<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 1999
---------------------------------------------------
Commission File No. 0-25914
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CASTLE BANCGROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 36-3238190
(STATE OR OTHER JURISDICTION OF INCORPORATION OR (I.R.S. EMPLOYER
ORGANIZATION) IDENTIFICATION NUMBER)
121 West Lincoln Highway 60115-3609
DeKalb, Illinois (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (815) 758-7007
---------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirments for the past 90 days: Yes /X/ No / /
The registrant had 2,178,185 shares of Common Stock outstanding as of April 30,
1999.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 10,084 12,270
Investment securities (note 2) 128,927 132,060
Mortgage loans held for sale, lower of cost or market 27,497 67,354
Loans (note 3) 328,690 329,197
Less:
Allowance for possible loan losses (note 3) 4,336 4,775
Unearned income and deferred loan fees, net 489 2,388
- --------------------------------------------------------------------------------------------------------------------
Net loans 323,865 322,034
Premises and equipment 12,339 11,554
Goodwill, net of amortization 3,859 3,967
Other assets 6,077 6,216
- --------------------------------------------------------------------------------------------------------------------
$ 512,648 555,455
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 42,972 50,371
Interest-bearing 393,023 401,794
- --------------------------------------------------------------------------------------------------------------------
Total deposits 435,995 452,165
Short-term borrowings 20,448 44,197
Long-term debt 10,300 10,300
Other liabilities 4,230 7,248
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 470,973 513,910
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value; authorized 100,000 shares
0 shares issued and outstanding 0 0
Common stock, $.33 1/3 par value; 5,000,000 shares authorized, 2,177,729 and
2,171,855 shares issued and outstanding in 1999 and 1998, respectively 726 724
Additional paid-in capital 7,347 7,163
Accumulated other comprehensive (loss) earnings (34) 934
Retained earnings 33,636 32,724
- --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 41,675 41,545
Commitments and contingent liabilities
- --------------------------------------------------------------------------------------------------------------------
$ 512,648 555,455
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
3 Months Ended
March 31, 1999 March 31, 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $7,147 7,127
Interest and dividends on investment securities:
Taxable 1,696 2,060
Nontaxable 241 148
Interest on excess funds sold 0 7
Interest on mortgage loans held for sale 719 534
- -------------------------------------------------------------------------------------------
Total interest income 9,803 9,876
- -------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 4,116 4,370
Interest on short-term borrowings 422 396
Interest on long-term debt 163 176
- -------------------------------------------------------------------------------------------
Total interest expense 4,701 4,942
- -------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 5,102 4,934
Provision for possible loan losses 159 127
- -------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 4,943 4,807
- -------------------------------------------------------------------------------------------
Other operating income
Trust fees 198 183
Deposit service charges 83 86
Other service charges 300 281
Investment securities gains, net (note 2) 245 0
Mortgage loan origination income, net 2,983 2,487
Other income 400 294
- -------------------------------------------------------------------------------------------
Total other operating income 4,209 3,331
- -------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 4,903 4,050
Net occupancy expense of premises 521 435
Furniture and fixtures 397 348
Office supplies 151 132
Outside services 327 251
Advertising expense 146 126
FDIC insurance assessment 13 16
Postage and courier 138 142
Amortization expense - goodwill 109 130
Loss on sale of loans 513 0
Other expenses 718 515
- -------------------------------------------------------------------------------------------
Total other operating expenses 7,936 6,145
- -------------------------------------------------------------------------------------------
Earnings before income taxes 1,216 1,993
Income tax expense 303 664
- -------------------------------------------------------------------------------------------
Net earnings $ 913 1,329
- -------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 913 1,322
- -------------------------------------------------------------------------------------------
Basic earnings per common share $ .42 .61
- -------------------------------------------------------------------------------------------
Diluted earnings per common share $ .41 .61
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
PREFERRED COMMON RETAINED COMPREHENSIVE
STOCK STOCK SURPLUS EARNINGS EARNINGS TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1999 0 724 7,163 32,724 934 41,545
Comprehensive Earnings
Net Earnings - - - 913 - 913
Unrealized loss on investment
securities - - - - (1,323) (1,323)
Reclassification adjustments for
gains included in net earnings - - - - (245) (245)
Income tax effect - - - - 600 600
Total comprehensive earnings - - - - - (55)
Issuance of 5,874 shares of common stock - 2 184 - - 186
---------------------------------------------------------------------------
Balance at March 31, 1999 $ 0 726 7,347 33,636 (34) 41,675
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
(UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
3 Months Ended
March 31, 1999 March 31, 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 8,470 9,295
Fees received 3,997 3,409
Net decrease in mortgage loans held for sale 39,857 7,183
Interest paid (4,794) (4,821)
Cash paid to suppliers and employees (10,383) (7,427)
Income taxes paid (191) (23)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 36,956 7,616
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities and calls of investment securities 10,035 7,229
Sales of investment securities 19,764 0
Purchases of investment securities (27,962) (12,704)
Net (increase) / decrease in loans (107) 11,324
Premises and equipment expenditures (1,140) (406)
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities 590 5,443
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net (decrease) in demand deposits,
NOW accounts, and savings accounts (10,280) (8,786)
Net increase / (decrease) in certificates of deposit (5,889) 4,034
Dividends paid on preferred stock 0 (7)
Net change in short-term debt (23,749) (10,702)
Proceeds from issuance of common stock 186 185
- ----------------------------------------------------------------------------------------------------------------
Net cash (used in) financing activities (39,732) (15,276)
- ----------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (2,186) (2,217)
Cash and cash equivalents at beginning of year 12,270 11,377
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 10,084 9,160
- ----------------------------------------------------------------------------------------------------------------
Reconciliation of net earnings to net cash provided by operating activities:
Net earnings $ 913 1,329
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 500 501
Provision for possible loan losses 159 127
Gains on sale of investment securities (245) 0
Increase (decrease) in:
Income taxes payable 112 641
Interest payable (93) 122
Unearned income (1,899) (2)
Other liabilities (2,474) (1,424)
Decrease (increase) in:
Interest receivable 559 (486)
Other assets (440) (283)
Decrease in mortgage loans held for sale 39,857 7,183
Discount accretion recorded as income (92) (161)
Premium amortization charged against income 99 69
- ----------------------------------------------------------------------------------------------------------------
$ 36,956 7,616
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Castle BancGroup,
Inc. (Company) and subsidiaries are prepared in conformity with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. These financial statements should be read in conjunction
with the Company's 1998 Annual Report on Form 10-K. In the opinion of
management, all normal recurring adjustments necessary for a fair
presentation of the financial position and the results of operations for
the periods presented have been included. Results of operations for
interim periods are not necessarily indicative of the results that may
be expected for the year.
(2) INVESTMENT SECURITIES
Investments in debt and equity securities have been classified as
available for sale and reported at fair value. The amortized value is
adjusted for amortization of premiums and accretion of discounts using a
method that approximates level yield. Unrealized gains and losses, net
of related deferred income taxes, are reported in stockholders' equity.
A comparison of amortized cost and fair value of investment securities
available-for-sale at March 31, 1999 and December 31, 1998 follows
(DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
March 31, 1999
-----------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 59,907 413 (264) 60,056
Obligations of state and political
subdivisions 22,362 215 (193) 22,384
Mortgage-backed securities 44,500 102 (358) 44,244
- ----------------------------------------------------------------------------------------------------------------------
Total debt securities 126,769 730 (815) 126,684
- ----------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,673 -- -- 1,673
Other Equity securities 570 -- -- 570
- ----------------------------------------------------------------------------------------------------------------------
Total securities $ 129,012 730 (815) 128,927
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1998
-------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 66,082 1,008 (17) 67,073
Obligations of state and political
subdivisions 15,329 277 (36) 15,570
Mortgage-backed securities 47,050 381 (130) 47,301
Total debt securities 128,461 1,666 (183) 129,944
- ----------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,673 0 0 1,673
Other Equity securities 443 0 0 443
- ----------------------------------------------------------------------------------------------------------------------
Total securities $ 130,577 1,666 (183) 132,060
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available for sale at
March 31, 1999 and December 31, 1998 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>
- ----------------------------------------------------------------------------------------
March 31, 1999
------------------------
Amortized Fair
cost value
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 4,134 4,165
Due after one year through five years 31,226 31,264
Due after five years through ten years 32,499 32,616
Due after ten years 14,410 14,395
- ----------------------------------------------------------------------------------------
82,269 82,440
Mortgage-backed securities 44,500 44,244
- ----------------------------------------------------------------------------------------
Total debt securities 126,769 126,684
- ----------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,673 1,673
Other Equity securities 570 570
- ----------------------------------------------------------------------------------------
Total securities $ 129,012 128,927
- ----------------------------------------------------------------------------------------
</TABLE>
Gross losses of approximately $3,748 and $0 occurred from security
activity during the three months ended March 31, 1999 and 1998,
respectively. Gross gains of $249,209 and $0 occurred from security
activity during the three month period ended March 31, 1999 and 1998,
respectively. All security gains and losses that occurred during 1999
and 1998 were as a result of transactions involving available for sale
securities.
Investment securities carried at approximately $82,135,000 and
$83,062,000 at March 31, 1999 and December 31, 1998, respectively, were
pledged to secure deposits and for other purposes as permitted or
required by law.
7
<PAGE>
(3) LOANS
The composition of the loan portfolio at the dates shown is as follows
(DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
March 31, 1999 Dec. 31, 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 93,483 85,790
Real estate mortgage 213,679 213,761
Consumer 21,088 29,168
Lease financing receivables 440 478
- --------------------------------------------------------------------------------------------------------------------
Total loans, gross $ 328,690 329,197
- --------------------------------------------------------------------------------------------------------------------
At March 31, 1999 and December 31, 1998, the following items existed (DOLLARS IN THOUSANDS):
- --------------------------------------------------------------------------------------------------------------------
March 31, 1999 Dec. 31, 1998
- --------------------------------------------------------------------------------------------------------------------
Non-accrual loans and leases $ 1,821 2,262
Loans past due 90 days or more and still accruing 220 544
Restructured loans still accruing and less than 90 days past due 202 208
- --------------------------------------------------------------------------------------------------------------------
Total non-performing loans and leases $ 2,243 3,014
- --------------------------------------------------------------------------------------------------------------------
The following is a summary of activity in the allowance for possible loan losses (DOLLARS IN THOUSANDS):
- --------------------------------------------------------------------------------------------------------------------
3 months ended 3 months ended
March 31, 1999 March 31, 1998
- --------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $ 4,775 4,646
Provision charged to expense 159 127
Additions to dealer reserves 0 0
Recoveries on loans previously charged off 126 64
- --------------------------------------------------------------------------------------------------------------------
5,060 4,837
Less loans charged off 224 288
Less allowance on loans sold 500 0
- --------------------------------------------------------------------------------------------------------------------
Balance, end of period $ 4,336 4,549
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
The following is a summary of loan loss experience for the three months
ended March 31, 1999, including an allocation of the allowance, by loan
category, at period end: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Commercial Real
and Agricultural Estate Consumer Leases Unalloc. Total
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $1,811 1,173 1,586 5 200 4,775
Provision charged to expense 0 159 0 0 0 159
Recoveries on loans previously
charged off 95 0 31 0 0 126
- --------------------------------------------------------------------------------------------------------------------
1,906 1,332 1,617 5 200 5,060
Less loans charged off 0 179 45 0 0 224
Less allowance on loans sold 0 0 500 0 0 500
- --------------------------------------------------------------------------------------------------------------------
Balance, March 31, 1999 $1,906 1,153 1,072 5 200 4,336
- --------------------------------------------------------------------------------------------------------------------
Ratios:
Loans in category to total loans 28.48% 65.00% 6.38% .14% N/A 100.00%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The allocation of the allowance for loan losses is based on historical trends in
charge-offs, general economic conditions, peer comparisons and management
experience.
(4) OPERATING SEGMENTS
The Company's operations include two primary segments: banking and
mortgage banking. Through its banking subsidiaries' network of 11 retail
banking facilities in Northern Illinois, the Company provides traditional
community banking services such as accepting deposits and making loans.
Mortgage banking activities conducted through the Company's subsidiary,
CMI, include the origination and brokerage of primarily residential
mortgage loans for sale to various investors. The Company's two
reportable segments are strategic business units that are separately
managed as they offer different products and services and have different
marketing strategies. Smaller operating segments are combined and consist
of consumer finance and holding company operations. Assets and results of
operations are based on generally accepted accounting principals, with
profit and losses of equity method investees excluded. Inter-segment
revenues and expenses are eliminated in reporting consolidated results of
operations.
9
<PAGE>
Operating segment information is as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Mortgage Consolidated
Banking Banking Other Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Three months ended March 31, 1999
Interest income $ 9,554 83 166 9,803
Interest expense 4,743 34 (76) 4,701
- --------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for possible loan losses 4,811 49 242 5,102
Provision for possible loan losses 72 0 87 159
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 4,739 49 155 4,943
Other operating income 1,722 2,437 50 4,209
Other operating expenses 3,705 2,674 1,557 7,936
- --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 2,756 (188) (1,352) 1,216
Income tax expense 958 (73) (582) 303
- --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,798 (115) (770) 913
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
March 31, 1999
- --------------
Assets $516,229 4,609 (8,190) 512,648
- --------------------------------------------------------------------------------------------------------------------------
Three months ended March 31, 1998
Interest income $ 9,443 46 387 9,876
Interest expense 4,753 (1) 190 4,942
- --------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for possible loan losses 4,690 47 197 4,934
Provision for possible loan losses 52 0 75 127
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 4,638 47 122 4,807
Other operating income 1,266 2,030 35 3,331
Other operating expenses 3,642 1,816 687 6,145
- --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 2,262 261 (530) 1,993
Income tax expense 788 101 (225) 664
- --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 1,474 160 (305) 1,329
- --------------------------------------------------------------------------------------------------------------------------
March 31, 1998
- --------------
Assets $493,385 4,646 2,829 500,860
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(5) COMPREHENSIVE INCOME
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income", which
is effective for fiscal years beginning after December 15, 1997. This
statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses) 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 Company adopted
SFAS No. 130 in the first quarter of 1998.
10
<PAGE>
The Company's comprehensive income for the three month periods ended
March 31, 1999 and 1998, is as follows (DOLLARS IN THOUSANDS):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1999 1998
-------- -------
<S> <C> <C>
Net earnings $ 913 $ 1,329
Other comprehensive earnings
Unrealized (loss) on investment securities (1,323) (132)
Reclassification adjustment for gain included in net earnings (245) 0
Income tax effect 600 51
-------- -------
Total comprehensive earnings $ (55) $ 1,248
-------- -------
</TABLE>
11
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company posted year-to-date net earnings of $913,000 at March 31, 1999, a
decrease of $416,000, or 31% from year-to-date earnings of $1,329,000 at March
31, 1998. This decrease in earnings is primarily attributable to a loss on the
first quarter sale of a substantial portion of the Castle Finance Company (CFC)
loan portfolio and related charges. CFC is a wholly-owned subsidiary of the
Company.
Year-to-date basic earnings per common share were $.42 at March 31, 1999, down
$.19 per share from March 31, 1998 basic earnings per common share of $.61. The
decrease in basic earnings per share is due primarily to the sale of a portion
of the CFC loan portfolio and related charges as described above. Diluted
earnings per share were $.41.
Net earnings applicable to common stock of $913,000 year-to-date at March 31,
1999 compares to $1,322,000 at March 31, 1998. This represents a 31% decrease.
Year-to-date preferred stock dividends were $0 at March 31, 1999 as compared to
$7,000 at March 31, 1998. The decrease was due to the preferred stock redemption
which occurred on December 31, 1998.
The following discussion of performance for the three month period ending March
31, 1999 as compared to the corresponding period in 1998 highlights significant
points of interest, trends in operations, and management's operating
philosophies. (Unless otherwise stated, all averages are simple daily averages.)
INTEREST INCOME
Net interest income before provision for possible loan losses for the first
three months of 1999 increased 3.4% to $5,102,000 as compared to $4,934,000 at
March 31, 1998. This increase can primarily be attributed to a $185,000 increase
in interest on mortgage loans held for sale as a result of volume increases in
the average mortgage loan held for sale portfolio. This interest income is
generated as a result of mortgage loans held for sale that have been originated
through CasBanc Mortgage, Inc. (CMI), but not yet sold in the secondary market.
CMI is a wholly-owned subsidiary of the Company. The Company's subsidiary banks
purchase these loans from CMI when the loans are made to the borrowers. The
subsidiary banks then hold these interest earning assets until they are sold
into the secondary market, providing short-term liquid investments for the
banks.
The average net interest margin, on a tax equivalent basis (including
non-accruing loans), decreased for the first three months of 1999 to 4.10% as
compared to 4.26% in 1998. This decrease can primarily be attributed to a
decrease in the average yield on earning assets due to a lower interest rate
environment for the first quarter of 1999 as compared to the same period for
1998.
The ratio of average earning assets to average total assets remained unchanged
at 94.4% for the first three months of 1999 as compared to the same period in
1998.
Competition from both financial institutions and non-traditional competitors, as
well as general economic trends, will continue to impact future earnings. The
earning asset mix, as well as the net interest margin, are monitored and
evaluated by management to develop strategies to help maintain and improve
earnings.
12
<PAGE>
PROVISION FOR POSSIBLE LOAN LOSSES
The subsidiaries establish a provision for loan losses which management believes
is sufficient to maintain adequate reserve levels. The provision is a result of
credit analysis, historical trends in net charges to the allowance, loan
portfolio configuration and loan growth. Management closely monitors loan
quality to minimize loan losses. The Company's loan review program closely
monitors credit conditions of specific loans, historical trends in charge-offs
at the subsidiaries as well as companies within their peer group, experience and
quality of lending staff, and general economic conditions in the communities
that the subsidiaries serve. This system allows management to assess the
adequacy of the allowance for loan losses. The allowance for loan losses as a
percentage of net outstanding loans decreased to 1.32% at March 31, 1999 as
compared to 1.46% at December 31, 1998. The allowance level was at 1.48% of net
loans at December 31, 1997. The provision for loan losses recorded during the
first three months of 1999 was $159,000 as compared to $127,000 during the same
period in 1998. The balance in the allowance for loan loss account is derived
from the quarterly assessment of adequacy performed in the ordinary course of
business by management. The allowance for loan loss balance reflects the
underlying credit risk in the loan and lease portfolio. As such, fluctuations
are expected in the allowance balance, however, as noted, the fluctuations have
not been material. The Company's allowance for loan losses is deemed to be
sufficient based on the evaluation of the above factors.
Management continues to closely monitor and control asset quality.
Non-performing assets, defined as loans 90 days or more past due and still
accruing, loans in non-accrual status, restructured loans, and other real estate
owned, represented .44% of total assets as of March 31, 1999, which has
decreased from .54% at December 31, 1998. The following table summarizes the
components of non-performing assets at March 31, 1999 and at December 31, 1998.
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans $1,821 $2,262
Loans past due 90+ days & still accruing 220 544
Restructured loans, performing according
to terms of restructure agreement 202 208
Other real estate owned 0 0
TOTAL NON-PERFORMING ASSETS $2,243 $3,014
</TABLE>
The decrease in non-accrual loans was primarily due to paydowns of non-accrual
loans, especially at Castle Bank Harvard, N.A. The reduction in loans 90+ days
past due and still accruing at March 31, 1999 is due to the sale of a portion of
the CFC loan portfolio. The remainder of loans 90+ days past due relate
primarily to residential real estate loans at CMI for which foreclosure
proceedings have started. Based on the collateral value of the loans, complete
recovery of the principal, interest, and collection costs are anticipated and,
as a result, in accordance with Company policy, interest income is still being
accrued.
Year-to-date net charge-offs at March 31, 1999 totaled $98,000 as compared to
$224,000 at March 31, 1998. The allowance for loan losses was reduced $500,000
as a result of the sale of a portion of the CFC loan portfolio. Management
continues to closely monitor all past dues and to improve collection efforts.
13
<PAGE>
OTHER OPERATING INCOME
Other operating income, excluding security gains and losses, totaled $3,964,000
for the first three months of 1999 as compared to $3,331,000 for the same period
in 1998. The $633,000 increase over the prior year period relates to increased
fee income of $496,000 earned on the origination of mortgages sold in the
secondary market. If interest rates for fifteen and thirty year mortgages
increase, mortgage origination activities and earnings may be adversely
impacted.
Securities gains of $245,000 were recognized during the first three months of
1999 as compared to no gains or losses during the first three months of 1998.
For 1999, all recognized gains and losses related to the sale or call of
securities classified as available for sale
OTHER OPERATING EXPENSES
Other operating expenses increased approximately $1,791,000 year to date at
March 31, 1999 over the corresponding three month period in 1998. Increases in
employee salaries and benefit expense accounted for $853,000 of the increase.
The majority of the salary increase was due to additional staff and mortgage
originators added to CMI as a result of opening new offices and expanding
current business. Salary and employee benefits expense also increased due to
normal salary increases granted during the year. Also, a $513,000 loss was
recognized due to the sale of a substantial portion of the CFC loan portfolio.
FINANCIAL CONDITION
Total assets at March 31, 1999, decreased $42,807,000 as compared to December
31, 1998. This decrease was primarily due to a decrease in mortgage loans held
for sale of $39,857,000. This decrease was off-set by a decrease in short-term
borrowings of $23,749 and a decrease in deposits of $16,170. The decrease in
deposits was due to normal fluctuations. Average assets for the first three
months of 1999 increased by $36,911,000 or approximately 7.42% as compared to
the corresponding period in 1998. This increase is primarily attributed to a $12
million increase in the average mortgage loan held for sale portfolio, and a $23
million increase in the average net loan portfolio. This increase was funded
primarily with an increase in average total deposits of $25 million or
approximately 6.05% over the corresponding period in 1998. The subsidiary Banks
are all experiencing significant competition for deposits which continues to put
pressure on each Bank's overall cost of funds. Management continues to view
"core" deposits (individuals, partnerships and corporate deposits) as the
primary long term funding source for internal growth of the Company. The Company
had $693,000 of brokered deposits at March 31, 1999, with interest rates ranging
from 6.20% to 6.75% and maturities ranging from August 2000 through October
2002. Brokered deposits at December 31, 1998, were $693,000.
14
<PAGE>
CAPITAL
The Company is committed to maintaining strong capital positions in each of its
subsidiaries and on a consolidated basis. Management monitors, analyzes and
forecasts capital positions for each entity to ensure that adequate capital is
available to support growth and maintain financial soundness. The Company's Tier
1 leverage ratio as of March 31, 1999 was 7.13%, an increase from 6.31% at
December 31, 1998. The ratio exceeds the regulatory well capitalized levels, and
management believes the Company is maintaining a strong capital position. The
Company's March 31, 1999 total risk weighted capital ratio also increased to
11.80% from 11.08% at December 31, 1998. The Tier 1 capital ratio at March 31,
1999 increased to 10.58% from 9.83% at December 31, 1998. Both the total risk
weighted and Tier 1 Capital ratios also continue to exceed regulatory well
capitalized levels.
LIQUIDITY
The Company ensures the subsidiary banks maintain appropriate liquidity and
provides access to secondary sources of liquidity in case of unusual or
unanticipated demand for funds. Primary bank sources of liquidity are repayments
of loans, high-quality marketable investment securities available for sale, and
the bank's federal funds position which, together, are more than sufficient to
satisfy liquidity needs arising in the normal course of business. The Company is
a secondary source of liquidity for its subsidiary banks through its
discretionary access to short-term funding in case of unanticipated demand for
funds.
As presented in the Consolidated Statement of Cash Flows, the Company has
experienced significant changes in the cash flows from operating, investing and
financing activities during the first three months of 1999 as compared to the
same period in 1998. These fluctuations primarily relate to the changes in the
loan, investment, and mortgage loans held for sale portfolios, as explained
above.
INTEREST RATE SENSITIVITY
The Company's overall success is dependent upon its ability to manage interest
rate risk. Interest rate risk can be defined as the exposure of the Company's
net interest income to adverse movements in interest rates. Because the Company
has no trading portfolio, the Company is not exposed to significant market risk
from trading activities. Other types of market risk, such as foreign currency
exchange and commodity price risk, do not arise in the normal course of the
Company's business activities. The Company does not currently use derivatives to
manage market and interest rate risks. A derivative financial instrument
includes futures, forwards, interest rate swaps, option contracts, and other
financial instruments with similar characteristics.
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. Commitments to extend credit are arrangements to lend to a
customer as long as there is no violation of any condition in the contract.
Commitments generally have fixed expiration dates and may require collateral
from the borrower if deemed necessary by the Company. Standby letters of credit
are conditional commitments issued by the Company to guarantee the performance
of a customer to a third party up to a stipulated amount and with specified
terms and conditions. Commitments to extend credit and standby letters of credit
are not recorded as an asset or liability by the Company until the instrument is
exercised.
15
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The subsidiary bank's interest rate exposure is reviewed on a regular basis by
the Asset/Liability Committee (ALCO) for each bank. The principal objective of
the Company's interest rate risk management function is to evaluate the interest
rate risk included in certain balance sheet accounts, determine the level of
risk appropriate given the Company's business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the funds management policy of the Company. Through such
management, the Company seeks to monitor the vulnerability of its operations to
changes in interest rates. The extent of the movement of interest rates is an
uncertainty that could have a negative effect on the earnings of the Company.
YEAR 2000
Like other businesses dependent upon computerized information processing,
the Company must deal with "Year 2000" issues, which stem from using two digits
to reflect the year in many computer programs and data. Computer programmers and
other designers of equipment that use microprocessors have long abbreviated
dates by eliminating the first two digits of the year. As the year 2000
approaches, many systems may be unable to distinguish years beginning with 20
from years beginning 19, and so may not accurately process certain date-based
information, which could cause a variety of operational problems for businesses.
The Year 2000 project has been a top priority for the Company. Failure of a
mission critical system used by the Company could have a materially adverse
effect on the Company's operations and financial performance, as could Year 2000
problems experienced by others with whom the Company does business. Because of
the range of possible issues and the large number of variables involved, it is
impossible to quantify the potential cost of problems should the Company's Year
2000 efforts or the efforts of those with whom it does business not be
successful.
The Company began its Year 2000 efforts in May 1997. A dedicated Year 2000
Project Team was formed and the team meets on a monthly basis. Each major
operational area of the Company is represented on the team, including internal
audit. The status of the project is reported to the Board of Directors at each
meeting. Results of all exams performed by all external agencies are reported to
the Board at the next available meeting. Status reports are also presented to
the Internal Audit Committee by the Internal Auditor. The Company partnered with
a major consulting firm beginning in February 1998 to assist the Company in
testing core mission critical systems (i.e. the loan and deposit systems). The
Company performs no programming in house and controls no source codes. All
software used by the Company is purchased from third parties including core
applications. The core application software is provided by a highly recognized
bank software provider with well over 1,000 banks using their software country
wide.
The Company completed the assessment phase of the project by June 1997. The
Company completed the inventory phases of the project by September 1997. Testing
and remediation efforts have been completed for all mission critical
applications. Some mission critical applications were discovered to be
non-compliant. These systems were replaced with new compliant systems by
December 31, 1998. The Company performed extensive core application testing in
July 1998 which was overseen by a major consulting firm. The project team has
had extensive contact with all mission critical vendors and continues to monitor
their progress as diligently as possible. Although the Company is attempting to
monitor and validate the efforts of other parties, it cannot control the success
of these efforts. Contingency plans have been developed where practical to
provide the Company with alternatives in situations where an entity furnishing a
critical product or service experiences significant Year 2000 difficulties that
will effect the Company. With respect to non-mission critical applications, the
Company's target for completion of Year 2000 work is September 1999.
16
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The Year 2000 project team has also been working on issues that are not
directly related to data processing systems. The team is reviewing various
infrastructure issues, such as checking elevators and heating, ventilation and
air-conditioning equipment, some of which include embedded systems, to verify
that they will function in the Year 2000. The team is also reviewing the status
of power and telecommunications providers. Possible problems in these areas are
continuing to be addressed by the Company.
As part of the Company's credit analysis process, it has developed a plan
for assessing the Year 2000 readiness of its major credit customers. Year 2000
issues have also been included in the loan review process and in the adequacy of
the reserve analysis. In addition, as part of the Company's fiduciary
responsibilities in the asset and trust management area, the Company has been
working very closely with the Company's third-party servicer to verify that
their product is Year 2000 compliant. The Company participated in proxy testing
of this servicer in the first quarter of 1999. The proxy testing was coordinated
by a major public accounting firm. The Company has also sent FDIC prepared
statement stuffers to all checking and savings account customers which describes
the Year 2000 problem in detail and provides guidance regarding FDIC insurance.
The Company estimates the cost of the Year 2000 project to be $411,000.
This estimate does not include the cost of internal staff time; $300,000 of
costs have been incurred to date, $226,000 of which will be capitalized as a few
new systems were purchased to replace non-compliant mission critical systems. It
is expected that the remaining $111,000 will be incurred by September 30, 1999.
It is anticipated that there may be various miscellaneous contingency plan
expenditures made in the fourth quarter of 1999 which cannot be estimated at
this time.
The discussion above incorporates the Company's best estimates of the costs
and completion date of the Year 2000 project. The Company derived these
estimates using numerous assumptions of future events, including the continued
availability of certain resources and other factors. There can be no guarantee
that the Company will achieve these estimates. Therefore, actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
ACCOUNTING STANDARDS
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 adopted this statement in the first quarter of 1998. The adoption of
SFAS No. 130 did not have a significant impact on the Company's financial
statements.
17
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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 adopted SFAS No. 131 for the fiscal year ended December 31,
1998. The adoption of this statement did not have a significant impact on the
Company's financial statements.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." The statement standardizes
the disclosure requirements of SFAS No. 87 and 106 to the extent practicable and
recommends a parallel format for presenting information about pensions and other
postretirement benefits. SFAS No. 132 only addresses disclosure and does not
change any current measurement or recognition provisions. The statement is
effective for fiscal years beginning after December 15, 1997. The Company has
adopted this statement and provided the proper disclosure within the
consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivatives instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that any entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. The statement is effective
for fiscal quarters of fiscal years beginning after June 15, 1999, and is not
expected to have a material impact on the Company's financial position, results
of operations or liquidity.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise." This statement amends
SFAS No. 65, "Accounting for Certain Mortgage Banking Activities" to conform
the subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent
accounting for securities retained after the securitization of other types of
assets by a non-mortgage banking enterprise. The statement is effective for
the first quarter beginning after December 15, 1998 and enterprises may
reclassify mortgage-backed securities and other beneficial interests retained
after the securitization of mortgage loans held for sale from the trading
category, except for those with sales commitments in place. The
reclassification is to be done when the statement is initially applied. The
adoption of this statement is not expected to have a material impact on the
Company's financial position, results of operations or liquidity.
18
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the market risks faced by the Company
since December 31, 1998. For information regarding the Company's market risk,
refer to its Annual Report on Form 10-K for the year ended December 31, 1998.
19
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PART II
ITEM 1--LEGAL PROCEEDINGS
Neither the Company nor any subsidiary is a party to, and none of their property
is subject to, any material legal proceeding at this time. However, the Company
and its subsidiaries are from time to time parties to routine litigation
incidental to their businesses.
ITEM 2--CHANGES IN SECURITIES
Not applicable.
ITEM 3--DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4-- SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5-- OTHER INFORMATION
Not applicable.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
3.1 Certificate of Incorporation of registrant, as amended
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
The Company filed a report on Form 8-K on January 6, 1999 with
respect to, among other things, the declaration of a cash dividend
payable January 5, 1999.
20
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ John W. Castle
- ---------------------------------------------
By: John W. Castle, Chairman of the Board
Chief Executive Officer and Director
Castle BancGroup, Inc.
Date: May 14, 1999
/s/ Micah R. Bartlett
- --------------------------------------------------
By: Micah R. Bartlett, Chief Accounting Officer
and Controller
Castle BancGroup, Inc.
Date: May 14, 1999
21
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EXHIBIT INDEX
EXHIBIT 3.1 Certificate of Incorporation of registrant, as amended
EXHIBIT 11 Computation of Per Share Earnings
EXHIBIT 27 Financial Data Schedule
22
<PAGE>
CERTIFICATE OF INCORPORATION
OF
CASTLE BANCGROUP, INC.
ARTICLE FIRST
NAME
The name of the corporation is Castle BancGroup, Inc.
ARTICLE SECOND
REGISTERED OFFICE AND AGENT
The address of the corporation's registered office in the State of Delaware
is 32 Loockerman Square, Suite L-100, in the City of Dover, County of Kent. The
name of its registered agent at such address is United States Corporation
Company.
ARTICLE THIRD
PURPOSES
The nature of the business or purposes to be conducted or promoted by the
corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.
ARTICLE FOURTH
CAPITAL STOCK
The total number of shares of all classes of stock which the Corporation
shall have the authority to issue is 5,100,000 shares, which are divided into
two classes as follows:
100,000 shares of Preferred Stock, without par value, and
5,000,000 shares of Common Stock of the par value of $.33 1/3 per share.
The designations, voting powers, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of the above classes of stock are as follows:
<PAGE>
I
PREFERRED STOCK
The board of directors is authorized, at any time and from time to time, to
provide for the issuance of shares of Preferred Stock in one or more series with
such designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof as are
stated and expressed in the resolution or resolutions providing for the issue of
such Preferred Stock adopted by the board of directors, including, but not
limited to, determination of any of the following:
(a) the distinctive serial designation and the number of shares
constituting a series;
(b) the dividend rate or rates, whether dividends are cumulative and from
which date, the payment date or dates for dividends, and the participating or
other special rights, if any, with respect to dividends;
(c) in addition to the voting rights provided by law, the voting powers,
full or limited, if any, of the shares of the series, which might include the
right to elect a specified number of directors in any case or if dividends on
the series are not paid for a specified period of time;
(d) whether the shares of the series are redeemable and the price or
prices at which, and the terms and conditions on which, the shares may be
redeemed, which prices, terms and conditions may vary under different conditions
and at different redemption dates;
(e) the amount or amounts, if any, payable upon the shares of the series
in the event of voluntary or involuntary liquidation, dissolution or winding up
of the corporation prior to any payment or distribution of the assets of the
corporation to any class or classes of stock of the corporation ranking junior
to the series;
(f) whether the shares of the series are entitled to the benefit of a
sinking or retirement fund to be applied to the purchase or redemption of shares
of the series and the amount of the fund and the manner of its application,
including the price or prices at which the shares of the series may be redeemed
or purchased through the application of the fund;
(g) whether the shares are convertible into, or exchangeable for, shares
of any other class or classes or of any other series of the same or any other
class or classes of stock of the corporation and the conversion price or prices,
or the rates of exchange, and the adjustments thereof, if any, at which the
conversion or exchange may be made, and any other terms and conditions of the
conversion or exchange; and
(h) any other preferences, privileges and powers, and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions of a series, as the board of
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directors may deem advisable and as are not inconsistent with the provisions
of this Certificate of Incorporation.
II
COMMON STOCK
A. DIVIDENDS.
Subject to the preferential rights of the Preferred Stock, the holders of
the Common Stock are entitled to receive, to the extent permitted by law, such
dividends as may be declared from time to time by the board of directors.
B. LIQUIDATION.
In the event of the voluntary or involuntary liquidation, dissolution,
distribution of assets or winding up of the corporation, after distribution in
full of the preferential amounts, if any, to be distributed to the holders of
shares of Preferred Stock, holders of Common Stock shall be entitled to receive
all of the remaining assets of the corporation of whatever kind available for
distribution to stockholders ratably in proportion to the number of shares of
Common Stock held by them respectively. The board of directors may distribute
in kind to the holders of Common Stock such remaining assets of the corporation
or may sell, transfer or otherwise dispose of all or any part of such remaining
assets to any other corporation, trust or other entity and receive payment
therefor in cash, stock or obligations of such other corporation, trust or other
entity, or any combination thereof, and may sell all or any part of the
consideration so received and distribute any balance thereof in kind to holders
of Common Stock. Neither the merger or consolidation of the corporation into or
with any other corporation or corporations, nor the purchase or redemption of
shares of stock of the corporation of any class, nor the sale or transfer by the
corporation of all or any part of its assets, nor the reorganization or
recapitalization of the corporation, shall be deemed to be a dissolution,
liquidation or winding up of the corporation for the purposes of this paragraph.
C. VOTING RIGHTS.
Except as may be otherwise required by law or this Certificate of
Incorporation, each holder of Common Stock has one vote in respect of each share
of stock held by him of record on the books of the corporation on all matters
voted upon by the stockholders.
D. 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
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<PAGE>
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.
III
OTHER PROVISIONS
A. NO PREEMPTIVE RIGHTS.
No stockholder shall have any preemptive right to subscribe to an
additional issue of stock of any class or series or to any securities of the
corporation convertible into such stock.
B. CHANGES IN AUTHORIZED CAPITAL STOCK.
Subject to the protective conditions and restrictions of any outstanding
Preferred Stock, any amendment to this Certificate of Incorporation which
increases or decreases the authorized capital stock of any class or classes may
be adopted by the affirmative vote of the holders of a majority of the
outstanding shares of the voting stock of the corporation without regard to
class or series.
C. UNCLAIMED DIVIDENDS.
Any and all right, title, interest and claim in and to any dividends
declared by the corporation, whether in cash, stock or otherwise, which are
unclaimed by the stockholder entitled thereto for a period of six years after
the close of business on the payment date, shall be and be deemed to be
extinguished and abandoned, and such unclaimed dividends in the possession of
the corporation, its transfer agents or other agents or depositaries, shall at
such time become the absolute property of the corporation, free and clear of any
and all claims of any persons whatsoever.
ARTICLE FIFTH
INCORPORATOR AND FIRST BOARD OF DIRECTORS
The name and mailing address of the incorporator of this corporation are:
John W. Castle
208 Miller Avenue
DeKalb, Illinois 60115
The powers of the incorporator shall terminate upon the filing of this
certificate of incorporation. The names and mailing addresses of the persons
who are to serve as directors until
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<PAGE>
the first annual meeting of stockholders or until their respective successors
are elected and qualified are as follows:
NAME MAILING ADDRESS
---- ---------------
John W. Castle 208 Miller Avenue
DeKalb, Illinois 60115
Louis P. Brady 407 North DeKalb Street
Sandwich, Illinois 60548
James N. McInnes 26 Edgebrook Drive
Sandwich, Illinois 60548
Franklyn L. Ament RR#2, Oak Knolls
Sandwich, Illinois 60548
Donald E. Breunig 108 East Arnold Road
Sandwich, Illinois 60548
Armand A. Legner 103 East Arnold Road
Sandwich, Illinois 60548
Nancy D. Castle 208 Miller Avenue
DeKalb, Illinois 60115
ARTICLE SIXTH
BOARD OF DIRECTORS
A. POWERS OF THE BOARD.
In furtherance and not in limitation of the powers conferred by statute,
the board of directors of the corporation is expressly authorized:
(a) To make, alter or repeal the by-laws of the corporation.
(b) To authorize and cause to be executed mortgages and liens upon the
real and personal property of the corporation.
(c) To set apart out of any of the funds of the corporation available for
dividends a reserve or reserves for any proper purpose and to abolish any such
reserve in the manner in which it was created.
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<PAGE>
(d) By resolution of a majority of the whole board, to designate one or
more committees, each committee to consist of two or more of the directors of
the corporation. 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. The bylaws may provide that in the absence or
disqualification of any member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute 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. Any such committee, to the extent provided in the
resolution or in the by-laws of the corporation, shall have and may exercise all
the powers and authority of the board of directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; and no committee
shall have the power or authority to declare a dividend or to authorize the
issuance of stock unless the resolution or by-laws expressly so provide.
(e) To sell, lease or exchange all or substantially all of the property
and assets of the corporation, including its goodwill and its corporate
franchises, upon such terms and conditions and for such consideration, which may
consist in whole or in part of money or property, including shares of stock in,
and/or other securities of, any other corporation or corporations, as the board
of directors shall deem expedient and for the best interests of the corporation,
when and as authorized by the affirmative vote of the holders of a majority of
the stock of the corporation issued and outstanding having voting power.
(f) To provide for the indemnification, within the limits permitted by
law, of directors, officers, employees and agents of the corporation (or of
other corporations absorbed into the corporation by merger or consolidation),
and of persons who serve other enterprises in such or similar capacities at the
request of the corporation (or at the request of other corporations absorbed
into the corporation by merger or consolidation), against expenses and liability
for actions they take in such capacities.
B. WRITTEN BALLOT.
Elections of directors need not be by written ballot unless the by-laws of
the corporation shall so provide.
C. CLASSIFIED BOARD OF DIRECTORS.
Section 1. NUMBER, ELECTION AND TERMS OF DIRECTORS. The business and
affairs of the Corporation shall be managed by or under the direction of a board
of directors consisting of not less than five (5) nor more than fifteen (15)
persons. The exact number of directors within the minimum and maximum
limitations specified in the preceding sentence shall be fixed from time to time
by the board of directors pursuant to a resolution adopted by a majority of the
board of directors then in office. The board of directors shall be divided into
three classes, the number of
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<PAGE>
directors in each class to be fixed by the board of directors. The initial
term of office of Class I directors shall expire at the annual meeting of
stockholders to be held in 1998; the initial term of office of Class II
directors shall expire at the annual meeting of stockholders to be held in
1999; and the initial term of office of Class III directors shall expire at
the annual meeting of stockholders to be held in 2000, and in each case until
their respective successors are elected and qualified. At each annual
meeting of stockholders, directors shall be chosen to succeed those whose
terms then expire and shall be elected for a term of office expiring at the
third succeeding annual meeting of stockholders after their election, and in
each case until their respective successors are elected and qualified.
The names of the persons who are to serve as the initial directors of each
class of directors of the Corporation until their successors are elected and
qualified or until their earlier resignation or removal are as follows:
-------------------------------------------------------
Name Class Designation
-------------------------------------------------------
John B. Hiatt I
-------------------------------------------------------
William R. Monat I
-------------------------------------------------------
Robert T. Boey II
-------------------------------------------------------
Donald E. Kieso II
-------------------------------------------------------
James N. McInnes II
-------------------------------------------------------
Bruce P. Bickner III
-------------------------------------------------------
John W. Castle III
-------------------------------------------------------
Peter H. Henning III
-------------------------------------------------------
Section 2. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. 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. 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
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<PAGE>
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 4. AMENDMENT, ALTERATION OR REPEAL. In addition to any
affirmative vote that may be otherwise required, the affirmative vote of the
holders of at least eighty percent (80%) 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, shall be
required to amend, alter or repeal in any respect, or adopt any provision
inconsistent with, this Subpart C of Article Sixth.
ARTICLE SEVENTH
STOCKHOLDER ACTION BY CONSENT
Action may be taken by the stockholders of the corporation, without a
meeting, by written consent as and to the extent provided at the time by the
General Corporation Law of the State of Delaware, provided that the matter to be
acted upon by such written consent previously has been approved by the board of
directors of the corporation and directed by such board to be submitted to the
stockholders for their action thereon by written consent.
ARTICLE EIGHTH
MERGER, CONSOLIDATION OR DISPOSITION OF ASSETS
In the event that the stockholders of the corporation are asked to vote on
a merger or consolidation with any Person (as hereinafter defined) or on a
proposal that the corporation sell, lease or exchange substantially all of its
assets or business to or with any Person or any affiliate of such Person, or
that any Person or any affiliate of such Person sell, lease or exchange
substantially all of its assets or business to or with the corporation, and such
Person and/or its affiliates singly or in the aggregate, own or control directly
or indirectly shares representing five percent (5%) or more of the voting power
of the corporation at the record date for determining stockholders entitled to
vote, the favorable vote of not less than eighty percent (80%) of all of the
votes which the holders of the issued and outstanding shares of the voting stock
of the corporation, voting as a single class, are entitled to cast thereon shall
be required for the approval of any such action; provided, however, that the
foregoing shall not apply to any such merger, consolidation or sale, lease or
exchange of assets or business which was approved by resolutions of the board of
directors of the corporation prior to the acquisition of the ownership or
control of shares representing at least five percent (5%) of the voting power of
the corporation by such Person and/or its affiliates, nor shall it apply to any
such merger, consolidation or sale of assets or business between the corporation
and another Person of which shares or other ownership interests representing
fifty percent (50%) or more of the voting power is owned by the corporation.
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<PAGE>
For the purposes of this Article, a "Person" is any corporation,
partnership, association, trust, business entity, estate or individual; an
"affiliate" is any Person who directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the Person specified; and "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, by
contract, or otherwise.
This ARTICLE EIGHTH may not be amended, nor may it be repealed in whole or
in part, unless authorized by the favorable vote of not less than eighty percent
(80%) of all the votes entitled to be cast thereon by the holders of the issued
and outstanding shares of voting stock of the corporation voting as a single
class, regardless of class or series of stock.
ARTICLE NINTH
AMENDMENT
The corporation reserves the right to amend its certificate of
incorporation, and to thereby change or repeal any provision therein contained
from time to time, in the manner prescribed at the time by statute, and all
rights conferred upon stockholders by such certificate of incorporation are
granted subject to this reservation.
ARTICLE TENTH
LIMITED LIABILITY OF DIRECTORS
No person who was or is a director of the corporation shall be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for breach of the duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is amended after the effective
date of this Article Tenth to further eliminate or limit, or to authorize
further elimination or limitation of, the personal liability of directors for
breach of fiduciary duty as a director, then the personal liability of a
director of the corporation to the corporation or its stockholders shall be
eliminated or limited to the full extent permitted by the Delaware General
Corporation Law, as so amended. For purposes hereof, "fiduciary duty as a
director" shall include any fiduciary duty arising out of serving at the request
of the corporation as a director of another corporation, partnership, joint
venture, trust or other enterprise, and "personally liable to the corporation"
shall include any liability to such other corporation, partnership, joint
venture, trust or other enterprise, and any liability to the corporation in its
capacity as a security holder, joint venturer, partner, beneficiary, creditor or
investor of or in any such other corporation, partnership, joint venture, trust
or other enterprise.
-9-
<PAGE>
ARTICLE ELEVENTH
INDEMNIFICATION
A. CERTIFICATE OF INCORPORATION ARTICLE NOT EXCLUSIVE; CHANGE IN LAW.
The indemnification and advancement of costs, charges and other expenses
(including attorneys' fees) ("Expenses") provided by, or granted pursuant to,
this Article Eleventh 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 Eleventh or the by-laws
of the corporation, the corporation shall indemnify and make advancement of
Expenses to each person who is or was or has agreed to become a director or
officer of the corporation, and each person who 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, 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.
B. CONTRACT RIGHTS.
All rights to indemnification and advancement of Expenses provided by this
Article Eleventh and the by-laws of the corporation shall be deemed to be a
contract between the corporation and each person who is or was or has agreed to
become a director or officer of the corporation, and each person who 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. Any repeal or modification of this Article Eleventh or the by-laws
of the corporation or any repeal or modification of relevant provisions of the
Delaware General Corporation Law 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.
C. INDEMNIFICATION FOR CERTAIN PERSONS FOR BREACH OF FIDUCIARY DUTY.
In addition to the indemnification provided for in the by-laws 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 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
-10-
<PAGE>
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 a 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.
-11-
<PAGE>
EXHIBIT 11
CASTLE BANCGROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
The components of basic and diluted EPS for the periods ended March 31,
1999 and 1998 were as follows: (DOLLARS IN THOUSANDS, EXCEPT SHARE
DATA)
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic EPS:
Net Income 913 1,329
Less: preferred stock dividends: 0 (7)
--------- ---------
Income available to common stockholders 913 1,322
--------- ---------
Average common shares 2,173,851 2,154,189
--------- ---------
Basic EPS .42 .61
--------- ---------
Diluted EPS:
Income available to common stockholders 913 1,322
Assumed conversion of preferred stock (anti-dilutive in 1998) 0 7
--------- ---------
Income available to common stockholders after assumed conversion 913 1,329
--------- ---------
Average common shares 2,173,851 2,154,189
Assumed conversion of preferred stock (anti-dilutive in 1998) N/A 13,043
Assumed exercise of stock options 27,185 24,153
--------- ---------
Average common shares after assumed conversions 2,201,036 2,191,385
--------- ---------
Diluted EPS .41 .61
--------- ---------
- --------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 10,084
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 128,927
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 355,698
<ALLOWANCE> 4,336
<TOTAL-ASSETS> 512,648
<DEPOSITS> 435,995
<SHORT-TERM> 20,448
<LIABILITIES-OTHER> 4,230
<LONG-TERM> 10,300
0
0
<COMMON> 726
<OTHER-SE> 40,949
<TOTAL-LIABILITIES-AND-EQUITY> 512,648
<INTEREST-LOAN> 7,866
<INTEREST-INVEST> 1,937
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 9,803
<INTEREST-DEPOSIT> 4,116
<INTEREST-EXPENSE> 4,701
<INTEREST-INCOME-NET> 5,102
<LOAN-LOSSES> 159
<SECURITIES-GAINS> 245
<EXPENSE-OTHER> 7,936
<INCOME-PRETAX> 1,216
<INCOME-PRE-EXTRAORDINARY> 1,216
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 913
<EPS-PRIMARY> .42
<EPS-DILUTED> .41
<YIELD-ACTUAL> 4.10
<LOANS-NON> 1,821
<LOANS-PAST> 220
<LOANS-TROUBLED> 202
<LOANS-PROBLEM> 2,243
<ALLOWANCE-OPEN> 4,775
<CHARGE-OFFS> 224
<RECOVERIES> 126
<ALLOWANCE-CLOSE> 4,336
<ALLOWANCE-DOMESTIC> 4,136
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 200
</TABLE>
