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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997 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.)
121 West Lincoln Highway
DeKalb, IL 60115
(Address including zip code, 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. / /
Aggregate market value of voting stock held by non-affiliates of the
registrant as of March 2, 1998, 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 $23.00 per
share. Based on this price the aggregate market value of voting shares held
by non-affiliates of the registrant is $34,959,000.
The registrant had 2,156,084 shares of Common Stock outstanding as of March 2,
1998.
The following documents are incorporated by reference in this report:
1. Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference to Part III hereof.
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TABLE OF CONTENTS
Part I.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission to Matters to a Vote of Security Holders.
Part II.
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Part III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Signatures
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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. It also
provides management services, training, human resource and business development
assistance.
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
CasBanc Mortgage, Inc. (formerly known as 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.
The Sandwich State Bank (SSB), First National Bank in DeKalb (FNB), Castle
Bank Harvard, N.A. (CBH) (formerly known as First State Bank of Harvard) 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 Sandwich, and Sugar Grove, Illinois.
Castle Finance Company (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
headquartered in DeKalb, with loan origination offices in DeKalb, Plano,
LaSalle, Dixon, Loves Park, Morris, and Harvard, Illinois.
CasBanc Mortgage, Inc. (CMI), an Illinois corporation, is a residental
mortgage originator and broker that engages in the origination of residental
mortgages which are subsequently sold in the secondary market. CMI is
headquartered in Oak Brook, Illinois and has loan origination offices in Oak
Brook, Rolling Meadows, Matteson, Chicago, and Naperville, Illinois and
Merrillville, Indiana. CMI also provides processing services and delivery in
the secondary market for residental mortgage loans orginated by the Subsidiary
Banks.
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 services industry. Service
and product quality are also significant factors in competing and allow for
differentiation from competitors.
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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 non-bank subsidiaries.
Deposits of all the Subsidiary Banks are insured by the Federal Deposit
Insurance Corporation (FDIC) and are subject to the provisions of the Federal
Desposit Insurance Act. Areas subject to regulation by federal and state
authorities include capital adequacy, reserves, investments, loans, mergers,
issuance of securities, payments of dividends by the banking affiliates,
establishment of branches, and other aspects of banking operations.
The FDIC Board of Directors voted December 11, 1996 to finalize a rule
lowering the rates on assessments paid to the Savings Association Insurance
Fund (SAIF), effective as of October 1, 1996. As a result of the special
assessment required by the Deposit Insurance Funds Act of 1996 (Funds Act),
the SAIF was capitalized at the target Designated Reserve Ratio (DRR) of
1.25% of estimated insured deposits on October 1, 1996. The Funds Act
required the FDIC to set assessments in order to maintain target DRR. The
Board has, therefore, lowered the rates on assessments paid to the SAIF,
while simultaneously widening the spread between the lowest and highest rates
to improve the effectiveness of the FDIC's risk-based premium system. The
Board has also established a process, similar to that which was applied to
the Bank Insurance Fund (BIF), adjusting the rate schedules for both the SAIF
and the BIF within a limited range, without notice and comment to maintain
each of the fund balances at the target DRR. Commencing in 1997 and
continuing through 1999, annual premium rates for the healthiest banks (1A
category) are 1.29 cents for every $100 of BIF-assessable deposits.
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All Subsidiary Banks paid the 1.29 cents rate during 1997. Commencing in 2000
and continuing through 2017, banks will be required to pay a flat annual
assessment of 2.43 cents for every $100 of BIF-assessable deposits.
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 were 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.
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, 1997, subject to minimum regulatory capital guidelines, FNB and
CBH could, without prior approval of regulatory authorities, declare
dividends of approximately $1,768,000 and $88,000 respectively.
SSB and BOY 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 and BOY are state chartered banks. They are therefore subject to
regulation and examination by the Illinois Office of Banks and Real Estate.
CBH converted to a nationally chartered bank effective April 1, 1997. CBH
and FNB are nationally chartered banks and Federal Reserve members, and are
therefore subject to regulation and examination by the Office of the
Comptroller of the Currency, as well as the Federal Reserve Board. All of
the Subsidiary Banks are subject to the provisions of the Federal Deposit
Insurance Act and examination by the FDIC. 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.
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.
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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 the 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 possible 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 6.38% as of December 31, 1997. 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 10.67% as of December 31, 1997. 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 9.42% as of December 31, 1997. The
regulatory requirements are considered minimums and actual ratios should be
commensurate with the level and nature of all risks of a company (as
determined 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, 1997, the Company and its subsidiaries had a total of
317 full-time equivalent employees. None of these employees are subject to a
collective bargaining agreement. Management believes it has excellent
relations with its staff.
ITEM 2. PROPERTIES
The Company operates its executive offices at 121 West Lincoln Highway,
DeKalb, Illinois. This recently remodeled commercial building is owned by FNB
and leased to the Company and contains approximately 15,000 square feet of
office space. This facility houses all administrative, accounting, data
processing, human resource, and marketing functions of the Company.
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 with
approximately 1,800 square
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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 space to the Company. 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. FNB operates an automated teller machine
at a local university and leases space on a month-to-month basis. FNB also
operates two additional automated teller machines, one located at a local
university housing complex and the other located at a local hospital. No
rent is paid for the space of these two ATM's.
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. In
addition, SSB operates an automated teller machine at a local grocery store,
and no rent is paid for the space.
CBH operates from its main office facility at 201 West Diggins Street,
Harvard, Illinois. This facility has approximately 11,000 square feet of
space. CBH owns both the building and the underlying land. A drive-in
facility is contiguous to the main office. CBH also operates a remote branch
facility with approximately 5,400 square feet at a local shopping center
located at 1265 South Division Street, Harvard, Illinois. The Bank owns
both the building and the underlying land. CBH also leases two office spaces
formerly used as mortgage loan origination offices. Each of these sites is
less than 1,000 square feet of office space. They are located at 62 North
Ayer Street, Harvard, Illinois and 695 North Perryville Road, Suite 2,
Rockford, Illinois. Effective December 1997, the Rockford office was closed
and the entire office space was subleased. Effective March 1998, the 62 North
Ayer Street, Harvard, location will be closed, and CBH is currently searching
for a tenant to sublease the office space.
BOY operates from its main office facility at 606 Countryside Center,
Yorkville, Illinois. The Bank utilizes 50% of the approximately 22,000
square feet 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. In addition, BOY operates a
drive-up automated teller machine located near a high traffic intersection
and leases space on a month-to-month basis.
CFC operates offices in the following seven towns in northern Illinois:
Plano, LaSalle, DeKalb, Dixon, Loves Park, 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, Rolling Meadows, Chicago, Matteson,
and Naperville in Illinois and Merrillville in Indiana. The Oak Brook office
includes both executive and operating functions and is located at 1315 West
22nd Street, Suite 100, Oak Brook, Illinois which consists of approximately
4,000 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 Matteson office leases approximately 3,500
square feet at 600 Holiday Plaza Drive, Suite 205, Matteson, 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 Road, Naperville, Illinois, with approximately 2,100 square feet of
office space. CMI owns both the building and the underlying land.
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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,
1997.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's stock is not traded on an established public trading
market. During the period from January 1, 1996 through December 31, 1997,
management of the Company believes that there were approximately 66 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 $16.25 to $22.50 per share on those
transactions with respect to which it does have information.
The approximate number of beneficial owners of Common Stock of the
Company on December 31, 1997 was 923.
Cash dividends on the above referenced common stock are paid annually.
Dividends for the years ended December 31, 1997 and 1996 were $0.22 and $0.20
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, 1997, the Company was limited to
$1,556,000 for dividend purposes.
On May 24, 1995, the Company issued 45,500 shares to Premier. These
shares were issued in conjunction with the acquisition by CMI of
substantially all the assets and the assumption of substantially all the
liabilities of Premier. This transaction was exempt from registration
pursuant to Section 4(2) thereof and Rule 506 thereafter. Premier
represented to the Company its status as an accredited investor.
On December 31, 1997, the Company issued 66,311 shares of Common Stock to
four preferred stockholders. These shares were issued in combination with a
cash payment of $841,158 to redeem 2,300 shares of the Company's Perpetual
Preferred Stock. This transaction was exempt from registration pursuant to
Section 3(a)(9) of the Securities Act of 1933.
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ITEM 6. SELECTED FINANCIAL DATA
Five Year Summary of Selected Consolidated Financial Data
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, (000'S OMITTED EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993*
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<S> <C> <C> <C> <C> <C>
Interest income $39,063 36,437 32,650 28,903 26,529
Interest expense 19,468 17,858 15,927 12,487 11,825
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 19,595 18,579 16,723 16,416 14,704
Provision for loan losses 1,128 1,113 488 323 1,328
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Net interest income after provision for loan losses 18,467 17,466 16,235 16,093 13,376
Other operating income 9,553 8,339 7,931 3,366 3,123
Investment securities gains (losses) 210 41 (284) (29) (260)
Other operating expenses 23,749 23,076 19,061 14,702 12,387
- -------------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 4,481 2,770 4,821 4,728 3,852
Applicable income taxes 1,468 926 1,457 1,368 572
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings 3,013 1,844 3,364 3,360 3,280
- -------------------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock 2,811 1,643 3,026 2,885 2,993
- -------------------------------------------------------------------------------------------------------------------------------
Per share data - common stock
Net earnings - basic $1.35 .80 1.49 1.46 1.58
Net earnings - diluted 1.34 .79 1.46 1.42 1.39
Cash dividends .22 .20 .18 .16 .125
Financial position-year end
Investment securities $129,479 133,072 135,566 137,826 137,749
Mortgage loans held for sale 44,761 20,343 13,484 - -
Net loans 308,542 285,394 251,291 232,557 223,296
Allowance for possible loan losses 4,646 3,775 3,309 3,475 3,940
Non-interest bearing deposits 42,589 43,233 40,524 37,517 36,629
Interest bearing deposits 381,094 360,876 345,646 317,436 318,867
Long-term debt 10,250 10,150 11,000 11,800 12,550
Preferred stock 300 2,600 2,600 5,350 5,350
Total stockholders' equity 36,862 34,962 34,346 30,671 28,749
Total assets 515,550 473,424 443,637 407,505 404,747
- -------------------------------------------------------------------------------------------------------------------------------
*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.
</TABLE>
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is management's analysis of the consolidated
financial condition and results of operations of the Company, which may not
otherwise be apparent from the consolidated financial statements included in
this report at Item 8. Reference should be made to those statements, the
notes thereto and the selected financial data presented elsewhere in this
report for an understanding of the following discussion and analysis.
RESULTS OF OPERATIONS
The Company's net earnings in 1997 totaled $3,013,000, a 63% increase
from 1996 earnings of $1,844,000. This represents a $.55 increase in basic
earnings per share. Net earnings for 1995 were $3,364,000.
Two major factors contributed to the improvement in performance at the
Company during 1997. First, net interest income after provision for possible
loan losses was $18,467,000 for the year ended December 31, 1997 versus
$17,466,000 for 1996, representing a 5.7% increase. Net interest income will
be discussed in detail below. Second, CMI recorded net earnings of $88,000
for the year ended December 31, 1997 versus a net loss of $700,000 for the
year ended December 31, 1996. This represents a $788,000 increase in income
at CMI in 1997 as compared to 1996. A favorable interest rate environment
during the fourth quarter of 1997 helped to increase CMI's net mortgage loan
origination income 7.8% for the year ended December 31, 1997, as compared to
1996. Also, secondary marketing losses experienced by CMI in 1996 did not
occur in 1997 due to CMI eliminating its wholesale hedging operation. CMI
now is producing loans for "best efforts" delivery to mortgage investors on
an individual loan-by-loan basis.
This $788,000 increase excludes decreased interest earnings at the
Subsidiary Banks relating to the portfolio of mortgage loans held for sale.
This interest income is generated as a result of mortgage loans held for sale
that have been originated through CMI, but not yet sold in the secondary
market. The Subsidiary Banks purchase these loans from CMI when the loans are
made to the borrowers. The Subsidiary Banks then hold these interest earning
assets until they are sold into the secondary market, providing short-term
liquid investments for the banks that averaged a yield of 7.29% for 1997.
Net earnings attributable to common stock increased to $2,811,000 in
1997 from $1,643,000 in 1996. Net earnings attributable to common stock for
1995 was $3,026,000. Dividends paid on preferred stock totaled $202,000 in
1997, as compared to $201,000 in 1996 and $338,000 in 1995. Basic earnings
per share increased to $1.35 for 1997 as compared to $.80 for 1996. Basic
earnings per share for 1995 was $1.49. The following table highlights
significant factors that have contributed to these changes in earnings per
share:
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<TABLE>
<CAPTION>
Changes in Basic Earnings per Share
1996 to 1997 1995 to 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Prior period basic earnings per share $ .80 $ 1.49
Changes due to:
Net Interest income 0.43 0.77
Provision for possible loan losses 0.00 (0.30)
- --------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 0.43 0.47
- --------------------------------------------------------------------------------------------
Other operating income
Investment securities gains (losses), net 0.08 0.16
Gain on sale of land and buildings (0.01) (0.15)
Mortgage revenues 0.65 0.55
Other operating income items (0.08) (0.04)
- --------------------------------------------------------------------------------------------
Total other operating income 0.64 0.52
- --------------------------------------------------------------------------------------------
Other operating expenses
Salaries and employee benefits (0.37) (1.31)
Net occupancy and furniture expenses 0.03 (0.38)
Outside services 0.18 (0.16)
FDIC insurance assessment (0.02) 0.20
Goodwill amortization 0.00 (0.02)
Other operating expense items (0.08) (0.35)
- --------------------------------------------------------------------------------------------
Total other operating expenses (0.26) (2.02)
Income tax expenses (0.26) 0.27
Preferred stock dividends 0.00 0.07
- --------------------------------------------------------------------------------------------
Current period basic earnings per share $ 1.35 $ 0.80
- --------------------------------------------------------------------------------------------
</TABLE>
The Company's return on average equity for 1997 was 8.43%, as compared
to 5.36% in 1996 and 9.94% in 1995. Return on average assets was .62% in
1997 versus .40% in 1996 and .80% in 1995. The increase in these ratios for
1997 were primarily due to the increase in net interest income and the
increase in net income at CMI as described above.
NET INTEREST INCOME
Net interest income before provision for possible loan losses, the
Company's primary source of earnings, totaled $19,595,000 in 1997, a
$1,016,000, or 5.5% increase over 1996. This increase can primarily be
attributed to a $2,318,000 increase in interest and fees on loans due to
volume growth in the loan portfolio. Interest and dividends on investment
securities also increased $1,215,000 during 1997 as compared to 1996. 48% of
the increase was due to volume increases in the portfolio. The volume
increase was due to the average outstanding balance for mortgage loans held
for sale for the year being $8,279,000 lower than the prior year which
allowed for some of the average excess funds to be invested. These increases
were partially off-set by a $628,000 reduction in interest income on mortgage
loans held for sale. This decrease was due to the average volume reduction
described above. Total interest expense increased $1,610,000 for the year
ended December 31, 1997, as compared to 1996. 62% of the increase was due to
volume increases used to fund the loan portfolio increase. Net interest
income before provision for possible loan losses increased $1,856,000 in 1996
as compared to 1995, which represented a 11.1% increase.
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.
11
<PAGE>
On a tax equivalent basis, net interest income increased to $20,041,000
in 1997 from $19,111,000 and $17,257,000 in 1996 and 1995, respectively. The
tax equivalent net interest margin remained relatively constant in 1997,
averaging 4.40% as compared to 4.42% in 1996 and 4.40% in 1995. While net
interest income increased during 1997 as a result of loan and investment
growth, higher rate time deposits and borrowed funds were used to fund this
growth. As a result, the net interest margin remained flat during 1997.
Total average earning assets in 1997 were $455,238,000 an increase of
$23,216,000 or 5.4% over 1996. Average earning assets as a percentage of
total average assets increased to 94.1% during 1997 as compared to 93.8% in
1996 and 93.3% in 1995. The total average loan portfolio represented 66.2%
of total average earning assets in 1997, an increase from 62.3% in 1996 and
61.3% in 1995. Mortgage loans held for sale represented 4.7% of average
earning assets in 1997, a decrease from 6.9% in 1996. Mortgage loans held
for sale represented 1.9% of average earning assets in 1995. In 1997,
average total interest-bearing liabilities were $402,637,000, a $21,050,000
or 5.5% increase over 1996. This increase can be attributed to a $3,313,000
increase in average borrowed funds as well as growth of $17,737,000 or 5.0%
in interest-bearing deposit liabilities. The proportion of average
interest-bearing liabilities to average earning assets in 1997 increased
slightly to 88.4% as compared to 1996 of 88.3%.
PROVISIONS 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 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 included in Item 8 for the required disclosures in relation to
impaired loans.
The adequacy of each Subsidiary Bank'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
and loans past due 90 days or more and still accruing was 100.8% at the end
of 1997 versus 131.9% and 140.8% at the end of 1996 and 1995, respectively.
This decrease was due to an increase in non-accrual loans from $2,348,000 at
the end of 1996 to $3,968,000 at the end of 1997. This increase in
non-accrual loans can primarily be attributed to a few commercial real estate
loans being transferred to non-accrual status. The allowance for loan losses
as a percentage of net outstanding loans increased to 1.48% at December 31,
1997 as compared to 1.31% at December 31, 1996. The allowance level was at
1.30% of net loans at December 31, 1995. Gross charge-offs decreased
$368,000 from 1996 to 1997, primarily due to commercial and agricultural
charge-offs which decreased $210,000. The ratio of net charge-offs to
average total loans outstanding improved during 1997 to .10% as compared to
.28% in 1996. The net charge-off ratio during 1995 was .29%. The
improvement in this ratio was due to the decrease in charge-offs as described
above and an increase in recoveries of $107,000 primarily due to consumer
loan recoveries.
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
$1,128,000 in 1997 as compared to $1,113,000 in 1996, which represents a
$15,000 increase. The provision for possible loan losses increased $625,000
from 1995 to 1996. Management's analysis of the
12
<PAGE>
allowance for possible loan losses indicates that the current level of 1.48%
of net outstanding loans appears to cover the risk of potential losses in the
loan portfolio at December 31, 1997.
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 $4,607,000, or .89% of total assets, at
December 31, 1997. This represents an increase from $2,937,000 and .62% at
December 31, 1996. As mentioned previously this increase can be attributed
to a few commercial real estate loans being transferred to non-accrual status
in late 1997. Non-performing assets at December 31, 1996 increased as
compared to $2,350,000 or .53% of total assets, at December 31, 1995.
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 $9,553,000 for 1997, increasing from $8,339,000 in
1996 and $7,472,000 in 1995. This change represents a $.56 basic earnings
per share increase from 1996 to 1997, most of which can be attributed to
mortgage revenues at CMI 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. Net mortgage loan origination income increased $1,374,000 from
1996 as compared to 1997. Net mortgage loan origination income increased
$1,192,000 from 1995 as compared to 1996.
Trust fee revenues increased 3% to $662,000 in 1997 as compared to
$644,000 in 1996 and $547,000 in 1995. 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 $155.7 million at December 31, 1997 as compared to
$123.2 million and $115.8 million at year end 1996 and 1995, respectively.
Net security gains, on a pre-tax basis, totaled $210,000 in 1997 as compared
to net gains of $41,000 in 1996 and net losses of $284,000 in 1995. 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 1997 several securities were sold at a gain to take
advantage of market conditions at the time of the sale. During the first
quarter of 1995, several securities were sold at a loss in an effort to
reinvest in higher yielding investments. The portfolio is recorded at
current market value in the accompanying financial statements at Item 8. 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 (but not limited to) the potential for increased
yield, improved liquidity, asset mix adjustment, or improvement in the
interest rate gap.
OTHER OPERATING EXPENSES
Other operating expenses totaled $23,749,000 in 1997 as compared to
$23,076,000 and $18,602,000 in 1996 and 1995, respectively. This increase in
expenses reduced basic earnings per share by $.26 from 1996 to 1997 and $2.02
per share from 1995 to 1996. As a percentage of average assets, total
operating expenses decreased to 4.91% in 1997 versus 5.01% in 1996. The
total operating expenses as a percentage of total average assets was 4.74%
for 1995. The efficiency ratio, which measures the level of non-interest
expense to total net revenues, was 80.9% in 1997 as compared to 85.6% and
77.8% in 1996 and 1995, respectively. The decrease in the efficiency ratio
is primarily due to the increase in net interest income and non-interest
income as described previously.
Salaries and employee benefits expense represents the largest component
of other operating expenses. This category increased $871,000, or 6.0% from
1996 to 1997. During 1996, this expense increased $2,895,000, or 25.0%, when
compared to 1995. The Company employed 317 full-time equivalent (FTE)
employees at December 31, 1997 as compared to 334 and 278 at December 31,
1996 and 1995, respectively. The decrease
13
<PAGE>
in FTEs during 1997 was primarily due to the significant reduction in the CBH
mortgage loan operation. The increase during 1996 was a result of additional
mortgage loan originators and lending officers at the Subsidary Banks, as
well as increased production and operations staff at CMI. The total cost per
FTE increased 11.71% during 1997 as compared to 1996. Total cost per FTE
during 1996 increased 4.06% when compared to 1995. The increase in cost per
FTE during 1997 relates to normal salary increases and compensation pay-outs
for former members of management.
Occupancy and furniture and fixtures expenses totaled $3,150,000 in
1997, a decrease of $38,000, or 1.2%, from 1996. During 1996, occupancy and
furniture and fixture expenses increased $815,505, or 34.4%, over 1995
expenses as 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. Outside services and other expense decreased
0.6% to $3,765,000 during 1997 as compared to $3,786,000 in the prior year.
Advertising expense decreased 21.84% in 1997 to $494,000 versus $632,000 in
1996. Subsidiary management continues to control overhead expenses by
emphasizing cost containment and by taking advantage of available economies
of scale at the holding company level. However, management's cost
containment measures are tempered by the need to maintain consistently high
levels of customer service and the need to attract and retain qualified
staff.
FINANCIAL CONDITION
Total assets at December 31, 1997 were $515,550,000, a $42,126,000 or
8.9% increase over December 31, 1996 total assets of $473,424,000. Average
assets for 1997 grew by $22,874,000 or 5.0% to $483,550,000 as compared to
$460,676,000 for 1996. Growth of $23,148,000, or 8.1% in the net loan
portfolio and $24,418,000, or 120.0%, of mortgage loans held-for-sale
accounted for the increase in total assets. 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. Management continues
to view "core" deposits (individuals, partnerships and corporate deposits) as
the primary long term funding source for internal growth of the Company.
Average deposits increased $19,026,000, or 4.9%, during 1997, while average
short-term borrowings increased $4,174,000, or 21.0%. Brokered deposits
totaled $4,059,000 at December 31, 1997, with interest rates ranging from
6.10% to 6.75% and maturities ranging from January 1998 through August 2000.
CAPITAL
The Company is committed to maintaining strong capital positions in both
the Subsidiary Banks 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 1997, stockholders' equity increased $1.9 million over
December 31, 1996, after a $130,000 increase in unrealized gains on
investment securities available-for-sale. The Company issued 10,190 shares
of stock through its Employee Stock Purchase Plan during 1997, which
generated $224,180 of new shareholders' equity. The Company's Tier 1 Leverage
ratio at December 31, 1997 was 6.38%, which decreased slightly from 6.39% as
of December 31, 1996. 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 increased slightly to 10.67%
as of December 31, 1997 from 10.66% as of December 31, 1996. The Tier 1
Capital ratio decreased from 9.45% at December 31, 1996 to 9.42% at December
31, 1997. For further discussion of the regulatory capital requirements, see
note 14 to the Financial Statements included in Item 8.
LIQUIDITY
The Company ensures the Subsidiary Banks maintain appropriate liquidity and
provides access to secondary sources of liquidity in case of unusual or
unanticipated demand for funds. Primary bank sources of liquidity are 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
14
<PAGE>
business. The Company is a secondary source of liquidity for its Subsidiary
Banks 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 included in
Item 8, the Company has experienced significant changes in the cash flows
from operating, investing, and financing activities during 1997 as compared
to prior years. These fluctuations primarily related to increases in the
loan portfolio and mortgage loans held-for-sale at year-end which have
primarily been funded by increases in short-term borrowings and deposit
accounts.
INTEREST RATE SENSITIVITY
The Company's overall success is dependent upon its ability to manage
interest rate risk. Interest rate risk can be defined as the exposure of the
Company's net interest income to adverse movements in interest rates.
Because the Company has no trading portfolio, the Company is not exposed to
significant market risk from trading activities. Other types of market risk,
such as foreign currency exchange and commodity price risk, do not arise in
the normal course of the Company's business activities. The Company does not
currently use derivatives to manage market and interest rate risks. A
derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics.
The Company is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit (see note 15 included in Item 8). These
instruments involve to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized in the consolidated balance sheets.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition in the contract. Commitments
generally have fixed expiration dates and may require collateral from the
borrower if deemed necessary by the Company. Standby letters of credit are
conditional commitments issued by the Company to guarantee the performance of
a customer to a third party up to a stipulated amount and with specified
terms and conditions. Commitments to extend credit and standby letters of
credit are not recorded as an asset or liability by the Company until the
instrument is exercised.
The Subsidiary Bank's interest rate exposure is reviewed on a regular
basis by the Asset/Liability Committee (ALCO) for each bank. The principal
objective of the Company's interest rate risk management function is to
evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with the funds
management policy of the Company. Through such management, the Company seeks
to monitor the vulnerability of its operations to changes in interest rates.
The extent of the movement of interest rates is an uncertainty that could
have a negative effect on the earnings of the Company.
Interest rate exposure is reviewed and managed, to the extent possible,
by matching maturities of interest bearing assets and interest bearing
liabilities. 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
significantly affects the Company's interest rate risk. 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 in 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.
15
<PAGE>
The following table indicates the Company's interest sensitive assets
and liabilities over specific time horizons as well as its interest
sensitivity gap at December 31, 1997:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) Balances Subject to Repricing Within
-------------------------------------
OVER
90 DAYS 180 DAYS 1 YEAR 1 YEAR TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest earning cash and due from banks $ 0 0 0 0 0
Execess funds sold 0 0 0 0 0
Investment securities available for sale 10,738 9,394 31,044 78,303 129,479
Mortgage loans held for sale 44,761 0 0 0 44,761
Net Loans 95,333 22,426 26,798 168,631 313,188
- ------------------------------------------------------------------------------------------------------------
Total earning assets 150,832 31,820 57,842 246,934 487,428
- ------------------------------------------------------------------------------------------------------------
NOW and Savings deposits $98,859 0 0 0 98,859
Cds and other interest-bearing deposits 95,648 34,142 36,189 116,256 282,235
Short-term borrowings 39,057 0 0 0 39,057
Long-term borrowings 9,250 0 0 1,000 10,250
============================================================================================================
Total interest-bearing liabilities 242,814 34,142 36,189 117,256 430,401
- ------------------------------------------------------------------------------------------------------------
Net asset (liability) repricing difference $(91,982) (2,322) 21,653 129,678 57,027
============================================================================================================
Cummulative asset (liability) repricing
difference $(91,982) (94,304) (72,651) 57,027
=========================================================================================
Cumulative earnings assets to cumulative
interest=bearing liabilities 0.62 0.66 0.77 1.13
=========================================================================================
Cumulative asset (liability) repricing
difference as a percent of total earning
assets -18.87% -19.35% -14.91% 11.70%
=========================================================================================
</TABLE>
The entire mortgage held for sale portfolio is included in the 90 day
category as the vast majority of these loans will be sold to investors within
90 days. The interest rates on lines-of-credit included in short-term
borrowings, as well as the interest rate on the majority of the Company's
long-term debt, reprice every 90 days or are priced at LIBOR. 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 and certain
other interest-bearing deposit accounts are contractually subject to
repricing within 90 days and therefore are included in the 90 day category in
the above table. Using historical analysis, 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 it
relates to these deposits.
Interest rate sensitivity analysis is used to measure the Company's
interest rate risk by computing estimated changes in the market value of
equity derived from the changes in discounted cash flows from assets and
liabilities in the event of a range of assumed changes in market interest
rates. The market value of equity is equal to the market value of assets
minus the market value of liabilities. This analysis assesses the risk of
loss in market risk sensitive instruments in the event of a sudden and
sustained one hundred to two hundred basis points increase or decrease in the
market interest rates. The following table presents the Company's projected
change in the market value of equity for the various rate shock levels at
December 31, 1997. All market risk sensitive instruments of the Company are
held to maturity or available for sale.
16
<PAGE>
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) ESTIMATED INCREASE
(DECREASE) IN MARKET
VALUE OF EQUITY
------------------------------------------------------------
ESTIMATED MARKET
CHANGE IN INTEREST RATES VALUE OF EQUITY AMOUNT PERCENT
- ------------------------ -------------------------- -------- ---------
<S> <C> <C>
200 basis point rise $35,276 $(8,195) (19)%
100 basis point rise 39,082 (4,389) (10)
Base Scenario 43,471 - -
100 basis point decline 48,787 5,316 12
200 basis point decline 57,134 13,663 31
</TABLE>
The calculation is based on the net present value of estimated
discounted cash flows utilizing market prepayment assumptions and market
rates of interest provided by independent broker quotations and other public
sources as of December 31, 1997, with adjustments made to reflect the shift
in the Treasury yield curve as appropriate. The preceding table indicates
that at December 31, 1997, in the event of a sudden and sustained increase in
prevailing market interest rates, the Company's market value of equity would
be expected to decrease and that in the event of a sudden and sustained
decrease in prevailing market interest rates, the Company's market value of
equity would be expected to increase.
Computation of prospective effects of hypothetical interest changes are
based on numerous assumptions, including relative levels of market interest
rates, discount rates, loan prepayments, investment call options, and
deposits decay, and should not be relied upon as indicative of actual
results. Further, the computations do not contemplate any actions the ALCO
could undertake in response to changes in interest rates. Certain
shortcomings are inherent in the method of analysis presented in the
computation of the change in the market value of equity. Actual values may
differ from those projections presented, should market conditions vary from
assumptions used.
YEAR 2000
The Company is aware of the issues associated with the programming code
in existing systems as the millennium (year 2000) approaches. The "year
2000" problem is pervasive and complex as virtually every computer operation
and every system with an embedded date chip will be affected in some way by
the rollover of the two digit year value to 00. The "year 2000" issue will
affect almost every area of the Company. The issue is whether systems and
date chips will properly recognize date sensitive information when the year
changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
The Company is utilizing both internal and external resources to
identify, correct, and test the systems for the year 2000 compliance. It is
anticipated that testing of mission critical applications will be complete by
December 31, 1998, allowing 1999 to be used for testing of non-mission
critical applications and other problem solving. To date, confirmations have
been received from the Company's primary system vendors that testing plans
are being developed to address processing of transactions in the year 2000.
Testing, upgrades, and replacement of equipment is expected to cost
approximately $50,000 to $100,000 over the next two years; however these
amounts may change significantly as the Company continues to analyze year
2000 issues. This estimate excludes internal staff costs. The amount
expensed in 1997 was immaterial.
ACCOUNTING STANDARDS
In 1995 the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (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,"
17
<PAGE>
superseded SFAS No. 122 and was effective in 1997. Currently, the Company
primarily sells all mortgage loans with servicing released, thus
implementation of this accounting statement was not material to the Company's
business practices or results of operations as of December 31, 1997.
In February 1997, SFAS No. 128, "Earnings Per Share" was issued. SFAS
No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and specifies the
computation, presentation, and disclosure requirements for earnings per share
(EPS) for entities with publicly held common stock or potential common stock.
SFAS No. 128 was issued to simplify the computation of EPS and to make the
U.S. standard more compatible with the EPS standards of other countries and
that of the International Accounting Standards Committee. It replaces the
presentation of primary EPS with a presentation of basic EPS and replaces
fully diluted EPS with diluted EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB 15. SFAS
No. 128 was effective for financial statements for both interim and annual
periods ending after December 15, 1997. All prior-period EPS data presented
has been restated to conform with SFAS No. 128. The adoption of SFAS No. 128
did not have a significant impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." The statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income, be reported in a financial statement that is displayed
with the same prominence as other financial statements. The statement is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will adopt this statement in
the first quarter of 1998.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The statement establishes
standards for the way that public business enterprises report information
about operating segments and certain other information in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders.
The statement is effective for financial statements for periods beginning
after December 15, 1997. The Company will adopt this statement in the first
quarter of 1998.
The following supplementary financial information of the registrant for
each of the last three years (unless otherwise stated) is included on pages
19 through 25 of this Report:
Table 1 Comparison of Average Balance Sheets
Table 2 Analysis of Net Interest Income - Tax Equivalent Basis
Table 3 Maturity Of Investment Securities
Table 4 Analysis of Loan Portfolio and Loss Experience (for last five
years)
Table 5 Allocation of Allowance for 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 Equity and Assets (for last five years)
18
<PAGE>
<TABLE>
<CAPTION>
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):
Years ended December 31,
--------------------------------------------------------------
1997 1996 1995*
-------------------- ------------------ ------------------
% of % of % of
Amount Total Amount Total Amount Total
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash and due from banks $10,070 2.1 $9,757 2.1 $10,166 2.4
Interest-bearing deposits in banks 0 0 376 0.1 113 0
Excess funds sold 547 0.1 10,426 2.3 10,743 2.6
------- ---- ------ ---- ------- ---
Total cash and cash equivalents 10,617 2.2 20,559 4.5 21,022 5.0
Taxable securities 122,190 25.3 $110,313 23.9 $117,051 27.8
Tax-exempt securities 9,710 2.0 12,165 2.6 16,296 3.9
Mortgage loans held for sale 21,372 4.4 29,651 6.4 7,610 1.8
Loans and leases, net of unearned income 301,419 62.3 269,091 58.5 240,778 57.2
Less: Allowance for loan losses 4,122 0.8 3,469 0.8 3,441 0.8
------- ---- ------ ---- ------- ---
Loans, net 297,297 61.5 265,622 57.7 237,337 56.4
Premises and Equipment 10,694 2.2 10,217 2.2 10,550 2.4
Goodwill, net of amortization 4,779 1.0 5,328 1.2 4,964 1.2
Other Assets 6,891 1.4 6,821 1.5 6,133 1.5
-------- ------ -------- ------ -------- -----
TOTAL ASSETS $483,550 100.0% $460,676 100.0% $420,963 100.0%
-------- ------ -------- ------ -------- -----
-------- ------ -------- ------ -------- -----
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Non-interest bearing deposits $ 40,589 8.4 39,300 8.5 $ 36,732 8.7
Interest bearing deposits 368,655 76.2 350,918 76.2 323,581 76.9
-------- ------ -------- ------ -------- -----
Total Deposits 409,244 84.6 390,218 84.7 360,313 85.6
-------- ------ -------- ------ -------- -----
Short-term borrowings 24,061 5.0 19,887 4.3 11,260 2.8
Long-term borrowings 9,921 2.1 10,782 2.3 11,575 2.7
Other liabilities 4,598 0.9 5,375 1.2 3,961 0.9
-------- ------ -------- ------ -------- -----
TOTAL LIABILITIES $447,824 92.6 $426,262 92.5 $387,109 92.0
STOCKHOLDERS' EQUITY:
Preferred Stock 2,591 0.5 2,600 0.6 3,956 0.9
Common Stock 693 0.1 689 0.1 686 0.2
Additional paid-in capital 5,100 1.1 4,875 1.1 4,270 1.0
Unrealized gain/(loss) on investment securities 198 0.0 475 0.1 1,497 0.4
Retained earnings 27,144 5.7 25,775 5.6 23,445 5.5
-------- ------ -------- ------ -------- -----
TOTAL STOCKHOLDERS' EQUITY $35,726 7.4 $34,414 7.5 $33,854 8.0
-------- ------ -------- ------ -------- -----
STOCKHOLDERS' EQUITY $483,550 100.0% $460,676 100.0% $420,963 100.0%
-------- ------ -------- ------ -------- -----
-------- ------ -------- ------ -------- -----
</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.
19
<PAGE>
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 1997 1996 1995(1) 1997 1996 1995
-------- -------- -------- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Taxable securities $122,190 $110,313 $117,051 6.81% 6.30% 6.22%
Tax-exempt securities 9,710 12,165 16,296 9.78% 10.03% 9.62%
-------- -------- -------- ----- ------ -----
Total Securities $131,900 $122,478 $133,347 7.03% 6.67% 6.64%
-------- -------- -------- ----- ------ -----
Time deposits 0 376 113 0.00% 2.39% 4.32%
Excess funds sold 547 10,426 10,743 6.03% 2.91% 4.21%
Mortgage loans held for sale(3) 21,372 29,651 7,610 7.29% 7.37% 6.82%
Loans, net of unearned income(2), (4) 301,419 269,091 240,778 9.50% 9.78% 9.68%
-------- -------- -------- ----- ----- -----
Total Earning Assets (FTE) $455,238 $432,022 $392,591 8.68% 8.56% 8.45%
-------- -------- -------- ----- ----- -----
-------- -------- -------- ----- ----- -----
INTEREST BEARING LIABILITIES:
Interest bearing deposits $368,655 $350,918 $323,581 4.67% 4.59% 4.49%
Short-term borrowings 24,061 19,887 11,260 6.21% 4.91% 4.42%
Long-term borrowings 9,921 10,782 11,575 7.53% 7.35% 7.79%
-------- -------- -------- ----- ------ -----
Total Interest Bearing Liabilities $402,637 $381,587 $346,416 4.83% 4.68% 4.60%
-------- -------- -------- ----- ------ -----
Interest Rate Spread (FTE) -------- -------- -------- 3.85% 3.88% 3.85%
Net interest margin (FTE) 4.40% 4.42% 4.40%
----- ------ -----
----- ------ -----
INTEREST EARNED OR PAID 1997/96 CHANGE DUE TO 1996/95 CHANGE DUE TO
-------------------------------- ----------------------- ---------------------
INTEREST EARNING ASSETS 1997 1996 1995(1) VOLUME RATE VOLUME RATE
-------- -------- -------- -------- ------ ---------------------
Taxable securities $8,325 $6,945 $7,281 783 597 (423) 87
Tax-exempt securities(2) 950 1,220 1,568 (241) (29) (412) 63
-------- -------- -------- -------- ------ --------- ------
Total securities: $9,275 $8,165 $8,849 $542 $568 ($835) $150
-------- -------- -------- -------- ------ --------- ------
Time deposits 0 9 54 (5) (4) 41 (86)
Excess funds sold 33 303 452 (432) 162 (1,665) 1,516
Mortgage loans held for sale(3) 1,557 2,185 519 (603) (25) 1,846 (180)
Net loans (2), (4) 28,644 26,307 23,310 3,089 (752) 3,277 (280)
-------- -------- -------- ------- ------ --------- -------
Total Earnings Asset (FTE) $39,509 $36,969 $33,184 $2,591 ($51) $2,664 $1,120
-------- -------- -------- ------- ------ --------- -------
-------- -------- -------- ------- ------ --------- -------
INTEREST BEARING LIABILITIES:
Interest bearing deposits $17,228 $16,090 $14,527 826 312 $1,262 $ 300
Short-term borrowings 1,493 976 498 229 288 430 48
Long-term borrowings 747 792 902 (64) 19 (40) (70)
-------- -------- -------- ------- ------ -------- -------
Total Interest Bearing Liabilities $19,468 $17,858 $15,927 $991 $619 $1,652 $ 278
-------- -------- -------- ------- ------ -------- -------
Net interest income (FTE) $20,041 $19,111 $17,257 $1,600 ($670) $1,012 $ 842
-------- -------- -------- ------- ------ --------- -------
-------- -------- -------- ------- ------ --------- -------
</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 1997 and 1996 and a federal tax rate of 34% in
1995.
(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 outstanding.
Interest on loans includes yield-related loan fees.
20
<PAGE>
TABLE 3
MATURITY OF INVESTMENT SECURITIES
THE FOLLOWING TABLE SETS FORTH THE MATURITY OF THE REGISTRANT'S INVESTMENT
PORTFOLIO: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
--------------------------------------------------------------------------------------
CORPORATE
U.S. GOVERNMENT AGENCIES STATE AND POLITICAL OBLIGATIONS
U.S. TREASURY 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 $ 4,022 6.99% $ 3,485 5.08% $ 1,569 10.12% --
After one through five years 15,314 6.49% 13,946 6.36% 6,200 9.45% --
After five through ten years 2,892 6.45% 28,260 7.06% 1,579 8.37% --
After ten years -- -- 34,060 7.66% 776 8.17% --
Mortgage backed securities(3) -- -- 15,570 7.02% -- -- --
------- ---- ------- ---- ------- ----- ------
Total debt securities $22,228 6.58% $95,321 7.09% $10,124 9.29% 0
Federal Home Loan Bank stock $1,472
Other equity securities 334
------- ---- ------- ---- ------- ----- ------
Total securities available
for sale $22,228 6.58% $95,321 7.09% $10,124 9.29% $1,806
------- ---- ------- ---- ------- ----- ------
------- ---- ------- ---- ------- ----- ------
</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, 1997, the Company did not own any investment securities
from a single issuer other than the U.S. Federal Government, that
represents 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.
21
<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,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $ 73,908 $ 69,594 $ 63,197 $ 59,131 $ 59,014
Real estate mortgages 208,502 186,613 159,928 141,651 135,984
Consumer 32,606 35,242 33,094 32,040 33,986
Leases 524 892 1,455 711 952
Student loans held for sale 0 0 0 5,450 0
-------- -------- -------- -------- --------
Gross Loans $315,540 $292,341 $257,674 $238,983 $229,936
Less:
Unearned discount and deferred loan fees 2,352 3,172 3,074 2,951 2,700
Allowance for possible loan losses 4,646 3,775 3,309 3,475 3,940
-------- -------- -------- -------- --------
Net Loans $308,542 $285,394 $251,291 $232,557 $223,296
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
SUMMARY OF LOAN LOSS EXPERIENCE:
Allowance for loan and lease losses, beginning $ 3,775 $ 3,309 $ 3,475 $ 3,940 $ 2,964
Amounts charged-off:
Commercial, financial and agricultural 60 270 268 570 382
Real estate mortgages 0 53 175 0 47
Consumer 678 783 547 398 348
-------- -------- -------- -------- --------
Total Charge-Offs $ 738 $ 1,106 $ 990 $ 968 $ 777
-------- -------- -------- -------- --------
Recoveries on amounts previously charged-off:
Commercial, financial and agricultural 274 236 133 90 55
Real estate mortgages 0 17 0 14 0
Consumer 174 88 151 75 55
-------- -------- -------- -------- --------
Total Recoveries $ 448 $ 341 $ 284 $ 179 $ 110
-------- -------- -------- -------- --------
Net Charges-Offs $ 290 $ 765 $ 706 $ 789 $ 667
Provision charged to expense 1,128 1,113 488 323 1,329
Addition to dealer reserve 33 118 51 1 0
Addition due to purchase of subsidiary 0 0 1 0 314
-------- -------- -------- -------- --------
Allowance for Loan and Lease Losses, Ending $ 4,646 $ 3,775 $ 3,309 $ 3,475 $ 3,940
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Non-performing loans at year-end:
Non-accrual $ 3,968 $ 2,348 $ 2,064 $ 2,699 $ 3,652
Restructured 139 314 270 630 209
-------- -------- -------- -------- --------
Total Non-Performing Loans $ 4,107 $ 2,662 $ 2,334 $ 3,329 $ 3,861
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Past due 90 days or more, not included above 500 201 16 256 716
Other real estate, not included above 0 75 0 0 48
RATIOS:
Allowance to year-end loans, net of unearned 1.48% 1.31% 1.30% 1.47% 1.73%
Allowance to non-performing loans 113.12 141.81 141.77 104.39 102.05
Net charge-offs to average loans (gross) 0.10 0.28 0.29 0.34 0.33
Recoveries to charge-offs 60.70 30.83 28.69 18.49 14.16
Non-performing loans to loans, net of unearned
discount and deferred loan fees 1.31 0.92 0.92 1.41 1.70
</TABLE>
22
<PAGE>
TABLE 5
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
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, 1997 $1,779 $1,407 $1,247 $13 $200 $4,646
% of loans in category to total loans 23.42% 66.08% 10.33% 0.17% N/A 100.00%
December 31, 1996 $1,376 $1,130 $1,054 $15 $200 $3,775
% of loans in category to total loans 23.81% 63.83% 12.06% 0.30% N/A 100.00%
December 31, 1995 $1,420 $1,144 $ 519 $26 $200 $3,309
% of loans in category to total loans 24.53% 62.07% 12.84% 0.56% N/A 100.00%
December 31, 1994 $1,655 $1,030 $ 464 $26 $300 $3,475
% of loans in category to total loans 24.74% 59.27% 15.69% 0.30% N/A 100.00%
December 31, 1993 $2,237 $ 963 $ 414 $26 $300 $3,940
% of loans in category to total loans 25.67% 59.14% 14.78% 0.41% N/A 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, 1997
---------------------------------------------------------------------------
TIME REMAINING TO MATURITY LOANS DUE AFTER ONE YEAR
------------------------------------ ------------------------
DUE ONE TO FIXED FLOATING
WITHIN FIVE YEARS AFTER FIVE INTEREST INTEREST
ONE YEAR YEARS TOTAL RATE RATE
-------- ---------- ---------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial & agricultural $ 54,054 $ 18,053 $ 1,801 $ 73,908 $ 16,872 $ 2,982
Real estate mortgages 81,170 90,387 36,945 208,502 79,807 47,525
Consumer 4,116 25,118 3,372 32,606 28,324 166
Leases 272 252 -- 524 77 175
-------- -------- -------- -------- -------- --------
Total $139,612 $133,810 $ 42,118 $315,540 $125,080 $ 50,848
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
</TABLE>
23
<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 INTEREST
BEARING BEARING
DEMAND DEMAND SAVINGS TIME TOTAL
DEPOSITS DEPOSITS ACCOUNTS DEPOSITS DEPOSITS
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1997 AVERAGE
Balance $40,589 $70,454 $72,899 $225,302 $409,244
Rate --- 2.74% 3.10% 5.79% 4.67%
1996 AVERAGE
Balance 39,300 67,583 76,087 207,248 390,218
Rate --- 2.52% 3.14% 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%
</TABLE>
THE FOLLOWING TABLE SETS FORTH THE REGISTRANT'S MATURITY DISTRIBUTION FOR ALL
TIME DEPOSITS OF $100,000 OR MORE AS OF DECEMBER 31, 1997.
MATURITY DISTRIBUTION FOR ALL TIME DEPOSITS OF $100,000 OR MORE
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------
6
3 3 THROUGH
MONTHS THROUGH 12 OVER
OR LESS 6 MONTHS MONTHS 12 MONTHS TOTAL
------- -------- -------- --------- -----
<S> <C> <C> <C> <C> <C>
Time Deposits of $100,000 or more $23,270 $13,075 $6,266 $16,944 $59,555
</TABLE>
24
<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,
-----------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
Repurchase agreements $ 4,268 $ 2,756 $ 2,374
Federal funds purchased 21,850 10,000 0
Federal Home Loan Bank Borrowings 7,932 0 0
Other short-term borrowings 5,007 6,832 4,217
------- ------- -------
Total $39,057 $19,588 $ 6,591
------- ------- -------
------- ------- -------
</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,
---------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.62% 0.40% 0.80% 0.84% 0.94%
Return on average equity 8.43% 5.36% 9.94% 11.22% 13.56%
Common stock dividend payout ratio 15.20% 22.44% 10.97% 9.43% 7.26%
Average equity to average asset ratio 7.39% 7.47% 8.04% 7.44% 6.97%
</TABLE>
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, above.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------------------
ASSETS 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (note 3) $ 11,377 10,617
Excess funds sold 0 1,950
- -----------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 11,377 12,567
- -----------------------------------------------------------------------------------------------------------
Investment securities available for sale (note 4) 129,479 133,072
- -----------------------------------------------------------------------------------------------------------
Mortgage loans held for sale, lower of cost or market 44,761 20,343
- -----------------------------------------------------------------------------------------------------------
Loans (note 5) 315,540 292,341
Less:
Allowance for possible loan losses (note 5) 4,646 3,775
Unearned income and deferred loan fees 2,352 3,172
- -----------------------------------------------------------------------------------------------------------
Net loans 308,542 285,394
Premises and equipment (note 6) 10,854 10,234
Goodwill, net of amortization 4,495 5,062
Other assets 6,042 6,752
- -----------------------------------------------------------------------------------------------------------
$ 515,550 473,424
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Non-interest-bearing 42,589 43,233
Interest-bearing (note 7) 381,094 360,876
- -----------------------------------------------------------------------------------------------------------
Total deposits 423,683 404,109
Short-term borrowings (note 8) 39,057 19,588
Long-term debt (note 9) 10,250 10,150
Other liabilities 5,698 4,615
- -----------------------------------------------------------------------------------------------------------
Total liabilities 478,688 438,462
- -----------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, authorized 100,000 shares:
7.75% cumulative preferred stock, no par value, 300 and
2,600 shares issued and outstanding in 1997 and 1996, respectively (note 12) 300 2,600
Common stock, $.33 par value; 5,000,000 shares authorized, 2,152,593 and
2,072,619 shares issued and outstanding in 1997 and 1996, respectively 718 691
Additional paid-in capital 6,691 5,001
Net unrealized gain on investment securities, net of tax (note 10) 577 447
Retained Earnings (Notes 13 and 14) 28,576 26,223
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 36,862 34,962
Commitments and contingent liabilities (notes 15 and 16)
- -------------------------------------------------------------------------------------------------------------
$ 515,550 473,424
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLDIATED FINANCIAL STATEMENTS.
26
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 28,566 26,248 23,310
Interest and dividends on investment securities:
Taxable 8,325 6,945 7,281
Nontaxable 582 747 1,035
Interest on time deposits 0 9 54
Interest on excess funds sold 33 303 452
Interest on mortgage loans held for sale 1,557 2,185 518
- -------------------------------------------------------------------------------------------------------------
Total interest income 39,063 36,437 32,650
- -------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 17,228 16,090 14,526
Interest on short-term borrowings 1,493 976 498
Interest on long-term debt 747 792 903
- -------------------------------------------------------------------------------------------------------------
Total interest expense 19,468 17,858 15,927
- -------------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 19,595 18,579 16,723
Provision for possible loan losses (note 5) 1,128 1,113 488
- -------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 18,467 17,466 16,235
- -------------------------------------------------------------------------------------------------------------
Other operating income:
Trust fees 662 644 547 547
Deposit service charges 373 397 470
Other service charges 1,178 1,153 1,185
Investment securities gains (losses), net (note 4) 210 41 (284)
Gain on sale of land and buildings 0 23 322
Mortgage loan origination income, net 6,546 5,172 3,980
Other income 794 950 968
- -------------------------------------------------------------------------------------------------------------
Total other operating income 9,763 8,380 7,188
- -------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits (note 11) 15,336 14,465 11,570
Net occupancy expense of premises 1,630 1,508 1,261
Furniture and fixtures 1,520 1,680 1,111
Office supplies 436 474 394
Outside services 760 1,142 803
Advertising expense 494 632 416
FDIC insurance assessment 49 8 418
Amortization expense-goodwill 519 523 471
Other expenses 3,005 2,644 2,158
- -------------------------------------------------------------------------------------------------------------
Total other operating expenses 23,749 23,076 18,602
- -------------------------------------------------------------------------------------------------------------
Earnings before income taxes 4,481 2,770 4,821
Income tax expense (note 10) 1,468 926 1,457
- -------------------------------------------------------------------------------------------------------------
Net earnings $ 3,013 1,844 3,364
- -------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 2,811 1,643 3,026
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 1.35 .80 1.49
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1.34 .79 1.46
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
27
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<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, 1995 $ 5,350 664 3,772 (1,450) 22,337 30,673
Issuance of 66,553 shares of
common stock - 22 923 - - 945
Redemption of preferred stock (2,750) - - - - (2,750)
Change in unrealized gain (loss) on
investment securities, net of tax - - 2,822 - 2,822
Net earnings - - - - 3,364 3,364
Cash dividends on preferred stock - - - - (338) (338)
Cash dividends on common stock
(.18 per share) - - - - (369) (369)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 2,600 686 4,695 1,372 24,994 34,347
Issuance of 15,488 shares of
common stock - 5 306 - - 311
Change in unrealized gain (loss) on
investment securities, net of tax - - - (925) - (925)
Net earnings - - - - 1,844 1,844
Cash dividends on preferred stock - - - - (201) (201)
Cash dividends on common stock
(.20 per share) - - - - (414) (414)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $ 2,600 691 5,001 447 26,223 34,962
Issuance of 79,974 shares of
common stock - 27 1,690 - - 1,717
Redemption of preferred stock (2,300) - - - - (2,300)
Change in unrealized gain (loss) on
investment securities, net of tax - - - 130 - 130
Net earnings - - - - 3,013 3,013
Cash dividends on preferred stock - - - - (202) (202)
Cash dividends on common stock
(.22 per share) - - - - (458) (458)
- --------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 300 718 6,691 577 28,576 36,862
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
28
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 38,535 35,721 33,359
Fees received 9,807 9,332 6,196
Net increase in mortgage loans held for sale (24,418) (6,859) (13,484)
Interest paid (19,041) (17,872) (15,427)
Cash paid to suppliers and employees (20,542) (21,544) (16,553)
Income taxes paid (1,784) (1,178) (685)
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (17,443) (2,400) (6,594)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities of investment securities available for sale 30,060 46,554 29,178
Sales of investment securities available for sale 59,152 23,162 16,657
Purchases of investment securities available for sale (85,310) (68,622) (40,622)
Net increase in loans (23,519) (35,378) (20,776)
Premises and equipment expenditures (2,029) (1,626) (1,349)
Proceeds from sale of land and building - 45 912
Net cash and cash equivalents used for acquisition
of Subsidiary - - (2,028)
- ----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,646) (35,865) (18,028)
- ----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts (1,841) 5,030 1,686
Net increase in certificates of deposit 21,415 12,909 32,334
Dividends paid on preferred stock (202) (201) (338)
Dividends paid on common stock (458) (414) (369)
Net proceeds from short-term debt 19,468 12,997 (2,047)
Net proceeds of long-term debt 100 (850) (800)
Redemption of preferred stock (2,300) - (2,750)
Issuance of common stock 1,717 311 945
- ----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 37,899 29,782 28,661
- ----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (1,190) (8,483) 4,039
Cash and cash equivalents at beginning of year 12,567 21,050 17,011
- ----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 11,377 12,567 21,050
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided
by operating activities:
Net earnings $ 3,013 1,844 3,364
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 2,065 2,122 1,732
Provision for possible loan losses 1,128 1,113 488
Losses (gains) on sale of investment
Securities (210) (41) 284
Gain on sale of land and building - (23) (322)
Increase (decrease) in:
Income taxes payable (316) (252) 774
Interest payable 426 51 499
Unearned income (821) 98 123
Other liabilities 1,142 167 1,380
Decrease (increase) in:
Interest receivable 363 (373) (322)
Other assets 254 194 (620)
Increase in mortgage loans held for sale (24,418) (6,859) (13,484)
Discount accretion recorded as income (380) (794) (877)
Premium amortization charged against income 311 353 387
- ----------------------------------------------------------------------------------------------------------------
$(17,443) (2,400) (6,594)
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Schedule of Non-Cash Financing and Investing Activities:
- ----------------------------------------------------------------------------------------------------------------
Issuance of common stock for the acquisition of Premier
Home Financing $ - - 637
- ----------------------------------------------------------------------------------------------------------------
A summary of the transactions in connection with the
acquisition of and substantially all the assets and liabilities
of Premier Home Financing in 1995 are as follows:
Fair value of assets acquired - - 9,723
Excess of acquisition cost over fair value
of assets acquired - - 1,922
Acquisition cost - - (2,968)
- ----------------------------------------------------------------------------------------------------------------
Liabilities assumed $ - - 8,677
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
(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 requires 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 (SSB), First National Bank in DeKalb (FNB), Castle Finance Company
(CFC), CasBanc Mortgage, Inc. (CMI), and SBI Illinois, Inc., which owns
100% of Castle Bank Harvard, N.A. (CBH) and The Bank of Yorkville (BOY)
(Subsidiaries). Significant intercompany transactions and accounts have
been eliminated in consolidation.
(b) INVESTMENT SECURITIES
Investments in debt and equity securities have been classified as available
for sale and reported at fair value. The amortized valued is adjusted for
amortization of premiums and accretion of discounts using a method that
approximates level yield. Unrealized gains and losses, net of related
deferred income taxes, are reported in 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 LOAN ORIGINATION 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 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 non-accrual and impaired loans is recognized until the
principal is collected. Loans are generally placed on non-accrual 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
non-accrual loan may be restored to accrual basis when interest and
principal payments are current and prospects for future payments are no
longer in doubt.
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.
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
31
<PAGE>
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.
(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 or sale date 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, 15 to 40 years; and furniture,
fixtures, and equipment, 3 to 10 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 $3,319,000
and $2,752,000 at December 31, 1997 and 1996, 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 and 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
Effective December 31, 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share" retroactively
for all years presented. Income for basic earnings per share (EPS) is
based on the weighted average number of common shares outstanding.
Diluted EPS is based on the weighted average number common shares
outstanding, increased by the assumed conversion of the convertible
preferred stock and exercise of the Company's stock options.
32
<PAGE>
The components of basic and diluted EPS for the years ended December 31,
1997, 1996, and 1995 were as follows: (DOLLARS IN THOUSANDS, EXCEPT SHARE
DATA)
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Net Income 3,013 1,844 3,364
Less: preferred stock dividends: (202) (201) (338)
----- ----- -----
Income available to common stockholders 2,811 1,643 3,026
----- ----- -----
----- ----- -----
Average common shares 2,079,251 2,066,213 2,034,479
--------- --------- ---------
--------- --------- ---------
Basic EPS 1.35 .80 1.49
---- --- ----
---- --- ----
Diluted EPS:
Income available to common stockholders 2,811 1,643 3,026
Assumed conversion of preferred stock (anti-dilutive in 1997 and 1996) N/A N/A 338
--- --- -----
Income available to common stockholders after assumed conversion 2,811 1,643 3,364
----- ----- -----
----- ----- -----
Average common shares 2,079,251 2,066,213 2,034,479
Assumed conversion of preferred stock (anti-dilutive in 1997 and 1996) N/A N/A 272,762
Assumed exercise of stock options 22,188 19,359 2,724
------ ------ -----
Average common shares after assumed conversions 2,101,439 2,085,572 2,309,965
--------- --------- ---------
--------- --------- ---------
Diluted EPS 1.34 .79 1.46
---- --- ----
---- --- ----
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(2) ACQUISITION
On May 24, 1995, the Company, through its subsidiary CMI, acquired
substantially all the assets and assumed substantially all liabilities of
Premier Home Financing, Inc. (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.
(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 $1,005,000 and
$950,000 in 1997 and 1996, respectively.
33
<PAGE>
(4) INVESTMENT SECURITIES
A comparison of amortized cost and fair value of investment securities
available-for-sale at December 31, 1997 and 1996 follows: (DOLLARS IN
THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 101,495 657 (173) 101,979
Obligations of state and political
subdivisions 9,873 253 (2) 10,124
Mortgage-backed securities 15,397 218 (45) 15,570
- -----------------------------------------------------------------------------------------------------
Total debt securities $ 126,765 1,128 (220) 127,673
- -----------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock $ 1,472 - - 1,472
Other equity securities 334 - - 334
- -----------------------------------------------------------------------------------------------------
Total securities $ 128,571 1,128 (220) 129,479
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</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 $ 101,081 898 (634) 101,345
Obligations of state and political
subdivisions 10,628 350 (73) 10,905
Mortgage-backed securities 19,574 290 (133) 19,731
- -----------------------------------------------------------------------------------------------------
Total debt securities 131,283 1,538 (840) 131,981
- -----------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock $ 967 - - 967
Other equity securities 124 - - 124
- -----------------------------------------------------------------------------------------------------
Total securities $ 132,374 1,538 (840) 133,072
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available-for-sale at
December 31, 1997 and 1996 by contractual maturity, are shown below
(dollars in thousands). Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Amortized Fair Amortized Fair
cost value cost value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 9,033 9,076 14,872 14,908
Due after one year through five years 35,121 35,460 54,661 54,954
Due after five years through ten years 32,474 32,731 42,176 42,388
Due after ten years 34,740 34,836 - -
- ------------------------------------------------------------------------------------------------------
111,368 112,103 111,709 112,250
Mortgage-backed securities 15,397 15,570 19,574 19,731
- ------------------------------------------------------------------------------------------------------
Total debt securities 126,765 127,673 131,283 131,981
- ------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,472 1,472 967 967
Other equity securities 334 334 124 124
- ------------------------------------------------------------------------------------------------------
Total securities $128,571 129,479 132,374 133,072
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE>
Gross gains of approximately $409,000, $162,000, and $79,000 occurred from
security activity during 1997, 1996, and 1995, respectively. Gross losses
of approximately $199,000, $121,000, and $363,000 occurred from security
activity during 1997, 1996, and 1995, respectively. All security gains
and losses were as a result of transactions involving available-for-sale
securities.
Investment securities carried at approximately $66,445,000 and $66,519,000
at December 31, 1997 and 1996, respectively, were 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:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 73,908 69,594
Real estate mortgage 208,502 186,613
Consumer 32,606 35,242
Lease financing receivables 524 892
- ---------------------------------------------------------------------------------------------
Total $ 315,540 292,341
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
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: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans and leases $ 3,968 2,348
Restructured loans 139 314
- ---------------------------------------------------------------------------------------------
Total non-performing loans and leases $ 4,107 2,662
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
Loans past due 90 days or more and still accruing interest are not included
above and totaled $500,000 and $201,000 at December 31, 1997 and 1996,
respectively.
Non-accrual and restructured loans and leases had the following effect on
interest income for the years ended December 31: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income recognized $ 27 138 105
Income which would have been recognized under original terms 344 357 195
- ---------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE>
Impaired loan information at December 31, 1997 and 1996 is
as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans for which a related allowance has been allocated $ 821 1,376 1,081
impaired loans for which no allowance has been allocated 1,841 267 135
- ----------------------------------------------------------------------------------------------------
Total loans determined to be impaired $ 2,662 1,643 1,216
- ----------------------------------------------------------------------------------------------------
Allowance allocated to impaired loans, included in the allowance
for possible loan losses $ 260 401 243
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
Impaired loans averaged $2,152,000, $1,429,000, and $1,385,000 for the
years ended December 31, 1997, 1996, and 1995, respectively. No
interest was either recognized or received on these impaired loans
during 1997, 1996 and 1995. The entire balance of impaired loans at
December 31, 1997 and 1996 is classified as non-accrual and is included
in the non-accrual loan and lease total presented above.
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 1997 and 1996: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Loans outstanding, beginning of year $ 3,445 3,345
New loans, renewals, and advances 4,375 1,772
Loan payments (3,652) (1,672)
- -------------------------------------------------------------------------------------------
Loans outstanding, end of year $ 4,168 3,445
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of activity in the allowance for possible loan
losses: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 3,775 3,309 3,475
Addition from acquisition of subsidiary - - 1
Provision charged to expense 1,128 1,113 488
Additions to dealer reserves 33 118 51
Recoveries on loans previously charged off 448 341 284
- -------------------------------------------------------------------------------------------
5,384 4,881 4,299
Less loans charged off 738 1,106 990
- -------------------------------------------------------------------------------------------
Balance, end of year $ 4,646 3,775 3,309
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
(6) PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 were as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 1,806 1,802
Building and improvements 10,861 10,094
Furniture, fixtures, and equipment 7,786 7,184
- -----------------------------------------------------------------------------------------
20,453 19,080
Less accumulated depreciation 9,599 8,846
- -----------------------------------------------------------------------------------------
Total $ 10,854 10,234
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
(7) DEPOSITS
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was $59,555,000 and $49,542,000 at
December 31, 1997 and 1996, respectively. Included in these
totals were $4,059,000 and $2,080,000 of brokered deposits
at December 31, 1997 and 1996, respectively, with interest
rates ranging from 6.10% to 6.75% in 1997 and 6.30% to 6.75%
in 1996.
(8) SHORT-TERM BORROWINGS
The components of short-term borrowings at December 31 are as
follows: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Repurchase agreements $ 4,268 2,756
Federal funds purchased 21,850 10,000
Federal Home Loan Bank borrowings 7,932 -
Other short-term borrowings 5,007 6,832
- --------------------------------------------------------------
Total $ 39,057 19,588
- --------------------------------------------------------------
- --------------------------------------------------------------
</TABLE>
The weighted average interest rate on short-term borrowings was
6.41% and 7.47% at December 31, 1997 and 1996, respectively.
Other short-term borrowings (excluding treasury, tax, and loan
borrowings) consists of the following line-of-credit agreements
at December 31:
<TABLE>
<CAPTION>
1997
Outstanding
Principal Rate
- -------------------------------------------------------------------------------
<S> <C> <C>
$5,000,000 maturing January 27, 1998 3,250,000 7.59%
$3,000,000 payable on demand 857,000 8.50%
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
Outstanding
Principal Rate
- ---------------------------------------------------------------------------------------
<S> <C> <C>
$5,000,000 maturing January 29, 1997 5,000,000 7.31%
$3,000,000 maturing November 12, 1997, unsecured 1,124,000 8.25%
- ---------------------------------------------------------------------------------------
</TABLE>
The $5,000,000 line of credit is secured by outstanding stock
of the Subsidiaries, which are 100% owned by the Company.
Unsued lines of credit at December 31, 1997, and December 31,
1996, totaled $2,000,000 and $3,000,000, respectively.
Federal Home Loan Bank borrowings are collateralized by
Federal Home Loan Bank stock and first mortgage real estate
loans. As of December 31, 1997, the notes mature from 1998
through 2004 and have variable interest rates with an average
of 5.34%. Certain Federal Home Loan Bank borrowings with
call features have been classified as short-term borrowings
by the Company. SSB, FNB, and BOY have collateral pledge
agreements whereby they have agreed to keep on hand at all
time, free of all other pledges, loans, and encumbrances,
whole first mortgages on improved residential property with
unpaid principal balances aggregating no less than 167% of
the outstanding advances from the Federal Home Loan Bank.
37
<PAGE>
(9) LONG-TERM DEBT
Long-term debt at December 31, 1997 and 1996 consists of the following:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Amendment to the secured term loan dated May 1, 1992 with interest at
the 180 day LIBOR rate plus 1.625% (7.53% at December 31,
1997), principal payable in 6 semi-annual payments remaining
from June 30, 1998 through December 31, 2000 $ 9,250 10,150
Federal Home Loan Bank Borrowing
(6.10% payable on December 22, 2000) $ 1,000 -
- ----------------------------------------------------------------------------------------------
$ 10,250 10,150
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
Scheduled principal payments on long-term debt for the next five years,
through maturity, are:
<TABLE>
<CAPTION>
Year ended
December 31 Amount
- ----------------------------------------------------------------------------
<S> <C>
1998 $ 950
1999 1,000
2000 8,300
- ----------------------------------------------------------------------------
</TABLE>
The long-term debt agreement with a balance outstanding of $9,250,000 at
December 31, 1997, is secured by the stock of the subsidiaries and contains
certain restrictive convenants, as further described in Note 13. The
Company is required to maintain certain financial covenants related to its
secured term loan. At December 31, 1997, CBH's ratio of non-performing
assets to total loans and real estate loans was 5.3%, which was in excess
of the quarterly maximum ratio required by the secured term loan of 3%.
The Company has received a waiver from its lender regarding this violation
as of December 31, 1997, and its lender has increased the maximum ratio to
4.5% through September 30, 1998.
(10) INCOME TAXES
The components of Federal income tax expense (benefit) for 1997, 1996, and
1995 were as follows: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 2,088 1,290 986
Deferred (620) (364) 471
- --------------------------------------------------------------------------------
Total $ 1,468 926 1,457
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
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 1997, 1996 and 1995 are as follows: (DOLLARS IN
THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate $ 1,523 942 1,639
Tax-exempt interest, net of premium amortization (211) (250) (308)
Nondeductible amortization 156 169 174
Investment losses - - (82)
Other, net - 65 34
- ------------------------------------------------------------------------------------
Total income tax expense $ 1,468 926 1,457
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
</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, 1997 and 1996 are as follows: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 85 139
Allowance for loan losses 1,127 578
Other 13 -
Deferred compensation 257 248
State net operating loss carryforwards 83 130
- --------------------------------------------------------------------------------
Total gross deferred tax assets 1,565 1,095
Less valuation allowance (33) (34)
- --------------------------------------------------------------------------------
Net deferred tax assets 1,532 1,061
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Purchase accounting adjustments (554) (591)
Accretion on investments (57) (149)
Depreciation (258) (218)
Unrealized gains on investment securities (330) (250)
Net lease adjustment (63) (80)
Other, net (43) (86)
- --------------------------------------------------------------------------------
Total gross deferred tax liabilities (1,305) (1,374)
- --------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 227 (313)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
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, 1997 and 1996. The valuation allowance consists of Illinois NOL
carryforwards 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 $1,155,000 which will expire
in varying amounts beginning December 31, 2005 through December 31, 2006.
39
<PAGE>
(11) EMPLOYEE BENEFIT PLANS
The Company maintains a profit-sharing plan which was amended 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 $672,000,
$620,000, and $673,000 in 1997, 1996, and 1995, respectively.
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 paid by the Company to the plan totaled approximately
$15,000, $53,000, and $77,000 in 1997, 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, non-qualified 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 non-qualified stock options ranges from $14.00 to $22.00 per
share at December 31, 1997. Non-qualified 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>
- ----------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996
----------------- -----------------
Average Average
Shares Price Shares Price
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 113,100 $14.39 105,700 $14.13
Options granted 17,750 $22.00 7,600 $18.00
Options exercised (9,275) $14.42 -- --
Options forfeited (12,325) $15.06 (200) $15.00
- -----------------------------------------------------------------------------------------
Options outstanding at end of year 109,250 $15.55 113,100 $14.39
- -----------------------------------------------------------------------------------------
Options exercisable at end of year 47,800 $14.20 35,325 $14.11
- -----------------------------------------------------------------------------------------
Options available to grant under plan at end
of year 31,675 37,100
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
</TABLE>
40
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Net Income As reported $3,013 1,844
Pro forma 2,944 1,820
----------------------------------------------------------------------
Basic earnings per share As reported $ 1.35 .80
Pro forma 1.32 .79
----------------------------------------------------------------------
</TABLE>
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
In 1993, the Company issued 2,600 shares of Perpetual
Preferred Stock. On December 31, 1997, the Company redeemed
2,300 shares of its outstanding Perpetual Preferred Stock. Of
the 2,300 shares, 649 shares were redeemed for cash, and 1,651
shares were exchanged into 66,311 shares of the Company's
common stock.
The dividend rate on the remaining 300 shares of cumulative
Perpetual Preferred Stock is fixed at 7.75% through December
7, 1998. This dividend rate then increases 25 basis points
per year from December 7, 1999, through December 7, 2003, when
the rate will be fixed at 9%. These shares are redeemable at
the Company's discretion after five years from the issue date.
Upon liquidation, these shares are entitled to the then
calculated redemption value.
(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, 1997, the Company
had $1,556,000 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,
1997, subject to minimum regulatory capital guidelines, FNB
could, without prior approval of regulatory authorities,
declare dividends of approximately $1,768,000, and CBH could,
without prior approval of regulatory authorities, declare
dividends of approximately $88,000.
SSB and BOY 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 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.
41
<PAGE>
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, 1997
and 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, 1997 and 1996 under the regulatory
capital framework for prompt corrective action. Minimum
capital requirements and actual capital amounts and ratios as
of December 31, 1997 and 1996 are as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1997
Actual Regulatory Minimum
Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total risk-based capital to risk-weighted assets:
Castle BancGroup, Inc. $35,988 10.67% $26,994 8.00%
First National Bank in DeKalb 18,669 11.03% 13,539 8.00%
The Sandwich State Bank 9,498 12.93% 5,878 8.00%
Castle Bank Harvard, N.A. 6,679 13.28% 4,024 8.00%
The Bank of Yorkville 5,248 13.05% 3,218 8.00%
- --------------------------------------------------------------------------------------------------------
Tier I capital to risk-weighted assets:
Castle BancGroup, Inc. $31,770 9.42% $13,497 4.00%
First National Bank in DeKalb 17,033 10.06% 6,769 4.00%
The Sandwich State Bank 8,558 11.65% 2,939 4.00%
Castle Bank Harvard, N.A. 6,045 12.02% 2,012 4.00%
The Bank of Yorkville 4,817 11.98% 1,609 4.00%
- --------------------------------------------------------------------------------------------------------
Tier I capital to average assets:
Castle BancGroup, Inc. $31,770 6.38% $19,919 4.00%
First National Bank in DeKalb 17,033 6.93% 9,839 4.00%
The Sandwich State Bank 8,558 7.65% 4,476 4.00%
Castle Bank Harvard, N.A. 6,045 8.11% 2,983 4.00%
The Bank of Yorkville 4,817 7.49% 2,572 4.00%
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
Actual Regulatory Minimum
Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total risk-based capital to risk-weighted assets:
Castle BancGroup, Inc. $33,206 10.66% $24,925 8.00%
First National Bank in DeKalb 17,093 12.43% 10,998 8.00%
The Sandwich State Bank 9,058 12.70% 5,705 8.00%
Castle Bank Harvard, N.A. 6,517 12.02% 4,339 8.00%
The Bank of Yorkville 4,601 12.84% 2,866 8.00%
- --------------------------------------------------------------------------------------------------------
Tier I capital to risk-weighted assets:
Castle BancGroup, Inc. $29,431 9.45% $12,463 4.00%
First National Bank in DeKalb 15,788 11.48% 5,499 4.00%
The Sandwich State Bank 8,167 11.45% 2,853 4.00%
Castle Bank Harvard, N.A. 5,839 10.77% 2,170 4.00%
The Bank of Yorkville 4,217 11.77% 1,433 4.00%
- --------------------------------------------------------------------------------------------------------
Tier I capital to average assets:
Castle BancGroup, Inc. $29,431 6.39% $18,414 4.00%
First National Bank in DeKalb 15,788 7.19% 8,778 4.00%
The Sandwich State Bank 8,167 7.62% 4,285 4.00%
Castle Bank Harvard, N.A. 5,839 7.93% 2,946 4.00%
The Bank of Yorkville 4,217 7.25% 2,325 4.00%
- --------------------------------------------------------------------------------------------------------
</TABLE>
(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 potential credit risk at December 31,
1997 and 1996 are as follows: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------------
<S> <C> <C>
Standby letters of credit $ 3,943 $ 4,999
Commitments to extend credit 138,647 90,657
------------------------------------------------------------------------
$142,590 $95,656
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
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.
43
<PAGE>
The commitments to extend credit presented above included $81,250,000
and $34,000,000 at December 31, 1997 and 1996, respectively, relating
to approved mortgage loan applications at CMI.
At December 31, 1997 and 1996, the Company had commitments to sell
approximately $68,131,000 and $23,023,000 of first mortgage loans. At
December 31, 1997, commitments to sell consisted of loan-by-loan
commitments with investors. At December 31, 1996, commitments to sell
consisted of forward sales contracts for future sale to investors in the
secondary market.
(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
Statement of Accounting Standards No 107, "Disclosures about Fair
Value of Financial Instruments" (Statement 107), 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, AND EXCESS FUNDS SOLD
The carrying amount of cash and cash equivalents approximate fair value
because they mature daily and do not represent unanticipated credit risks.
(B) INVESTMENT SECURITIES
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.
(C) MORTGAGE LOANS HELD FOR SALE
As of December 31, 1997 and 1996, the carrying value of the Company's
mortgage loans held for sale was $44,761,000 and $20,343,000,
respectively. The estimated fair value of these loans was $44,940,000
and $20,410,000 at December 31, 1997 and 1996, 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 consumer. Each loan
category is further segmented into fixed and variable rate interest terms.
The fair value of 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.
44
<PAGE>
(E) DEPOSIT LIABILITIES
Under Statement 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, 1997 and 1996. 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.
(F) SHORT-TERM BORROWINGS
For these short-term instruments, the carrying amount is a reasonable
estimate of fair value.
(G) LONG-TERM BORROWINGS
Rates currently available to the Corporation for debt with similar terms
and remaining maturities are used to estimate fair value of existing
borrowings.
(H) LOAN COMMITMENTS AND LETTERS OF CREDIT
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, 1997 and 1996.
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
1997 1996
------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------------- ---------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 11,377 $ 11,377 $ 10,617 $ 10,617
Excess funds sold - - 1,950 1,950
Investment securities available
for sale 129,479 129,479 133,072 133,072
Mortgage loans held for sale 44,761 44,940 20,343 20,410
Loans 315,540 315,814 292,341 294,531
Financial Liabilities
Non-interest-bearing deposits 42,589 42,589 43,233 43,233
Interest-bearing deposits 381,094 383,279 360,876 369,705
Short-term borrowings 39,057 39,057 19,588 19,588
Long-term borrowings 10,250 10,249 10,150 10,150
</TABLE>
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
substantial trust department that annually contributes net 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
45
<PAGE>
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:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31
----------------------
CONDENSED BALANCE SHEETS 1997 1996
----------------------------------------------------------
<S> <C> <C>
Assets:
Investments in subsidiaries $ 43,453 41,462
Other assets 6,412 8,702
----------------------------------------------------------
Total assets $ 49,865 50,164
----------------------------------------------------------
----------------------------------------------------------
Liabilities and stockholders' equity:
Liabilities 13,003 15,202
Stockholders' equity 36,862 34,962
----------------------------------------------------------
----------------------------------------------------------
Total liabilities and
stockholders' equity $ 49,865 50,164
----------------------------------------------------------
----------------------------------------------------------
Years ended
December 31
------------------------------
CONDENSED STATEMENTS OF EARNINGS 1997 1996 1995
----------------------------------------------------------------------------
<S> <C> <C> <C>
Income - primarily subsidiary dividends $ 5,405 5,611 8,413
----------------------------------------------------------------------------
Expenses:
Interest 1,081 1,082 902
Other 4,420 3,867 3,228
----------------------------------------------------------------------------
Total expense 5,501 4,949 4,130
----------------------------------------------------------------------------
Earnings (loss) before income tax benefit and
equity in undistributed earnings
of subsidiaries (96) 662 4,283
Income tax benefit 1,248 1,128 796
----------------------------------------------------------------------------
Earnings before equity in undistributed
earnings of subsidiaries 1,152 1,790 5,079
Equity in undistributed earnings of
subsidiaries 1,861 54 -
Dividends received in excess of equity in
earnings of subsidiaries - - (1,715)
----------------------------------------------------------------------------
Net earnings $ 3,013 1,844 3,364
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net earnings applicable to common stock $ 2,811 1,643 3,026
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Years ended
December 31
----------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1997 1996 1995
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided by operating activities:
Net earnings $ 3,013 1,844 3,364
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Equity in undistributed earnings of subsidiaries (1,861) (54) -
Dividends received in excess of subsidiary earnings - - 1,715
Depreciation and amortization 514 595 420
(Gain) loss on sale of fixed assets 1 (22) (87)
Increase (decrease) in:
Income taxes payable 141 (234) (13)
Other liabilities 353 87 (27)
Decrease (increase) in other assets 22 262 (605)
----------------------------------------------------------------------------------------------------------
Cash flows provided by operating activities $ 2,183 2,478 4,767
----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital contribution to subsidiary - (700) (3,073)
Loans to subsidiary - (5,000) -
Other (340) (154) 267
----------------------------------------------------------------------------------------------------------
Net cash used by investing activities (340) (5,854) (2,806)
----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of short-term debt - 5,000 -
Repayment of short-term debt (1,750) - -
Redemption of preferred stock (2,300) - (2,750)
Issuance of common stock 1,717 311 945
Repayment of long-term debt (900) (850) (800)
Dividends paid (660) (615) (707)
----------------------------------------------------------------------------------------------------------
Net cash provided (used in) financing activities (3,893) 3,846 (3,312)
----------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (2,050) 470 (1,351)
Cash and cash equivalents at beginning of year 2,050 1,580 2,931
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ (0) 2,050 1,580
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
Supplemented disclosure:
Interest received $ 334 290 -
Interest paid (1,081) (1,082) (902)
----------------------------------------------------------------------------------------------------------
Income taxes received from subsidiaries 2,794 2,248 1,600
Income taxes paid by Parent Company (1,784) (1,370) (725)
Net income taxes received by Parent Company 1,010 878 875
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
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, 1997 and 1996,
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, 1997. These consolidated financial statements are the
responsiblity 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 managment, 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
February 3, 1998
Chicago, Illinois
48
<PAGE>
PART III
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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 22, 1998 (Proxy Statement)
under the captions "Proposal No. 1 - Election of Directors" (page 2) and
"Section 16(a) Beneficial Ownership Reporting Compliance" 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.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) FINANCIAL STATEMENTS:
The following financial statements are submitted herewith in response
to Part II Item 8:
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Earnings for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995.
(b) REPORTS ON FORM 8-K
The registrant has not filed any reports on Form 8-K for the quarter
ended December 31, 1997.
(c) EXHIBITS:
3.1 Certificate of Incorporation of registrant as amended is
incorporated herein by reference to Exhibit 3.1 of the
registrant's Form 10-Q for the quarter end March 31, 1997.
3.2 By-laws of the registrant as amended.
4.2 Certificate of Designation by the Board of Directors establishing
Class B Perpetual Preferred Stock dated November 15, 1993 is
incorporated herein by reference to exhibit 4.1 of the
registrant's 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 the registrant's Form S-8,
Registration Statement, filed on December 22, 1994, Registration
No. 33-87658.
21.1 Subsidiaries of Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule
50
<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.
(REGISTRANT)
/s/ John W. Castle
- ----------------------------------------------
BY: John W. Castle, Chairman of the
Board, Chief Executive Officer
and Director
Date: March 11, 1998
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following the persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ John W. Castle /s/ James N. McInnes
- ------------------------------ --------------------------
By: John W. Castle By: James N. McInnes
Chairman of the Board, Director
Chief Executive Officer Date: March 11, 1998
(Principal Executive Officer)
and Director
Date: March 11, 1998
/s/ Victoria S. Maher /s/ Donald E. Kieso
- ------------------------------- ---------------------------
By: Victoria S. Maher By: Donald E. Kieso
Vice President and Controller Director
(Principal Financial Officer
and Principal Accounting Date: March 11, 1998
Officer)
Date: March 11, 1998
/s/ Robert T. Boey /s/ William R. Monat
- ------------------------------- ---------------------------
By: Robert T. Boey By: William R. Monat
Director Director
Date: March 11, 1998 Date: March 11, 1998
51
<PAGE>
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Certificate of Incorporation of registrant as amended is
incorporated herein by reference to Exhibit 3.1 of the
registrant's Form 10-Q for the year ended December 31, 1997.
3.2 By-laws of the registrant as amended.
4.2 Certificate of Designation by the Board of Directors
establishing Class B Perpetual Preferred Stock dated November
15, 1993 is incorporated herein by reference to Exhibit 4.1 of
the registrant's 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 the registrant's Form S-8,
Registration Statement, filed on December 22, 1994,
Registration No. 33-87658.
21.1 Subsidiaries of Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule
52
<PAGE>
EXHIBIT 3.2
BY-LAWS
OF
CASTLE BANCGROUP, INC.
(A DELAWARE CORPORATION)
ARTICLE 1
OFFICES; REGISTERED AGENT
Section 1.1 REGISTERED OFFICE AND AGENT. The corporation shall
maintain in State of Delaware a registered office and a registered agent
whose business office identical with such registered office.
Section 1.2. PRINCIPAL BUSINESS OFFICE. The corporation shall
have its Principal business office at such location within or without the
State of Delaware as the boar of directors may from time to time determine.
The corporation may have other office within or without the State of Delaware.
ARTICLE 2
THE STOCKHOLDERS
Section 2.1. ANNUAL MEETING. The annual meeting of the stockholders
shall b held on the fourth Wednesday in April each year, at the hour of 2:00
p.m. or, if such date in any year shall be a legal holiday, such meeting
shall be held on the next succeeding business day, provided, however, that a
different date and/or time for holding the annual meeting of stockholders may
be fixed from time to time by resolution of the Board of Directors. Each
annual meeting of stockholders shall be the purpose of electing directors and
for the transaction of such other business as m come before the meeting.
Section 2.2. SPECIAL MEETING. Special meetings of the stockholders
of the corporation may be called at any time by the board of directors, the
chairman of the board, the president or the vice chairman and shall be called
promptly by or at the direction of the secretary at the request in writing of
the holders of outstanding share of stock of the corporation having not less
than 33% of the voting power of all of the outstanding shares of stock of the
corporation entitled to vote at elections of director provided that such
request shall state the purpose or purposes of the proposed meeting.
Section 2.3. PLACE OF MEETINGS. The board of directors may
designate any place, either within or without the State of Delaware, as the
place of meeting for any annual meeting or for any special meeting called by
the board of directors, but if no designation is made, or if a special
meeting be otherwise called, the place of meeting shall be the principal
business office of the corporation; provided, however, that for any meeting
of the stockholders for which a waiver of notice designating a: place is
signed by all of the stockholders, then that shall be the place for the
holding of such meeting.
Section 2.4. NOTICE OF MEETINGS. written or printed notice stating
the place, date and hour of the meeting of the stockholders and, in the case
of a special meeting, the purpose or purposes for which the meeting is
called, shall be given to each stockholder of record entitled to vote at the
meeting, not less than 10 nor more than 60 days before the date of the
meeting, or in the case of a meeting called for the purpose of acting upon a
merger or consolidation not less than 20 nor more than 60 days before the
meeting. Such notice shall be given by or at the
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direction of the secretary. If mailed, such notice shall be deemed to be
given when deposited in the United States mail addressed to the stockholder
at his or her address as it appears on the records of the corporation, with
postage thereon prepaid. If delivered (rather than mailed) to such address,
such notice shall be deemed to be given when so delivered.
When a meeting is adjourned to another time or place, notice need
not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken, unless the
adjournment is for more than 30 days or unless a new record date is fixed for
the adjourned meeting.
Section 2.5. WAIVER OF NOTICE. A waiver of notice in writing signed
by a stockholder entitled to such notice, whether before or after the time
stated therein, shall be deemed equivalent to the giving of such notice.
Attendance of a stockholder in person or by proxy at a meeting of
stockholders shall constitute a waiver of notice of such meeting except when
the stockholder or his or her proxy attends the meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of
any business because the meeting is not lawfully called or convened.
Section 2.6. MEETING OF ALL STOCKHOLDERS. If all of the stockholders
shall meet at any time and place, either within or without the State of
Delaware, and shall, in writing signed by all of the stockholders, waive
notice of, and consent to the holding of, a meeting at such time and place,
such meeting shall be valid without call or notice, and at such meeting any
corporate action may be taken.
Section 2.7. RECORD DATES.
(a) In order that the corporation may determine .the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights
in respect of any change, conversion or exchange of stock or for the purpose
of any other lawful action, the board of directors may fix, in advance, a
record date, which shall not be more than 60 nor less than 10 days before the
date of such meeting (or 20 days if a merger or consolidation is to be acted
upon at such meeting), nor more than 60 days prior to any other action.
(b) If a record date has not been fixed as provided in preceding
subsection (a), then:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders of the
corporation shall be at the close of business on the day
next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next
preceding the day on which the meeting is held;
(ii) The record date for determining stockholders entitled to
express consent to corporate action in writing without a
meeting, when no prior action by the board of directors is
necessary, shall be the day on which the first written
consent is expressed; and The record date for determining
stockholders entitled to express consent to corporate action
in writing without a meeting, when no prior action by the
board of directors is necessary, shall be the day on which
the first written consent is expressed; and
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on
which the board of directors adopts the resolution relating
thereto.
(c) Only those who shall be stockholders of record on the record date
so fixed as aforesaid shall be entitled to such notice of, and to
vote at, such meeting and any adjournment thereof, or to express
such consent, or to receive payment of such dividend or other
distribution, or to receive such allotment of rights, or to
exercise such rights, as the case may be,
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notwithstanding the transfer of any stock on the books of the
corporation after the applicable record date.
Section 2.8. LISTS OF SHAREHOLDERS. The officer who has charge of
the stock ledger of the corporation shall prepare and make, at least 10 days
before each meeting of stock-holders, a complete list of the stockholders
entitled to vote thereat, arranged in alphabetical order, and showing the
address of and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least 10 days prior to the meeting, either at a place within the
municipality where the meeting is to be held, which place shall be specified
in the notice of the meeting, or, if not so specified, at the place where
said meeting is to be held, and the list shall be produced and kept at the
time and place of meeting during the whole time thereof, for inspection by
any stockholder who may be present.
Section 2.9. QUORUM AND VOTE REQUIRED FOR ACTION. A majority of the
outstanding stock of the corporation entitled to vote at the meeting,
represented in person or by proxy, shall constitute a quorum at any meeting
of the stockholders; provided that if a quorum is not present, then holders
who are present in person or by proxy representing a majority of the votes
cast, may adjourn the meeting from time to time without further notice. If a
quorum is present at any meeting of the stockholders, a majority of the votes
entitled to be cast by those stockholders present in person or by proxy shall
be the act of the stockholders, unless a different number of votes is
required by statute or the certificate of incorporation of the corporation.
At any adjourned meeting at which a quorum is present, any business may be
transacted which might have been transacted at the original meeting.
Withdrawal of stockholders from any meeting shall not cause failure of a duly
constituted quorum at that meeting.
Section 2.10. CUMULATIVE VOTING. At all elections of directors of
the corporation each stockholder entitled generally to vote for the election
of directors shall be entitled to as many votes as shall equal the number of
votes which (except for this provision as to cumulative voting) he would be
entitled to cast for the election of directors with respect to his shares of
stock multiplied by the number of directors to be elected, and he may cast
all of such votes for a single director or may distribute them among the
number to be voted for, or for any two or more of them as he may see fit.
Section 2.11. PROXIES. Each stockholder entitled to vote at a
meeting 6f--the stockholders or to express consent to corporate action - in
writing without a meeting may authorize another person or persons to act for
him by proxy, but no proxy shall be valid after three years from its date
unless otherwise provided in the proxy. Such proxy shall be in writing and
shall be filed with the secretary of the corporation before or at the time of
the meeting or the giving of such written consent, as the case may be.
Section 2.12. VOTING OF SHARES. Each stockholder of the corporation
shall be entitled to such vote (in person or by proxy) for each share of
stock having voting power held of record by such stockholder as shall be
provided in the certificate of incorporation of the corporation or, absent
provision therein fixing or denying voting . rights, shall be entitled to one
vote per share.
Section 2.13. VOTING BY BALLOT. Voting in any election of directors
shall be by ballot unless otherwise provided in the certificate of
incorporation of the corporation.
Section 2.14. INSPECTORS. At any meeting of the stockholders the
presiding officer may, or upon the request of any stockholder shall, appoint
one or more persons as inspectors for such meeting. Such inspectors shall
ascertain and report the number of shares represented at the meeting, based
upon their determination of the validity and effect of proxies; count all
votes and report the results; and do such other acts as are proper to conduct
the election and voting with impartiality and fairness to all the
stockholders. Each report of an inspector shall be in writing and signed by
him or a majority of them if there is more than one inspector acting at such
meeting. If there is more than one inspector, the report of a majority shall
be the report of the inspectors. The report of the inspector or inspectors on
the number of shares represented at the meeting and the results of the voting
shall be prima facie evidence thereof.
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ARTICLE 3
DIRECTORS
Section 3.1. POWERS. The business and affairs of the corporation
shall be managed under the direction of its board of directors which may do
all such lawful acts and things as are not by statute or by the certificate
of incorporation of the corporation or by these by-laws directed or required
to be exercised or done by the stockholders.
Section 3.2. NUMBER, ELECTION, AND QUALIFICATIONS. The number of
directors shall -be not less than five (5) nor more than fifteen (15), with
the exact number to be fixed from time to time pursuant to a resolution
adopted by a majority of the Board of Directors then in office. The election
of directors is subject to any provisions contained in the Certificate of
Incorporation relating thereto, including any provisions for a classified
Board of Directors. Directors need not be stockholders of the corporation.
Section 3.3. VACANCY. Newly created directorships resulting from any
increase in the authorized number of directors or any vacancies in the board
of directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause shall be filled by a majority vote of the
directors then in office, although less than a quorum, or by a sole remaining
director. Directors so chosen shall hold office for a term expiring at the
annual meeting of stockholders at which the term of the class to which they
have been elected expires. No decrease in the number of directors
constituting the board of directors shall shorten the term of any incumbent
director. Newly created directorships shall be allocated among the classes
of directors so that each class of directors shall consist, as nearly as
possible, of one-third of the total number of directors.
Section 3.4. REGULAR MEETINGS. A regular organizational meeting of
the board of directors shall be held immediately following the 'close of,
and at the same place as each annual meeting of stockholders. The board of
directors shall also hold quarterly meetings on the third Thursday. No
notice of any such meetings, other than this by-law, shall be necessary in
order legally to constitute the meeting, provided a quorum shall be present.
In the event such meeting is not held at such time and place, the meeting may
be held at such time and place as shall be specified in a notice given as
hereinafter provided for special meetings of the board of directors or as
shall be specified in a written waiver signed by all of the directors. The
board of directors may provide, by resolution, the time and place for the
holding of additional regular meetings without notice other than such
resolution.
Section 3.5. SPECIAL MEETINGS. Special meetings of the board may be
called by the chairman of the board, the president, the vice chairman or any
three (3) directors. The person or persons calling a special meeting of the
board shall fix the time and place at which the meeting shall be held and
such time and place shall be specified in the notice of such meeting.
Section 3.6. NOTICE. Notice of any special meeting of the board of
directors shall be given at least 12 hours previous thereto by written notice
to each director at his or her business address or such other address as he
or she may have advised the secretary of the corporation to use for such
purpose. If delivered, such notice shall be deemed to be given when
delivered to such address or to the person to be notified. If mailed, such
notice shall be deemed to be given two business days after deposit in the
United States mail so addressed, with postage thereon prepaid. If given by
telegraph, such notice shall be deemed to be given the next business day
following the day the telegram is given to the telegraph company. Such
notice may also be given by telephone or other means not specified herein,
and in each such case shall be deemed to be given when actually received by
the director to be notified. Notice of any meeting of the board of directors
shall set forth the time and place of the meeting. Neither the business to
be transacted at, nor the purpose of, any meeting of the board of directors
(regular or special) need be specified in the notice or waiver of notice of
such meeting.
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Section 3.7. WAIVER OF NOTICE. A written waiver of notice, signed by
a director entitled to notice of a meeting of the board of directors or of a
committee of such board of which the director is a member, whether before or
after the time stated therein, shall be deemed equivalent to the giving of
such notice to that director. Attendance of a director at a meeting of the
board of directors or of a committee of such board of which the director is a
member shall constitute a waiver of notice of such meeting except when the
director attends the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
Section 3.8. QUORUM. At all meetings of the board of directors, a
majority of the number of directors fixed by these by-laws shall constitute a
quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act
of the board of directors except as may be otherwise specifically provided by
statute, the certificate of incorporation of the corporation or these
by-laws. If a quorum shall not be present at any meeting of the board of
directors, a majority of the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Section 3.9. ATTENDANCE BY CONFERENCE TELEPHONE. Members of the
board of directors or any committee designated by the board may participate
in a meeting of such board or committee by means of conference telephone or
similar communications equipment by means of which all persons participating
in the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such a meeting.
Section 3.10. PRESUMPTION OF ASSENT. A director of the corporation
who is present at a duly convened meeting of the board of directors at which
action on any corporate matter is taken shall be conclusively presumed to
have assented to the action taken unless his or her dissent shall be entered
in the minutes of the meeting or unless he or she shall file his or her
written dissent to such action with the person acting as the secretary of the
meeting before the adjournment thereof or shall forward such dissent by
registered or certified mail to the secretary of the corporation immediately
after the adjournment of the meeting. Such right to dissent shall not apply
to a director who voted in favor of such action.
Section 3.11. INFORMAL ACTION. Unless otherwise restricted by
statute, the certificate of incorporation of the corporation or these
by-laws, any action required or permitted to be taken at any meeting of the
board of directors or of any committee thereof may be taken without a
meeting, if a written consent thereto is signed by all the directors or by
all the members of such committee, as the case may be, and such written
consent is filed with the minutes of proceedings of the board of directors or
of such committee.
Section 3.12. COMPENSATION. The directors may be paid their
expenses, if any, of attendance at each meeting of the board of directors and
at each meeting of a committee of the board of directors of which they are
members. The board of directors, irrespective of any personal interest of any
of its members, shall have authority to fix compensation of all directors for
services to the corporation as directors, officers or otherwise.
Section 3.13. REMOVAL. Subject to the rights of the holders of any
class or series of Preferred Stock of the Corporation, any director, or the
entire board of directors, may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of at least a majority of
the outstanding shares of all classes of stock of the Corporation generally
entitled to vote in the election of directors, considered for purposes of this
Section as one class.
Section 3.14. ELECTION, APPOINTMENT, SUCCESSION, AND MANDATORY
RETIREMENT OF DIRECTORS
Definitions: Terms used in this paragraph 3.14 are defined as follows,
COMPANY: Castle BancGroup, Inc., a Delaware corporation, or the
corporate successor to Castle BancGroup, Inc.
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SUBSIDIARY: A corporate subsidiary of the Company.
BOARD: The Board of Directors of the Company or of a subsidiary.
DIRECTOR: A person elected or appointed to a Board of Directors of the
Company or of a Subsidiary.
DISABILITY: A physical or mental condition which renders a Director or
Senior Officer incapable of fully performing his or her
duties.
DETERMINATION OF DISABILITY SHALL BE IN THE SOLE DISCRETION OF THE BOARD and
shall be made by a majority of the members of the Board meeting in a regular
or in a special meeting called for that purpose.
Terms:
Director terms shall be staggered in the manner prescribed in the Company
Articles of Incorporation.
Directors shall be elected for three year terms. No person shall be
nominated for the office of Director who will reach mandatory retirement age
before completion of the tenn for which the person is nominated.
Retirement:
Persons are elected by shareholders to the position of Director in the
expectation that they will contribute leadership, energy, insight, business
acumen, professional skill, high ethical and personal standards, and
knowledge of the marketplace to the advancement of the Company and the
interests of its shareholders.
When a Director's ability to meet those expectations is diminished it is in
the interests of the Company and the Director that the Director retire from
the Board.
Retirement Events:
Recognizing that it is inherently difficult for an individual director, or a
board of directors, to recognize and act upon the fact that a director is no
longer fully able to meet shareholder expectations, the Board mandates
retirement of directors upon the occurrence of one or more of the following
events:
- - A director reaches the age of 72 years.
- - A director fails to attend annually at least seventy-five percent (75%) of
the meetings of the Board and its committees on which the director serves.
- - A director changes his or her employer or principal occupation unless
mandatory retirement in such case is expressly waived by a majority of the
Board.
- - A director suffers a physical or mental disability and becomes unable to
fully function as a director of the Company.
Effective Date, Extension:
Retirement shall be at the end of the calendar year in which a mandatory
retirement event occurs unless the Board determines that retirement should be
at an earlier date.
The Board may extend for a maximum of two years the term of a director whose
retirement is mandated upon reaching the age of 72 years.
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A director whose age mandates retirement at the date of the adoption of this
policy may continue to serve as a director for an additional calendar year.
ARTICLE 4
COMMITTEES
Section 4.1. COMMITTEES. The board of directors may, by resolution
passed by a majority of the whole board, designate one or more committees,
each committee to consist of one or more of the directors of the corporation,
which, to the extent provided in the resolution, shall have and may exercise
the powers of the board of directors with respect to the management of the
business affairs of the corporation and may authorize the seal of the
corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority of the board in reference to
amending the certificate of incorporation, adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange
of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporate or a
revocation of a dissolution, or amending the by-laws of the corporation; and,
unless the resolution of these by-laws expressly so provide, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock. Such committee or committees shall have
such name or names as may be determined from time to time by resolution
adopted by the board of directors and the board may designate one or more
directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. Additionally, in the
absence or disqualification of any member of such committee or committees,
the member or members thereof present any meeting and not disqualified from
voting, whether or not a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such absent
or disqualified member.
Section 4.2. COMMITTEE RECORDS. Each committee shall keep regular
minutes of its meetings and report the same to the board of directors when
required.
ARTICLE 5
OFFICERS
Section 5.1. DESIGNATION; NUMBER; ELECTION. The board of directors,
at its initial meeting and thereafter at its first regular meeting after each
annual meeting of stockholders, shall choose the officers of the corporation.
Such officers shall be a president, a chairman of the board, and a vice
chairman, (each of whom shall be a director) and a secretary, and a
treasurer, and such vice presidents, assistant secretaries and assistant
treasurers as the board of directors may choose. The chairman of the board,
the president and the vice chairman shall be elected; the other officers may
be appointed by the board of directors. The board of directors may appoint
such other officers and agents as it shall deem necessary who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as shall be determined from time to time by the board. Any two or
more offices may be held by the same person. Except as provided in Article 6,
election or appointment as an officer shall not of itself create contract
rights.
Section 5.2. SALARIES. The salaries of all officers and agents of
the corporation chosen by the board of directors shall be fixed by the board
of directors, and no officer shall be prevented from receiving such salary by
reason of the fact that he is also a director of the corporation.
Section 5.3. TERM OF OFFICE; REMOVAL; VACANCIES. Each officer of the
corporation chosen by the board of directors shall hold office until the next
annual election or appointment of officers by the board of directors and until
his or her successor is appointed and qualifies, or until his or her earlier
death, resignation or removal in the
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manner hereinafter provided. Any officer or agent chosen by the board of
directors may be removed at any time by the board of directors whenever in
its judgment the best interests of the corporation would be served thereby,
but such removal shall be without prejudice to the contract rights, if any,
of the person so removed. Any vacancy occurring in any office of the
corporation at any time or any new offices may be filled by the board of
directors for the unexpired portion of the term.
Section 5.4. PRESIDENT. The president shall be the principal
executive officer of the corporation and, subject to the direction and
control of the board of directors, shall be in charge of the business of the
corporation. In general, the president shall discharge all duties incident
to the principal executive office of the corporation and such other duties as
may be prescribed by the board of directors from time to time. Without
limiting the generality of the foregoing, the president shall see that the
resolutions and directions of the board of directors are carried into effect
except in those instances in which that responsibility is specifically
assigned to some other person by the board of directors; and, except in those
instances in which the authority to execute is expressly delegated to another
officer or agent of the corporation or a different mode of execution is
expressly prescribed by the board of directors, may execute for the
corporation certificates for its shares of stock (the issue of which shall
have been authorized by the board of directors), and any contracts, deeds,
mortgages, bonds, or other instruments which the board of directors has
authorized, and may (without previous authorization by the board of
directors) execute such contracts and other instruments as the conduct of the
corporation's business in its ordinary course requires, and may accomplish
such execution in each case either under or without the seal of the
corporation and either individually or with the secretary, any assistant
secretary, or any other officer thereunto authorized by the board of
directors, according to the requirements of the form of the instrument. The
president may vote all securities which the corporation is entitled to vote
except as and to the extent such authority shall be vested in a different
officer or agent of the corporation by the board of directors.
Section 5.5. VICE PRESIDENTS. The vice president (and, in the event
there is more than one vice president, each of the vice presidents) shall
render such assistance to the president in the discharge of his or her duties
as the president may direct and shall perform such other duties as from time
to time may be assigned by the president or by the board of directors. In
the absence of the president or in the event of his or her inability or
refusal to act, the vice president (or in the event there may be more than
one vice president, the vice presidents in the order designated by the board
of directors, or by the president if the board of directors has not made such
a designation, or in the absence of any designation, then in the order of
seniority of tenure as vice president) shall perform the duties of the
president, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the president. Except in those instances in which
the authority to execute is expressly delegated to another officer or agent
of the corporation or a different mode of execution is expressly prescribed
by the board of directors or these by-laws, the vice president (or each of
them if there are more than one) may execute for the corporation certificates
for its shares of stock (the issue of which shall have been authorized by the
board of directors), and any contracts, deeds, mortgages, bonds or other
instruments which the board of directors has authorized, and may .-(without
previous authorization by the board of directors) execute such contracts and
other instruments as the conduct of the corporation's business in its
ordinary course requires, and may accomplish such execution in each case
either under or without the seal of the corporation and either individually
or with the secretary, any assistant secretary, or any other officer
thereunto authorized by the board of directors, according to the requirements
of the form of the instrument.
Section 5.6. CHAIRMAN OF THE BOARD. The chairman of the board shall
preside at all meetings of the board of directors and at all meetings of the
stockholders, including the annual meeting.
Section 5.7. VICE CHAIRMAN OF THE BOARD. The vice chairman of the board
shall preside at all meetings of the board of directors in the absence of the
chairman of the board.
Section 5.8. TREASURER. The treasurer shall be the principal
accounting and financial officer of the corporation and as such shall perform
all the duties incident to the office of treasurer and such other duties as
from time to time may be assigned by the board of directors or the president.
Without limiting the generality of the foregoing, the treasurer shall have
charge of and be responsible for the maintenance of adequate books of
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account for the corporation and shall have charge and custody of all funds
and securities of the corporation and be responsible therefor and for the
receipt and disbursement thereof. If required by the board of directors, the
treasurer shall give a bond for the faithful discharge of his or her duties
in such sum and with such surety or sureties as the board of directors may
determine.
Section 5.9. SECRETARY. The secretary shall perform all duties
incident to the office of secretary and such other duties as from time to
time may be assigned by the board of directors or the president. Without
limiting the generality of the foregoing, the secretary shall (a) record the
minutes of the meetings of the stockholders and the board of directors in one
or more books provided for that purpose and shall include in such books the
actions by written consent of the stockholders and the board of directors;
(b) see that all notices are duly given in accordance with the provisions of
these by-laws or as required by statute; (c) be the custodian of the
corporate records and the seal of the corporation; (d) keep a register of the
post office address of each stockholder which shall be furnished to the
secretary by such stockholder; (e) sign with the president, or a vice
president, or any other officer thereunto authorized by the board of
directors, certificates for shares of stock of the Corporation (the issue of
which shall have been authorized by the board of directors), and any
contracts, deeds, mortgages, bonds, or other instruments which the board of
directors has authorized, and may (without previous authorization by the
board of directors) sign with such other officers as aforesaid such contracts
and other instruments as the conduct of the corporation's business in its
ordinary course requires, in each case according to the requirements of the
form of the instrument, except when a different mode of execution is
expressly prescribed by the board of directors; and (f) have general charge
of the stock transfer books of the corporation.
Section 5.10. ASSISTANT TREASURERS AND ASSISTANT SECRETARIES. The
assistant treasurers and assistant secretaries shall perform such duties as
shall be assigned to them by the treasurer, in the case of assistant
treasurers, or the secretary, in the case of assistant secretaries, or by the
board of directors or president in either case. Each assistant secretary may
sign with the president, or a vice president, or any other officer thereunto
authorized by the board of directors, certificates for shares of stock of the
corporation (the issue of which shall have been authorized by the board of
directors), and any contracts, deeds, mortgages, bonds, or other instruments
which the board of directors has authorized, and may (without previous
authorization by the board of directors) sign with such other officers as
aforesaid such contracts and other instruments as the conduct of the
corporation's business in its ordinary course requires, in each case
according to the requirements of the form of the instrument, except when a
different mode of execution is expressly prescribed by the board of
directors. The assistant treasurers shall, if required by the board of
directors, give bonds for the faithful discharge of their duties in such sums
and with such sureties as the board of directors shall determine.
Section 5.11. DEFINITIONS: Senior Officer(s) referred to in this
Paragraph 5.11 and Paragraph 5.12 which follows are the Chief Executive
Officer, the Chief Operating Officer, and Senior Vice Presidents of Castle
BancGroup, Inc., and the Chief Executive Officer and the second most senior
management position of each Castle BancGroup, Inc. subsidiary.
Retirement
Senior Officers shall retire from their position not later than the end of
the calendar year in which they attain the age of 68 years. Senior Officers
may be offered a position with the Company at a lesser title and reduced
total compensation upon retirement from a Senior Officer's position.
NOTWITHSTANDING THE FOREGOING, THE BOARD IN ITS DISCRETION MAY OFFER AN
EMPLOYEE ACCEPTING A LESSER TITLE UPON RETIREMENT ADDITIONAL BENEFITS SUCH AS
STOCK OPTIONS AD PARTICIPATION IN PROFIT SHARING AND BONUS PROGRAMS.
Section 5.12 VACANCY. A vacancy may occur in the position of a Senior
Officer through resignation, retirement, discharge, death, or through Board
determination of disability and declaration that a vacancy exists in a Senior
Officer position.
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In the event a vacancy occurs in a Senior Officer's position such officer's
duties shall be assumed on an acting basis by the next senior officer until
the Board has made such assumption of duties permanent or has filled the
vacancy in some other manner. The order of succession shall be as follows,
CASTLE BANCGROUP, INC.
1. Chairman and Chief Executive Officer.
2. President and Chief Operating Officer.
3. Senior Vice President, marketing and retail services delivery.
4. Senior Vice President, operations, information systems, human resources.
5. Subsidiary President/Chief Executive Officer most senior in position.
SUBSIDIARY
1. President and Chief Executive Officer
2. Executive Vice-president.
3. Next senior officer.
ARTICLE 6
INDEMNIFICATION
Section 6. 1. CLAIM BROUGHT BY THIRD PARTIES. The corporation shall
indemnify any person who was or is a party or is threatened to be made a
party to any threatened,. pending or completed action, suit or proceeding,
whether civil, criminal administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that he is or
was or has agreed to become a director or officer of the corporation, or is
or was serving or has agreed to serve at the request of the corporation. As
a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, or by reason of any action alleged to have been
taken or omitted by such person in such capacity, against costs, charges and
other expenses (including attorneys' fees) ("Expenses"), -judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he .acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best,
interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contenders or its equivalent,
shall not, of itself, create a presumption that the person did not act in
good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests -of the corporation, and with respect to any
criminal action or proceeding, had reasonable cause to believe that his
conduct was unlawful.
Section 6.2. CLAIM BY OR IN THE RIGHT OF THE CORPORATION. The
corporation shall indemnify any person who was or is-a party or is threatened
to be made a party to any threatened, pending or completed action or suit by
or in the right of the corporation to procure a judgment in its favor by
reason of the fact that he is or was or has agreed to become a director of
the corporation, or is or was serving or has agreed to serve at the -request
of the corporation as a director or officer of another corporation,
- -partnership, joint venture, trust or other enterprise, or by reason of any
action alleged to have been taken or omitted by such person in such capacity,
against Expenses actually and reasonably incurred by him in connection with
the investigation, defense or settlement of such action or suit if he acted
in good faith and in a manner he reasonably believed to be in or not opposed
to the best interests of the corporation and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such
person shall have been adjudged to be liable to the corporation unless and
only to the extent that the Court of Chancery of the State of Delaware or the
court in which such action or suit was brought
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<PAGE>
shall determine upon application that, despite the adjudication of liability
but in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such Expenses which the Court of
Chancery of the State of Delaware or such other court shall deem proper.
Section 6.3. ADDITIONAL INDEMNIFICATION. In addition to the
indemnification provided for in Section 6.1 and Section 6.2, the corporation
shall indemnify any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of another corporation, partnership, joint venture, trust or other
enterprise by reason of the fact that he is or was serving or has agreed to
serve at the request of the corporation as a director of such other
corporation, partnership, joint venture, trust or other enterprise against
Expenses, judgments, fines and amounts-paid in settlement actually and
reasonably incurred by him in connection with such action or suit and any
appeal thereof for breach of fiduciary duty as such director, except for
liability (i) for breach of the duty of loyalty to such other corporation,
,.partnership, joint venture, trust or other enterprise; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or
knowing violation of law; (iii) for unlawful payment of a dividend or
unlawful purchase or redemption of stock; or (iv) for any transaction from
which the director derived an improper personal benefit.
Section 6.4. SUCCESSFUL DEFENSE. To the extent that any person
referred to in Section 6.1, Section 6.2 or Section 6.3 has been successful on
the merits or otherwise, including, without limitation, the dismissal of an
action without prejudice, in defense of any action, suit or proceeding
referred to therein or in defense of any claim, issue or matter therein, he
shall be indemnified against Expenses actually and reasonably incurred by him
in connection therewith.
Section 6.5. DETERMINATION OF CONDUCT. Any indemnification under
Section 6.1, Section 6.2, or Section 6.3 (unless ordered by a court) shall be
made by the corporation only as authorized in the specific case upon a
determination -that indemnification of any person referred to in Section 6.1,
Section 6.2 or Section 6.3 is proper in the circumstances because he has met
the applicable standard of conduct set forth in Section 6.1, Section 6.2 or
Section 6.3. Such determination shall be made (a) by the Board of Directors
by a majority vote of a quorum consisting of directors who were not parties
to such action, suit or proceeding, or (b) if such quorum is not obtainable,
or, even if obtainable and a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (c) by the stockholders.
Section 6.6. ADVANCE PAYMENT. Expenses incurred by any person
referred to in Section 6.1 Section 6.2 or Section 6.3 in defending a civil or
criminal action, suit or proceeding ;hall be paid by the corporation in
advance of the final disposition of such action, suit or proceeding upon
receipt by the corporation of an undertaking by or on behalf of such person
to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as provided in this Article 6.
Section 6.7. BY-LAW NOT EXCLUSIVE; CHANGE in Law. The indemnification
and advancement of Expenses provided by, or granted pursuant to, this Article 6
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of Expenses may be entitled under any law (common
or statutory), by-law, agreement, vote of stockholders or disinterested
directors, or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office, and shall continue as to a
person who has ceased to be a director or officer and shall inure to the benefit
of the heirs, executors and -administrators of such a person. Notwithstanding
the provisions of this Article 6, the corporation shall indemnify and make
advancement of Expenses to any person referred to in Section 6.1, Section 6.2 or
Section 6.3 to the fullest extent permitted under the laws of the State of
Delaware and any other applicable laws, as they now exist or as they may be
amended in the future.
Section 6.8. CONTRACT RIGHTS. All rights to indemnification and
- -advancement of Expenses provided by this Article 6 shall be deemed to be a
contract between the corporation and each person referred to in Section 6.1,
Section 6.2 or Section 6.3. Any repeal or modification of this Article 6 or
any repeal or modification of relevant provisions of the General Corporation
Law of the State of Delaware or any other applicable law shall not in any way
diminish any rights to indemnification or advancement of Expenses with
respect to any state of facts then or previously existing or any action, suit
or proceeding previously or thereafter brought or threatened based in whole
or in part on such state of facts.
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Section 6. 9. INSURANCE. The corporation shall have power to
purchase and maintain insurance on behalf of any person referred to in
Section 6.1, Section 6.2 or Section 6.3 against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power to
indemnify him against such liability under the provisions of the Certificate
of Incorporation of the corporation, of this Article 6 or of Section 145 of
the General Corporation Law of the State of Delaware.
Section 6.10. INDEMNIFICATION OF EMPLOYEES OR AGENTS. The Board of
Directors may, by resolution, extend the provisions of this Article 6
pertaining to indemnification and advancement of Expenses to any person who
was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by reason of the fact that he
is or was or has agreed to become an employee or agent of the corporation, or
is or was serving or has agreed to serve at the request of the corporation as
an employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
Section 6.11. DEFINITION OF CORPORATION. For purposes of this
Article 6, references to "the corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent
of a constituent) absorbed in a consolidation or merger which, if its
separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents so that any person who
is or was or has agreed to become a director, officer, employee or agent of
such constituent corporation, or is or was serving or has agreed to serve at
the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position -under the provisions of this
Article 6 with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence
had continued.
Section 6.12. EMPLOYEE BENEFIT PLANS. For purposes of this Article
6, references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person
with respect to an employee benefit plan; and references to "serving at the
request of the corporation" shall include any service as a director, officer,
employee or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee or agent with respect to any
employee benefit plan, its participants.: or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed -to be in the
interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests
of the corporation" as referred to in this Article 6.
ARTICLE 7
CERTIFICATES OF STOCK AND THEIR TRANSFER
Section 7.1. FORM AND EXECUTION OF CERTIFICATES. Every holder of
stock in the corporation shall be entitled to have a certificate signed by,
or in the name of the corporation by the president or a vice president and by
the secretary or an assistant secretary of the corporation, certifying the
number of shares owned. Such certificates shall be in such form as may be
determined by the board of directors. During .the period while more than one
class of stock of the corporation is authorized there will be set forth on
the face or back of the certificates which the corporation shall issue to
represent each class or series of stock a statement that the corporation will
furnish, without charge to each stockholder who so requests, the
designations, preferences and relative, participating, optional or other
special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or
rights. In case any officer, transfer agent or registrar of the corporation
who has signed, or whose facsimile signature has been placed upon, any such
certificate shall have ceased to be such officer, transfer agent or registrar
of the corporation before such certificate is issued by the corporation, such
certificate may nevertheless be issued and delivered by the corporation with
the same effect as if the officer, transfer agent or registrar who signed, or
whose facsimile signature was placed upon, such certificate had not ceased to
be such officer, transfer agent or registrar of the corporation.
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Section 7.2. REPLACEMENT CERTIFICATES. The board of directors may
direct a new certificate to be issued in place of any certificate evidencing
shares of stock of the corporation theretofore issued by the corporation
alleged to have been lost, stolen or destroyed, upon the making of an
affidavit of the fact by the person claiming the certificate to be lost,
stolen or destroyed. When authorizing such issue of a new certificate, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such
manner as it shall require and may require such owner to give the corporation
a bond in such sum as it may direct as indemnity against any claim that may
be made against the corporation with respect to the certificate alleged to
have been lost, stolen or destroyed. The board of directors may delegate its
authority to direct the issuance of replacement stock certificates to the
transfer agent or agents of the corporation upon such conditions precedent as
may be prescribed by the board.
Section 7.3. TRANSFERS OF STOCK. Upon surrender to the or the
transfer agent to the corporation of a for shares of stock of the corporation
duly accompanied by proper evidence of succession, or other-authority to
transfer, it shall be the corporation to issue a new certificate to the
person entitled thereto, cancel the old certificate and record the
transaction upon its books, provided the corporation or a transfer agent of
the corporation shall not have received a notification of adverse interest
and that the conditions of Section 8-401 of Title 6 of the Delaware Code have
been met.
Section 7.4. REGISTERED STOCKHOLDERS. The corporation shall be
entitled to treat the holder of record (according to the books of the
corporation) of any share or shares of its stock as the holder in fact
thereof and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other party whether or
not the corporation shall have express or other notice thereof, except as
expressly provided by the laws of the State of Delaware.
ARTICLE 8
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 8.1. CONTRACTS. The board of directors may authorize any
officer or officers, agent or agents, to enter into any contract or execute
and deliver any instrument in the name of and on behalf of the corporation,
and such authority may be general or confined to specific instances;
provided, however, that this S 8.1 shall not be a limitation on the powers of
office granted under Article 5 of these bylaws.
Section 8.2. LOANS. No loans shall be contracted on behalf of the
corporation and no evidences of indebtedness shall be issued in its name
unless authorized by a resolution of the board of directors. Such authority
may be general or confined to specific instances.
Section 8.3. CHECKS, DRAFTS AND OTHER INSTRUMENTS. All checks,
drafts or other orders for the payment of money and all notes or other
evidences of indebtedness issued in the name of the corporation shall be
signed by such officer or officers or such agent or agents of the corporation
and in such manner as from time to time may be determined by the resolution
of the board of directors or by an officer or officers of the corporation
designated by the board of directors to make such determination.
Section 8.4. DEPOSITS. All funds of the corporation not otherwise
employed shall be deposited from time to time to the credit of the corporation
in such banks, trust companies or other depositories as the board of directors,
or an officer or officers designated by the board of directors, may select.
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ARTICLE 9
MISCELLANEOUS PROVISIONS
Section 9.1. DIVIDENDS. Subject to any provisions of any applicable
statute or of the certificate of incorporation, dividends may be declared upon
the capital stock of the corporation by the board of directors at any regular or
special meeting thereof; and such dividends may be paid in cash, property or
shares of stock of the corporation.
Section 9.2. RESERVES. Before payment of any dividends, there may be
set aside out of any funds of the corporation available for dividends such
sum or sums as the board of directors from time to time, in its discretion,
determines to be proper as a reserve or reserves to meet contingencies, or
for equalizing dividends, or for repairing or maintaining any property of the
corporation, or for such other purpose as the board of directors shall
determine to be conducive to the interests of the corporation, and the
directors may modify or abolish any such reserve in the manner in which it
was created.
Section 9.3. VOTING STOCK OF OTHER CORPORATIONS. In the absence of
specific action by the board of directors, the president shall have authority
to represent the corporation and to vote, on behalf of the corporation, the
securities of other corporations, both domestic and foreign, held by the
corporation.
Section 9.4. FISCAL Year. The fiscal year of the corporation shall
begin on the first day of January in each year and end on the last day of the
next following December.
Section 9.5. SEAL. The corporate seal shall have inscribed thereon
the name of the corporation and the words "Corporate Seal, Delaware". The
seal may be used by causing it or a facsimile thereof to-be impressed or
affixed or reproduced or otherwise applied.
Section 9.6. SEVERABILITY. If any provision of these by-laws, or its
application thereof to any person or circumstances, is held invalid, the
remainder of these by-laws and the application of such provision to other
persons or circumstances shall not be affected thereby.
Section 9.7. AMENDMENT. These by-laws may be amended or repealed, or
new by-laws may be adopted, by the board of directors of the corporation.
These by-laws may also be amended or repealed, or new by-laws may be adopted,
by action taken by the stockholders of the corporation.
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EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
First National Bank in DeKalb (a National banking association)
Castle Bank Harvard, N.A. (a National banking association)
The Bank of Yorkville (an Illinois banking coporation)
The Sandwich State Bank (an Illinois banking corporation)
Castle Finance Company (an Illinois corporation)
CasBanc Mortage, Inc. (an Illinois corporation)
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors
Castle BancGroup, Inc.
We consent to incorporation by reference in the registration statement (No.
333-45325) on Form S-8 of Castle BancGroup, Inc. of our report dated February
3, 1998, relating to the consolidated balance sheets of Castle BancGroup,
Inc. and subsidiaries as of December 31, 1997 and 1996, 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,
1997, which report appears in the December 31, 1997 annual report on Form
10-K of Castle BancGroup, Inc.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
March 16, 1998
68
<TABLE> <S> <C>
<PAGE>
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<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<TRADING-ASSETS> 0
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0
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<EPS-PRIMARY> 1.35
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