders for the year ended December 31, 1996, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the section entitled "Management Discussion
and Analysis of Financial Condition & Results of Operations" on pages 14
through 20 of the Company's Annual Report to its stockholders for the year
ended December 31, 1996, is incorporated herein by reference.
The following supplementary financial information of the registrant for
each of the last three years (unless otherwise stated) is included on pages
11 through 17 of this Report:
Table 1 Comparison of Average Balance Sheets
Table 2 Analysis of Net Interest Income - Tax Equivalent Basis
Table 3 Maturing Of Investment Securities
Table 4 Analysis of Loan Portfolio and Loss Experience (for Last Five
Years)
Table 5 Allocation of Loan Losses (for Last Five Years)
Table 6 Maturity and Interest Sensitivity of Loans
Table 7 Average Deposits (for Last Five Years)
Table 8 Short-term Borrowings
Table 9 Return on Average Equity and Average Assets (for Last Five
Years)
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TABLE 1
COMPARISON OF AVERAGE BALANCE SHEETS
The following table sets forth the registrant's consolidated average daily
condensed balance sheet for each of the last three years (dollar figures in
thousands):
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------
1996 1995** 1994
---------------------- ---------------------- -------------------
% of % of % of
ASSETS: Amount Total Amount Total Amount Total
--------- ------ ---------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $9,757 2.1% $10,166 2.4% $11,310 2.8%
Interest-bearing deposits in banks 376 0.1 113 0.0 106 0.0
Excess funds sold 10,426 2.3 10,743 2.6 7,632 1.9
--------- ------ ---------- ------ -------- ------
Total cash and cash equivalents $20,559 4.5 $21,022 5.0 $19,048 4.7
Taxable securities $110,313 23.9 $117,051 27.8 $118,224 29.4
Tax-exempt securities 12,165 2.6 16,296 3.9 20,369 5.1
Mortgage loans held for sale 29,651 6.4 7,610 1.8 0 0.0
Loans and leases, net of unearned income 269,091 58.5 240,778 57.2 228,776 56.9
Less: Allowance for loan losses 3,469 0.8 3,441 0.8 3,567 0.9
--------- ------ ---------- ------ -------- ------
Loans, net 265,622 57.7 237,337 56.4 225,209 56.0
--------- ------ ---------- ------ -------- ------
Premises and Equipment 10,217 2.2 10,550 2.4 9,978 2.5
Goodwill, net of amortization 5,328 1.2 4,964 1.2 4,181 1.0
Other Assets 6,821 1.5 6,133 1.5 5,245 1.3
--------- ------ ---------- ------ -------- ------
TOTAL ASSETS 460,676 100.0% 420,963 100.0% 402,254 100.0%
--------- ------ ---------- ------ -------- ------
--------- ------ ---------- ------ -------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Non-interest bearing deposits $39,300 8.5% $36,732 8.7% $36,360 9.0%
Interest bearing deposits 350,918 76.2 323,581 76.9 315,794 78.5
--------- ------ ---------- ------ -------- ------
Total Deposits 390,218 84.7 360,313 85.6 352,154 87.5
--------- ------ ---------- ------ -------- ------
Short-term borrowings $19,887 4.3 $11,260 2.8 $4,947 1.2
Long-term borrowings 10,782 2.3 11,575 2.7 12,328 3.2
Other liabilities 5,375 1.2 3,961 0.9 2,883 0.7
--------- ------ ---------- ------ -------- ------
TOTAL LIABILITIES $426,262 92.5 $387,109 92.0 $372,312 92.6
STOCKHOLDERS' EQUITY:
Preferred Stock 2,600 0.6 3,956 0.9 5,350 1.2
Common Stock 689 0.1 686 0.2 658 0.2
Additional paid-in capital 4,875 1.1 4,270 1.0 3,527 0.9
Unrealized gain/(loss) on
investment securities 475 0.1 1,497 0.4 0 0.0
Retained earnings 25,775 5.6 23,445 5.5 20,407 5.1
--------- ------ ---------- ------ -------- ------
TOTAL STOCKHOLDERS' EQUITY $34,414 7.5 $33,854 8.0 $29,942 7.4
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY --------- ------ ---------- ------ -------- ------
$460,676 100.0% $420,963 100.0% $402,254 100.0%
--------- ------ ---------- ------ -------- ------
--------- ------ ---------- ------ -------- ------
</TABLE>
** Castle BancGroup, Inc. acquired substantially all the assets and assumed
substantially all the liabilities of Premier Home Financing, Inc. on May 24,
1995, in a transaction that was accounted for as a purchase. Assets,
liabilities, and equity balances were included in the averages from that
date forward.
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TABLE 2
ANALYSIS OF NET INTEREST INCOME - TAX EQUIVALENT BASIS
(IN THOUSANDS)
THE TABLE BELOW SHOWS THE CHANGES IN INTEREST INCOME (TAX EQUIVALENT) AND
INTEREST EXPENSE ATTRIBUTABLE TO VOLUME AND RATE VARIANCES. THE CHANGE IN
INTEREST INCOME (TAX EQUIVALENT) DUE TO BOTH VOLUME AND RATE HAS BEEN
ALLOCATED TO VOLUME AND RATE CHANGES IN PROPORTION TO THE RELATIONSHIP OF THE
ABSOLUTE DOLLAR AMOUNTS OF THE CHANGE IN EACH.
<TABLE>
<CAPTION>
AVERAGE BALANCE AVERAGE RATE
------------------------------------- ------------------------------
INTEREST EARNING ASSETS 1996 1995(1) 1994 1996 1995 1994
----------------------- ----------- ---------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Taxable securities $110,313 $117,051 $118,224 6.30% 6.22% 5.84%
Tax-exempt securities(2) 12,165 16,296 20,369 10.03% 9.62% 10.23%
----------- ---------- ---------- -------- -------- ---------
Total Securities $122,478 $133,347 $138,593 6.67% 6.64% 6.48%
----------- ---------- ---------- -------- -------- ---------
Time deposits 376 113 106 2.39% 4.32% 5.66%
Excess funds sold 10,426 10,743 7,632 2.91% 4.21% 4.56%
Mortgage loans held for sale(3) 29,651 7,610 0 7.37% 6.82% 0.00%
Net loans (2)(4) 269,091 240,778 228,776 9.78% 9.68% 8.86%
----------- ---------- ---------- -------- -------- ---------
Total Earning Assets (FTE) $432,022 $392,591 $375,107 8.56% 8.45% 7.89%
----------- ---------- ---------- -------- -------- ---------
----------- ---------- ---------- -------- -------- ---------
INTEREST BEARING LIABILITIES:
----------------------------
Interest bearing deposits $350,918 $323,581 $315,794 4.59% 4.49% 3.69%
Short-term borrowings 19,887 11,260 4,947 4.91% 4.42% 1.92%
Long-term borrowings 10,782 11,575 12,328 7.35% 7.79% 6.08%
----------- ---------- ---------- -------- -------- ---------
Total Interest Bearing Liabilities $381,587 $346,416 $333,069 4.68% 4.60% 3.75%
----------- ---------- ---------- -------- -------- ---------
Interest Rate Spread (FTE) 3.88% 3.85% 4.14%
Net interest income (FTE) 4.42% 4.40% 4.57%
-------- -------- ---------
-------- -------- ---------
</TABLE>
<TABLE>
<CAPTION>
INTEREST EARNED OR PAID 1996/95 CHANGE DUE TO 1995/94 CHANGE DUE TO
-------------------------------- ---------------------- ----------------------
INTEREST EARNING ASSETS 1996 1995(1) 1994 VOLUME RATE VOLUME RATE
----------------------- ---------- --------- --------- ----------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Taxable securities $6,945 $7,281 $6,899 ($423) $87 ($69) $451
Tax-exempt securities(2) 1,220 1,568 2,083 (412) 63 (398) (117)
---------- --------- --------- ----------- ------- --------- --------
Total securities: $8,165 $8,849 $8,982 ($835) $151 ($467) $334
---------- --------- --------- ----------- ------- --------- --------
Time deposits 9 54 6 41 (86) 0 48
Excess funds sold 303 452 348 (1,665) 1,516 133 (29)
Mortgage loans held for sale(3) 2,185 519 0 1,846 (180) 519 0
Net loans (2)(4) 26,307 23,310 20,277 3,277 (280) 934 2,099
---------- --------- --------- ----------- ------- --------- --------
Total Earnings Asset (FTE) $36,969 $33,184 $29,613 $2,665 $1,120 $1,120 $2,451
---------- --------- --------- ----------- ------- --------- --------
---------- --------- --------- ----------- ------- --------- --------
INTEREST BEARING LIABILITIES:
----------------------------
Interest bearing deposits $16,090 $14,527 $11,644 $1,262 $301 $279 $2,604
Short-term borrowings 976 498 95 430 48 199 204
Long-term borrowings 792 902 749 (40) (70) (48) 201
---------- --------- --------- ----------- ------- --------- --------
Total Interest Bearing Liabilities $17,858 $15,927 $12,488 $1,653 $278 $430 $3,009
---------- --------- --------- ----------- ------- --------- --------
Net interest income (FTE) $19,111 $17,257 $17,125 $1,012 $842 $689 ($557)
---------- --------- --------- ----------- ------- --------- --------
---------- --------- --------- ----------- ------- --------- --------
</TABLE>
(1) Castle BancGroup, Inc. acquired substantially all the assets and assumed
substantially all the liabilities of Premier Home Financing, Inc. on May 24,
1995 in a transaction that was accounted for as a purchase. Assets,
liabilities and equity balances were included in the averages from that
date forward.
(2) The interest on tax-exempt investment securities and tax-exempt loans is
calculated on a tax equivalent basis assuming a blended federal and state
tax rate of 38.75% in 1996 and 34% in 1995 and 1994.
(3) The yield-related fees recognized from the origination of mortgage loans
held for sale are in addition to the interest earned on the loans during
the period in which they are warehoused for sale as shown above.
(4) The balances of nonaccrual loans are included in average loans
oustanding. Interest on loans includes yield-related loan fees.
12
<PAGE>
TABLE 3
MATURITY OF INVESTMENT SECURITIES
The following table sets forth the maturity of the registrants investment
portfolio.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-------------------------------------------------------------------------------------
CORPORATE
U.S. GOVERNMENT STATES AND POLITICAL OBLIGATIONS
U.S. TREASURY AGENCIES SUBDIVISIONS(1) AND OTHER
------------------------ ---------------------- --------------------- -----------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
----------- ------- ----------- -------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE(2):
One year or less $10,009,350 5.93% 3,016,190 6.31% 1,882,273 9.64% --
After one through five years 25,837,063 6.20% 22,282,493 6.32% 6,834,573 10.30% --
After five through ten years 2,112,041 6.44% 38,086,813 7.61% 2,188,513 10.54% --
After ten years -- -- -- -- -- -- --
Mortgage backed securities(3) -- -- 19,731,446 6.86% -- -- --
----------- -------- ----------- -------- ----------- -------- -----------
Total debt securities $37,958,454 6.13% $83,116,942 7.04% $10,905,359 10.24% $0
Federal Home Loan Bank stock $966,600
Other equity securities 124,625
----------- -------- ----------- -------- ----------- -------- -----------
Total securities available for sale $37,958,454 6.13% $83,116,942 7.04% $10,905,359 10.24% $1,091,225
----------- -------- ----------- -------- ----------- -------- -----------
----------- -------- ----------- -------- ----------- -------- -----------
</TABLE>
- - ------------------------------------
1 Yields were calculated on a tax equivalent basis assuming a blended
federal and state tax rate of 38.75%.
2 At December 31, 1996, the Company did not own any investment securities
from a single issuer, other than the U.S. Federal Government, that was
greater than 10% of total equity capital.
3 Mortgage-backed security maturities may differ from contractual
maturities because the underlying mortgages may be called or prepaid
without any penalties. Therefore, these securities are not included
within the maturity categories above.
13
<PAGE>
TABLE 4
ANALYSIS OF LOAN PORTFOLIO AND LOSS EXPERIENCE
(IN THOUSANDS)
THE FOLLOWING TABLE SETS FORTH THE REGISTRANT'S LOAN PORTFOLIO BY MAJOR CATEGORY
FOR EACH OF THE LAST FIVE YEARS.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $69,594 $63,197 $59,131 $59,014 $53,709
Real estate mortgage 186,613 159,928 141,651 135,984 107,067
Consumer 35,242 33,094 32,040 33,986 30,220
Leases 891 1,455 711 952 469
Student loans held for sale 0 0 5,450 0 0
---------- ---------- ---------- ---------- ----------
Gross Loans $292,340 $257,674 $238,983 $229,936 $191,465
Less:
Unearned discount and deferred loan fees 3,172 3,074 2,951 2,700 2,242
Allowance for possible loan losses 3,775 3,309 3,475 3,940 2,964
---------- ---------- ---------- ---------- ----------
Net Loans $285,393 $251,291 $232,557 $223,296 $186,259
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
SUMMARY OF LOAN LOSS EXPERIENCE:
Allowance for loan and lease losses,
beginning $3,309 $3,475 $3,940 $2,964 $3,029
Amounts charged-off:
Commercial, financial and agricultural 270 268 570 382 235
Real estate mortgages 53 175 0 47 0
Consumer 783 547 398 348 269
Leases 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total Charge-Offs $1,106 $990 $968 $777 $504
---------- ---------- ---------- ---------- ----------
Recoveries on amounts previously charged-off:
Commercial, financial and agricultural $236 $133 $90 $55 $63
Real estate mortgages 17 0 14 0 2
Consumer 88 151 75 55 43
Leases 0 0 0 0 0
---------- ---------- ---------- ---------- ----------
Total Recoveries $341 $284 $179 $110 $108
---------- ---------- ---------- ---------- ----------
Net Charges-Offs $765 $706 $789 $667 $396
Provision charged to expense $1,113 $488 $323 $1,329 $331
Addition to dealer reserve 118 51 1 0 0
Addition due to purchase of subsidiary 0 1 0 314 0
---------- ---------- ---------- ---------- ----------
Allowance for Loan and Lease Losses, Ending $3,775 $3,309 $3,475 $3,940 $2,964
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Non-performing loans at year-end:
Non-accrual $2,348 $2,064 $2,699 $3,652 $1,065
Restructured $314 $270 $630 $209 $0
---------- ---------- ---------- ---------- ----------
Total Non-Performing Loans $2,662 $2,334 $3,329 $3,861 $1,065
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Past due 90 days or more, not included above 201 16 256 716 1,814
Other real estate, not included above 75 0 0 48 0
RATIOS:
Allowance to year-end net loans 1.32% 1.32% 1.49% 1.76% 1.59%
Allowance to non-performing loans 141.81 141.77 104.39 102.05 278.31
Net charge-offs to average loans (gross) 0.28 0.29 0.34 0.33 0.22
Recoveries to charge-offs 30.83 28.69 18.49 14.16 21.43
Non-performing loans to loans, net of unearned
discount and deferred loan fees 0.92 0.92 1.41 1.70 0.56
</TABLE>
14
<PAGE>
TABLE 5
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
THE FOLLOWING TABLE SHOWS THE REGISTRANT'S ALLOWANCE FOR LOAN LOSSES
FOR THE LAST FIVE YEARS.
<TABLE>
<CAPTION>
COMMERCIAL,
FINANCIAL & REAL ESTATE
AGRICULTURAL MORTGAGE CONSUMER LEASES UNALLOCATED TOTAL
------------ ----------- -------- ------ ----------- -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996
% of loans in category to total loans $1,391 $1,130 $1,054 $0 $200 $3,775
23.81% 63.83% 12.06% 0.30% 0.00% 100.00%
December 31, 1995
% of loans in category to total loans $1,420 $1,144 $519 $26 $200 $3,309
24.53% 62.07% 12.84% 0.56% 0.00% 100.00%
December 31, 1994
% of loans in category to total loans $1,655 $1,030 $464 $26 $300 $3,475
24.74% 59.27% 15.69% 0.30% 0.00% 100.00%
December 31, 1993
% of loans in category to total loans $2,236 $963 $415 $26 $300 $3,940
25.67% 59.14% 14.78% 0.41% 0.00% 100.00%
December 31, 1992
% of loans in category to total loans $1,274 $652 $164 $174 $700 $2,964
28.05% 55.92% 15.78% 0.24% 0.00% 100.00%
</TABLE>
TABLE 6
MATURITY AND INTEREST SENSITIVITY OF LOANS
(IN THOUSANDS)
THE FOLLOWING TABLE SHOWS THE MATURITY OF THE REGISTRANT'S LOAN PORTFOLIO.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
--------------------------------------------------------------------------------------
TIME REMAINING TO MATURITY LOANS DUE AFTER ONE YEAR
----------------------------------------------- -----------------------------------
DUE ONE TO FIXED FLOATING
WITHIN FIVE AFTER FIVE INTEREST INTEREST
ONE YEAR YEARS YEARS TOTAL RATE RATE
------------ ----------- ------------ -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial & agricultural $45,855 $22,558 $2,398 $70,811 $15,991 $8,965
Real estate mortgages 85,639 65,188 29,946 180,773 60,682 34,452
Consumer 7,151 28,090 4,624 39,865 32,543 171
Leases 648 243 -- 891 9 234
------------ ----------- ------------ -------- ----------- -----------
Total $139,293 $116,079 $36,968 $292,340 $109,225 $43,822
------------ ----------- ------------ -------- ----------- -----------
------------ ----------- ------------ -------- ----------- -----------
</TABLE>
15
<PAGE>
TABLE 7
AVERAGE DEPOSITS
(IN THOUSANDS)
THE FOLLOWING TABLE SETS FORTH THE REGISTRANT'S AVERAGE DAILY DEPOSITS AND
AVERAGE RATE PAID ON THE INTEREST BEARING DEPOSITS FOR EACH OF THE LAST FIVE
YEARS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------------------------------------------
NON-INTEREST
BEARING DEMAND INTEREST BEARING
DEPOSITS DEMAND DEPOSITS SAVINGS ACCOUNTS TIME DEPOSITS TOTAL DEPOSITS
------- --------------- ---------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1996 AVERAGE
Balance $39,300 $67,583 $76,087 $207,248 $390,218
Rate --- 2.54% 3.13% 5.79% 4.59%
1995 AVERAGE
Balance 36,732 65,951 75,884 181,746 $360,313
Rate --- 2.51% 3.39% 5.67% 4.49%
1994 AVERAGE
Balance 36,360 79,208 81,105 155,481 $352,154
Rate --- 2.46% 2.96% 4.69% 3.69%
1993 AVERAGE
Balance 32,263 70,882 72,008 133,434 $308,587
Rate --- 2.89% 3.24% 5.06% 4.03%
1992 AVERAGE
Balance 28,306 65,044 56,734 135,172 $285,256
Rate --- 3.92% 4.36% 5.96% 5.08%
</TABLE>
THE FOLLOWING TABLE SETS FORTH THE REGISTRANT'S MATURITY DISTRIBUTION FOR ALL
TIME DEPOSITS OF $100,000 OR MORE AS OF DECEMBER 31, 1996.
MATURITY DISTRIBUTION FOR ALL TIME DEPOSITS OF $100,000 OR MORE
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------------------------
3 MONTHS OR 3 THROUGH 6 6 THROUGH OVER 12
LESS MONTHS 12 MONTHS MONTHS TOTAL
---- ------ --------- ------ -----
<S> <C> <C> <C> <C> <C>
Time Deposits of $100,000 or more $19,625 $8,827 $9,824 $11,266 $49,542
</TABLE>
16
<PAGE>
TABLE 8
SHORT-TERM BORROWINGS
(DOLLAR FIGURES IN THOUSANDS)
THE FOLLOWING TABLE SETS FORTH A SUMMARY OF THE REGISTRANT'S SHORT-TERM
BORROWINGS FOR EACH OF THE LAST THREE YEARS.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Repurchase agreements $ 2,756 $2,374 $2,350
Federal funds purchased 10,000 0 1,050
Other short-term borrowings 6,832 4,217 3,803
------- ------ ------
Total $19,588 $6,591 $7,203
------- ------ ------
------- ------ ------
</TABLE>
TABLE 9
RETURN ON EQUITY AND ASSETS
THE FOLLOWING TABLE SETS FORTH THE REGISTRANT'S RETURN ON AVERAGE ASSETS,
RETURN ON AVERAGE EQUITY, DIVIDEND PAYOUT RATIO, AND AVERAGE EQUITY TO
AVERAGE ASSET RATIO FOR THE LAST FIVE YEARS:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.40% 0.80% 0.84% 0.94% 0.99%
Return on average equity 5.36 9.94 11.22 13.56 14.57
Common stock dividend payout ratio 22.44 10.97 9.43 7.26 6.56
Average equity to average asset ratio 7.47 8.04 7.44 6.97 6.77
</TABLE>
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and related notes on pages 21
through 41 of the Company's Annual Report to its stockholders for the year
ended December 31, 1996, are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Company is
included in the Company's Definitive Proxy Statement for the Annual Meeting
of Stockholders to be held April 23, 1997 (Proxy Statement) under the
captions "Proposal No. 1 - Election of Directors" (page 2) and "Section 16(a)
Beneficial Ownership Reporting Compliance" (page 20) which information is
incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information contained under the captions "Directors' Compensation,"
"Executive Compensation" and "Compensation Committee Interlocks and Insider
Participation" in the Proxy Statement is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated
herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Transactions with Management" in
the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
1. The following documents are filed as part of this report:
A. The Consolidated Financial Statements of the Company which are
incorporated by reference in Item 8 from the Annual Report of the
Company to its stockholders for the year ended December 31, 1996, as
follows:
18
<PAGE>
1. Consolidated Balance Sheets, December 31, 1996 and 1995 on
page 21.
2. Consolidated Statements of Earnings, for the three
years ended December 31, 1996 on page 22.
3. Consolidated Statements of Changes in Stockholders' Equity for
the three years ended December 31, 1996 on page 23.
4. Consolidated Statements of Cash Flows for the
three years ended December 31, 1996 on pages 24
through 25.
5. Notes to Consolidated Financial Statements on
pages 26 through 40.
6. Independent Auditors' Report on page 41.
B. Financial Statement Schedules as follows:
Schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange
Commission have been omitted because they are not required
under the related instructions or the required information is
set forth in the financial statements and related notes.
C. Exhibits as follows:
3.1 Articles of incorporation of registrant as amended are
incorporated herein by reference to Exhibit 3.1 on
Form 10-K for the year ended December 31, 1993.
3.2 By-laws of the registrant as amended are incorporated
herein by reference to Exhibit 3.2 on Form 10-K for the
year ended December 31, 1995.
4.1 Certificate of Designation by the Board of Directors
establishing Series A Perpetual Preferred Stock dated
July 9, 1990 is incorporated herein by reference to
exhibit 4.1 on Form 10-K for the year ended December 31,
1990.
4.2 Certificate of Designation by the Board of
Directors establishing 2,600 shares of Perpetual
Preferred Stock dated November 15, 1993 is
incorporated herein by reference to exhibit 4.1 on
Form 10-K for the year ended December 31, 1993.
10.1 Castle BancGroup, Inc. Stock Benefit Plan is incorporated
herein by reference to Exhibit 4.1 of Registrant's Form S-8,
Registration Statement, filed on December 22, 1994,
Registration No. 33-87658.
13.1 Registrant's Annual Report to Shareholders for the Year
ended December 31, 1996. The Annual Report, except for
portions expressly incorporated by reference, is furnished
for the information of the Commission only and is not deemed
to be filed as a part of this filing.
21.1 Subsidiaries of Registrant.
23.1 Consent of KPMG Peat Marwick on Form S-8
Filing dated June 15, 1992 for the Castle
BancGroup, Inc. Employee Stock Purchase Plan
and on Form S-8 Filing dated December 22, 1994
for the Castle BancGroup, Inc. Employee Stock
Benefit Plan.
27 Financial Data Schedule
2. Reports on Form 8-K
The registrant has not filed any reports on Form 8-K for the
quarter ended December 31, 1996.
19
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- - ------- -------------
3.1 Articles of incorporation of registrant as amended are
incorporated herein by reference to Exhibit 3.1 on Form 10-K
for the year ended December 31, 1993.
3.2 By-laws of the registrant as amended are incorporated herein by
reference to Exhibit 3.2 on Form 10-K for the year ended December
31, 1995.
4.1 Certificate of Designation by the Board of Directors
establishing Series A Perpetual Preferred Stock dated July 9,
1990, is incorporated herein by reference to Exhibit 4.1 on
Form 10-K for the year ended December 31, 1990.
4.2 Certificate of Designation by the Board of Directors
establishing 2,600 shares of Perpetual Preferred Stock dated
November 15, 1993 is incorporated herein by reference to Exhibit
4.1 on Form 10-K for the year ended December 31, 1993.
10.1 Castle BancGroup, Inc. Stock Benefit Plan is incorporated
here by reference to Exhibit 4.1 of Registrant's Form S-8,
Registration Statement, filed on December 22, 1994, Registration
No. 33-87658.
13.1 Registrant's Annual Report to Shareholders for the Year Ended
December 31, 1996. The Annual Report, except for portions
expressly incorporated herein by reference, is furnished for the
information of the Commission only and is not deemed to be filed
as a part of this filing.
21.1 Subsidiaries of Registrant.
23.1 Consent of KPMG Peat Marwick on Form S-8 Filing Dated June 15,
1992 for the Castle BancGroup, Inc. Employee Stock Purchase Plan
and on Form S-8 Filing Dated December 22, 1994 for the Castle
BancGroup, Inc. Employee Stock Benefit Plan.
27.1 Financial Data Schedule.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
- - -------------------------------
John W. Castle, Chairman of the
Board, Chief Executive Officer
and Director
Date:
--------------------------
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by following the persons on behalf of the registrant
and in the capacities and on the dates indicated.
- - ---------------------------------- ------------------------------
By: Larry D. Beaty, Executive Vice By: James N. McInnes,
President, Treasurer, Chief President, Chief Operating
Financial Officer and Director Officer and Director
Date: Date:
----------------- ---------------------
- - ---------------------------------- ------------------------------
By: Jea Nae B. Wood, Chief By: Donald E. Kieso,
Accounting Officer and Controller Director
Date: Date:
----------------- ---------------------
- - ----------------------------------- ------------------------------
By: John W. Castle, Chairman of the By:Louis P. Brady, Vice-
Board Chief Executive Officer Chairman of the Board
and Director and Director
Date: Date:
----------------- ---------------------
- - ----------------------------------- ------------------------------
By: William R. Monat, Director By: Nancy D. Castle, Director
Date: Date:
----------------- ---------------------
21
<PAGE>
CASTLE BANCGROUP, INC.
1996 ANNUAL REPORT
FINANCIAL SERVICES FOR
GROWING
COMMUNITIES
<PAGE>
"ALL OF
OUR RESOURCES ARE
NOW CONCENTRATED ON
BECOMING THE LEADING,
INDEPENDENT FINANCIAL
SERVICES PROVIDER IN OUR
'CASTLE BANCGROUP COUNTIES'."
John W. Castle
CHAIRMAN &
CHIEF EXECUTIVE OFFICER
<PAGE>
A FOCUSED APPROACH TO GROWTH
Dear Shareholder:
Exactly 140 years ago, the founding bank of Castle BancGroup, Inc. began serving
the new community of Sandwich, Illinois, from a corner of my great-grandfather
Miles B. Castle's lumberyard.
M. B. was an entrepreneur and merchant, a practicing economist you might say,
who recognized an unmet need for banking services. M. B's early "bank" responded
to the mid-nineteenth century needs of rural townspeople, tradesmen, merchants
and farmers by offering credit and safekeeping of cash and other valuables. In
the ensuing years, the bank and the community prospered together.
The opportunity to meet the financial service demands of a growing community,
which M. B. Castle identified long ago, is our opportunity today.
The Sandwich community is an integral part of a region which grows now, as
Sandwich did then, from the westward migration of men and women seeking a
balance between economic opportunity and a quality of life not easily found in
densely populated urban areas. A dynamic regional market has evolved, its
population ranking among Illinois' fastest-growing and its employment growth
greatly outpacing the state's rate.
As charter members of this market, we have the home field advantage in realizing
its potential. Our community bank approach differentiates us from our
competition and defines our uniqueness. No financial services provider can match
our exceptional customer service, the products and services we customize for the
community and our strong corporate citizenship.
[PHOTO]
JAMES N. MCINNES JOHN W. CASTLE LARRY D. BEATY
PRESIDENT & CHAIRMAN & EXECUTIVE VICE PRESIDENT &
CHIEF OPERATING OFFICER CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER
OUR BLUEPRINT FOR MARKET DEVELOPMENT
Our $470 million company is composed of four banks, a consumer finance company
and a mortgage company, which do business from 21 locations primarily in DeKalb,
McHenry, Kendall, Kane, DuPage and Winnebago counties in Illinois. We call these
the "Castle BancGroup Counties." They are our marketplace.
We remain strongly committed to our five-year plan drafted last year, which
outlines strategies to develop this market, thereby maximizing shareholder
value.
The infrastructure which will help us succeed has been put into place over the
past two years. We have invested in the technology to improve internal
productivity and customer convenience. We have expanded our range of superior
products and services and have placed experienced, knowledgeable people in every
job.
All of our resources now are concentrated on becoming the leading community-
based, community-focused provider of financial services in the Castle BancGroup
Counties.
OUR PROGRESS
In 1996, all of our bank subsidiaries had solid increases in both assets and net
interest income, but earnings were very disappointing at our consumer finance
and mortgage subsidiaries. We are pleased with the growth we have attained. Now
we have turned our attention toward a more solid return from our non-bank
businesses, which we expect to be significant contributors to Company
profitability in the future.
We have taken initial steps to strengthen the non-bank businesses, such as
establishing new offices in growing communities and taking a hard look at under-
performing locations.
Castle BancGroup, Inc.
<PAGE>
2
CASTLE BANCGROUP COUNTIES ARE AMONG ILLINOIS' FASTEST GROWING POPULATIONS
CASTLE BANCGROUP COUNTIES ACCOUNTED FOR AN ASTOUNDING 45% OF ILLINOIS'
POPULATION GROWTH FROM 1990 TO 1995, ACCORDING TO U.S. CENSUS DATA.
WHILE ILLINOIS' 102-COUNTY POPULATION INCREASED 3%, OR 400,000 PEOPLE, DURING
THIS PERIOD, THE POPULATION IN OUR SIX COUNTIES GREW BY NEARLY 180,000. ONE OF
OUR COUNTIES, MCHENRY, WITH A 23% INCREASE, IS THE FASTEST-GROWING IN ILLINOIS.
AMONG ILLINOIS' NINE COUNTIES WITH DOUBLE-DIGIT INCREASES, THREE ARE IN OUR
MARKETING AREA.
A CASTLE BANCGROUP PRIORITY IS TO BE THE LEADING PROVIDER OF FINANCIAL SERVICES
TO THESE RAPIDLY GROWING COMMUNITIES.
ILLINOIS COUNTY
---------------
POPULATION
---------------
GROWTH
State Rank
----------
McHenry #1 23%
Kendall #4 15%
Kane #5 13%
DuPage #10 9%
DeKalb #15 7%
Winnebago #21 5%
Total Illinois 3%
THESE 6 COUNTIES ACCOUNTED FOR 45% OF ILLINOIS' POPULATION GROWTH
SOURCE: NEIPC (THE NORTHEASTERN ILLINOIS PLANNING COMMISSION)
We opened Castle Finance Company, Inc. offices in LaSalle and Rockford while
closing offices of the finance company in Mendota and Oregon.
A mortgage branch of the First State Bank of Harvard also opened its doors in
Rockford, and we relocated an office of Castle Mortgage, Inc. to Rolling
Meadows, in the heart of the rapidly growing northwest suburbs.
These moves have allowed us to gain an important presence in communities not
served by our banking subsidiaries.
WE FINANCE GROWTH IN OUR COMMUNITIES
Our Castle BancGroup Counties offer new and established companies room to grow
and a skilled, expanding labor force. Business magnets such as the I-88 Research
& Development Corridor and the I-90 Golden Corridor crisscross our market and
are attracting an increasing number of commercial and industrial corporations.
Mature industries in our Counties such as farming and manufacturing are being
joined by advanced technology, health care and construction industries. DuPage
County alone is home to 23,000 businesses and averages 3,000 business starts
each year.
Helping these companies reach their financial goals is a major growth
opportunity for Castle BancGroup companies. Commercial banking offers good
profit margins, the chance to cross-sell other services and the framework in
which to forge lasting relationships with small and mid-sized companies in the
community.
Two start-up businesses which we financed became success stories as well as
consistent sources of new revenue for the Castle BancGroup subsidiaries which
helped them.
Three years ago Rudy and Glenda Beringer purchased the Car Store, a used car
dealership in Aurora, Illinois,
[PHOTO]
FROM LEFT: CAR STORE OWNERS RUDY AND GLENDA BERINGER, STAN FREE OF THE BANK OF
YORKVILLE, GEORGE BOLEK OF CASTLE FINANCE COMPANY.
<PAGE>
3
with a loan from The Bank of Yorkville. Recognizing that the dealership would be
a good referral source for auto loans, the Bank introduced the Beringers to
Castle Finance in nearby Plano. Today George Bolek at Castle Finance makes about
10 auto loans a month to Car Store customers.
Castle Finance Company also helped two 25-year veterans of the auto business to
open their own auto dealership, C&M Motors, in Harvard, Illinois. Castle Finance
knew their excellent track record and credit history and loaned them the money
to bring inventory to the lot. Later the Company offered loans to C&M Motors
customers.
The Car Store and C&M Motors experiences encouraged Castle Finance to do more
auto lending with dealerships, and it now has become a $100,000 a month business
for the Company.
Castle BancGroup's expertise and wide range of products also help growing
businesses through the years as their needs change or expand. One such customer
is Erect-A-Tube, Inc., an aircraft hangar specialist in Harvard. This 32-
employee company has been a customer of First State Bank of Harvard since 1969,
relying on the Bank for operating credit, letters of credit and term loans for
real estate and capital improvements.
President Kenn B. Shelton, Jr. and his son K. B. have seen their business grow
from a 1,200- to a 43,000-square-foot facility, supplying the aircraft industry
in all 50 states. Erect-A-Tube has custom built hangars and hangar door systems,
ranging from a 280-foot-wide door at Glenview Naval Air Station to individual
hangars sized for light aircraft.
[PHOTO]
KENN B. SHELTON, JR. AND K.B. SHELTON OF ERECT-A-TUBE, INC.
PROLIFIC JOB CREATION IS A HALLMARK OF CASTLE BANCGROUP COUNTIES
CASTLE BANCGROUP COUNTIES RANKED AMONG THE MOST PROLIFIC JOB-CREATING COUNTIES
IN ILLINOIS FROM 1990 TO 1995, ACCORDING TO ILLINOIS DEPARTMENT OF EMPLOYMENT
SECURITY FIGURES.
THESE SIX COUNTIES CONTRIBUTED 45% OF THE STATE'S JOB GROWTH DURING THIS PERIOD,
ADDING 74,753 JOBS. 1995 COUNTY UNEMPLOYMENT LEVELS, TOO, WERE ALL BELOW THE
STATE'S 5.2% AVERAGE.
THESE COUNTIES WHICH WE SERVE ARE PRODUCING NEW JOBS FASTER, BECAUSE THEY ARE
ATTRACTING A DIVERSITY OF GROWTH INDUSTRIES. CASTLE BANCGROUP IS WELL POSITIONED
TO HELP FINANCE THE GROWTH IN OUR GROWING COMMUNITIES.
ILLINOIS COUNTY
----------------
EMPLOYMENT
----------------
GROWTH
McHenry 16%
Kendall 11%
Kane 9%
Winnebago 8%
DuPage 7%
DeKalb 5%
Total Illinois 3%
THESE 6 COUNTIES ACCOUNTED FOR 45% OF ILLINOIS' EMPLOYMENT GROWTH
ILLINOIS COUNTY
- - ---------------
UNEMPLOYMENT
DuPage 3.4%
DeKalb 3.8%
Kendall 4.0%
Winnebago 4.0%
McHenry 4.1%
Kane 5.0%
Total Illinois 5.2%
Source: Illinois Department of Employment Security
<PAGE>
4
A CHANGING LANDSCAPE OF OPPORTUNITY
Our Castle BancGroup Counties have outpaced the state in employment growth as
the suburban work force has gravitated to our market, and families have searched
for smaller communities with good schools, affordable housing and a bit of land.
Our bank and mortgage subsidiaries often have worked hand in hand to take
advantage of this migration.
James Scott Custom Builders, for example, was referred to The Bank of Yorkville
for a commercial loan by Castle Mortgage, which had provided residential
mortgages to the builder's home buyers. The Bank made owner Scott Eckstein and
his customers construction loans on eight houses in the Oswego-Naperville area
during 1996.
The Bank of Yorkville also has helped other young builders develop their
businesses. Bill McCue of McCue Builders, Inc. used his contacts in Aurora to
identify home-seekers who wanted to relocate to Kendall County. The Bank
financed 10 of his $170,000 to $200,000 homes in 1996 and provided mortgage
loans to his customers.
Scott and Amy Corwin of Corwin Construction, Inc. depended on a line of credit
from The Bank of Yorkville to meet the payroll of their custom framing business,
between the time framing was completed and when they collected on construction
payouts.
The Sandwich State Bank has been the exclusive lender to award-winning general
contractor Kathleen Mueller of MAK Homes, Inc. for two years. The Bank has
financed no fewer than 25 of her homes in Sugar Grove's Black Walnut Trails and
Prestbury developments during this period, including sold homes, models and spec
homes. The Bank also provided mortgage loans to her buyers.
The building boom in DeKalb and Sycamore has been a profitable source of
business for First National Bank.
BETTER JOBS ATTRACT A SKILLED WORKFORCE TO CASTLE BANCGROUP COUNTIES
THE NUMBER OF HOUSEHOLDS WITH INCOMES INCREASED SIGNIFICANTLY IN CASTLE
BANCGROUP COUNTIES BETWEEN 1990 AND 1995. AND THE PERCENTAGE OF THOSE WITH
INCOMES OF $50,000 OR MORE EXCEEDS 40% OF TOTAL HOUSEHOLDS IN FOUR OF OUR
COUNTIES--DuPAGE, McHENRY, KENDALL AND KANE.
NOT SURPRISING, THESE COUNTIES ALSO ARE LEADERS WHEN IT COMES TO THE EDUCATIONAL
ATTAINMENT OF THEIR RESIDENTS. THE NORTHEASTERN ILLINOIS PLANNING COMMISSION
ATTRIBUTES THIS GROWTH PRIMARILY TO PEOPLE MOVING IN FROM OTHER PARTS OF
ILLINOIS AND OTHER PARTS OF THE COUNTRY.
FROM COMPETITIVE RATE MORTGAGES TO TELEBANKING, CASTLE BANCGROUP OFFERS THE
FINANCIAL SERVICES GROWING COMMUNITIES NEED.
ILLINOIS COUNTY
-------------------
HOUSEHOLDS WITH
-------------------
INCOMES*
State Rank
----------
McHenry #1 19%
Kendall #2 14%
Kane #5 9%
DuPage #7 8%
Winnebago #15 5%
DeKalb #20 4%
Total Illinois 3%
ILLINOIS COUNTY
-------------------
HOUSEHOLD
-------------------
INCOMES*
Percentage $50,000 & Over
-------------------------
DuPage 53%
McHenry 43%
Kendall 41%
Kane 40%
Total Illinois 30%
DeKalb 25%
Winnebago 25%
EDUCATIONAL
-----------------------
ATTAINMENT**
-----------------------
PERSON 25+ YEARS
Bachelor's Degrees & Over
-------------------------
McHenry 65%
DuPage 62%
Kane 57%
Kendall 46%
Total Illinois 42%
Winnebago 38%
DeKalb 35%
Sources:
* Woods & Poole Economics--1996
** U.S. Bureau of the Census/Center for Govt. Studies, Northern Illinois
University (NIU)
<PAGE>
5
Construction loans were made to Sanderson Brothers Building & Development Ltd.
for residences in the Knolls subdivision and a retail center in Sycamore.
The Bank also obtained FHA project approval for the 92-unit Foxpointe
Condominium in Sycamore, when it gave builder Roncon Construction Co. its real
estate construction loan. FHA approval allows home buyers to get FHA financing
when they may not be able to get conventional financing, and it also requires a
lower down payment from them.
SUPPORTING THE CAREGIVERS
Health care is one of the fastest-growing industries in the Castle BancGroup
Counties, and we have helped finance that trend. Bidding against the largest
banks in Rockford, First State Bank of Harvard won the business of providing
construction loans, equipment loans and end loans to the Marianjoy
Rehabilitation Center of Rockford.
Due to open in March, 1997, the $1.2 million project is a tri-venture with
Marianjoy Rehabilitation Hospital & Clinics, Debes Corporation and
SwedishAmerican Health Systems. Loan officer Stuart Charland worked for two
years to put the deal together and credits the Bank's success to its experience
in project financing and superior service.
The Allen Home Health Nursing Agency, a premier at-home health care company
based in Maple Park, employs 30-40 nurses, home health aides and physical
therapists. President Joyce Allen has been a long-time customer of The Sandwich
State Bank and has used the Bank resources for pension funding and to meet her
payroll while waiting for insurance company reimbursement.
The dream of expanding her daycare facility, For Kids Only, Inc., turned into
reality for owner Diane Thomas with the help of The Sandwich State Bank. It
financed her purchase and refitting of an existing building, which allowed her
to take on children six weeks to two years old, doubling her business.
OUR LOAN OFFICERS ARE TRUSTED ADVISORS AS WELL AS
FINANCIAL SERVICES PROVIDERS.
HELPING TO MANAGE GROWTH
Our loan officers often take on the role of a trusted advisor as well as a
financial services provider. For example, when companies experience
unprecedented growth and are faced with internal growing pains, we can help them
deal with their increasingly complex accounting procedures.
This was the case with Davidson Grain, Inc., a family business which operates
more than 4,000 acres of land near Creston, Illinois. Originally a grain company
that handled the drying, storing and merchandising of grain grown on its own
land, it now encompasses a one million bushel storage facility and a trucking
company with five semi-trucks.
A STRONG ECONOMY AND AN EXCEPTIONAL QUALITY OF LIFE MAKE CASTLE BANCGROUP
COUNTIES AN IDEAL PLACE TO WORK AND LIVE
AN EXTRAORDINARY QUALITY OF LIFE, JUST AS THE AVAILABILITY OF BETTER JOBS, IS A
STRONG ATTRACTION WHICH DRAWS SKILLED WORKERS AND FAMILIES TO CASTLE BANCGROUP
COUNTIES. BUT PRESERVING THE QUALITY OF LIFE IN THE FACE OF THE REGION'S RAPID
GROWTH AND PROSPERITY MIGHT HAVE BEEN A PROBLEM IF IT WERE NOT FOR A LONG
HISTORY OF PRESERVATION AND PLANNING.
COMPREHENSIVE PLANNING WHICH SPELLS OUT THE GOALS AND POLICIES FOR FUTURE LAND
DEVELOPMENT AND RESOURCE MANAGEMENT HAS BEEN AN IMPORTANT FUNCTION OF OUR COUNTY
GOVERNMENTS FOR DECADES. THE NEED TO BALANCE RESIDENTIAL DEVELOPMENT AND
BUSINESS EXPANSION WITH ENVIRONMENTAL CONSERVATION HAS THE BROAD SUPPORT AND
COOPERATION OF OUR COMMUNITIES.
CASTLE BANCGROUP SUPPORTS BALANCED GROWTH AS THE BEST APPROACH FOR RETAINING THE
CHARACTER AND UNIQUENESS OF OUR COMMUNITIES AS WELL AS PRESERVING THEIR NATURAL
BEAUTY. AFTER ALL, WE NOT ONLY WORK HERE, WE LIVE HERE, TOO.
[PHOTO]
<PAGE>
6
Carl Heinisch of First National Bank in DeKalb/Sycamore provided the standard
lines of credit, operating loans and term loans, but he also assisted with the
review of Davidson's financial statements and discussed with them their goals
and possibilities.
"We sat down together and looked at our profit and loss sheets to make sure
everything worked," said Ron Davidson. "Carl and the Bank have been very
supportive."
Another extremely successful company is Microplastics, Inc. of St. Charles,
Illinois whose sales have multiplied 11-fold over the past five years. Frank
Roberts of First National Bank in DeKalb/Sycamore recognized the growing
complexity of their accounting procedures. He suggested that they employ a local
CPA firm to help them improve their systems and internal controls. This insert
injection molding company now handles its record-keeping smoothly and is
positioned for new growth.
MEETING OUR CUSTOMERS' NEEDS FOR INNOVATIVE PRODUCTS AND
PERSONAL SERVICE IS OUR HIGHEST PRIORITY.
WE PROVIDE FINANCIAL SERVICES TO OUR COMMUNITIES
Castle BancGroup Counties have strong and stable economies, due primarily to
residential growth and an expanding base of commercial development.
Both the number and variety of single family homes being built in our
communities are increasing. More than 12,000 building permits were issued for
housing appealing to different age groups, family sizes and incomes.
Supporting this residential growth in our region is a vital commercial economy
that not only provides tax revenues, but also goods, services and jobs.
Understanding and meeting our customers' varied needs for products and services
continues to be a priority for our banking, finance and mortgage company
operations.
UNDERSTANDING OUR COMMERCIAL CUSTOMERS' NEEDS
Becoming the Castle BancGroup Counties' premier provider of commercial financial
services requires a keen understanding of what new products and services
businesses want. Three new commercial services became income sources for Castle
BancGroup in 1996.
BUSINESS MANAGER is a turnkey program whereby First State Bank of Harvard
purchases receivables from companies on a continual basis. This fee service
provides immediate operating capital to new, expanding or under-capitalized
companies. For them, it also means they don't need a
DIVERSIFIED ECONOMIES IN CASTLE BANCGROUP COUNTIES FOSTER STABILITY AND GROWTH
TOTAL EMPLOYMENT INCREASED 15% IN CASTLE BANCGOUP COUNTIES BETWEEN 1990 AND
1995--NEARLY THREE TIMES THE STATE'S 5.7% RATE.
MORE IMPORTANTLY, EMPLOYMENT BY INDUSTRY DATA IN OUR SIX COUNTIES DURING THIS
PERIOD SHOWED STRONG GROWTH IN ALL CATEGORY SEGMENTS. THE FASTEST-GROWING JOBS
INVOLVE BUSINESS SERVICES SUCH AS ACCOUNTING, HEALTH, COMPUTERS AND CONSULTING.
OTHER GROWTH INDUSTRIES INCLUDE WHOLESALE AND RETAIL TRADE, FOLLOWED CLOSELY BY
FINANCE, INSURANCE AND REAL ESTATE.
CASTLE BANCGROUP'S INVESTMENT OVER THE PAST TWO YEARS IN TECHNOLOGY, PERSONNEL,
PRODUCTS AND SERVICES IS AN INVESTMENT IN THE GROWTH OF OUR COMMUNITIES.
ILLINOIS COUNTY
---------------
EMPLOYMENT
BY INDUSTRY
Percent Change Castle BancGroup Total
Counties Illinois
Total Employment 15.2% 5.7%*
Farming/Ag. Services 10.0 9.8
Construction 10.9 7.2
Manufacturing 4.1 -2.9
Transportation 5.9 6.2
Wholesale Trade 19.8 -0.6
Retail Trade 15.8 6.5
Finance/Insurance/ 16.9 2.2
Real Estate
Business Services 23.6 15.6
Government 14.6 -13.1
SOURCE: 1996 STATE PROFILE, WOODS & POOLE, INC., CENTER FOR GOV'T. STUDIES, NIU
*Includes: Sole proprietorships and gov't. workers
<PAGE>
7
large line of credit, and they don't have to borrow lots of money. Another
benefit is that it reduces a customer's staffing needs since the Bank does all
the bookkeeping, including the issuing of statements to the company's customers.
Hartwig Plumbing & Heating, Inc. was one of our first customers to use Business
Manager. "It's working just fine," according to Bill Hartwig, who along with his
brothers Gene and Jim has been in business for 22 years and has seen the company
grow 10-fold since 1984. "We have a good feeling with the Bank," Bill said.
"They're aggressive. They have a good feel for our business."
"Our goal for the Business Manager program," stated Terry Schwebke, program
director at the Bank, "is to grow the business by $2 million in receivables by
the end of 1997."
AIRCRAFT LENDING, which has been offered for the past 25 years by Jerry
Englehart of The Sandwich State Bank, now also is being offered by First State
Bank of Harvard under the direction and expertise of Stuart Charland. Stu, who
is retired from the Wisconsin Air National Guard and has been involved with
aviation for 27 years, is expanding this very specialized lending service.
Stu works with "fixed base" operators, such as air charter and air freight
companies, as well as individual pilots to finance light to medium twin aircraft
and high performance single engine airplanes. Already over a million dollars in
aircraft loans has been put on the books. "It's a niche that's very profitable
for the Bank," remarked Stu. "Our clients love their aircraft, our loans are
well secured, and the business is really growing!"
CORPORATE MORTGAGE ASSISTANCE PROGRAM (MAP) was introduced in July of 1996 by
Castle Mortgage, Inc. to offer mortgage services to corporate employees. Working
with Human Resource and Relocation departments, Castle Mortgage, Inc. custom
designs mortgage programs to fit the needs of organizations.
Among the services provided are employee home financing seminars, no-cost pre-
approvals, available financing options and reduced closing costs. Transferees
especially can benefit from this program through Castle's direct billing of all
company-paid closing costs.
[LOGO]
"Our earliest MAP success was with Advocate Health Care Federal Credit Union.
Advocate Health Care is one of the largest health care providers in Illinois,"
recalled Judy Maloney, manager corporate accounts at Castle Mortgage. "It's been
a win-win situation. Our mortgage program has become a no-cost employee benefit
for them, and we've become their employees' mortgage lender of choice."
[PHOTO]
JIM, BILL AND GENE HARTWIG OF HARTWIG PLUMBING & HEATING, INC. WITH TERRY
SCHWEBKE OF FIRST STATE BANK OF HARVARD.
<PAGE>
8
OFFERING MORE CONSUMER PRODUCTS
Strengthening our portfolio of consumer products with an accompanying commitment
to customer service was a major achievement for Castle BancGroup in 1996. Each
new product or service introduced made it even more convenient for our customers
to conduct their business with us and helped establish Castle BancGroup as the
financial services source for busy people.
TELEBANC was launched in July to give our customers instant, 24-hour access to
their accounts from any touch tone telephone. The system allows customers to
check account balances,
[LOGO]
review recent transactions, receive a fax copy of a statement, make loan
payments, transfer funds or speak with an accounts representative, if needed--
quickly and easily.
While telephone banking technology is not new, our system's customer-tested
design and implementation are unique. The system utilizes one central telephone
number and a customized, user-friendly telephone "script" that guides a caller
seamlessly through the menu of transaction choices. Customer response has been
tremendous. In August, our first full month of operation, 11,000 transactions
were processed. Monthly transactions have increased steadily to more than 23,000
in the month of December.
CHECK CARD is a new, electronic checking account service that offers customers
another way, in addition to writing checks or using an ATM, to access their
checking accounts. To ensure instant on-line processing and worldwide
recognition, Castle BancGroup selected the VISA-Registered Trademark- Card
program. VISA-Registered Trademark- makes account access possible worldwide from
any location displaying the VISA-Registered Trademark- logo or through more than
12 million ATM locations.
Initial response to Castle BancGroup, Inc. check cards, which were only
introduced in December, has been excellent. Several thousand check cards have
been issued under each
CONSUMER VITALITY IN CASTLE BANCGROUP COUNTIES EXPANDS RETAIL BUSINESSES
ILLINOIS COUNTY
- - ----------------
BUILDING PERMITS
Single Family Homes Illinois # Permits
Rank*
DuPage 4 3,905
Kane 5 3,389
McHenry 6 2,854
Winnebago 7 1,082
Kendall 13 472
DeKalb 18 307
------
12,009
Total Illinois: 35,392
*97-county ranking. 5 counties don't issue permits.
SOURCE: U.S. BUREAU OF CENSUS, CENTER FOR GOV'T. STUDIES, NIU
HOUSING STARTS ARE STRONG IN CASTLE BANCGROUP COUNTIES. OVER 12,000 BUILDING
PERMITS WERE ISSUED IN 1995 FOR SINGLE FAMILY HOMES, OR 34% OF THE STATE'S
TOTAL. THE STATE RANKINGS FOR OUR SIX COUNTIES ARE ALL IN THE TOP 20 WITH AN
AVERAGE PERMIT VALUE OF $125,000.
EQUALLY IMPRESSIVE IS THE HIGH LEVEL OF RETAIL TRADE ACTIVITY IN OUR
COMMUNITIES. PER CAPITA EXPENDITURES IN OUR REGION ARE 32% HIGHER THAN THE
STATE'S. OUR SALES TAX REVENUES IN 1995 SURPASS THE STATE IN EVERY CATEGORY,
UNDERSCORING THE VITALITY OF OUR MARKET AND THE GROWTH POTENTIAL FOR CASTLE
BANCGROUP'S CONSUMER PRODUCTS AND SERVICES.
ILLINOIS COUNTY
- - ---------------
RETAIL SALES
Per Capita Castle BancGroup Total
Expenditures Counties Illinois
Total Tax Receipts $11,726 $8,870
General Merchandise 1,646 1,276
Food 1,463 1,219
Eating & Drinking 927 884
Apparel 471 383
Furniture 567 386
Hardware/Building 1,078 715
Automotive 2,696 2,142
Pharmacy 1,725 1,131
Agriculture 513 386
Manufacturers 640 348
SOURCE: ILLINOIS DEPT. OF REVENUE, WOODS & POOLE, INC., CENTER FOR GOV'T.
STUDIES, NIU
<PAGE>
9
bank's own logo and name, yet they offer the full functionality of an
international bank card.
[PHOTO]
INVESTMENT SERVICES PROGRAM, which was introduced at the First National Bank in
DeKalb/Sycamore, was expanded to the other bank locations in 1996. Now our
customers are offered a full range of investment services, including asset
management, discount brokerage and investment advice.
The Asset & Trust Management Group provides asset management services tailored
to the specific needs of individuals, businesses, local foundations and
municipalities. "We listen very carefully to our customers," said Angela Duffy
Smith, who is vice president and trust officer at the First National Bank in
DeKalb/Sycamore. "Then we tailor a program to them reach their financial goals."
Helping our customers to establish financial goals and objectives, providing
estate and retirement planning, coordinating personal agency business and
managing investment portfolios has generated excellent income growth for the
banks. The Group currently has assets under management of $125 million.
This past year the First National Bank in DeKalb/Sycamore and The Bank of
Yorkville established investment centers in their facilities through Focused
Investments L.L.C. and its affiliates, so they can service their customers'
investment needs. Investment products offered include stocks, bonds, mutual
funds, unit investment trusts, variable annuities, and fixed annuities; products
which are not FDIC insured are not guaranteed and are subject to risk including
possible loss of principal.
The program, which was started with Wendy Menard at First National Bank, has
experienced strong growth in assets under management since its inception.
Wendy's advice has helped individuals and institutions, such as the City of
DeKalb Police Pension Fund.
OUR NEW PRODUCTS AND SERVICES MAKE IT MORE CONVENIENT FOR
OUR CUSTOMERS TO DO BUSINESS WITH US.
Jeff Brewster, at The Bank of Yorkville, stated that the investment center
"provides a one-stop investment service to current, prospective and non-
customers alike. Now our customers can get traditional banking products as well
as investment products all under the same roof, right here in the Bank." As of
first quarter, 1997, Jeff also will begin helping customers at The Sandwich
State Bank.
A MOBILE ATM booth was installed and operated by The Sandwich State Bank last
September at the Sandwich Fair and at the Sandwich Antique Shows in September
and October. Anticipating consumer need, the Bank modified a storage shed on the
Fairgrounds and arranged for special phone lines to be hooked up.
The booth, which dispensed thousands of dollars to Fair attendees and antique
buyers, was featured in Magic Line Inc.'s ATM customer magazine. Next year, the
Bank's mobile ATM will be at the Sandwich Fair and at the Sandwich Antique
Shows, May through October.
Castle BancGroup, Inc. joined the "Internet revolution" in October 1996, when we
established our own INTERNET WEB SITE. The site, which took six months to
launch, was developed to attract new customers living in the Midwest or
contemplating a move into our marketing area -- northern Illinois, northwest
Indiana or southern Wisconsin. The results have been very rewarding.
Homepage visitors have myriad options to explore, including our products,
services, locations of Castle BancGroup companies, a directory of personal
representatives, and an opportunity to e-mail or call any office for more
information. Another popular option is our mortgage calculator, which allows
visitors to calculate mortgage amounts and payments by simply entering product,
term and interest rate choices along with information about themselves. The site
even permits visitors to fill in a short Internet mortgage pre-qualification
form via e-mail.
Sound interesting? Check us out at "http://www.castlebancgroup.com."
<PAGE>
10
WE'RE INVOLVED IN OUR COMMUNITIES
Our pride in our communities shows every time one of our employees volunteers
for a civic improvement project and every time we support citizens in need or
invest in their future success.
Often we're involved in fun-filled experiences like organizing a youth baseball
team or helping students to learn business fundamentals. Sometimes, a community
crisis calls for every helping hand that can be found. Here are some examples
from 1996.
REPAIRING NATURE'S DAMAGE
A large portion of the Castle BancGroup Counties was overcome by devastating
floods in July. Thousands of acres were underwater; homes and businesses were
severely damaged. All of our Counties were declared disaster areas, and clean-up
efforts continued for weeks.
Several of our banks set up flood relief loan programs. Home owners who had
suffered damage to their residences could apply for a loan of up to $3,000 with
only a 3 to 5% annual percentage rate of interest.
Scott and Jill Reid of Sandwich eagerly took advantage of this offer. The Reid's
basement had been flooded with six feet of water, ruining their furnace, hot
water heater and air conditioning system. The family had two young children and
twins on the way and needed quick, low-cost financing to repair their home.
Denise Habbe of The Sandwich State Bank worked with the Reids to get these
valued customers up and running again.
The flood relief loan was an extension of a "3% home improvement loan program,"
which The Sandwich State Bank has offered for 25 years. These loans are
designated for external home improvements only and have a cap of $1,000. In
1996, the Bank made 98 loans during spring and summer fix-up months.
When instituted in 1971, the program was called a "community betterment"
service. We think it still is today.
[PHOTO]
ABOVE: JILL AND SCOTT REID WITH THEIR FAMILY AND DENISE HABBE OF THE SANDWICH
STATE BANK.
[PHOTO]
LEFT: THE REID'S HOME DURING THE FLOOD.
<PAGE>
11
BUILDING FOR THE FUTURE
The First State Bank of Harvard joined local businesses in helping students from
the Harvard Community High School build a house in Harvard.
The Bank provided financing for the construction of the ranch-style home, which
is a project of the Building and Trades class. A Harvard architect donated the
plans, and community merchants acted as consultants.
Brenda Gratz, loan officer at the Bank, taught the students that building a
house involves a lot of detailed paperwork as well as materials and labor. She
took care of getting contractor statements and delivering them to the title
company. She now plans to show the students how to balance the statements, as
draws are made to pay for construction costs and supplies.
Classes have worked on the house two hours a day since spring of 1996 and plan
to complete the project in early summer of 1997, at which time they will put it
up for sale.
OTHER HIGHLIGHTS
The Bank of Yorkville teller Kathy Jones chairs the Yorkville Riverfront
Foundation, a group which is upgrading the local park land along the Fox River.
Kathy's efforts were helped by the Bank, which contributed new park benches.
The Sandwich State Bank employees baked 40 dozen cookies for the Franklin Mall
Project, which delivers goods to needy families during the holidays. The Bank
also was a depository for donated funds.
First National Bank in DeKalb/Sycamore made a $50,000 donation to Kishwaukee
Community Hospital, helping the fund-raising campaign.
As always, our employees donated thousands of hours of their own time to making
our communities a better place in which to live. We salute them for their
community spirit and their efforts to improve our quality of life for future
generations.
As I reflect on our accomplishments of 1996, I'm reminded of M. B. Castle's
contribution to the community banking tradition. His achievement was providing
the best financial services possible to a growing community, a town which was
undergoing rapid change and had diverse needs.
M. B.'s legacy is one we take seriously and one we strive to honor in everything
we do.
/s/ John W. Castle
John W. Castle
CHAIRMAN & CHIEF EXECUTIVE OFFICER
<PAGE>
BOARD OF DIRECTORS AND CORPORATE OFFICERS
- - --------------------------------------------------------------------------------
12
BOARD OF DIRECTORS
Larry D. Beaty
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
Castle BancGroup, Inc.
Bruce P. Bickner
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
DeKalb Genetics Corporation
Robert T. Boey
PRESIDENT
American Bare Conductor, Inc.
PARTNER
Sycamore Industrial Park Associates
Louis P. Brady
RETIRED INSURANCE AND REAL ESTATE BROKER
John W. Castle
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Castle BancGroup, Inc.
Nancy D. Castle
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Horizons Unlimited Foundation
Peter H. Henning
CHAIRMAN, CHIEF EXECUTIVE OFFICER AND PRESIDENT
Plano Molding Company
John B. Hiatt
RETIRED CONTRACTOR
Hiatt Brothers
Donald E. Kieso
KPMG PEAT MARWICK EMERITUS
PROFESSOR OF ACCOUNTANCY
Northern Illinois University
William R. Monat
REGENCY PROFESSOR EMERITUS
Northern Illinois University
James N. McInnes
PRESIDENT AND CHIEF OPERATING OFFICER
Castle BancGroup, Inc.
CORPORATE OFFICERS
John W. Castle
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
Louis P. Brady
VICE CHAIRMAN OF THE BOARD
James N. McInnes
PRESIDENT AND CHIEF OPERATING OFFICER
Larry D. Beaty
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER
David B. Castle
SECRETARY
James V. Bowers
ASSISTANT SECRETARY
Patricia A. Gamble
VICE PRESIDENT, HUMAN RESOURCES
Patrick J. Wise
VICE PRESIDENT, OPERATIONS
Thomas D. Young
VICE PRESIDENT, MARKETING
Diane F. Leto
GENERAL AUDITOR
Janet M. Plote
LOAN REVIEW DIRECTOR
Jea Nae B. Wood
CONTROLLER
<PAGE>
13
FIVE YEAR SUMMARY OF SELECTED
CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31 (000'S OMITTED EXCEPT PER SHARE DATA)
- - --------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993* 1992
- - --------------------------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 36,437 32,650 28,903 26,529 26,971
Interest expense 17,858 15,927 12,487 11,825 13,801
- - --------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 18,579 16,723 16,416 14,704 13,170
Provision for loan losses 1,113 488 323 1,328 331
- - --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 17,466 16,235 16,093 13,376 12,839
Other operating income 9,073 7,931 3,366 3,123 1,959
Investment securities gains (losses) 41 (284) (29) (260) 30
Other operating expenses 23,810 19,061 14,702 12,387 10,557
- - --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 2,770 4,821 4,728 3,852 4,271
Applicable income taxes 926 1,457 1,368 572 1,108
- - --------------------------------------------------------------------------------------------------------------------------
Net earnings 1,844 3,364 3,360 3,280 3,163
- - --------------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock 1,643 3,026 2,885 2,993 2,835
- - --------------------------------------------------------------------------------------------------------------------------
Per share data - common stock
Net earnings $ .80 1.49 1.46 1.58 1.55
Cash dividends .20 .18 .16 .125 .11
Financial position - year end
Investment securities $ 133,072 135,566 137,826 137,749 124,608
Mortgage loans held for sale 20,343 13,484 - - -
Net loans 285,394 251,291 232,557 223,296 186,259
Allowance for possible loan losses 3,775 3,309 3,475 3,940 2,964
Non-interest bearing deposits 43,233 40,524 37,517 36,629 34,152
Interest bearing deposits 360,876 345,646 317,436 318,867 271,012
Long-term debt 10,150 11,000 11,800 12,550 9,119
Preferred stock 2,600 2,600 5,350 5,350 2,750
Total stockholders' equity 34,962 34,346 30,671 28,749 22,638
Total assets $ 473,424 443,637 407,505 404,747 341,303
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</TABLE>
*1993 balances include the results of operations for The Bank of Yorkville,
since the date of acquisition of December 7, 1993. Included in applicable
income taxes is a $346,000 benefit from implementation of Financial Accounting
Standards Statement 109.
<PAGE>
14
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATION
Castle BancGroup, Inc.'s (the Company) primary goal is to increase shareholder
value. The Company's strategy for achieving this goal is based on future
internal growth of its Subsidiaries, as well as selective acquisition of
financial institutions and financial service companies in markets west of the
Chicago metropolitan area. The Company is committed to aggressive internal
growth, and Subsidiaries are encouraged to increase assets by expanding in their
current markets, expanding into new markets, and introducing new products and
services.
The addition of two new major products in 1996 will provide growth opportunities
for the banking subsidiaries. "TeleBanc," an interactive customer
inquiry/account transfer system, was implemented during the third quarter of
1996. "Check Card," an on-line debit card product, was introduced during the
fourth quarter of 1996. Both of these products address customer demands in the
market place.
Along with its growth objectives, the Company continues to seek diversification
of income origination sources by increasing other financial service revenues.
Castle Mortgage, Inc., the Company's mortgage banking subsidiary, and Castle
Finance Company, Inc., which provides consumer lending products in a non-bank
environment, both provide such revenue enhancement opportunities.
The Company is also committed to increasing long term shareholder return. The
Company's Long Term Strategic Plan encompasses a five year period and includes
some directives that position the Company for future growth and profitability,
such as capital expenditures, that could have a negative impact on short term
profitability. As part of this commitment, Company management is continuing to
assess holding company responsibilities and the centralization of certain
functions at the corporate level. Centralization efforts are concentrated on
functional areas which management believes will result in significant cost
savings without sacrificing customer service, including data processing, loan
review, accounting, internal audit, marketing and human resources. The Company
remains committed to the community banking philosophy and to providing superior
service to all of its varied customer groups.
RESULTS OF OPERATIONS
The Company's net earnings in 1996 totaled $1,844,502, a 45% decline from 1995
earnings of $3,364,410. This represents a $.69 reduction in common earnings per
share. Net earnings remained relatively constant at $3,364,410 during 1995 as
compared to $3,360,290 during 1994.
Two major factors contributed to the reduction in performance at the Company
during 1996. Steady loan growth and higher net charge-offs at the consumer
finance and banking subsidiaries necessitated a $383,000 after-tax increase in
the provision for loan losses in 1996 as compared to 1995. Additionally, Castle
Mortgage, Inc. recognized a net loss of $700,000 for the year ended December 31,
1996 versus $217,000 of net income in 1995. This represents a $917,000
reduction in income at the mortgage banking subsidiary in 1996 as compared to
1995, however, this loss excludes increased interest earnings at the Subsidiary
banks relating to the portfolio of mortgage loans held for sale, as explained
below. This reduction in earnings is attributable to a number of factors.
A wholesale mortgage lending division was established at Castle Mortgage, Inc.
during 1996. Loans are purchased from independent mortgage brokers for resale
into the secondary market. Additionally, the Company began generating loans in-
house in 1996 for pooling and reselling into the secondary market, a departure
from past practices of exclusively producing loans for "best efforts" delivery
to mortgage investors on an individual loan-by-loan basis. The initial
investment in personnel and systems to support this new line of business, along
with aggressive pricing designed to establish a presence in the wholesale
market, created losses during 1996. To manage the interest rate risk exposure
associated with the new wholesale line of business and oversee sale and delivery
of these loans, Castle Mortgage also established a "secondary marketing"
function. Rapid fluctuations in interest rates during the first half of 1996
resulted in marketing losses at Castle Mortgage, Inc. Management has reviewed
all elements of the new wholesale operation. Pricing on loans purchased from
brokers has been revised to improve profit margins now that a market presence
has been established. Additionally, the interest rate risk management
responsibilities of the secondary marketing function have been outsourced to
minimize risk to the Company and to take advantage of focused market expertise
and cost savings opportunities. Management continues to focus its efforts on
the operations of the mortgage company, focusing on operating efficiencies,
product offerings, pricing, and profitability levels.
NET EARNINGS
(in millions)
[BAR CHART]
1992 3,163,006
1993 3,279,789
1994 3,360,290
1995 3,364,410
1996 1,844,502
<PAGE>
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATION
15
The losses incurred by Castle Mortgage, Inc. during 1996 were partially
mitigated by revenue enhancements at the banking Subsidiaries. Interest income
on mortgage loans held for sale increased $1,021,000, net of tax, from 1995 to
1996. This income is generated as a result of mortgage loans held for sale that
have been generated through Castle Mortgage, Inc. but not yet sold on the
secondary market. The Subsidiary banks purchase these loans from Castle
Mortgage, Inc. 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 that averaged a
yield of 7.35% for 1996. Castle Mortgage, Inc., through its extensive investor
network, provides access for the Subsidiary banks to a significantly larger menu
of mortgage products and pricing opportunities that would not otherwise be
available to the Company. This improved product offering provides the Company
with improved production and profitability opportunities.
Net earnings attributable to common stock decreased to $1,643,002 in 1996 from
$3,026,235 and $2,885,449 in 1995 and 1994, respectively. Dividends paid on
preferred stock totaled $201,500 in 1996, as compared to $338,175 in 1995 and
$474,841 in 1994. The decrease in preferred stock dividends is a result of the
repayment of $2,750,000 of preferred stock in June 1995.
Earnings per share decreased to $.80 for 1996 as compared to $1.49 and $1.46 for
1995 and 1994, respectively. The following table highlights significant factors
that have contributed to these changes in earnings per share:
<TABLE>
<CAPTION>
Changes in Earnings per Share
1995 to 1996 1994 to 1995
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Prior period earnings per share $1.49 1.46
Changes due to:
Net interest income 0.77 (0.09)
Provision for possible loan losses (0.30) (0.08)
- - ----------------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 0.47 (0.17)
- - ----------------------------------------------------------------------------------------------------
Other operating income
Investment securities gains (losses), net 0.16 (0.13)
Gain on sale of fixed assets (0.15) 0.16
Mortgage revenues 0.55 1.62
Other operating income items (0.04) 0.19
- - ----------------------------------------------------------------------------------------------------
Total other operating income 0.52 1.84
- - ----------------------------------------------------------------------------------------------------
Other operating expenses
Salaries and employee benefits (1.31) (1.45)
Net occupancy and furniture expenses (0.11) (0.09)
Outside services (0.16) (0.04)
FDIC insurance assessment 0.20 0.20
Goodwill amortization (0.02) (0.04)
Other operating expense items (0.62) (0.28)
- - ----------------------------------------------------------------------------------------------------
Total other operating expenses (2.02) (1.70)
Income tax expenses 0.27 (0.02)
Preferred stock dividends 0.07 0.08
- - ----------------------------------------------------------------------------------------------------
Current period earnings per share $0.80 1.49
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
</TABLE>
The Company's return on average common equity for 1996 was 5.15%, as compared to
10.14% in 1995 and 11.73% in 1994. Return on average assets was .40% in 1996
versus .80% in 1995 and .84% in 1994. The declines in these ratios in 1996 were
primarily a result of the increased provision for loan losses and start-up costs
of the wholesale mortgage lending function, as explained previously.
The Company's earnings are generated principally by its subsidiaries: The
Sandwich State Bank; First National Bank in DeKalb; First State Bank of Harvard;
The Bank of Yorkville; Castle Finance Company; and, most recently Castle
Mortgage, Inc. (Subsidiaries). The Company, through Castle Mortgage, Inc.,
completed the acquisition of substantially all the assets and assumed
substantially all the liabilities of Premier Home Financing, Inc. (Premier) on
May 24, 1995. Results of Castle Mortgage, Inc. as they relate to the assets and
liabilities of Premier are included in the Company's earnings from May 1, 1995,
which represents the date used to determine the final purchase price. These
results had a nominal effect on the Company's consolidated results of 1995, due
to limited time frame that they were owned and the relatively small size of the
acquisition.
NET EARNINGS
PER SHARE
(in millions)
[BAR CHART]
1992 1.55
1993 1.58
1994 1.46
1995 1.49
1996 0.80
<PAGE>
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATION
16
The following discussion of performance for the three year period ending
December 31, 1996 highlights significant points of interest, trends in
operations, and management's operating philosophies. Unless otherwise noted,
all averages are simple daily averages.
NET INTEREST INCOME
Net interest income, the Company's primary source of earnings, totaled $18.6
million in 1996, a $1.9 million, or 12.1% increase over 1995. This increase can
be primarily attributed to the interest earnings on the Company's portfolio of
mortgage loans held for sale, with a year-to-date average outstanding balance of
$29.7 million in 1996 versus $7.6 million in 1995. The Subsidiary banks
redirected invested funds from lower yielding investment securities and
overnight funds into mortgage loans held for sale during 1996. Continued growth
of the loan portfolio during 1996 also affected the mix of interest income.
Interest expense on deposits increased in correlation to the increase in the
deposit base. Interest expense on short term borrowings increased in response
to short-term funding needs for mortgages held for sale, while interest expense
on long-term debt decreased in 1996 in response to principal pay-downs on the
term debt. Net interest income increased $3.4 million in 1995 as compared to
1994, which represented a 27.5% increase.
On a tax equivalent basis, net interest income increased to $19.0 million in
1996 from $17.3 and $17.1 million in 1995 and 1994, respectively. The tax
equivalent net interest margin remained constant in 1996, averaging 4.39% as
compared to 4.40% in 1995, but was still less than the average of 4.56% in 1994.
While net interest income increased during 1996 as a result of growth of the
loan portfolio and mortgage loans held for sale, higher rate time deposits and
borrowed funds were used to fund this growth. As a result, the net interest
margin remained flat during 1996.
Total average earning assets in 1996 were $432.0 million, an increase of $25.5
million or 6.5% over 1995. Average earning assets as a percentage of total
assets increased to 93.8% during 1996 as compared to 93.3% in 1995 and 1994.
This increase was primarily the result of strong residential mortgage loan
growth. The total average loan portfolio represented 62.3% of total average
earning assets in 1996, an increase from 61.3% in 1995 and 61.0% in 1994.
Mortgage loans held for sale represented 6.9% of average earning assets in 1996,
a significant increase over 1.9% in 1995.
In 1996, average total interest-bearing liabilities were $381.6 million, a $35.1
million or 10.2% increase over 1995. This increase can be attributed to a $7.8
million increase in average borrowed funds as well as growth of $27.3 million or
8.4% in interest-bearing deposit liabilities. The proportion of interest-
bearing liabilities to average earning assets in 1996 remained constant at 88.3%
when compared to 1995.
Management believes that net interest margins will continue to narrow as
competitive pressures in the market place expand. Competition from both
financial institutions and non-traditional competitors, as well as general
economic trends, will continue to impact future earnings. Earning asset mix, as
well as the net interest margin are monitored and evaluated by management to
develop strategies to help maintain and improve earnings. The Subsidiaries
continue their efforts to increase the loan portfolio with higher yielding,
quality credits. In addition to traditional bank lending, the Company has
increased its investment in mortgage loans held for sale. These long-term
fixed-rate mortgage loans are sold in the secondary market, servicing released
and without recourse. This line of business not only provides needed services
for customers, but also generates fee income and reduces the Company's exposure
to long-term interest rate risk.
PROVISION FOR POSSIBLE LOAN LOSSES
Effective January 1, 1995, the Company adopted SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan -- Income Recognition and Disclosures." These new
standards require that loans be considered impaired when, based on current
information, it is probable that the Company will not collect all principal and
interest due. A portion of the allowance for loan losses must be set aside for
impaired loans and is calculated based on the present value of the estimated
future cash flows of principal and interest, discounted at the loan's effective
rate, or on the fair value of the collateral for collateral dependent loans.
See Note 5 to the Consolidated Financial Statements for the required disclosures
in relation to impaired loans.
The adequacy of each Subsidiary's allowance for possible loan losses is
determined by calculating the allocated and unallocated portions of the reserve
using a combination of internal loan classifications, weighted historical
charge-off experience, and an evaluation of estimated losses on existing problem
credits. The allowance is maintained to cover the allocated requirement plus an
unallocated portion, which considers economic conditions, industry
concentrations, peer-group comparisons, lending staff experience, and other risk
factors.
The coverage of the allowance for loan losses to non-performing loans was 131.9%
at the end of 1996 versus 140.8% and 117.6% at the end of 1995 and 1994,
respectively.
The allowance for loan losses as a percentage of net outstanding loans increased
slightly to 1.31% at December 31, 1996 as compared to 1.30% at December 31,
1995. The allowance level was at 1.47% of net loans at December 31, 1994.
While net charge-offs increased $58,756 from 1995
<PAGE>
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATION
17
to 1996, the ratio of net charge-offs to average total loans outstanding
improved slightly during 1996 to .28% as compared to .29% in 1995. The net
charge-off ratio during 1994 was .35%.
The provision for possible loan losses is based on management's analysis of risk
in the loan portfolio which takes into account portfolio growth and historical
charge-offs, among many other factors. The provision totaled $1,112,836 in 1996
as compared to $488,011 in 1995, which represents a $624,825 increase. The
provision for possible loan losses increased $165,176 from 1994 to 1995. The
net loan portfolio increased $34.6 million from December 31, 1995 to December
31, 1996, which resulted in the recognition of $450,000 of additional reserves
during the year. The ratio of net charge-offs to average total loans has
remained stable, and management has no additional information that indicates
increased charge-offs will be experienced in the future. Management's analysis
of the allowance for possible loan losses indicates that the current level of
1.31% of net outstanding loans appears adequate to cover the risk of potential
losses in the loan portfolio at December 31, 1996.
Non-performing assets (defined as loans 90 days or more past due but still
accruing interest, loans in non-accrual status, restructured loans and other
real estate owned) totaled $2,937,000, or .62% of total assets, at December 31,
1996. This represents an increase from $2,350,000 and .53% at December 31,
1995. This increase can be attributed to a large agricultural real estate loan
being transferred to non-accrual status in early 1996. Non-performing assets
decreased at December 31, 1995 as compared to $2,955,000, or .88% of total
assets, at December 31, 1994.
NON-INTEREST INCOME
Total other operating income is comprised of fee based revenues from mortgage,
trust, and data processing services, as well as deposit and other customer
service charges. Excluding security gains and losses, other operating income
totaled $8.34 million for 1996, increasing from $7.47 million in 1995 and $3.37
million in 1994. This change represents a $.52 earnings per share increase from
1995 to 1996, all of which can be attributed to increased mortgage revenues at
Castle Mortgage, Inc. during this period. Mortgage loan origination income
represents the largest source of fee based revenue for the company and includes
income generated from processing and closing fees, commission income, servicing
release premiums, and net gains (losses) on the sales of these loans.
Trust fee revenues increased 17.8% to $644,455 in 1996 as compared to $547,270
in 1995 and $509,417 in 1994. The Company continues to focus on growth of trust
services in light of corporate goals to diversify revenue sources. The market
value of assets managed by the Asset and Trust Management Group grew to $123.2
million at December 31, 1996 as compared to $115.8 and $91.9 million at year end
1995 and 1994, respectively.
During 1995, the Company sold a piece of real estate that had been used for
corporate offices which generated a gain of $322,000. During 1996, a small
piece of real estate adjacent to the parcel sold in 1995 was also disposed of,
resulting in a gain of $23,000. The net earnings per share effect of this
reduction in income was $.15. Data processing fees are another revenue source
that declined in 1996. This $143,451, or $.07 per share, reduction in income is
a result of the data processing services to non-affiliated banks that were
discontinued during 1996 as the result of a merger.
The Subsidiaries continue to periodically reevaluate fee schedules to ensure
that they are fair to the customer and adequately compensate the Company for
costs incurred and risks assumed. Net security gains, on a pre-tax basis,
totaled $40,809 in 1996 as compared to net losses of $283,574 and $28,696 in
1995 and 1994, respectively. The entire investment portfolio is classified as
available-for-sale and all sales during the last three years were made from the
available-for-sale classification. During the first quarter of 1995, several
securities were sold at a loss in an effort to restructure the Company's
interest rate risk position and to reinvest in higher yielding investments. The
portfolio is recorded at current market value in the accompanying financial
statements. It is management's expectation to classify all investment
securities purchased as available-for-sale for the foreseeable future. Changes
in the market value of these securities are made by a charge to equity, net of
applicable income taxes. The decision to purchase or sell a security is based
on a number of factors including the potential for increased yield, improved
liquidity, asset mix adjustment, or improvement in the interest rate gap. Sales
of securities over the past three years have been relatively minor in nature and
have resulted in insignificant gains and losses in each year.
OTHER OPERATING EXPENSES
Other operating expenses totaled $23.1 million in 1996 as compared to $18.6
million and $14.7 million in 1995 and 1994, respectively. This increase in
expenses reduced earnings per share by $2.02 from 1995 to 1996 and $1.70 per
share from 1994 to 1995. As a percentage of average assets, total operating
expenses increased to 5.01% in 1996 versus 4.74% in 1995 and 3.92% in 1994. The
efficiency ratio, which measures the level of non-interest expense to total tax
equivalent net revenues, was 88.5% in 1996 as compared to 78.1% and 73.4% in
1995 and 1994, respectively. The increase in the efficiency ratio is a result
of the increased operating expenses associated with the start-up of the
wholesale mortgage lending function, as well as increased personnel costs at the
corporate level relating to centralization efforts.
Salaries and employee benefits expense represents the largest component of other
operating expenses. This category increased $2.9 million, or 25.0% from 1995 to
1996. During 1995, this expense increased $3.1 million, or 38.1%, when
<PAGE>
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATION
18
compared to 1994. The Company employed 334 full-time equivalent (FTE) employees
at December 31, 1996 as compared to 278 and 195 at December 31, 1995 and 1994,
respectively. The increase in FTEs during 1996 is a result of additional
mortgage originators and lending officers at the bank Subsidiaries, as well as
increased production and operations staff at Castle Mortgage, Inc. The increase
during 1995 was a result of the acquisition of the mortgage operations of
Premier Home Financing (Premier). The total cost per FTE increased 4.06% during
1996 as compared to 1995. Total cost per FTE during 1995 decreased 3.13% when
compared to 1994. The increase in cost per FTE during 1996 relates to normal
salary increases. 1995 salaries and benefits expense includes approximately
$140,000 from the early distribution of deferred compensation contracts assumed
in connection with The Bank of Yorkville acquisition.
Occupancy and furniture and fixtures expenses totaled $3.2 million in 1996, an
increase of $815,505, or 34.4%, over 1995. This increase is a result of the
start-up of two new mortgage origination offices during 1996, as well as
increased equipment costs relating to computer hardware and software upgrades.
During 1995, occupancy and furniture and fixture expenses increased $328,775, or
16.1%, over 1994 expenses as a result of the acquisition of Premier.
Outside services expense increased 42.2% to $1,141,695 during 1996 as compared
to $802,868 in the prior year. Advertising expense increased 51.9% in 1996 to
$632,223 versus $416,314 in 1995. These increases relate to increased
professional fees and marketing expenses associated with management's continuing
efforts to identify growth and revenue opportunities. Outside services expense
and advertising expense were $695,057 and $351,746, respectively, in 1994.
Goodwill amortization expense increased $52,646, or 11.2%, during 1996 as a
result of a full year of amortization of the goodwill acquired with the 1995
purchase of Premier. Goodwill amortization expense totaled $523,604, $470,958,
and $387,786 during 1996, 1995, and 1994 respectively. Increases in operating
expenses were partially off-set by a $410,000 decrease in FDIC insurance expense
during 1996 as a result of a reduction in FDIC premiums in 1995 for well managed
financial institutions. FDIC premiums decreased $386,000, or 48.0%, in 1995
versus 1994 as a result of this premium reduction.
Management anticipates that current upward trends in other operating expenses
will slow as economies of scale are realized at the holding company level
through centralization of bank functions such as internal audit, human
resources, accounting, marketing, data processing, and purchasing. Subsidiary
management also continues to focus on cost containment. However, management's
cost containment efforts are tempered by the need to maintain consistently high
levels of customer service, the need for long-term investment in equipment and
facilities, and the need to attract and retain qualified staff. Several staff
additions were made during 1996 to help facilitate future growth in key
operational areas. Management also anticipates that inflation will remain
moderate over the next several years, which will further limit the growth in
expenses.
The Financial Accounting Standards Board (FASB) also issued Statement No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of." This statement provides guidance for recognition and
measurement of impairment of long-lived assets, certain intangible assets and
goodwill related both to assets to be held and used, and assets of which are to
be disposed. Statement No. 121 is effective for fiscal years beginning after
December 15, 1995. Implementation of this statement had no impact on the
financial results of the Company.
In 1995 the FASB also issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights," which requires capitalization of servicing rights on mortgage loans
when the loans are to be sold and the servicing retained. In addition, SFAS No.
125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities," Supersedes SFAS No. 122 and is effective in
1997. Currently, the Company primarily sells all mortgage loans with servicing
released, thus implementation of both of these accounting statements is not
expected to be material to the Company's business practices or results of
operations.
BALANCE SHEET STRUCTURE
Total assets at December 31, 1996 were $473.4 million, a $29.5 million or 6.65%
increase over December 31, 1995 total assets of $443.6 million. Average assets
for 1996 grew by more than $39.7 million or 9.43% to $460.7 million as compared
to $421.0 million for 1995. Growth of $34.6 million, or 13.6%, in the loan
portfolio and $6.9 million, or 50.9%, of mortgage loans held-for-sale accounted
for the increase in total assets. Management continues efforts to maximize
returns on assets through shifts in asset mix. As previously indicated,
increasing loans and mortgage loans held for sale with quality credits continues
to be a priority. Cash and cash equivalents are continually monitored and
maintained at operational minimums to utilize resources in historically higher
yielding assets such as loans and mortgage loans held for sale.
The Company's asset growth has been funded primarily by growth in deposit
accounts and short-term borrowings. Average deposits increased $29.9 million,
or 8.3%, during 1996, while average short-term borrowings increased $4.2 million
or 37.0%. The Subsidiary banks are experiencing significant competition for
deposits, which has caused an increase in the company's cost of funds, as noted
previously. Management continues to view "core" deposits (individuals,
partnerships and corporate accounts) as the primary funding source for future
growth of the Company. Brokered deposits totaled $2,080,000 at December 31,
1996, with interest rates ranging from 6.30% to
<PAGE>
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATION
19
6.75% and maturities ranging from August 1997 through August 2000. The deposit
growth required to fund the increasing operations of the Company will require
the Subsidiaries to continue to develop and offer high value deposit products
that attract new customer relationships, as well as maintaining existing ones.
AVERAGE ASSETS
(in millions)
[BAR CHART]
1992 320,634,025
1993 347,272,119
1994 402,254,330
1995 420,962,431
1996 460,675,714
CAPITAL
The Company is committed to maintaining strong capital positions in both the
Subsidiaries as well as 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. During 1996,
common stockholders' equity increased $615,000 over December 31, 1996, after a
$925,000 reduction in unrealized gains on investment securities available-for-
sale. The Company issued 15,488 shares of stock through its Employee Stock
Purchase Plan during 1996, which generated $311,102 of new shareholders' equity.
The Company's Tier 1 Leverage ratio at December 31, 1996 was 6.39%, which
increased slightly from 6.27% as of December 31, 1995. This ratio exceeds the
regulatory capital minimum and management believes the Company is maintaining a
strong capital position. The Company's Total Risk Weighted Capital ratio
decreased slightly to 10.66% as of December 31, 1996 from 10.95% as of December
31, 1995. The Tier 1 Capital ratio increased from 9.33% at December 31, 1995 to
9.45% at December 31, 1996. For further discussion of the regulatory capital
requirements, see Note 14 to the Consolidated Financial Statements.
AVERAGE COMMON SHAREHOLDER'S EQUITY
(in millions)
[BAR CHART]
1992 18,959,841
1993 21,435,984
1994 24,592,401
1995 29,846,919
1996 31,814,034
LIQUIDITY
The Company ensures the Subsidiaries 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 repayment 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 Subsidiaries through its discretionary
access to short-term funding sources 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 1996 as compared to prior years. These fluctuations
primarily related to increases in the loan portfolio and mortgage loans held-
for-sale, as explained previously, which have primarily been funded by increases
in deposit accounts and short-term borrowings.
INTEREST RATE SENSITIVITY
Company senior management monitors and manages interest rate exposure to
minimize the impact of interest rate fluctuations. Interest rate exposure is
reviewed and managed, to the extent possible, by matching interest bearing
assets and interest bearing liabilities. Maximization of net interest income
consistent with acceptable risk and liquidity needs are the underlying
objectives of asset/liability management.
Movements in market interest rates are a significant factor in the changes in
the net interest margin. Another factor in this equation relates to the
difference between the amount of interest earning assets that are scheduled to
mature or reprice during a period and the amount of interest bearing liabilities
maturing or repricing in the same period. This difference is generally referred
to as the interest sensitivity gap. A positive gap, or asset sensitive
position, indicates there are more rate-sensitive assets than rate-sensitive
liabilities repricing or maturing within specified time frames, which generally
has a favorable impact on net interest income in periods of rising interest
rates. Conversely, a negative gap, or liability sensitive position, would
generally imply a favorable impact on net interest income on periods of
declining interest rates. In periods of changing interest rates, net interest
margin is not only impacted by the amounts of repricing assets and liabilities,
but also by the rate at which repricings occur. Earnings may also be impacted
by variances in repayment of loans and securities.
<PAGE>
MANAGEMENT DISCUSSION & ANALYSIS OF FINANCIAL CONDITION & RESULTS OF OPERATION
20
The following table indicates the Company's interest sensitive assets and
liabilities over specific time horizons as well is its interest sensitivity gap
at December 31, 1996:
<TABLE>
<CAPTION>
Balances Subject to Repricing Within
---------------------------------------------------------------------------
($ in thousands) 90 Days 180 Days 1 Year Over 1 Year Total
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest earning cash and due from banks $ 3 0 0 0 3
Excess funds sold 1,950 0 0 0 1,950
Investment securities available for sale 20,016 3,494 10,770 98,792 133,072
Mortgage loans held for sale 20,343 0 0 0 20,343
Net Loans 89,785 38,466 29,611 131,307 289,169
- - -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets 132,097 41,960 40,381 230,099 444,537
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
NOW and Savings deposits $ 96,891 0 0 0 96,891
CDs and other interest-bearing deposits 65,374 33,089 56,923 108,599 263,985
Short-term borrowings 19,588 0 0 0 19,588
Long-term borrowings 10,150 0 0 0 10,150
- - -----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 192,003 33,089 56,923 108,599 390,614
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
Net asset (liability) repricing difference $ (59,906) 8,871 (16,542) 121,500 53,923
Interest rate hedges (6,932) 0 0 0
Specific placement contracts (13,411) 0 0 0
- - -----------------------------------------------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------------------------------------------
Cumulative asset (liability) repricing difference $ (80,249) (71,378) (87,920) 33,580
- - ------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------
Cumulative earning assets to cumulative
interest-bearing liabilities 0.69 0.77 0.76 1.14
- - ------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------
Cumulative asset (liability) repricing difference
as a percent of total earning assets -18.05% -16.06% -19.78% 7.55%
- - ------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
The interest rate hedges and specific placement contracts included in the above
table represent off-balance sheet obligations to deliver mortgage loans into the
secondary market, all of which mature within the first 90 days of 1997. The
entire mortgage loans held for sale portfolio is also included in the 90 day
category, as these loans correspond to the forward sales contracts maturing
during this time period. The interest rates on lines-of-credit included in
short-term borrowings, as well as the interest rate on the Company's long-term
debt, reprice every 90 days or are priced at prime. As a result, these
liabilities are also included in the 90 day category in the above table. Non-
maturing interest bearing NOW and savings accounts are contractually subject to
repricing within 90 days and therefore are included in the 90 day category in
the above table. Management believes that these deposits are less interest rate
sensitive and are less likely to reprice, regardless of the contractual ability
to do so. As a result, management believes that the interest rate gap is
overstated in the short-term as itrelates to these deposit liabilities.
The Company's asset/liability management policy calls for the maintenance of a
positive funds gap if rates are expected to rise and a negative funds gap if
rates are expected to fall. Management currently believes the interest rates
will remain fairly stable to increasing over the next twelve months, thus
resulting in the gap position shown in the table above.
OVERVIEW
The Company continues to face new and different challenges as the financial
services industry evolves. Management recognizes this continuing evolution and
is developing new, creative solutions for each additional challenge faced by
financial services providers. The Company's development of alternative financial
service companies to provide diversification should allow future growth and
expanded returns. The Company is positioned to take advantage of opportunities
in traditional and non-traditional markets with new products, increased access
to financial products through new facilities and other modes of access for our
customers. The acquisition of Premier Home Financing, as well as the expansion
of Castle Finance Company and Castle Mortgage, Inc., has expanded the Company's
lending product offerings and provided access to new market areas. The creation
of full service brokerage departments, as well as the introduction of the
TeleBanc and Check Card products at the subsidiary banks, answer customer
demands for market innovation.
Historically, the Company has responded well to challenges and opportunities
with innovative products and services, fair and appropriate pricing, sound risk
management practices, cost containment initiatives, and aggressive pursuit of
market opportunities. Management believes that the Company's future success will
continue to be from effective operation of the Subsidiaries. The development of
holding company functions was designed to provide essential services to the
Subsidiaries to allow them to continue as dominant financial services providers
in the markets which they serve and to provide a solid basis for future growth
through acquisition of financial assets in accordance with the Company's long-
term strategic plan.
<PAGE>
CONSOLIDATED BALANCE SHEETS
21
<TABLE>
<CAPTION>
DECEMBER 31,
ASSETS 1996 1995
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (note 3) $ 10,616,722 15,499,903
Excess funds sold 1,950,000 5,550,000
- - ---------------------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 12,566,722 21,049,903
- - ---------------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale (note 4) 133,071,980 135,565,802
- - ---------------------------------------------------------------------------------------------------------------------------------
Mortgage loans held for sale 20,342,698 13,483,973
- - ---------------------------------------------------------------------------------------------------------------------------------
Loans (note 5) 292,340,920 257,673,647
Less:
Allowance for possible loan losses (note 5) 3,775,108 3,308,721
Unearned income and deferred loan fees 3,172,278 3,074,425
- - ---------------------------------------------------------------------------------------------------------------------------------
Net loans 285,393,534 251,290,501
Premises and equipment (note 6) 10,233,862 9,983,628
Goodwill, net of amortization 5,062,350 5,585,954
Other assets 6,752,528 6,677,364
- - ---------------------------------------------------------------------------------------------------------------------------------
$ 473,423,674 443,637,125
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ---------------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Non interest-bearing 43,232,861 40,523,691
Interest-bearing (note 7) 360,876,356 345,646,046
- - ---------------------------------------------------------------------------------------------------------------------------------
Total deposits 404,109,217 386,169,737
Short-term borrowings (note 8) 19,588,237 6,590,912
Long-term debt (note 9) 10,150,000 11,000,000
Other liabilities 4,614,454 5,530,036
- - ---------------------------------------------------------------------------------------------------------------------------------
Total liabilities 438,461,908 409,290,685
- - ---------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value; authorized 100,000 shares (note 12):
7.75% cumulative preferred stock, 2,600 shares issued and outstanding 2,600,000 2,600,000
Common stock, $.331/3 par value; 5,000,000 shares authorized, 2,072,619 and
2,057,131 shares issued and outstanding in 1996 and 1995, respectively 690,873 685,710
Additional paid-in capital 5,001,343 4,695,404
Net unrealized gains (losses) on investment securities, net of tax (note 10) 447,057 1,371,900
Retained earnings (notes 13 and 14) 26,222,493 24,993,426
- - ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 34,961,766 34,346,440
Commitments and contingent liabilities (notes 15 and 16)
- - ---------------------------------------------------------------------------------------------------------------------------------
$ 473,423,674 443,637,125
- - ---------------------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
22
<TABLE>
<CAPTION>
Years Ended December 31 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 26,248,059 23,310,097 20,276,986
Interest and dividends on investment securities:
Taxable 6,944,564 7,281,145 6,898,305
Nontaxable 746,763 1,034,887 1,373,312
Interest on time deposits 9,359 53,881 6,248
Interest on excess funds sold 303,304 451,579 348,442
Interest on mortgage loans held for sale 2,185,082 518,128 --
- - ---------------------------------------------------------------------------------------------------------------------
Total interest income 36,437,131 32,649,717 28,903,293
- - ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 16,090,419 14,526,192 11,644,100
Interest on short-term borrowings 975,632 498,268 94,754
Interest on long-term debt 791,919 902,200 748,600
- - ---------------------------------------------------------------------------------------------------------------------
Total interest expense 17,857,970 15,926,660 12,487,454
- - ---------------------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 18,579,161 16,723,057 16,415,839
- - ---------------------------------------------------------------------------------------------------------------------
Provision for possible loan losses (note 5) 1,112,836 488,011 322,835
- - ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 17,466,325 16,235,046 16,093,004
- - ---------------------------------------------------------------------------------------------------------------------
Other operating income:
Trust fees 644,455 547,270 509,417
Deposit service charges 396,483 469,619 479,182
Other service charges 1,153,336 1,185,254 983,455
Data processing fees 118,733 262,184 173,405
Investment securities gains (losses), net (note 4) 40,809 (283,574) (28,696)
Gain on sale of land and buildings 22,933 321,789 --
Mortgage banking income 5,172,127 3,979,723 654,391
Other income 831,400 705,789 566,072
- - ---------------------------------------------------------------------------------------------------------------------
Total other operating income $ 8,380,276 7,188,054 3,337,226
- - ---------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits (note 11) $ 14,465,570 11,570,057 8,377,874
Net occupancy expense of premises 1,507,905 1,261,360 1,037,530
Furniture and fixtures 1,679,861 1,110,901 1,005,956
Office supplies 473,619 393,575 273,804
Outside services 1,141,695 802,868 695,057
Advertising expense 632,223 416,314 351,746
FDIC insurance assessment 8,000 418,256 804,161
Amortization expense-goodwill 523,604 470,958 387,786
Other expenses 2,643,622 2,157,401 1,768,026
- - ---------------------------------------------------------------------------------------------------------------------
Total other operating expenses 23,076,099 18,601,690 14,701,940
- - ---------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 2,770,502 4,821,410 4,728,290
- - ---------------------------------------------------------------------------------------------------------------------
Income tax expense (note 10) 926,000 1,457,000 1,368,000
- - ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,844,502 3,364,410 3,360,290
- - ---------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 1,643,002 3,026,235 2,885,449
- - ---------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------
Earnings per share data based on weighted average common
shares and common stock equivalents outstanding of
2,066,213 shares in 1996, 2,034,479 shares in 1995
and 1,975,513 shares in 1994: $ .80 1.49 1.46
- - ---------------------------------------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
23
<TABLE>
<CAPTION>
NET UNREALIZED
GAIN (LOSS) ON
PREFERRED COMMON INVESTMENT RETAINED
STOCK STOCK SURPLUS SECURITIES EARNINGS TOTAL
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $ 5,350,000 635,293 2,690,539 305,260 19,767,528 28,748,620
Issuance of 84,700 shares of
common stock -- 28,233 1,081,745 -- -- 1,109,978
Change in unrealized gains (losses) on
investment securities, net of tax -- -- -- (1,755,802) -- (1,755,802)
Net earnings -- -- -- -- 3,360,290 3,360,290
Cash dividends on preferred stock -- -- -- -- (474,841) (474,841)
Cash dividends on common stock
($ .16 per share) -- -- -- -- (316,858) (316,858)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994 5,350,000 663,526 3,772,284 (1,450,542) 22,336,119 30,671,387
Issuance of 66,553 shares of
common stock - 22,184 923,120 -- -- 945,304
Redemption of preferred stock (2,750,000) -- -- -- -- (2,750,000)
Change in unrealized gains (losses) on
investment securities, net of tax -- -- -- 2,822,442 -- 2,822,442
Net earnings -- -- -- -- 3,364,410 3,364,410
Cash dividends on preferred stock -- -- -- -- (338,175) (338,175)
Cash dividends on common stock
($ .18 per share) -- -- -- -- (368,928) (368,928)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 2,600,000 685,710 4,695,404 1,371,900 24,993,426 34,346,440
Issuance of 15,488 shares of
common stock -- 5,163 305,939 -- -- 311,102
Change in unrealized gains (losses) on
investment securities, net of tax -- -- -- (924,843) -- (924,843)
Net earnings -- -- -- -- 1,844,502 1,844,502
Cash dividends on preferred stock -- -- -- -- (201,500) (201,500)
Cash dividends on common stock
($ .20 per share) -- -- -- -- (413,935) (413,935)
- - ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 2,600,000 690,873 5,001,343 447,057 26,222,493 34,961,766
- - ------------------------------------------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
24
<TABLE>
<CAPTION>
Years Ended December 31 1996 1995 1994
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 35,720,578 33,359,446 29,386,824
Fees received 9,331,831 6,195,899 3,475,327
Net increase in mortgage loans held for sale (6,858,725) (13,483,975) --
Interest paid (17,872,075) (15,427,524) (12,444,173)
Cash paid to suppliers and employees (21,543,772) (16,553,161) (12,477,814)
Income taxes paid (1,178,151) (684,603) (2,301,812)
- - ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities (2,400,314) (6,593,918) 5,638,352
- - ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities of investment securities available for sale 46,553,531 29,177,947 27,096,836
Sales of investment securities available for sale 23,162,512 16,657,168 2,503,370
Purchases of investment securities available for sale (68,622,220) (40,621,923) (31,620,378)
Net increase in loans (35,378,005) (20,776,422) (9,874,922)
Premises and equipment expenditures (1,626,090) (1,348,773) (1,294,636)
Proceeds from sale of land and building 44,933 912,087 --
Net cash and cash equivalents used for acquisition
of Subsidiary -- (2,027,884) --
- - ----------------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (35,865,339) (18,027,800) (13,189,730)
- - ----------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts 5,030,650 1,685,602 (8,087,317)
Net increase in certificates of deposit 12,908,830 32,333,528 7,526,123
Dividends paid on preferred stock (201,500) (338,175) (474,841)
Dividends paid on common stock (413,935) (368,928) (316,858)
Net proceeds from short-term debt 12,997,325 (2,047,022) 2,266,458
Repayment of long-term debt (850,000) (800,000) (750,000)
Redemption of preferred stock -- (2,750,000) --
Issuance of common stock 311,102 945,304 1,109,978
- - ----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 29,782,472 28,660,309 1,273,543
- - ----------------------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (8,483,181) 4,038,591 (6,277,835)
Cash and cash equivalents at beginning of year 21,049,903 17,011,312 23,289,147
- - ----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $12,566,722 21,049,903 17,011,312
- - ----------------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(CONTINUED ON NEXT PAGE)
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
25
<TABLE>
<CAPTION>
Years Ended December 31 1996 1995 1994
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided
by operating activities:
Net earnings $ 1,844,502 3,364,410 3,360,290
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 2,122,292 1,732,036 1,449,704
Provision for possible loan losses 1,112,836 488,011 322,835
Losses (gains) on sale of investment
securities (40,809) 283,574 28,696
Gain on sale of land and building (22,933) (321,789) --
Increase (decrease) in:
Income taxes payable (252,151) 774,397 (933,812)
Interest payable 50,711 499,136 43,281
Unearned income 97,853 122,990 251,275
Other liabilities 167,173 1,379,738 771,997
Decrease (increase) in:
Interest receivable (373,131) (321,886) 61,621
Other assets 193,343 (620,780) 196,114
Increase in mortgage loans held for sale (6,858,725) (13,483,975) --
Discount accretion recorded as income (794,201) (876,962) (612,815)
Premium amortization charged against income 352,926 387,182 699,166
- - ----------------------------------------------------------------------------------------------------------------------------------
$(2,400,314) (6,593,918) 5,638,352
- - ----------------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------------
Schedule of Non-Cash Financing and Investing Activities:
Issuance of common stock for the acquisition of Premier
Home Financing $ -- 637,000 --
- - ----------------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------------
A summary of the acquisition of substantially all the assets and
liabilities of Premier Home Financing in 1995 is as follows:
Fair value of assets acquired$ -- 9,722,863 --
Excess of acquisition cost over fair value
of assets acquired -- 1,922,000 --
Acquisition cost -- (2,968,000) --
- - ----------------------------------------------------------------------------------------------------------------------------------
Liabilities assumed $ -- 8,676,863 --
- - ----------------------------------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
26
December 31, 1996, 1995, 1994
- - --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Castle BancGroup, Inc. and
subsidiaries (Company) are prepared in conformity with generally accepted
accounting principles and prevailing practices of the financial services
industry which require management to make estimates that affect the
reported financial position and results of operations. Actual results
could differ from those estimates. The following is a summary of the
significant accounting and reporting policies used in preparing the
consolidated financial statements.
(a) BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and the Company's wholly owned subsidiaries, The Sandwich State
Bank, First National Bank in DeKalb/Sycamore, Castle Finance Company, Inc.,
Castle Mortgage, Inc., and SBI Illinois, Inc., which owns 100% of First
State Bank of Harvard and The Bank of Yorkville (Subsidiaries).
Significant intercompany transactions and accounts have been eliminated in
consolidation.
(b) INVESTMENT SECURITIES
Investments in debt and equity securities are classified as available for
sale and reported at fair value, adjusted for amortization of premiums and
accretion of discounts using a method that approximates level yield.
Unrealized gains and losses, net of related deferred income taxes, are
reported in stockholder's equity.
Gains and losses from the sale of investment securities prior to maturity
are computed under the specific identification method and are included in
investment securities gains (losses), net, in the consolidated statement of
earnings.
(c) MORTGAGE LOANS HELD FOR SALE
Mortgage loans held for sale are valued at the lower of cost or market
value as determined by outstanding commitments from investors or current
investor yield requirements on an aggregate basis. Holding costs are
treated as period costs.
(d) MORTGAGE BANKING INCOME
Gains or losses on sales and service release premiums of mortgage loans
held for sale are recognized at the time the loans are purchased by the
permanent investor and are based upon the difference between the selling
price and the carrying value of the related mortgage loan sold. All
mortgage loans are sold servicing released, and the related premiums are
recognized at the time the loans are sold. Points, application and other
origination fees, net of appraisal, credit report and inspection costs, are
recognized at closing on mortgage loans held for sale.
(e) LOANS
Loans are carried at the principal balance outstanding. Interest on loans
is computed on the principal balance outstanding, except that interest on
certain consumer loans is recognized using the sum-of-the-months-digit
method which is not materially different than the level yield method. No
interest income on nonaccrual and impaired loans is recognized until the
principal is collected. Loans are generally placed on nonaccrual status
when they are past due 90 days as to either interest or principal.
However, loans well secured and in the process of collection may remain on
accrual status, at the judgment of senior credit management. A nonaccrual
loan may be restored to accrual basis when interest and principal payments
are current and prospects for future payments are no longer in doubt.
On January 1, 1995, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a
Loan," and No. 118, "Accounting by Creditors for Impairment of a Loan -
Income Recognition and Disclosures." Loans are considered impaired when,
based on current information and events, it is probable that the Company
will not be able to collect all amounts due according to the contractual
terms of the loan agreement. Under the accounting standards, the
impairment is measured based on the present value of expected future cash
flows, or alternatively, the observable market price of the loans or the
fair value of the collateral. However, for those loans that are collateral
dependent, and for which management has determined foreclosure is probable,
the measure of impairment is based on the fair value of the collateral less
estimated disposal costs. Certain loans, such as loans carried at the
lower of cost or market or small-balance homogeneous loans (credit card
loans, installment loans) are exempt from the provisions of SFAS No. 114.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27
SFAS No. 114 and No. 118 require certain disclosures about impaired loans,
the allowance for possible loan losses allocated to impaired loans, and
interest income recognized on impaired loans. These disclosures are
included in Note 5. The adoption of these accounting standards did not
have a material effect on net income or the allowance for possible loan
losses.
Lease financing receivables and the related unearned income are included in
loans. Unearned income and investment tax credits related to lease
financing receivables are recognized in income over the life of the lease
under a method that yields an approximate level rate of return on the
unrecovered lease investment.
(f) LOAN FEES
The Subsidiaries defer all material fees and costs associated with the
origination of loans and leases. Such fees and costs are amortized, using
a level yield method, over the period to maturity of the loans and leases.
(g) ALLOWANCE FOR POSSIBLE LOAN LOSSES
An allowance for possible loan losses is maintained at a level deemed
adequate by management to provide for known and inherent risks in the loan
portfolio. The allowance is based upon a continuing review of specific
loans, past loan loss experience, current economic conditions which may
affect the borrowers' ability to pay, and the underlying collateral value
of the loans. Loans deemed to be uncollectible are charged off and
deducted from the allowance. The provision for possible loan losses and
recoveries on loans previously charged off are added to the allowance.
(h) PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is charged to expense on a straight-line or accelerated basis
over the estimated useful lives of the respective assets, as follows:
building and improvements, fifteen to forty years; and furniture, fixtures,
and equipment, five to ten years.
(i) GOODWILL
The total cost of the Company's acquisitions of various subsidiaries
exceeded their fair value of net assets acquired by approximately
$7,814,000. This amount, net of accumulated amortization of approximately
$2,752,000 and $2,231,000 at December 31, 1996 and 1995, respectively, is
shown as goodwill in the accompanying consolidated balance sheets and is
being amortized on a straight line basis over 15 years.
(j) OTHER REAL ESTATE
Other real estate owned includes foreclosures and property acquired in
forgiveness of debt, and is included in other assets in the accompanying
consolidated balance sheets. These properties are carried at the lower of
cost or fair market value, less the estimated costs of disposal. Losses
arising from the acquisition of property in full or partial satisfaction of
loans are treated as loan losses. Any subsequent losses are charged to
other expenses.
(k) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases, net operating loss (NOL) and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company and Subsidiaries file a consolidated Federal income tax return.
(l) EARNINGS PER SHARE
Earnings per share are computed based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
year as adjusted for the May 11, 1994 two-for-one stock split. For
calculation purposes, earnings are reduced by preferred stock dividend
requirements.
(2) ACQUISITION
On May 24, 1995, the Company, through its subsidiary Castle Mortgage, Inc.,
acquired substantially all the assets and assumed substantially all
liabilities of Premier Home Financing (Premier) in a transaction that was
accounted for as a purchase. The cost of the acquisition was approximately
$2,968,000 which was paid in cash and common stock of the Company, which
exceeded the fair value of net assets of Premier by approximately
$1,922,000.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
28
(3) CASH AND DUE FROM BANKS
Certain of the Company's subsidiary banks, which are members of the Federal
Reserve System, are required to maintain certain daily reserve balances in
accordance with Federal Reserve Board requirements. The reserves required
to be maintained at the Federal Reserve Bank averaged $950,000 and $499,000
in 1996 and 1995, respectively.
(4) INVESTMENT SECURITIES
A comparison of amortized cost and fair value of investment securities
available-for-sale at December 31, 1996 and 1995 follows:
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 101,080,871 897,567 (634,488) 101,343,950
Obligations of state and political
subdivisions 10,627,931 350,110 (72,682) 10,905,359
Mortgage-backed securities 19,574,597 290,026 (133,177) 19,731,446
- - ----------------------------------------------------------------------------------------------------
Total debt securities 131,283,399 1,537,703 (840,347) 131,980,755
Federal Home Loan Bank stock 966,600 -- -- 966,600
Other equity securities 124,625 -- -- 124,625
- - ----------------------------------------------------------------------------------------------------
Total securities $ 132,374,624 1,537,703 (840,347) 133,071,980
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 97,508,730 1,530,828 (503,967) 98,535,591
Obligations of state and political
subdivisions 12,386,226 570,457 (7,923) 12,948,760
Mortgage-backed securities 23,473,310 567,384 (83,868) 23,956,826
- - ----------------------------------------------------------------------------------------------------
Total debt securities 133,368,266 2,668,669 (595,758) 135,441,177
Other equity securities 124,625 -- -- 124,625
- - ----------------------------------------------------------------------------------------------------
Total securities $ 133,492,891 2,668,669 (595,758) 135,565,802
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available-for-sale at December
31, 1996 and 1995 by contractual maturity are shown below. Actual maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------------------------------------------------
Amortized Fair Amortized Fair
cost value cost value
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 14,872,387 14,907,813 34,500,941 34,437,373
Due after one year through five years 54,661,029 54,954,129 51,438,692 52,381,742
Due after five years through ten years 42,175,386 42,387,367 23,760,323 24,462,196
Due after ten years -- -- 195,000 203,040
- - ----------------------------------------------------------------------------------------------------
111,708,802 112,249,309 109,894,956 111,484,351
Mortgage-backed securities 19,574,597 19,731,446 23,473,310 23,956,826
- - ----------------------------------------------------------------------------------------------------
Total debt securities 131,283,399 131,980,755 133,368,266 135,441,177
Federal Home Loan Bank stock 966,600 966,600 -- --
Other equity securities 124,625 124,625 124,625 124,625
- - ----------------------------------------------------------------------------------------------------
Total securities $ 132,374,624 133,071,980 133,492,891 135,565,802
- - ----------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
29
Gross gains of approximately $162,000, $79,000, and $6,000 occurred from
security activity during 1996, 1995, and 1994 respectively. Gross losses
of approximately $121,000, $363,000, and $35,000 occurred from security
activity during 1996, 1995, and 1994 respectively. All security gains and
losses that occurred during 1996 and 1995 were as a result of transactions
involving available-for-sale securities.
Investment securities carried at approximately $66,519,000 and $46,570,000
at December 31, 1996 and 1995 respectively, are pledged to secure deposits
and for other purposes permitted or required by law.
(5) LOANS
The composition of the loan portfolio at December 31 is as follows:
1996 1995
---------------------------------------------------------------------------
Commercial, financial, and agricultural $ 69,594,462 63,196,344
Real estate mortgage 186,612,809 159,927,950
Consumer 35,242,151 33,094,011
Lease financing receivables 891,498 1,455,342
---------------------------------------------------------------------------
Total $ 292,340,920 257,673,647
---------------------------------------------------------------------------
---------------------------------------------------------------------------
The Company provides several types of loans to customers, including
residential, construction, commercial and installment loans. The largest
component of the loan portfolio is secured by residential and commercial
real estate, or other interests in real property. Lending activities are
conducted with customers in a wide variety of industries as well as with
individuals with varying credit requirements. The Company does not have a
concentration of loans in any specific industry. Credit risk, as it
relates to the Company's business activities, tends to be geographically
concentrated in that the majority of the customer base lies within the
cities and surrounding communities served by the Company's Subsidiaries.
The components of non-performing loans and leases are as follows at
December 31:
1996 1995
---------------------------------------------------------------------------
Non-accrual loans and leases $ 2,348,000 $ 2,064,000
Restructured loans 314,000 270,000
---------------------------------------------------------------------------
Total non-performing loans and leases $ 2,662,000 $ 2,334,000
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Loans past due 90 days or more and still accruing interest are not included
above and totaled $201,000 and $16,000 at December 31, 1996 and 1995,
respectively.
Non-accrual and restructured loans and leases had the following effect on
interest income for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------------------
<S> <C> <C>
Income recognized $137,700 $104,600
Income which would have been recognized under original terms 356,900 194,600
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
Impaired loan information at December 31, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans for which a related allowance has been allocated $1,376,000 $1,081,000
Impaired loans for which no allowance has been allocated 267,000 135,000
--------------------------------------------------------------------------------------------------------------
Total loans determined to be impaired $1,643,000 $1,216,000
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
Allowance allocated to impaired loans, included in the allowance for possible
loan losses $401,000 $243,000
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
</TABLE>
Impaired loans averaged $1,429,000 and $1,385,000 for the years ended
December 31, 1996 and 1995, respectively. No interest was either
recognized or received on these impaired loans during 1996 and 1995. The
entire balance of impaired loans at December 31, 1996 and 1995 is
classified as non-accrual and is included in the non-accrual loan and lease
total presented above.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
30
At various times throughout the year, certain officers and directors of the
Company and its affiliates have borrowed money from the Subsidiary banks.
These loans were made in the ordinary course of business on substantially
the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other bank
customers.
The following summarizes activity on loans, including renewals, made to
related parties during 1996 and 1995:
1996 1995
--------------------------------------------------------------------------
Loans outstanding, beginning of year $ 3,345,000 3,562,000
New loans and renewals 1,772,000 1,540,000
Loan payments (1,672,000) (1,757,000)
--------------------------------------------------------------------------
Loans outstanding, end of year $ 3,445,000 3,345,000
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following is a summary of activity in the allowance for possible loan
losses:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 3,308,721 3,474,929 3,939,824
Addition from acquisition of subsidiary -- 650 --
Provision charged to expense 1,112,836 488,011 322,835
Additions to dealer reserves 118,253 51,076 572
Recoveries on loans previously charged off 341,153 284,270 180,142
----------------------------------------------------------------------------------------------------
4,880,963 4,298,936 4,443,373
Less loans charged off 1,105,855 990,215 968,444
----------------------------------------------------------------------------------------------------
Balance, end of year $ 3,775,108 3,308,721 3,474,929
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
(6) PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 are as follows:
1996 1995
--------------------------------------------------------------------------
Land and land improvements $ 1,802,339 1,759,443
Building and improvements 10,094,027 8,995,755
Furniture, fixtures, and equipment 7,183,449 6,959,240
--------------------------------------------------------------------------
19,079,815 17,714,438
Less accumulated depreciation 8,845,953 7,730,810
--------------------------------------------------------------------------
Total $ 10,233,862 9,983,628
--------------------------------------------------------------------------
--------------------------------------------------------------------------
(7) DEPOSITS
The aggregate amount of short-term jumbo certificates of deposit, each with
a minimum denomination of $100,000, is $49,542,000 and $42,499,000 at
December 31, 1996 and 1995, respectively. Included in these totals are
$2,080,000 of brokered deposits at December 31, 1996, with interest rates
ranging from 6.30% to 6.75%. The Company had no brokered deposits at
December 31, 1995.
(8) SHORT-TERM BORROWINGS
The components of short-term borrowings at December 31 are as follows:
1996 1995
--------------------------------------------------------------------------
Repurchase agreements $ 2,755,817 2,373,976
Federal funds purchased 10,000,000 --
Other short-term borrowings 6,832,420 4,216,936
--------------------------------------------------------------------------
Total $ 19,588,237 6,590,912
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The weighted average interest rate on short-term borrowings was 7.47% and
7.32% at December 31, 1996 and 1995.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
31
Included in other short-term borrowings are the following line-of-credit
agreements at December 31:
<TABLE>
<CAPTION>
1996 1995
Outstanding Outstanding
Principal Rate Principal Rate
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$5,000,000 maturing January 29, 1997 $5,000,000 7.31% $ -- N/A
$1,000,000 maturing May 5, 1997, unsecured -- 8.25% -- N/A
$3,000,000 maturing November 12, 1997, unsecured 1,124,000 8.25% 1,899,000 8.50%
$2,000,000 maturing December 17, 1997, unsecured -- 8.25% 1,150,000 8.50%
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
</TABLE>
The $5,000,000 line of credit is secured by outstanding stock of the
Subsidiaries, which is 100% owned by the Company.
The Company has also been approved for a total of $966,600 of Federal Home
Loan Bank advances at December 31, 1996. The advances are equal to the
amount of Federal Home Loan Bank stock owned by the Company, which is
pledged as collateral against any outstanding advances. There were no
outstanding balances on these advances at December 31, 1996.
(9) LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consists of the following:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amendment to the secured term loan dated May 1, 1992 with interest at
the 90 day LIBOR rate plus 1.625% (7.25% at December 31,
1996), principal payable in 8 semi-annual payments remaining due
from June 30, 1997 through December 31, 2000 $10,150,000 11,000,000
$10,150,000 11,000,000
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>
Scheduled principal payments on long-term debt for the next five years,
through maturity, are:
Year ended
December 31 Amount
-------------------------------------------------------------------------
1997 $ 900,000
1998 950,000
1999 1,000,000
2000 7,300,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The long-term debt agreement is secured by the stock of the Subsidiaries
and contains certain restrictive covenants, as further described in Note
13. The Company was in compliance with all financial covenants at December
31, 1996.
(10) INCOME TAXES
The components of Federal income tax expense (benefit) for 1996, 1995, and
1994 are as follows:
1996 1995 1994
-------------------------------------------------------------------------
Current $ 1,290,000 986,000 1,176,000
Deferred (364,000) 471,000 192,000
-------------------------------------------------------------------------
Total $ 926,000 1,457,000 1,368,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
32
The reasons for the difference between income taxes in the statements of
earnings and the amount computed by applying the statutory Federal income
tax rate of 34% in 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate $ 942,000 1,639,200 1,607,600
Tax-exempt interest, net of premium amortization (250,000) (308,400) (423,600)
Nondeductible amortization 169,000 173,900 174,900
Investment losses -- (81,800) --
Other, net 65,000 34,100 9,100
------------------------------------------------------------------------------------------
Total income tax expense $ 926,000 1,457,000 1,368,000
------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are as follows:
1996 1995
---------------------------------------------------------------------------
Deferred tax assets:
Deferred loan fees $ 138,900 160,500
Allowance for loan losses 577,500 693,700
Other -- 31,300
Deferred compensation 248,200 224,400
State net operating loss carryforwards 130,000 96,200
---------------------------------------------------------------------------
Total gross deferred tax assets 1,094,600 1,206,100
Less valuation allowance (33,900) (33,900)
---------------------------------------------------------------------------
Deferred tax assets 1,060,700 1,172,200
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Deferred tax liabilities:
Purchase accounting adjustments (591,000) (677,600)
Accretion on investments (148,800) (587,900)
Depreciation (217,700) (185,900)
Unrealized gains on investment securities (250,300) (804,900)
Net lease adjustment (80,100) (99,400)
Other, net (85,700) (48,300)
---------------------------------------------------------------------------
Total gross deferred tax liabilities (1,373,600) (2,404,000)
---------------------------------------------------------------------------
Net deferred tax assets $ (312,900) (1,231,800)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the capacity to carry back net operating losses, scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based on the level of
historical taxable income and projections for future taxable income over
the periods which the deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the benefits
of these deductible differences, net of the valuation allowance at December
31, 1996 and 1995. The valuation allowance consists of Illinois NOL carry
forwards relating to the acquisition of The Bank of Yorkville that are
available for use only at this subsidiary.
The Company has Illinois NOL carryfowards of $2,190,000 which will expire
in varying amounts beginning December 31, 2003 through December 31, 2011.
(11) EMPLOYEE BENEFIT PLANS
The Company maintains a profit-sharing plan which was amended and restated
in 1990. The amended plan covers substantially all officers and employees
of the Company. Under provisions of the plan, the Company is required to
make minimum annual contributions of 7.5% of net operating profits, as
defined in the plan. Contributions by the Company to the plan totaled
$620,000, $673,000, and $583,000 in 1996, 1995, and 1994, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
33
In 1995, the Company instituted a non-qualified supplemental employee
profit sharing plan. The supplemental plan covers all officers and
employees of the Company whose contributions under the qualified profit
sharing plan were limited by the Internal Revenue Code of 1986 (the Code),
as amended. Under the non-qualified plan, the Company is required to
accrue a liability for the contribution that was limited by the Code.
Contributions and earnings paid by the Company to the plan totaled
approximately $53,000 and $77,000 in 1996 and 1995, respectively.
In 1992, the Company instituted an Employee Stock Purchase Plan (Plan)
covering substantially all officers and employees of the Company. The
Company incurs no costs associated with the Plan except for nominal
administration expenses. The employees may purchase original issue Company
stock at market prices up to a maximum limit established within the Plan.
On December 23, 1994, the Company adopted a Stock Benefit Plan covering key
managerial employees and non-employee directors of the Company and its
Subsidiaries. The Stock Benefit Plan provides for the grant of incentive
stock options, nonqualified stock options, limited rights, stock
appreciation rights, and restricted stock. The Company may award options
to acquire up to 150,000 shares of its outstanding common stock, with no
options being granted after October 31, 2004. The exercise price on
outstanding nonqualified stock options ranges from $14.00 to $18.00 per
share at December 31, 1996. Nonqualified stock options issued are
exercisable at not less than the current common stock market value at the
date of grant. The outstanding options vest ratably over a four year term.
The following table presents certain information pursuant to the Stock
Benefit Plan at December 31:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------------------------------------------------
Average Average
Shares Price Shares Price
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 105,500 $14.13 12,000 $14.00
Options granted 7,600 18.00 93,500 14.14
Options exercised -- -- -- --
Options forfeited (200) 15.00 -- --
Options outstanding at end of year 112,900 $14.39 105,500 $14.13
---------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 35,325 $14.11 3,000 $14.00
---------------------------------------------------------------------------------------------------------------
Options available to grant under plan at end of year 37,100 44,500
---------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies APB opinion No. 25 and related interpretations in
accounting for the Stock Benefit Plan. Had compensation cost for the plan
been determined consistent with FASB Statement No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below:
1996 1995
--------------------------------------------------------------------------
Net Income As reported $1,844,502 3,364,410
Pro forma 1,820,000 3,158,000
--------------------------------------------------------------------------
Earnings per share As reported $ .80 1.49
Pro forma .78 1.39
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model.
(12) PREFERRED STOCK
The Company redeemed all 2,750 of the outstanding shares of Series A
cumulative preferred stock on June 30, 1995 for a total redemption value of
$2,750,000.
In 1993 the Company issued 2,600 shares of 7.75% cumulative preferred
stock. The dividend rate was fixed at 7.75% through December 7, 1998.
This dividend rate then increases 25 basis points per year from year six,
ending December 7, 1999, through year ten, ending December 7, 2003, when
the rate will be fixed at 9%. These shares are redeemable at the Company's
discretion after three to five years from the issue date. Upon
liquidation, these shares are entitled to the then calculated redemption
value.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
34
(13) DIVIDEND LIMITATIONS
The amendment to the secured term loan agreement contains several
restrictive covenants, including restrictions on dividends to stockholders,
maintenance of various capital adequacy levels, and certain restrictions
with regard to other indebtedness. Future cash dividends, in addition to
dividends on preferred stock are limited to 50% of the Company's net
after-tax earnings for the immediately preceding eight fiscal quarters of
the Company. As of December 31, 1996, the Company had $1,821,000 of
unrestricted earnings available for additional cash dividends.
National banking regulations restrict the amount of dividends that a bank
may pay to its stockholders. Generally, the regulations provide that
dividends are limited to net earnings for the current and two preceding
years, reduced by dividends paid and transfers to permanent capital. At
December 31, 1996, subject to minimum regulatory capital guidelines, First
National Bank in DeKalb could, without prior approval of regulatory
authorities, declare dividends of approximately $1,452,000.
The Sandwich State Bank, First State Bank of Harvard, and The Bank of
Yorkville are subject to state banking regulations which provide that
dividends can be paid up to the amount of available undivided profits (as
defined), subject to total capital adequacy considerations.
(14) REGULATORY CAPITAL REQUIREMENTS
The Company is subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the Company's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company to maintain minimum amounts and ratios of total Tier I
capital to risk-weighted assets, and of Tier I capital to average assets,
as defined in the regulations. Management believes, as of December 31,
1996, that the Company meets all capital adequacy requirements to which it
is subject.
The Company and Subsidiaries were categorized as well capitalized at
December 31, 1996 under the regulatory capital framework for prompt
corrective action. Minimum capital requirements and actual capital amounts
and ratios as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
Actual Regulatory Minimum
Amount Ratio Amount Ratio
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total capital to risk-weighted assets:
Castle BancGroup, Inc. $33,206,000 10.66% $ 24,925,000 8.00%
First National Bank in DeKalb 17,093,000 12.43% 10,998,000 8.00%
The Sandwich State Bank 9,058,000 12.70% 5,705,000 8.00%
First State Bank of Harvard 6,517,000 12.02% 4,339,000 8.00%
The Bank of Yorkville 4,601,000 12.84% 2,866,000 8.00%
---------------------------------------------------------------------------------------------------------
Tier I capital to risk-weighted assets:
Castle BancGroup, Inc. $29,431,000 9.45% $ 12,463,000 4.00%
First National Bank in DeKalb 15,788,000 11.48% 5,499,000 4.00%
The Sandwich State Bank 8,167,000 11.45% 2,853,000 4.00%
First State Bank of Harvard 5,839,000 10.77% 2,170,000 4.00%
The Bank of Yorkville 4,217,000 11.77% 1,433,000 4.00%
---------------------------------------------------------------------------------------------------------
Tier I capital to average assets :
Castle BancGroup, Inc. $29,431,000 6.39% $ 18,414,000 4.00%
First National Bank in DeKalb 15,788,000 7.19% 8,778,000 4.00%
The Sandwich State Bank 8,167,000 7.62% 4,285,000 4.00%
First State Bank of Harvard 5,839,000 7.93% 2,946,000 4.00%
The Bank of Yorkville 4,217,000 7.25% 2,325,000 4.00%
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
35
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meeting the financing needs of its
customers and to effectively manage its exposure to interest rate risk.
Credit risk is the possibility that the Company will incur a loss due to
the other party's failure to perform under its contractual obligations.
The Company's exposure to credit loss in the event of non-performance by
the other party with regard to commitments to extend credit and standby
letters of credit is represented by the contractual amount of these
instruments. The Company uses the same credit policies in making
commitments and conditional obligations as it does for actual extensions of
credit.
Financial instruments representing credit risk at December 31, 1996 and
1995 are as follows:
1996 1995
---------------------------------------------------------------------------
Standby letters of credit $4,999,000 1,288,000
Commitments to extend credit: 18,169,000
Variable rate 38,180,000 18,169,000
Fixed rate (7.06% to 10.75%) 52,477,000 18,859,000
---------------------------------------------------------------------------
$95,656,000 38,316,000
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance of a customer to a third party. Commitments
to extend credit are agreements to lend to a customer as long as there is
no violation of any condition established by the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The credit risk involved
for commitments to extend credit and in issuing standby letters of credit
is essentially the same as that involved in extending loans to customers.
The commitments to extend credit presented above include $34,000,000 and
$9,900,000 at December 31, 1996 and 1995, respectively, relating to
approved mortgage loan applications at Castle Mortgage, Inc.. The company
uses forward sales contracts to protect the value of residential mortgage
loans that are being underwritten for future sale to investors in the
secondary market. Adverse market interest rate changes, between the time
that a customer receives a rate-lock commitment and when the fully-funded
mortgage loan is sold to an investor, can erode the value of that mortgage.
Therefore, the Company enters into forward sales contracts to mitigate the
interest rate risk associated with the origination and sale of mortgage
loans. The Company accepts credit risk in forward sales contracts to the
extent of nonperformance by the counterparty, in which case the Company
would be compelled to sell the mortgages to another party at the current
market price. The credit exposure of forward sales contracts represents
the fair value of contracts. The contractual amount of mortgage forward
contracts at December 31, 1996 and 1995 were $52,100,000 and $9,900,000
respectively.
(16) COMMITMENTS AND CONTINGENT LIABILITIES
Because of the nature of their activities, the Company and 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 of the Company.
(17) FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires that the Company disclose estimated fair value for its financial
instruments. Fair value estimates, methods, and assumptions are set forth
below for the Company's financial instruments.
(a) CASH AND CASH EQUIVALENTS
The carrying amount of cash and cash equivalents approximate fair value
because they mature daily and do not represent unanticipated credit risks.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
36
(b) INVESTMENT SECURITIES AVAILABLE-FOR-SALE
The fair value of investment securities available-for-sale, with the
exception of certain state and municipal securities, is estimated based on
bid prices published in financial newspapers or bid quotations received
from securities dealers. The fair value of certain state and municipal
securities is not readily available through market sources other than
dealer quotations, so fair value estimates are based on quoted market
values of similar instruments, adjusted for differences between the quoted
instruments, and the instruments being valued.
As of December 31, 1996 and 1995, the carrying value and estimated fair
value of the Company's investment securities were $133,071,980 and
$135,565,802, respectively. Tables detailing the book value and fair value
of various types of securities and of securities segregated by contractual
maturity are included previously in this report in Note 4.
(c) MORTGAGE LOANS HELD FOR SALE
As of December 31, 1996 and 1995, the carrying value of the Company's
mortgage loans held for sale was $20,342,698 and $13,483,973, respectively.
The estimated fair value of these loans was $20,410,000 and $13,607,000 at
December 31, 1996 and 1995, based on commitments to purchase from the end
investors.
(d) LOANS
Fair values are estimated for portfolios of loans with similar financial
characteristics. Loans are segregated by type such as commercial,
commercial real estate, residential real estate, and others. Each loan
category is further segmented into fixed and variable rate interest terms.
The fair value of loans, except residential real estate loans, is
calculated by discounting scheduled cash flows through the estimated
maturity using estimated market discount rates that reflect the credit and
interest rate risk inherent in the loan. The fair value of residential
real estate loans is determined by discounting contractual cash flows
adjusted for prepayment estimates using discount rates based on secondary
market sources. The following tables present information for loans:
<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------------------------------------------------------
Average Average Estimated
Carrying historical maturity discount Calculated
amount yield (months) (1) rate (2) fair value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial:
Adjustable $ 39,144,769 9.16% 4.2 8.90% $ 38,704,000
Fixed 32,558,194 8.32 21.5 9.15 32,154,000
Real estate:
Residential:
Adjustable 22,326,410 8.66 15.6 7.00 23,016,000
Fixed 60,160,909 8.04 33.2 7.11 61,612,000
Commercial:
Adjustable 38,253,917 9.10 19.8 8.75 38,448,000
Fixed 23,474,746 8.91 41.4 9.00 23,386,000
Other 36,556,650 8.85 15.9 8.90 36,513,000
Consumer 39,865,326 14.58 30.4 14.98 40,698,000
----------------------------------------------------------------------------------------------------
Total $292,340,921 $294,531,000
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
37
<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------------------------------------------------------
Average Average Estimated
Carrying historical maturity discount Calculated
amount yield (months) (1) rate (2) fair value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial:
Adjustable $ 34,462,828 9.55% 4.1 8.95% $ 34,555,000
Fixed 25,705,511 8.62 21.5 9.21 25,326,000
Real estate:
Residential:
Adjustable 29,367,369 8.56 16.8 7.00 29,990,000
Fixed 45,168,606 8.27 46.9 7.11 46,963,000
Commercial:
Adjustable 28,246,931 9.13 15.0 8.75 28,356,000
Fixed 23,932,159 8.68 48.0 9.00 23,607,000
Other 31,833,843 8.98 21.2 8.92 31,842,000
Consumer 38,956,400 13.58 27.1 14.03 38,720,000
----------------------------------------------------------------------------------------------------
Total $257,673,647 $259,359,000
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
Notes:
(1) AVERAGE MATURITY REPRESENTS THE EXPECTED AVERAGE CASH FLOW PERIOD
WHICH IN SOME INSTANCES IS DIFFERENT THAN THE STATED MATURITY.
(2) MANAGEMENT HAS MADE ESTIMATES OF FAIR VALUE DISCOUNT RATES THAT IT
BELIEVES TO BE REASONABLE. HOWEVER, BECAUSE THERE IS NO MARKET FOR
MANY OF THESE FINANCIAL INSTRUMENTS, MANAGEMENT HAS NO BASIS TO
DETERMINE WHETHER THE FAIR VALUE PRESENTED ABOVE WOULD BE INDICATIVE
OF THE VALUE NEGOTIATED IN AN ACTUAL SALE.
(3) DUE TO LIMITATIONS CAUSED BY CERTAIN SYSTEM CODING CONVENTIONS, THE
LOAN CLASSIFICATIONS SHOWN ABOVE VARY FROM THOSE SHOWN IN NOTE 5.
(d) ACCRUED INTEREST RECEIVABLE AND PAYABLE
The carrying amount of accrued interest receivable and payable approximate
fair value because it is collected over a relatively short period and does
not represent unanticipated credit risk.
(e) DEPOSIT LIABILITIES
Under SFAS 107, the fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, savings and NOW accounts, and money
market and checking accounts, is equal to the amounts payable on demand as
of December 31, 1996 and 1995. The fair value of certificates of deposit
is based on the discounted value of contractual cash flows. The discounted
rate is estimated using the rates currently offered for deposits of similar
maturities.
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
----------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
amount fair value amount fair value
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Noninterest-bearing demand $ 43,232,854 43,233,000 40,523,691 40,524,000
Savings and NOW 134,350,413 134,350,000 134,790,484 134,790,000
Money market and checking 42,751,759 42,752,000 46,593,997 46,594,000
Certificates of deposit:
Maturing in six months or less 25,845,884 26,022,000 28,781,405 28,781,000
Maturing between six
months and one year 50,822,884 51,883,000 33,495,911 33,496,000
Maturing between one
and three years 72,752,935 76,704,000 66,158,808 66,159,000
Maturing beyond three years 34,352,853 37,994,000 35,825,441 35,826,000
----------------------------------------------------------------------------------------------------
Total $ 404,109,217 412,938,000 386,169,737 386,170,000
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
38
The fair value estimates above do not include the benefit that results from
the low-cost funding provided by the deposit liabilities compared to the
cost of borrowing funds in the market. If that value were considered at
December 31, 1996 and 1995, the fair value of the Company's net assets
would increase $18,300,000 and $17,500,000, respectively.
The Subsidiary banks' letters of credit, lines of credit, and loan
commitments are financial instruments as defined by Statement 107. The
fair value of these financial instruments is based on the present value of
the fees received for these services, which are not significant at December
31, 1996 and 1995.
The fair value of all short-term borrowings and long-term debt is based on
the present value of the fees received for these services, which are not
significant at December 31, 1996 and 1995.
(e) LIMITATIONS
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates do not reflect any premium or discount that could result
from offering for sale at one time the Company's entire holdings of a
particular financial instrument. Because no market exists for a
significant portion of the Company's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment and,
therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. For example, the Company has a
trust department that annually contributes fee income. The trust
department is not considered a financial instrument, and its value has not
been incorporated into the fair value estimates. Other significant assets
and liabilities that are not considered financial assets or liabilities
include the mortgage banking operation, deferred tax liabilities, property,
plant, equipment, and goodwill. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered in
many of the estimates.
(18) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
The following is a summary of condensed financial information for the
Parent Company only (in thousands):
December 31,
CONDENSED BALANCE SHEETS 1996 1995
---------------------------------------------------------------------------
Assets:
Investments in subsidiaries $ 47,136 42,523
Other assets 3,028 3,023
---------------------------------------------------------------------------
Total assets $ 50,164 45,546
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Liabilities and stockholders' equity:
Liabilities 15,202 11,200
Stockholders' equity 34,962 34,346
---------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 50,164 45,546
---------------------------------------------------------------------------
---------------------------------------------------------------------------
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
39
<TABLE>
<CAPTION>
Years ended
December 31,
CONDENSED STATEMENTS OF EARNINGS 1996 1995 1994
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income--primarily subsidiary dividends $ 5,611 8,413 5,946
---------------------------------------------------------------------------------------------------------
Expenses:
Interest 1,082 902 749
Other 3,867 3,228 2,885
---------------------------------------------------------------------------------------------------------
Total expenses 4,949 4,130 3,634
---------------------------------------------------------------------------------------------------------
Earnings before income tax benefit and equity
in undistributed earnings of subsidiaries 662 4,283 2,312
Income tax benefit 1,128 796 753
---------------------------------------------------------------------------------------------------------
Earnings before equity in undistributed earnings
of subsidiaries 1,790 5,079 3,065
Equity in undistributed earnings of subsidiaries 54 -- 295
Dividends received in excess of equity in earnings of subsidiaries -- (1,715) --
---------------------------------------------------------------------------------------------------------
Net earnings $ 1,844 3,364 3,360
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 1,643 3,026 2,885
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years ended
December 31,
CONDENSED STATEMENTS OF CASH FLOWS 1996 1995 1994
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows provided by operating activities $ 2,478 4,767 2,491
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital contribution to subsidiary (700) (3,073) --
Loan to subsidiary (5,000) -- --
Other (154) 267 (366)
---------------------------------------------------------------------------------------------------------
Net cash used by investing activities (5,854) (2,806) (366)
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of short-term debt 5,000 -- --
Issuance (redemption) of preferred stock -- (2,750) --
Issuance of common stock 311 945 1,110
Repayment of long-term debt (850) (800) (750)
Dividends paid (615) (707) (792)
---------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 3,846 (3,312) (432)
---------------------------------------------------------------------------------------------------------
Increase in cash and cash equivalents 470 (1,351) 1,693
Cash and cash equivalents at beginning of year 1,580 2,931 1,238
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,050 1,580 2,931
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
Cash paid (received) for:
Interest received $ 290 -- --
Interest paid 1,082 902 749
Income taxes (878) (567) (645)
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>
(CONTINUED ON NEXT PAGE)
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided
by operating activities:
Net earnings $ 1,844 3,364 3,360
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (54) -- (295)
Dividends received in excess of subsidiary earnings -- 1,715 --
Non-cash dividends received from subsidiary -- -- (1,051)
Depreciation and amortization 595 420 340
Gain on sale of fixed assets (22) (87) --
Increase (decrease) in:
Income taxes payable (234) (13) (108)
Other liabilities 87 (27) (125)
Decrease (increase) in other assets 262 (605) 370
---------------------------------------------------------------------------------------------------------
$ 2,478 4,767 2,491
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
41
INDEPENDENT AUDITORS' REPORT
Board of Directors
Castle BancGroup, Inc.:
We have audited the accompanying consolidated balance sheets
of Castle BancGroup, Inc. and subsidiaries (Company) as of
December 31, 1996 and 1995, and the related consolidated
statements of earnings, changes in stockholders' equity, and
cash flows for each of the years in the three-year period
ended December 31, 1996. These consolidated financial
statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects,
the financial position of the Company at December 31, 1996
and 1995, and the results of their operations and their cash
flows for each of the years in the three-year period ended
December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
January 31, 1997
Chicago, Illinois
<PAGE>
CASTLE BANCGROUP, INC. SUBSIDIARIES
42
THE SANDWICH STATE BANK
- - --------------------------------------------------------------------------------
Main Office Directors: Total Assets
100 West Church Street Ernest A. Basler $106,822,920
Sandwich, Illinois 60548 Louis P. Brady
(815) 786-8461 John W. Castle
Peter H. Henning
Mortgage Junction Office Donald E. Kieso
91 Sugar Lane, Suite C James N. McInnes
Sugar Grove, Illinois 60554 A. Gene Shumway
(630) 466-1192 Craig A. Stevenson
Sandwich Mortgage Center
44 West Church Street
Sandwich, IL 60548
(815) 786-7180
FIRST NATIONAL BANK IN DEKALB/SYCAMORE
- - --------------------------------------------------------------------------------
Main Office Directors: Total Assets
141 W. Lincoln Highway Larry D. Beaty $224,958,852
DeKalb, Illinois 60115 Robert T. Boey
(815) 758-2411 James V. Bowers
John W. Castle
Sycamore Office John B. Hiatt
511 West State Street Donald R. Huftalin
Sycamore, Illinois 60178 Michael D. Larson
(815) 895-3751 James N. McInnes
William R. Monat
Drive-Up Office John R. Nelson
1007 North First Street Paul M. Stromborg
DeKalb, Illinois 60115
(815) 758-2411
FIRST STATE BANK OF HARVARD
- - --------------------------------------------------------------------------------
Main Office Directors: Total Assets
201 West Diggins Raymond A. Anderson $75,551,387
Harvard, Illinois 60033 Larry D. Beaty
(815) 943-6441 John W. Castle
Hugh A. Deneen
Drive-Up Office Robert E. Fritz
1265 South Division James N. McInnes
Harvard, Illinois 60033 Jay T. Nolan
(815) 943-6441 David A. Stearns
Calvin E. Wittmus
Mortgage Center Office
62 North Ayer
Harvard, Illinois 60033
(815) 943-4663
Mortgage Center Office
695 North Perryville Road
Suite 2
Rockford, Illinois 61107
(815) 398-7800
THE BANK OF YORKVILLE
- - --------------------------------------------------------------------------------
Main Office Directors: Total Assets
606 Countryside Center Donald E. Ament $59,664,029
Yorkville, Illinois 60560 Larry D. Beaty
(630) 553-6333 Robert W. Brenart
John W. Castle
Stan J. Free
Joseph W. Gruber
James H. Hall
James N. McInnes
<PAGE>
CASTLE FINANCE COMPANY, INC.
- - --------------------------------------------------------------------------------
Main/Operating Office Director: Total Assets
232 W. Lincoln Highway Ernest A. Basler $10,349,252
DeKalb, Illinois 60115 Larry D. Beaty
(815) 758-5525 John W. Castle
Richard J. Duellman
Dixon Office Gerald D. Englehart
77 South Hennepin Ave. James N. McInnes
Dixon, Illinois 61021 William R. Monat
(815) 288-5700
Harvard Office Plano Office
360 South Division Street 206 South Ben Street
Harvard, Illinois 60033 Plano, Illinois 60545
(815) 943-8888 (630) 552-8051
LaSalle Office Rockford Office
400 First Street 695 North Perryville Road
LaSalle, Illinois 61301 Suite 2A
(815) 224-8160 Rockford, Illinois 61107
(815) 226-9000
Morris Office
1824B N. Division Street
Morris, Illinois 60450
(815) 942-0004
CASTLE MORTGAGE, INC.
- - --------------------------------------------------------------------------------
Main Office Directors: Total Assets
Oak Brook Executive Plaza Larry D. Beaty $3,748,772
1315 W. 22nd Street Lawrence M. Budnik
Suite 100 John W. Castle
Oak Brook, Illinois 60521 James N. McInnes
(630) 990-0140 William R. Monat
Chicago Office Rolling Meadows Office
2549 North Racine 5105 Tollview Drive
Chicago, Illinois 60614 Suite 110
(773) 929-0858 Rolling Meadows, Illinois 60008
(847) 255-1800
Merrillville Office
101 West 79th Avenue
Merrillville, Indiana 46410
(219) 736-5559
Naperville Office
847 North Center Street
Naperville, Illinois 60563
(630) 420-2045
[PHOTO]
RICHARD J. DUELLMAN
PRESIDENT
CASTLE FINANCE COMPANY, INC.
LAWRENCE M. BUDNIK
PRESIDENT
CASTLE MORTGAGE, INC.
STAN J. FREE
PRESIDENT
THE BANK OF YORKVILLE
GENE SHUMWAY
PRESIDENT
THE SANDWICH STATE BANK
DAVID A. STEARNS
PRESIDENT
FIRST STATE BANK OF HARVARD
JAMES V. BOWERS
PRESIDENT
FIRST NATIONAL BANK IN DEKALB/SYCAMORE
<PAGE>
[LOGO]
HEADQUARTERS:
121 West Lincoln Highway
DeKalb, IL 60115
LOCATIONS:
Chicago
DeKalb
Dixon
Harvard
LaSalle
Morris
Naperville
Oak Brook
Plano
Rockford
Rolling Meadows
Sandwich
Sugar Grove
Sycamore
Yorkville
Merrillville, Indiana
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
First National Bank in DeKalb (incorporated in Illinois)
First State Bank of Harvard (incorporated in Illinois)
The Bank of Yorkville (incorporated in Illinois)
The Sandwich State Bank (incorporated in Illinois)
Castle Finance Company, Inc. (incorporated in Illinois)
Castle Mortgage, Inc. (incorporated in Illinois)
<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> .80
<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>
