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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1998 Commission File No. 0-25914
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CASTLE BANCGROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3238190
(State or other jurisdiction of (I.R.S. Employer
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. /X/
Aggregate market value of voting stock held by non-affiliates of the
registrant as of February 22, 1999, 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 $30.00 per
share. Based on this price the aggregate market value of voting shares held
by non-affiliates of the registrant is $55,889,000.
The registrant had 2,175,394 shares of Common Stock outstanding as of
March 18, 1999.
The following documents are incorporated by reference in this report:
1. Portions of the registrant's Proxy Statement for the 1999 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 resources, 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, generally defined as the corridor 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.
Castle Bank, N.A. (CB) (formerly known as The Sandwich State Bank), 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 wholly 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, Plano, Sugar Grove,
Harvard, and Yorkville, Illinois and a mortgage loan origination office in
Sandwich, Illinois.
CasBanc Mortgage, Inc. (CMI), an Illinois corporation and wholly owned
subsidiary of the Company, is a residential mortgage originator and broker that
engages in the origination of residential 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,
Naperville, and Berwyn, Illinois, Merrillville, Indiana, and Chesterfield,
Missouri. CMI also provides processing services and delivery in the secondary
market for residential mortgage loans originated by the Subsidiary Banks.
Castle Finance Company (CFC), an Illinois corporation and wholly owned
subsidiary of the Company, 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 and Plano, Illinois.
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.
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
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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
Deposit 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 on 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. All Subsidiary Banks paid the 1.29 cents rate during 1998.
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. 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
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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, 1998,
subject to minimum regulatory capital guidelines, FNB and CBH could, without
prior approval of regulatory authorities, declare dividends of approximately
$3,224,000 and $262,000 respectively. Assuming CB's conversion to a national
bank charter was effective as of December 31, 1998, CB could, without prior
approval of regulatory authorities, declare dividends of approximately $773,000.
BOY is 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
BOY is a state chartered bank. It is 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. CB converted to a nationally
chartered bank effective January 1, 1999. CB, 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.
CMI is a residential 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, Wisconsin and
Missouri. Examinations by this regulator are designed for the protection of the
consumer borrowers and not for the mortgage company shareholders.
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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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
4.00%. The Company had a tangible leverage capital ratio of 6.38% as of December
31, 1998. 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 11.08% as of December 31,
1998. 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 9.83% as of
December 31, 1998. 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, 1998, the Company and its subsidiaries had a total of
364 full-time equivalent employees. None of these employees are subject to a
collective bargaining agreement. Management believes it has excellent relations
with its staff.
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ITEM 2. PROPERTIES
The following table sets forth information related to the Company's
properties. These properties are suitable and adequate for the Company's
business needs.
<TABLE>
<CAPTION>
APPROXIMATE
ENTITY DESCRIPTION ADDRESS CITY/STATE SQUARE FEET OWNED/LEASED
- ------ ----------- ------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
FNB Main bank 141 West Lincoln Highway DeKalb, IL 19,600 Owned
FNB Drive-in facility 141 West Lincoln Highway DeKalb, IL 1,200 Owned
FNB Branch facility 1007 North First Street DeKalb, IL 1,800 Owned
FNB Branch facility 511 West State Street Sycamore, IL 9,400 Owned/Leased(1)
FNB Branch facility 1602 East Sycamore Road DeKalb, IL 2,300 Owned
FNB Commercial building 121 West Lincoln Highway DeKalb, IL 15,000 Owned(2)
CB Main bank 100 West Church Street Sandwich, IL 13,000 Owned
CB Mortgage office 44 West Church Street Sandwich, IL 1,200 Leased
CB Branch facility 91 Sugar Lane, Suite C Sugar Grove, IL 1,000 Leased
CB Branch facility 505 West Route 34 Plano, IL 2,400 Leased
CBH Main Bank 201 West Diggins Street Harvard, IL 11,700 Owned
CBH Branch facility 1265 South Division Street Harvard, IL 3,500 Owned
BOY Main bank 606 Countryside Center Yorkville, IL 21,100 Owned
CMI Main/Mortgage office 1315 West 22nd Street OakBrook, IL 10,400 Leased
CMI Mortgage office 5105 Tollview Drive Rolling Meadows, IL 2,100 Leased
CMI Mortgage office 6922 West Cermak Berwyn, IL 1,800 Leased
CMI Mortgage office 2549 North Racine Chicago, IL 1,200 Leased
CMI Mortgage office 2017 West Division Chicago, IL 1,200 Leased
CMI Mortgage office 600 Holiday Plaza Drive Matteson, IL 3,900 Leased
CMI Mortgage office 847 North Center Street Naperville, IL 3,200 Owned
CMI Mortgage office 101 West 79th Avenue Merrillville, IN 3,140 Leased
CMI Mortgage office 13990 Olive Road Chesterfield, MO 1,800 Leased
CFC Main/Origination office 232 West Lincoln Highway DeKalb, IL 2,000 Leased
CFC Origination office 206 South Ben Street Plano, IL 600 Leased
</TABLE>
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 at this time. However,
the Company and its subsidiaries are from time to time parties to routine
litigation incidental to their businesses.
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,
1998.
- ----------------------------
(1) FNB owns the building and approximately 60% of the underlying land and has
a long-term lease with option to buy the remaining land.
(2) FNB owns the building and leases the entire space to the Company. The
facility houses all administrative and operational functions of the Company.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's stock is traded over-the-counter and is quoted on the OTC
Bulletin Board, under the symbol CTBG. During the period from January 1, 1997
through December 31, 1998, management of the Company believes that there were
approximately 80 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 $20.50 to $31.00 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, 1998 was 973.
Cash dividends on the above referenced common stock are paid semi-annually.
Dividends for the years ended December 31, 1998 and 1997 were declared as
follows:
<TABLE>
<S> <C> <C>
1998 1997
---- ----
First semi-annual dividend $0.12 $0.10
Second semi-annual dividend $0.14 $0.12
----- -----
Total $0.26 $0.22
----- -----
</TABLE>
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, 1998, the Company was limited to $2,628,000 for dividend
purposes.
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)
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Interest income $40,625 39,063 36,437 32,650 28,903
Interest expense 19,702 19,468 17,858 15,927 12,487
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Net interest income before provision for possible 20,923 19,595 18,579 16,723 16,416
loan losses
Provision for possible loan losses 737 1,128 1,113 488 323
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Net interest income after provision for possible 20,186 18,467 17,466 16,235 16,093
loan losses
Other operating income 14,960 9,553 8,339 7,931 3,366
Investment securities gains (losses) 154 210 41 (284) (29)
Other operating expenses 27,978 23,749 23,076 19,061 14,702
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Earnings before income taxes 7,322 4,481 2,770 4,821 4,728
Income tax expense 2,587 1,468 926 1,457 1,368
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Net earnings $4,735 3,013 1,844 3,364 3,360
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Net earnings applicable to common stock $4,712 2,811 1,643 3,026 2,885
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Per share data - common stock
Net earnings - basic $2.18 1.35 .80 1.49 1.46
Net earnings - diluted $2.16 1.34 .79 1.46 1.42
Cash dividends $ .26 .22 .20 .18 .16
Financial position - year end
Investment securities available for sale $132,060 129,479 133,072 135,566 137,826
Mortgage loans held for sale 67,354 44,761 20,343 13,484 -
Net loans 322,034 308,542 285,394 251,291 232,557
Allowance for possible loan losses 4,775 4,646 3,775 3,309 3,475
Non-interest bearing deposits 50,371 42,589 43,233 40,524 37,517
Interest bearing deposits 401,794 381,094 360,876 345,646 317,436
Long-term debt 10,300 10,250 10,150 11,000 11,800
Preferred stock 0 300 2,600 2,600 5,350
Total stockholders' equity 41,545 36,862 34,962 34,347 30,671
Total assets 555,455 515,550 473,424 443,637 407,505
- ---------------------------------------------------------------------------------------------------------------------------
</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 1998 totaled $4,735,000, a 57.2% increase
from 1997 earnings of $3,013,000. This represents an $.83 increase in basic
earnings per share. Net earnings for 1996 were $1,844,000.
Two major factors contributed to the improvement in performance at the
Company during 1998. First, net interest income after provision for possible
loan losses was $20,186,000 for the year ended December 31, 1998 versus
$18,467,000 for 1997, representing a 9.3% increase. Net interest income will be
discussed in detail below. Second, a favorable interest rate environment during
the year helped to increase net mortgage loan origination income to $11,490,000
for 1998 from $6,546,000 for 1997, or an increase of 75.5%. These increases were
partially offset by an increase in salaries and employee benefits expense of
20.5%, from $15,336,000 in 1997 to $18,477,000 in 1998. This increase is largely
due to the commission paid to mortgage loan originators related to net mortgage
loan origination income.
Net earnings attributable to common stock increased to $4,712,000 in 1998
from $2,811,000 in 1997. Net earnings attributable to common stock for 1996 was
$1,643,000. Dividends paid on preferred stock totaled $23,000 in 1998 as
compared to $202,000 in 1997, and $201,000 in 1996. Basic earnings per share
increased to $2.18 for 1998 as compared to $1.35 for 1997. Basic earnings per
share for 1996 was $.80. The following table highlights significant factors that
have contributed to these changes in earnings per share:
<TABLE>
<CAPTION>
Changes in Basic Earnings per Share
1997 to 1998 1996 to 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Prior period basic earnings per share $ 1.35 $ .80
Changes due to:
Net Interest income 0.25 0.43
Provision for possible loan losses 0.20 0.00
- --------------------------------------------------------------------------------------------
Net interest income after provision
for possible loan losses 0.45 0.43
- --------------------------------------------------------------------------------------------
Other operating income
Investment securities gains (losses), net (.03) 0.08
Gain on sale of land and buildings .00 (0.01)
Mortgage revenues 2.16 0.65
Other operating income items .16 (0.08)
- --------------------------------------------------------------------------------------------
Total other operating income 2.29 0.64
- --------------------------------------------------------------------------------------------
Other operating expenses
Salaries and employee benefits (1.16) (0.37)
Net occupancy and furniture expenses (.03) 0.03
Outside services (.17) 0.18
FDIC insurance assessment 0.00 (0.02)
Goodwill amortization 0.01 0.00
Other operating expense items (0.16) (0.08)
- --------------------------------------------------------------------------------------------
Total other operating expenses (1.51) (0.26)
Income tax expenses (0.49) (0.26)
Preferred stock dividends 0.09 0.00
- --------------------------------------------------------------------------------------------
Current period basic earnings per share $ 2.18 $ 1.35
- --------------------------------------------------------------------------------------------
</TABLE>
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The Company's return on average equity for 1998 was 11.95%, as compared to
8.43% in 1997 and 5.36% in 1996. Return on average assets was .93% in 1998
versus .62% in 1997 and .40% in 1996. The increase in these ratios for 1998 were
primarily due to the increase in net interest income and the increase in net
mortgage loan origination income as described above.
NET INTEREST INCOME
Net interest income before provision for possible loan losses, the
Company's primary source of earnings, totaled $20,923,000 in 1998, a $1,328,000,
or 6.8% increase over 1997. This increase can primarily be attributed to both an
$840,000 increase in interest and fees on loans and an $837,000 increase in
interest on mortgage loans held for sale. These changes were due to increases in
average portfolio balances in 1998 versus 1997. These increases were partially
off-set by a $234,000 increase in interest expense. Net interest income before
provision for possible loan losses increased $1,016,000 in 1997 as compared to
1996, which represented a 5.5% 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.
On a tax equivalent basis, net interest income increased to $21,517,000 in
1998 from $20,041,000 and $19,111,000 in 1997 and 1996, respectively. The tax
equivalent net interest margin remained relatively constant in 1998, averaging
4.45% as compared to 4.40% in 1997 and 4.42% in 1996.
Total average earning assets in 1998 were $478,895,000 an increase of
$27,779,000 or 6.2% over 1997. Average earning assets as a percentage of total
average assets increased slightly to 93.6% during 1998 as compared to 93.3% in
1997 and 93.0% in 1996. The total average loan portfolio represented 65.0% of
total average earning assets in 1998, a decrease from 66.8% in 1997 and an
increase from 62.8% in 1996. Mortgage loans held for sale represented 7.3% of
average earning assets in 1998, an increase from 4.7% in 1997. Mortgage loans
held for sale represented 6.9% of average earning assets in 1996. In 1998,
average total interest-bearing liabilities were $423,551,000, a $20,914,000 or
5.2% increase over 1997. This increase can be attributed to a $3,802,000
increase in average short-term borrowings as well as growth of $18,037,000 or
4.9% in interest-bearing deposit liabilities. The proportion of average
interest-bearing liabilities to average earning assets in 1998 decreased to
88.4% as compared to 89.3% in 1997.
PROVISIONS FOR POSSIBLE LOAN LOSSES
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 158.4% at the end of 1998
versus 100.8% and 131.9% at the end of 1997 and 1996, respectively. This
increase in coverage was due to a decrease in non-accrual loans from $3,968,000
at the end of 1997 to $2,262,000 at the end of 1998. The allowance for loan
losses as a percentage of total outstanding loans decreased slightly to 1.46% at
December 31, 1998 as compared to 1.48% at December 31, 1997. The allowance level
was at 1.31% of total loans at December 31, 1996. Gross charge-offs increased
$296,000 from 1997 to 1998, primarily due to real estate charge-offs which
increased $275,000. The ratio of net charge-offs to average total loans
outstanding increased during 1998 to .19% as compared to .10% in 1997. The net
charge-off ratio during 1996 was .28%. The increase in this ratio was due to the
increase in charge-offs as described above and a decrease in recoveries of
$22,000 primarily due to commercial and agricultural recoveries.
11
<PAGE>
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 $737,000
in 1998 as compared to $1,128,000 in 1997, which represents a $391,000 decrease.
The provision for possible loan losses increased $15,000 from 1996 to 1997.
Management's analysis of the allowance for possible loan losses indicates that
the current level of 1.46% of net outstanding loans appears to cover the risk of
potential losses in the loan portfolio at December 31, 1998.
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 $3,014,000, or .54% of total assets, at December 31,
1998. This represents a decrease from $4,607,000 or .89% of total assets at
December 31, 1997. Non-performing assets at December 31, 1996 were $2,938,000 or
.62% of total assets.
NON-INTEREST INCOME
Total other operating income is comprised of fee based revenues from
mortgage and trust services, as well as deposit and other customer service
charges. Excluding security gains and losses, other operating income totaled
$14,960,000 for 1998, increasing from $9,553,000 in 1997 and $8,339,000 in 1996.
This change represents a 57% increase from 1997 to 1998, most of which can be
attributed to an increase in mortgage revenues 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 $4,944,000
from 1997 to 1998. Net mortgage loan origination income increased $1,374,000
from 1996 to 1997. The increased mortgage loan activity was a result of the
favorable low interest rate environment in effect for fifteen and thirty year
mortgages on one-to-four-family residential properties. If interest rates for
fifteen and thirty year mortgages increase, the subsidiaries may not be able to
maintain origination volume at past levels and earnings may be adversely
impacted.
Trust fee revenues increased 16.2% to $769,000 in 1998 as compared to
$662,000 in 1997 and $644,000 in 1996. 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
$163.9 million at December 31, 1998 as compared to $155.7 million and $123.2
million at year end 1997 and 1996, respectively. Net security gains, on a
pre-tax basis, totaled $154,000 in 1998 as compared to net gains of $210,000 in
1997 and $41,000 in 1996. 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 1998 several securities were sold at a
gain to take advantage of market conditions at the time of the sale. 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 $27,978,000 in 1998 as compared to
$23,749,000 and $23,076,000 in 1997 and 1996, respectively. As a percentage of
average assets, total operating expenses increased to 5.47% in 1998 versus 4.91%
in 1997. The total operating expenses as a percentage of total average assets
was 5.01% for 1996. The efficiency ratio, which measures the level of
non-interest expense to total net revenues, was 77.6% in 1998 as compared to
80.9% and 85.6% in 1997 and 1996, 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 $3,141,000, or 20.5% from 1997
to 1998. During 1997, this expense increased $871,000, or
12
<PAGE>
6.0%, when compared to 1996. The increase for 1998 is largely attributable to
an increase in commission paid to mortgage loan originators. The Company
employed 364 full-time equivalent (FTE) employees at December 31, 1998 as
compared to 317 and 334 at December 31, 1997 and 1996, respectively. The
increase in FTEs during 1998 was primarily due to the significant increase in
the CMI mortgage loan operation. The decrease during 1997 was primarily due
to the significant reduction in the CBH mortgage loan operations.
Occupancy and furniture and fixtures expenses totaled $3,322,000 in 1998,
an increase of $172,000, or 5.5%, from 1997. During 1997, occupancy and
furniture and fixture expenses decreased $38,000 as compared to 1996. Outside
services and other expense increased 13.6% to $3,761,000 during 1998 as compared
to $3,312,000 in the prior year. Advertising expense increased 27.3% in 1998 to
$629,000 versus $494,000 in 1997. 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, 1998 were $555,455,000, a $39,905,000 or 7.7%
increase over December 31, 1997 total assets of $515,550,000. Growth of
$13,492,000, or 4.4% in the net loan portfolio and $22,593,000, or 50.5%, for
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. Average assets for 1998 grew by
$28,052,000 or 5.8% to $511,602,000 as compared to $483,550,000 for 1997.
The Company's asset growth has been funded primarily by growth in deposit
accounts and short-term borrowings. Management continues to view "core" deposits
(individual, partnership and corporate deposits) as the primary long term
funding source for internal growth of the Company. Average deposits increased
$20,260,000, or 5.0%, during 1998, while average short-term borrowings increased
$3,802,000, or 15.8%. Brokered deposits totaled $693,000 at December 31, 1998,
with interest rates ranging from 6.20% to 6.75% and maturities ranging from
August 2000 through October 2002.
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
1998, stockholders' equity increased $4,683,000 over December 31, 1997, after a
$357,000 increase in unrealized gains on investment securities
available-for-sale. The Company issued 17,773 shares of stock through its
Employee Stock Purchase Plan during 1998, which generated $459,000 of new
shareholders' equity. The Company's Tier 1 Leverage ratio at December 31, 1998
was 6.31%, which decreased from 6.38% as of December 31, 1997. 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 to 11.08% as of December 31, 1998 from 10.67% as of December 31,
1997. The Tier 1 Capital ratio increased to 9.83% at December 31, 1998 from
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 business.
13
<PAGE>
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 its cash flows from
operating, investing, and financing activities during 1998 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 14 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.
14
<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, 1998:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS Balances Subject to Repricing Within
-------------------------------------------------------------------
OVER 1
90 DAYS 180 DAYS 1 YEAR YEAR TOTAL
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest earning cash and due from banks $ 0 0 0 0 0
Excess funds sold 0 0 0 0 0
Investment securities available for sale 7,615 4,479 22,427 97,539 132,060
Mortgage loans held for sale 67,354 0 0 0 67,354
Gross Loans 100,254 28,079 39,552 161,312 329,197
- ---------------------------------------------------------------------------------------------------------------------
Total earning assets 175,223 32,558 61,979 258,851 528,611
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
NOW and Savings deposits 100,766 0 0 0 100,766
Cds and other interest-bearing deposits 123,615 28,479 35,283 113,651 301,028
Short-term borrowings 44,197 0 0 0 44,197
Long-term borrowings 9,300 0 0 1,000 10,300
- ---------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 277,878 28,479 35,283 114,651 456,291
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Net asset (liability) repricing difference (102,655) 4,079 26,696 144,200 72,320
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Cumulative asset (liability) repricing
difference $(102,655) (98,576) (71,880) 72,320
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Cumulative earnings assets to cumulative
interest-bearing liabilities .63 .68 .79 1.16
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Cumulative asset (liability) repricing difference
as a percent of total earning assets -19.42% -18.65% -13.60% 13.68%
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</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.
The table below presents in tabular form contractual balances of the
Company's on balance sheet financial instruments in U.S. dollars at the expected
maturity dates as well as the fair value of those on balance sheet financial
instruments for the period ended December 31, 1998. The expected maturity
categories take into consideration the repricing ability of loans, and the
callable feature of certain investments. The Company's liabilities that do not
have a stated maturity date are considered to be long term in nature by the
Company and are reported in the thereafter column. The Company does not consider
these financial instruments materially sensitive to interest rate fluctuations
and historically the balances have remained fairly constant over various
economic conditions. The weighted average interest rates for the various assets
and liabilities presented are actual as of December 31, 1998. The fair value of
loans takes into consideration discounted cash flows through the estimated
maturity or repricing dates using estimated market discount rates that reflect
credit risk. The fair value of checking, savings and interest-bearing checking
accounts is the amount payable upon demand. The fair value of time deposits is
based upon the discounted value of contractual cash flows, which is estimated
using current rates offered for deposits of similar remaining terms. The fair
value of other borrowings approximates the carrying value due to the borrowings
interest rate approximating market rates.
15
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Fair
Value
(DOLLARS IN THOUSANDS) 1999 2000 2001 2002 2003 Thereafter Total 12/31/98
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Mortgage Loans held for Sale $67,354 - - - - - $ 67,354 $ 67,663
Average interest rate 6.74% - - - - - 6.74%
Fixed interest rate loans $76,950 $26,935 $19,384 $ 12,808 $ 3,673 $ 25,199 $164,949 $166,878
Average interest rate 8.46% 9.98% 10.22% 10.14% 8.94% 9.08% 9.15%
Variable interest rate loans $90,935 $30,005 $22,804 $ 12,545 $ 1,309 $ 6,650 $164,248 $165,609
Average interest rate 8.42% 7.45% 7.45% 7.40% 7.10% 7.02% 7.96%
Fixed interest rate $34,521 $29,685 $21,040 $ 5,230 $ 4,578 $ 37,006 $132,060 $132,060
securities
Average interest rate 6.74% 6.55% 6.33% 6.41% 6.04% 6.04% 6.42%
Variable interest rate - - - - - - - -
securities
Average interest rate - - - - - - - -
Other interest-bearing - - - - - - - -
assets
Average interest rate - - - - - - - -
RATE SENSITIVE LIABILITIES:
Non interest-bearing
checking (with no stated - - - - - $ 50,371 $ 50,371 $ 50,371
maturity)
Average interest rate - - - - - - - -
Savings and interest
bearing checking (with no - - - - - $175,025 $175,025 $175,025
stated maturity)
Average interest rate - - - - - 2.73% 2.73%
Time deposits $110,290 $25,880 $13,324 $64,156 $13,119 - $226,769 $231,307
Average interest rate 5.15% 6.03% 5.61% 6.12% 5.76% - 5.59%
Short term borrowings $ 44,197 - - - - - $ 44,197 $ 44,197
Average interest rate 5.54% - - - - - 5.54%
Long term debt - $1,000 - - - $ 10,300 $ 10,300
$9,300
Average interest rate - 4.95% - - - 6.47%
6.63%
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The computations in the above table are based on numerous assumptions,
including relative levels of market interest rates, discount rates, loan
prepayments, investment call options, and deposit 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 assumption used.
There have been no material changes in the market risks faced by the
Company since December 31, 1997.
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
16
<PAGE>
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 underway on mission critical applications
since early 1998. Some mission critical applications have been discovered to be
non-compliant. These systems were replaced with new compliant systems by
December 31, 1998. The Company's goal is to have all mission critical
applications tested by March 31, 1999. Testing was completed by December 31,
1998 for all mission critical applications, except that the Company is
participating in proxy testing with one vendor where the testing is on target to
be completed by the first quarter of 1999. Also, the Company has purchased new
compliant processing software for CMI which was installed in December 1998 and
the testing is scheduled to take place in March 1999. 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.
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 area 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 will be participating in proxy
testing of this servicer in the first quarter of 1999. The proxy testing is
being 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; $280,000 of
costs have been incurred to date, $215,000 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 $131,000 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.
17
<PAGE>
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.
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 effectively 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
<PAGE>
The following supplementary financial information of the registrant for
each of the last three years (unless otherwise stated) is included on pages 20
through 26 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)
19
<PAGE>
TABLE 1
COMPARISON OF AVERAGE BALANCE SHEETS
(DOLLARS IN THOUSANDS)
The following table sets forth the registrant's consolidated average daily
condensed balance sheet for each of the last three years:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------------------------
1998 1997 1996
-------------------------- ------------------------- --------------------------
% of % of % of
ASSETS: Amount Total Amount Total Amount Total
-------------- ---------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $10,800 2.1% $10,070 2.1 $9,757 2.1
Interest-bearing deposits in banks 0 0.0 0 0 376 0.1
Excess funds sold 2,907 0.6 547 0.1 10,426 2.3
-------------- ---------- -------------- ---------- -------------- ----------
Total cash and cash equivalents $13,707 2.7 10,617 2.2 20,559 4.5
Taxable securities $121,784 23.8 122,190 25.3 $110,313 23.9
Tax-exempt securities 12,508 2.4 9,710 2.0 12,165 2.6
Mortgage loans held for sale 35,094 6.9 21,372 4.4 29,651 6.4
Loans and leases, net of unearned 311,196 60.8 301,419 62.3 269,091 58.5
income
Less: Allowance for loan losses 4,594 0.9 4,122 0.8 3.469 0.8
-------------- ---------- -------------- ---------- -------------- ----------
Loans, net 306,602 59.9 297,297 61.5 265,622 57.7
Premises and Equipment 11,206 2.2 10,694 2.2 10,217 2.2
Goodwill, net of amortization 4,230 0.8 4,779 1.0 5,328 1.2
Other Assets 6,471 1.3 6,891 1.4 6,821 1.5
-------------- ---------- -------------- ---------- -------------- ----------
TOTAL ASSETS 511,602 100.0% $483,550 100.0% $460,676 100.0%
-------------- ---------- -------------- ---------- -------------- ----------
-------------- ---------- -------------- ---------- -------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Non-interest bearing deposits $42,812 8.4% $40,589 8.4 39,300 8.5
Interest bearing deposits 386,692 75.6 368,655 76.2 350,918 76.2
-------------- ---------- -------------- ---------- -------------- ----------
Total Deposits 429,504 84.0 409,244 84.6 390,218 84.7
-------------- ---------- -------------- ---------- -------------- ----------
Short-term borrowings 27,863 5.4 24,061 5.0 19,887 4.3
Long-term borrowings 8,996 1.8 9.921 2.1 10,782 2.3
Other liabilities 5,605 1.1 4,598 0.9 5,375 1.2
-------------- ---------- -------------- ---------- -------------- ----------
TOTAL LIABILITIES $471,968 92.3 $447,824 92.6 $426,262 92.5
STOCKHOLDERS' EQUITY:
Preferred Stock 298 0.1 2,591 0.5 2,600 0.6
Common Stock 721 0.1 693 0.1 689 0.1
Additional paid-in capital 6,954 1.4 5,100 1.1 4,875 1.1
Accumulated other comprehensive 781 0.2 198 0.0 475 0.1
earnings
198 0.0 475 0.1
Retained earnings 30,880 5.9 27,144 5.7 25,775 5.6
-------------- ---------- -------------- ---------- -------------- ----------
TOTAL STOCKHOLDERS' EQUITY $39,634 7.7 $35,726 7.4 $34,414 7.5
TOTAL LIABILITIES AND
-------------- ---------- -------------- ---------- -------------- ----------
STOCKHOLDERS' EQUITY $511,602 100.0% $483,550 100.0% $460,676 100.0%
-------------- ---------- -------------- ---------- -------------- ----------
-------------- ---------- -------------- ---------- -------------- ----------
</TABLE>
20
<PAGE>
TABLE 2
ANALYSIS OF NET INTEREST INCOME - TAX EQUIVALENT BASIS
(DOLLARS 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 EARNINGS ASSETS: 1998 1997 1996 1998 1997 1996
-------------------------
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Taxable securities $121,784 $122,190 $110,313 6.65% 6.81% 6.30%
Tax-exempt securities(1) 12,508 9,710 12,165 8.58% 9.78% 10.03%
----------- ----------- ----------- ----------- ----------- -----------
Total Securities $134,292 $131,900 $122,478 6.83% 7.03% 6.67%
----------- ----------- ----------- ----------- ----------- -----------
Time deposits 0 0 376 N/A N/A 2.39%
Excess funds sold 2,907 547 10,426 2.51% 6.03% 2.91%
Mortgage loans held for sale(2) 35,094 21,372 29,651 6.82% 7.29% 7.37%
Loans, net(1),(3) 306,602 297,297 265,622 9.51% 9.50% 9.78%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
Total Earning Assets (FTE) $478,895 $451,116 $428,553 8.53% 8.68% 8.56%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
INTEREST BEARING LIABILITIES:
Interest bearing deposits $386,692 $368,655 $350,918 4.53% 4.67% 4.59%
Short-term borrowings 27,863 24,061 19,887 5.37% 6.21% 4.91%
Long-term borrowings 8,996 9,921 10,782 7.45% 7.53% 7.35%
----------- ----------- ----------- ----------- ----------- -----------
Total Interest Bearing Liabilities $423,551 $402,637 $381,587 4.65% 4.83% 4.68%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- -----------
Interest Rate Spread (FTE) 3.87% 3.85% 3.88%
Net interest margin (FTE) 4.45% 4.40% 4.42%
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
INTEREST EARNED OR PAID 1998/97 CHANGE DUE TO 1997/96 CHANGE DUE
TO
------------------------------------ ----------------------- ---------------------
INTEREST EARNING ASSETS: 1998 1997 1996 VOLUME RATE VOLUME RATE
------------------------
--------- ---------- ---------- --------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Taxable securities $8,095 $8,325 $6,945 (28) (202) 783 597
Tax-exempt securities(1) 1,073 950 1,220 250 (127) ( 241) (29)
--------- ---------- ---------- --------- ---------- --------- --------
Total securities: $9,168 $9,275 $8,165 $222 ($329) $542 $568
--------- ---------- ---------- --------- ---------- --------- --------
Time deposits 0 0 9 - - (5) (4)
Excess funds sold 73 33 303 69 (29) (432) 162
Mortgage loans held for sale(2) 2,394 1,557 2,185 942 (105) (603) (25)
Net loans (1),(3) 29,584 28,644 26,307 929 11 3,089 (752)
--------- ---------- ---------- --------- ---------- --------- --------
Total Earnings Asset (FTE) $41,219 $39,509 $36,969 $2,162 ($452) $2,591 ($51)
--------- ---------- ---------- --------- ---------- --------- --------
--------- ---------- ---------- --------- ---------- --------- --------
INTEREST BEARING LIABILITIES:
Interest bearing deposits $17,535 $17,228 $16,090 827 (520) 826 312
Short-term borrowings 1,497 1,493 976 219 (215) 229 288
Long-term borrowings 670 747 792 (69) (8) (64) 19
--------- ---------- ---------- --------- ---------- --------- --------
Total Interest Bearing Liabilities $19,702 $19,468 $17,858 $977 ($743) $991 $619
--------- ---------- ---------- --------- ---------- --------- --------
Net interest income (FTE) $21,517 $20,041 $19,111 $1,185 $291 $1,600 ($670)
--------- ---------- ---------- --------- ---------- --------- --------
--------- ---------- ---------- --------- ---------- --------- --------
</TABLE>
- ------------
(1) 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%.
(2) 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.
(3) The balances of nonaccrual loans are included in average loans
outstanding. Interest on loans includes yield-related loan fees.
21
<PAGE>
TABLE 3
MATURITY OF INVESTMENT SECURITIES
(DOLLARS IN THOUSANDS)
THE FOLLOWING TABLE SETS FORTH THE MATURITY OF THE REGISTRANT'S INVESTMENT
PORTFOLIO:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-------------------------------------------------------------------------------------------
CORPORATE
U.S. GOVERNMENT AGENCIES STATES 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 $11,161 6.68% - N/A $1,181 8.89%
After one through five years 7,292 5.62% 7,067 6.00% 5,049 9.26%
After five through ten years 2,877 6.45% 26,883 6.64% 5,234 7.02%
After ten years 11,793 7.46% 4,106 7.74%
Mortgage backed securities(3) 47,301 6.54%
------------ ----------- ------------- ---------- ------------- ---------- -----------
Total debt securities $21,330 6.29% $93,044 6.64% $15,570 8.07% $0
Federal Home Loan Bank stock $1,673
Other equity securities 443
------------ ----------- ------------- ---------- ------------- ---------- -----------
Total securities available
for sale $21,330 6.29% $93,044 6.64% $15,570 8.07% $2,116
------------ ----------- ------------- ---------- ------------- ---------- -----------
------------ ----------- ------------- ---------- ------------- ---------- -----------
</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, 1998, 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.
22
<PAGE>
TABLE 4
ANALYSIS OF LOAN PORTFOLIO AND LOSS EXPERIENCE
(DOLLARS 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,
----------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $85,790 $ 73,908 $ 69,594 $ 63,197 $ 59,131
Real estate mortgages 213,761 208,502 186,613 159,928 141,651
Consumer 29,168 32,606 35,242 33,094 32,040
Leases 478 524 892 1,455 711
Student loans held for sale 0 0 0 0 5,450
----------- ---------- --------- ---------- ----------
Gross Loans $329,197 $315,540 $292,341 $257,674 $238,983
Less:
Unearned discount and deferred loan fees 2,388 2,352 3,172 3,074 2,951
Allowance for possible loan losses 4,775 4,646 3,775 3,309 3,475
----------- ---------- --------- ---------- ----------
Net Loans $322,034 $308,542 $285,394 $251,291 $232,557
----------- ---------- --------- ---------- ----------
----------- ---------- --------- ---------- ----------
SUMMARY OF LOAN LOSS EXPERIENCE:
Allowance for loan and lease losses, beginning $4,646 $3,775 $3,309 $3,475 $3,940
Amounts charged-off:
Commercial, financial and agricultural 11 60 270 268 570
Real estate mortgages 275 0 53 175 0
Consumer 748 678 783 547 398
----------- ---------- --------- ---------- ----------
Total Charge-Offs $1,034 $ 738 $1,106 $ 990 $ 968
----------- ---------- --------- ---------- ----------
Recoveries on amounts previously charged-off:
Commercial, financial and agricultural 230 274 236 133 90
Real estate mortgages 18 0 17 0 14
Consumer 178 174 88 151 75
Leases 0 0 0 0 0
----------- ---------- --------- ---------- ----------
Total Recoveries $426 $ 448 $ 341 $ 284 $ 179
----------- ---------- --------- ---------- ----------
Net Charges-Offs $608 $ 290 $ 765 $ 706 $ 789
Provision charged to expense 737 1,128 1,113 488 323
Addition to dealer reserve 0 33 118 51 1
Addition due to purchase of subsidiary 0 0 0 1 0
----------- ---------- --------- ---------- ----------
Allowance for Loan and Lease Losses, Ending $4,775 $4,646 $3,775 $3,309 $3,475
----------- ---------- --------- ---------- ----------
----------- ---------- --------- ---------- ----------
Non-performing loans at year-end:
Non-accrual $2,262 $3,968 $2,348 $2,064 $2,699
Restructured 208 139 314 270 630
----------- ---------- --------- ---------- ----------
Total Non-Performing Loans $2,470 $4,107 $2,662 $2,334 $3,329
----------- ---------- --------- ---------- ----------
----------- ---------- --------- ---------- ----------
Past due 90 days or more, not included above 544 500 201 16 256
Other real estate, not included above 0 0 75 0 0
RATIOS:
Allowance to year-end loans, net of unearned 1.46% 1.48% 1.31% 1.30% 1.47%
Allowance to non-performing loans 193.32 113.12 141.81 141.77 104.39
Net charge-offs to average loans (gross) 0.19 0.10 0.28 0.29 0.34
Recoveries to charge-offs 41.20 60.70 30.83 28.69 18.49
Non-performing loans to loans, net of unearned
discount and deferred loan fees 0.76 1.31 0.92 0.92 1.41
</TABLE>
23
<PAGE>
TABLE 5
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS 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, 1998 $1,811 $1,173 $1,586 $5 $200 $4,775
% of loans in category to total
loans 26.90% 64.20% 8.81% 0.10% N/A 100.00%
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%
</TABLE>
TABLE 6
MATURITY AND INTEREST SENSITIVITY OF LOANS
(DOLLARS IN THOUSANDS)
THE FOLLOWING TABLE SHOWS THE MATURITY OF THE REGISTRANT'S LOAN PORTFOLIO.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1998
-------------------------------------------------------------------------------------
TIME REMAINING TO MATURITY LOANS DUE AFTER ONE YEAR
--------------------------------------- ----------------------------
FIXED FLOATING
DUE ONE TO AFTER INTEREST INTEREST
WITHIN FIVE YEARS FIVE YEARS TOTAL RATE RATE
ONE YEAR
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial & agricultural 62,300 14,206 9,284 85,790 14,676 8,814
Real estate mortgages 93,231 100,970 19,560 213,761 71,665 48,865
Consumer 12,032 14,131 3,005 29,168 17,097 39
Leases 322 156 - 478 - 156
----------- ----------- ----------- ----------- ----------- -----------
Total $167,885 $129,463 $31,849 $329,197 $103,438 $57,874
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
24
<PAGE>
TABLE 7
AVERAGE DEPOSITS
(DOLLARS 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 ACCOUNTS TIME DEPOSITS TOTAL DEPOSITS
DEPOSITS DEPOSITS
--------------- ------------ ------------------ -------------- ----------------
<S> <C> <C> <C> <C> <C>
1998 AVERAGE
Balance $42,811 $76,210 $78,725 $231,758 $429,504
Rate -- 2.61% 2.82% 5.75% 4.53%
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%
</TABLE>
THE FOLLOWING TABLE SETS FORTH THE REGISTRANT'S MATURITY DISTRIBUTION FOR ALL
TIME DEPOSITS OF $100,000 OR MORE AS OF DECEMBER 31, 1998.
MATURITY DISTRIBUTION FOR ALL TIME DEPOSITS OF $100,000 OR MORE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------------------------------
3 MONTHS OR 3 THROUGH 6 6 THROUGH OVER 12
LESS MONTHS 12 MONTHS MONTHS TOTAL
---- ------ ------- ------ -----
<S> <C> <C> <C> <C> <C>
Time Deposits of $100,000 or more $21,977 $14,250 $7,007 $13,378 $56,612
</TABLE>
25
<PAGE>
TABLE 8
SHORT-TERM BORROWINGS
(DOLLARS 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,
----------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Repurchase agreements $313 $ 4,268 $ 2,756
Federal funds purchased 33,900 21,850 10,000
Federal Home Loan Bank Borrowings 5,700 7,932 0
Other short-term borrowings 4,284 5,007 6,832
------------- ------------- -------------
Total $44,197 $39,057 $19,588
------------- ------------- -------------
------------- ------------- -------------
</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,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Return on average assets 0.93% 0.62% 0.40% 0.80% 0.84%
Return on average equity 11.95% 8.43% 5.36% 9.94% 11.22%
Common stock dividend payout ratio 11.91% 15.20% 22.44% 10.97% 9.43%
Average equity to average asset ratio 7.75% 7.39% 7.47% 8.04% 7.44%
</TABLE>
26
<PAGE>
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Item 7, above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31, 1998 and 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks (note 2) $ 12,270 11,377
- ---------------------------------------------------------------------------------------------------------------------------
Investment securities available for sale (note 3) 132,060 129,479
- ---------------------------------------------------------------------------------------------------------------------------
Mortgage loans held for sale, lower of cost or market 67,354 44,761
- ---------------------------------------------------------------------------------------------------------------------------
Loans (note 4) 329,197 315,540
Less:
Allowance for possible loan losses (note 4) 4,775 4,646
Unearned income and deferred loan fees 2,388 2,352
- ---------------------------------------------------------------------------------------------------------------------------
Net loans 322,034 308,542
Premises and equipment (note 5) 11,554 10,854
Goodwill, net of amortization 3,967 4,495
Other assets 6,216 6,042
- ---------------------------------------------------------------------------------------------------------------------------
$ 555,455 515,550
- ---------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing 50,371 42,589
Interest-bearing (note 6) 401,794 381,094
- ---------------------------------------------------------------------------------------------------------------------------
Total deposits 452,165 423,683
Short-term borrowings (note 7) 44,197 39,057
Long-term debt (note 8) 10,300 10,250
Other liabilities 7,248 5,698
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities 513,910 478,688
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value; authorized 100,000 shares:
7.75% cumulative 0 and 300 shares issued and outstanding in 1998
1997, respectively (note 11) 0 300
Common stock, $.33 1/3 par value; 5,000,000 shares authorized, 2,171,855 and
2,152,593 shares issued and outstanding in 1998 and 1997, respectively 724 718
Additional paid-in capital 7,163 6,691
Accumulated other comprehensive earnings (note 9) 934 577
RETAINED EARNINGS (NOTES 12 AND 13) 32,724 28,576
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 41,545 36,862
Commitments and contingent liabilities (notes 14 and 15)
- ---------------------------------------------------------------------------------------------------------------------------
$ 555,455 515,550
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLDIATED FINANCIAL STATEMENTS.
27
<PAGE>
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997, and 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 29,406 28,566 26,248
Interest and dividends on investment securities:
Taxable 8,095 8,325 6,945
Nontaxable 657 582 747
Interest on excess funds sold 73 33 312
Interest on mortgage loans held for sale 2,394 1,557 2,185
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME 40,625 39,063 36,437
- ---------------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 17,535 17,228 16,090
Interest on short-term borrowings 1,497 1,493 976
INTEREST ON LONG-TERM DEBT 670 747 792
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 19,702 19,468 17,858
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 20,923 19,595 18,579
PROVISION FOR POSSIBLE LOAN LOSSES (NOTE 4) 737 1,128 1,113
- ---------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 20,186 18,467 17,466
- ---------------------------------------------------------------------------------------------------------------------------
Other operating income:
Trust fees 769 662 644
Deposit service charges 347 373 397
Other service charges 1,224 1,178 1,153
Investment securities gains, net (note 3) 154 210 41
Mortgage loan origination income, net 11,490 6,546 5,172
OTHER INCOME 1,130 794 973
- ---------------------------------------------------------------------------------------------------------------------------
Total other operating income 15,114 9,763 8,380
- ---------------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits (note 10) 18,477 15,336 14,465
Net occupancy expense of premises 1,784 1,630 1,508
Furniture and fixtures 1,538 1,520 1,680
Office supplies 590 436 474
Outside services 1,169 760 1,142
Advertising expense 629 494 632
FDIC insurance assessment 51 49 8
Postage and courier expense 629 453 450
Amortization expense-goodwill 519 519 523
OTHER EXPENSES 2,592 2,552 2,194
- ---------------------------------------------------------------------------------------------------------------------------
Total other operating expenses 27,978 23,749 23,076
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 7,322 4,481 2,770
INCOME TAX EXPENSE (NOTE 9) 2,587 1,468 926
- ---------------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 4,735 3,013 1,844
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 4,712 2,811 1,643
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 2.18 1.35 .80
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 2.16 1.34 .79
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
28
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended December 31, 1998, 1997, and 1996
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data)
ACCUMULATED
OTHER
PREFERRED COMMON RETAINED COMPREHENSIVE
STOCK STOCK SURPLUS EARNINGS EARNINGS TOTAL
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1996 $ 2,600 686 4,695 24,994 1,372 34,347
Comprehensive Earnings
Net Earnings - - - 1,844 - 1,844
Unrealized gain on investment
securities - - - - (1,445) (1,445)
Reclassification adjustments for
gains included in net earnings - - - - (41) (41)
Income tax effect - - - - 561 561
---------
Total comprehensive earnings - - - - - 919
Issuance of 15,488 shares of - 5 306 - - 311
common stock
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 26,223 447 34,962
Comprehensive Earnings
Net Earnings - - - 3,013 - 3,013
Unrealized gain on investment
securities - - - - 425 425
Reclassification adjustments for
gains included in net earnings - - - - (210) (210)
Income tax effect - - - - (85) (85)
---------
Total comprehensive earnings - - - - - 3,143
Issuance of 79,974 shares of common stock - 27 1,690 - - 1,717
Redemption of preferred stock (2,300) - - - - (2,300)
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 28,576 577 36,862
Comprehensive Earnings
Net Earnings - - - 4,735 - 4,735
Unrealized gain on investment
securities - - - - 727 727
Reclassification adjustments for
gains included in net earnings - - - - (154) (154)
Income tax effect - - - - (216) (216)
---------
Total comprehensive earnings - - - - - 5,092
Issuance of 19,262 shares of - 6 472 - - 478
common stock
Redemption of preferred stock (300) - - - - (300)
Cash dividends on preferred stock - - - (23) - (23)
Cash dividends on common stock
(.26 per share) - - - (564) - (564)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $0 724 7,163 32,724 934 41,545
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
29
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
(Dollars in thousands)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Interest received $ 40,077 38,535 35,721
Fees received 15,055 9,807 9,332
Net increase in mortgage loans held for sale (22,593) (24,418) (6,859)
Interest paid (19,706) (19,041) (17,872)
Cash paid to suppliers and employees (24,538) (20,542) (21,544)
Income taxes paid (2,695) (1,784) (1,178)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (14,400) (17,443) (2,400)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities of investment securities available for sale 40,235 30,060 46,554
Sales of investment securities available for sale 38,406 59,152 23,162
Purchases of investment securities available for sale (80,197) (85,310) (68,622)
Net increase in loans (14,330) (23,519) (35,378)
Proceeds from sale of land and building - - 45
Premises and equipment expenditures (2,085) (2,029) (1,626)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (17,971) (21,646) (35,865)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits,
NOW accounts, and savings accounts 33,691 (1,841) 5,030
Net (decrease) increase in certificates of deposit (5,210) 21,415 12,909
Dividends paid on preferred stock (23) (202) (201)
Dividends paid on common stock (564) (458) (414)
Net proceeds from short-term debt 5,141 19,468 12,997
Issuance of long term debt 1,000 1,000 -
Repayment of long-term debt (950) (900) (850)
Redemption of preferred stock (300) (2,300) -
Issuance of common stock 479 1,717 311
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 33,264 37,899 29,782
- ---------------------------------------------------------------------------------------------------------------------------
Net change in cash and due from banks 893 (1,190) (8,483)
Cash and due from banks at beginning of year 11,377 12,567 21,050
- ---------------------------------------------------------------------------------------------------------------------------
Cash and due from banks at end of year $ 12,270 11,377 12,567
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
Consolidated Statement of Cash Flows (continued)
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided by operating activities:
Net earnings $ 4,735 3,013 1,844
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 2,066 2,065 2,122
Provision for possible loan losses 737 1,128 1,113
Gains on sale of investment
securities (154) (210) (41)
Gain on sale of land and building - - (23)
Increase (decrease) in:
Income taxes payable (108) (316) (252)
Interest payable (5) 426 51
Unearned income 36 (821) 98
Other liabilities 1,375 1,142 167
Decrease (increase) in:
Interest receivable (358) 363 (373)
Other assets 94 254 194
Increase in mortgage loans held for sale (22,593) (24,418) (6,859)
Discount accretion recorded as income (485) (380) (794)
Premium amortization charged against income 260 311 353
- ---------------------------------------------------------------------------------------------------------------------------
$ (14,400) (17,443) (2,400)
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
<PAGE>
Years Ended December 31, 1998, 1997, and 1996
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of Castle BancGroup, Inc. and
subsidiaries (Company) are prepared in conformity with generally
accepted accounting principles and prevailing practices of the financial
services industry which require management to make estimates that affect
the reported financial position and results of operations. Actual
results could differ from those estimates. The following is a summary of
the significant accounting and reporting policies used in preparing the
consolidated financial statements.
(A) BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts
of the Company and the Company's wholly owned subsidiaries, Castle Bank,
N.A. (CB), 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 AVAILABLE FOR SALE
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 stockholders' 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, 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 those
32
<PAGE>
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 $3,847,000
and $3,319,000 at December 31, 1998 and 1997, respectively, is shown as
goodwill in the accompanying consolidated balance sheets and is being
amortized on a straight line basis over 15 years. Goodwill and other
valuation intangibles are reviewed for impairment when events or future
assessments of profitability indicate that the carrying value may not be
recoverable.
(J) OTHER REAL ESTATE OWNED
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
33
<PAGE>
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.
The components of basic and diluted EPS for the years ended December 31,
1998, 1997, and 1996 were as follows: (DOLLARS IN THOUSANDS, EXCEPT
SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic EPS:
Net Income $ 4,735 3,013 1,844
Less: preferred stock dividends: (23) (202) (201)
---------- --------- ---------
Income available to common stockholders $ 4,712 2,811 1,643
---------- --------- ---------
Average common shares 2,163,644 2,079,251 2,066,213
---------- --------- ---------
Basic EPS $ 2.18 1.35 .80
---------- --------- ---------
Diluted EPS:
Income available to common stockholders $ 4,712 2,811 1,643
Assumed conversion of preferred stock (anti-dilutive in 1997 and 1996) 23 N/A N/A
---------- --------- ---------
Income available to common stockholders after assumed conversion $ 4,735 2,811 1,643
---------- --------- ---------
Average common shares 2,163,644 2,079,251 2,066,213
Assumed conversion of preferred stock (anti-dilutive in 1997 and 1996) 10,909 N/A N/A
Assumed exercise of stock options 18,719 22,188 19,359
---------- --------- ---------
Average common shares after assumed conversions 2,193,272 2,101,439 2,085,572
---------- --------- ---------
Diluted EPS $ 2.16 1.34 .79
---------- --------- ---------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(M) REPORTING COMPREHENSIVE INCOME
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.
(N) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
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.
34
<PAGE>
(2) 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
$1,060,000 and $1,005,000 in 1998 and 1997, respectively. Cash and due
from banks include cash on hand and in banks with original maturities of
three months or less.
(3) INVESTMENT SECURITIES
A comparison of amortized cost and fair value of investment securities
available for sale at December 31, 1998 and 1997 follows: (DOLLARS IN
THOUSANDS)
<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 - - 1,673
Other equity securities 443 - - 443
- ---------------------------------------------------------------------------------------------------------------------------
Total securities $ 130,577 1,666 (183) 132,060
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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>
35
<PAGE>
The amortized cost and fair value of securities available for sale at
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>
DECEMBER 31, 1998
------------------------------------------------
Amortized cost Fair value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 12,176 12,342
Due after one year through five years 19,072 19,408
Due after five years through ten years 34,540 34,995
Due after ten years 15,623 15,898
- ------------------------------------------------------------------------------------------------------------------
81,411 82,643
Mortgage-backed securities 47,050 47,301
- ------------------------------------------------------------------------------------------------------------------
Total debt securities 128,461 129,944
- ------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,673 1,673
Other equity securities 443 443
- ------------------------------------------------------------------------------------------------------------------
Total securities $ 130,577 132,060
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross gains of approximately $167,000, $409,000, and $162,000 occurred
from security activity during 1998, 1997, and 1996, respectively. Gross
losses of approximately $13,000, $199,000, and $121,000 occurred from
security activity during 1998, 1997, and 1996, respectively. All security
gains and losses were as a result of transactions involving
available-for-sale securities.
Investment securities carried at approximately $83,062,000 and
$66,445,000 at December 31, 1998 and 1997, respectively, were pledged to
secure deposits and for other purposes permitted or required by law.
(4) LOANS
The composition of the loan portfolio at December 31 is as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 85,790 73,908
Real estate mortgage 213,761 208,502
Consumer 29,168 32,606
Lease financing receivables 478 524
- ------------------------------------------------------------------------------------------------------------------
Total $329,197 315,540
- ------------------------------------------------------------------------------------------------------------------
</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>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans and leases $ 2,262 3,968
Restructured loans 208 139
- ---------------------------------------------------------------------------------------------------------------------------
Total non-performing loans and leases $ 2,470 4,107
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
36
<PAGE>
Loans past due 90 days or more and still accruing interest are not
included above and totaled $544,000 and $500,000 at December 31, 1998
and 1997, 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>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income recognized $ 65 27 138
Income which would have been recognized under original terms 175 344 357
- ---------------------------------------------------------------------------------------------------------------------------
Impaired loan information at December 31, 1998 and 1997 is as follows:
(DOLLARS IN THOUSANDS)
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Impaired loans for which a related allowance has been allocated $ 54 821 1,376
Impaired loans for which no allowance has been allocated 864 1,841 267
- ---------------------------------------------------------------------------------------------------------------------------
Total loans determined to be impaired $ 918 2,662 1,643
- ---------------------------------------------------------------------------------------------------------------------------
Allowance allocated to impaired loans, included in the allowance
- ---------------------------------------------------------------------------------------------------------------------------
for possible loan losses $ 10 260 401
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Impaired loans averaged $1,790,000, $2,152,000, and $1,429,000 for the
years ended December 31, 1998, 1997, and 1996, respectively. No interest
was either recognized or received on these impaired loans during 1998,
1997 and 1996. The entire balance of impaired loans at December 31, 1998
and 1997 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 1998 and 1997: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans outstanding, beginning of year $ 4,168 3,445
New loans, renewals, and advances 3,450 4,375
Loan payments (1,560) (3,652)
- ---------------------------------------------------------------------------------------------------------------------------
Loans outstanding, end of year $ 6,058 4,168
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of activity in the allowance for possible loan
losses: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, beginning of year $ 4,646 3,775 3,309
Provision charged to expense 737 1,128 1,113
Additions to dealer reserves 0 33 118
Recoveries on loans previously charged off 426 448 341
- ---------------------------------------------------------------------------------------------------------------------------
5,809 5,384 4,881
Less loans charged off 1,034 738 1,106
- ---------------------------------------------------------------------------------------------------------------------------
Balance, end of year $ 4,775 4,646 3,775
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
(5) PREMISES AND EQUIPMENT
The components of premises and equipment at December 31 were as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land and land improvements $ 1,721 1,806
Building and improvements 11,457 10,861
Furniture, fixtures, and equipment 8,211 7,786
- ---------------------------------------------------------------------------------------------------------------------------
21,389 20,453
- ---------------------------------------------------------------------------------------------------------------------------
Less accumulated depreciation 9,835 9,599
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 11,554 10,854
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(6) DEPOSITS
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was $56,612,000 and $59,555,000 at December
31, 1998 and 1997, respectively. Included in these totals were $693,000
and $4,059,000 of brokered deposits at December 31, 1998 and 1997,
respectively, with interest rates ranging from 6.20% to 6.75% in 1998
and 6.10% to 6.75% in 1997.
(7) SHORT-TERM BORROWINGS
The components of short-term borrowings at December 31 are as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Repurchase agreements $ 313 4,268
Federal funds purchased 33,900 21,850
Federal Home Loan Bank borrowings 5,700 7,932
Other short-term borrowings 4,284 5,007
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 44,197 39,057
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The weighted average interest rate on short-term borrowings was
5.54% and 6.41% at December 31, 1998 and 1997, respectively.
Other short-term borrowings (excluding treasury, tax, and loan
borrowings) consists of the following line-of-credit agreements at
December 31:
<TABLE>
<CAPTION>
1998
Outstanding
Principal Rate
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
$7,500,000 maturing February 28, 1999 3,825,000 6.63%
$3,000,000 payable on demand - 7.75%
- ---------------------------------------------------------------------------------------------------------------------------
1997
Outstanding
Principal Rate
- ---------------------------------------------------------------------------------------------------------------------------
$5,000,000 maturing January 27, 1998 3,250,000 7.59%
$3,000,000 payable on demand 857,000 8.50%
$2,000,000 payable on May 31, 1998 - 8.50%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The $7,500,000 line of credit is secured by outstanding stock of the
Subsidiaries, which are 100% owned by the Company.
Federal Home Loan Bank borrowings are collateralized by Federal Home
Loan Bank stock and first mortgage real estate loans. As of December 31,
1998, the notes mature from 1999 through 2004 and have variable interest
rates with an average of 5.02%. Certain Federal Home Loan Bank
borrowings with call features have been classified as short-term
borrowings by the Company. CB, FNB, and BOY
38
<PAGE>
have collateral pledge agreements whereby they have agreed to keep on
hand at all times, 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.
(8) LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consists of the following:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Amendment to the secured term loan dated May 1, 1992 with interest at
the 60 day LIBOR rate plus 1.625% (6.85% at December 31, 1998),
principal payable in 4 semi-annual payments remaining
from June 30, 1999 through December 31, 2000 $ 8,300 9,250
Federal Home Loan Bank Borrowing
(6.10% payable on December 22, 2000 and
4.95% payable on January 16, 2001) $ 2,000 1,000
- ---------------------------------------------------------------------------------------------------------------------------
$ 10,300 10,250
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Scheduled principal payments on long-term debt, through maturity, are: (DOLLARS IN THOUSANDS)
Year ended
December 31 Amount
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
2000 $ 1,000
2001 9,300
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The long-term debt agreement with a balance outstanding of $8,300,000 at
December 31, 1998, is secured by the stock of the subsidiaries and
contains certain restrictive covenants, including restrictions on
dividends to stockholders, maintenance of various capital adequacy
levels, maintenance of allowance for loan losses, restrictions on
non-performing assets, attainment of a minimum return on average assets,
and certain restrictions with regard to other indebtedness. The
restriction on dividends to stockholders is described further in Note 12.
(9) INCOME TAXES
The components of Federal income tax expense (benefit) for 1998, 1997,
and 1996 were as follows: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ 2,715 2,088 1,290
Deferred (128) (620) (364)
- ---------------------------------------------------------------------------------------------------------------------------
Total $ 2,587 1,468 926
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 1998, 1997 and 1996 are as follows: (DOLLARS IN
THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax expense at statutory rate $ 2,489 1,523 942
Tax-exempt interest, net of premium amortization (253) (211) (250)
Nondeductible amortization 158 156 169
Other, net 193 - 65
- ---------------------------------------------------------------------------------------------------------------------------
Total income tax expense $ 2,587 1,468 926
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1998 and 1997 are as follows: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ 40 85
Allowance for loan losses 1,266 1,127
Other 13 13
Deferred compensation 281 257
State net operating loss carryforwards - 83
- ---------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 1,600 1,565
Less valuation allowance 0 (33)
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 1,600 1,532
- ---------------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Purchase accounting adjustments (464) (554)
Accretion on investments (45) (57)
Depreciation (257) (258)
Unrealized gains on investment securities (504) (330)
Net lease adjustment (52) (63)
Other, net (97) (43)
- ---------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (1,419) (1,305)
- ---------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) $ 181 227
- ---------------------------------------------------------------------------------------------------------------------------
</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, 1998 and 1997. The valuation
allowance for December 31, 1997 consisted of Illinois NOL carryforwards
related to the acquisition of The Bank of Yorkville and were available
for use only at that subsidiary.
(10) 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 $908,000,
$672,000, and $620,000 in 1998, 1997, and 1996, 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
$14,000, $15,000, and $53,000 in 1998, 1997, and 1996, 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.
40
<PAGE>
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 7.5% of its issued and 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 $31.00
per share at December 31, 1998. 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, 1998 DECEMBER 31, 1997
----------------- -----------------
Average Average
Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 109,250 $15.55 113,100 $14.39
Options granted 25,000 $29.28 17,750 $22.00
Options exercised (1,575) $14.05 (9,275) $14.42
Options forfeited (875) $25.29 (12,325) $15.06
- ----------------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 131,800 $18.10 109,250 $15.55
- ----------------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 73,463 $14.70 47,800 $14.20
- ----------------------------------------------------------------------------------------------------------------------------
Options available to grant under plan at end
of year 20,239 42,919
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company applies APB opinion No. 25 and related interpretations in
accounting for the Stock Benefit Plan. Had compensation cost for the plan
been determined consistent with FASB Statement No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma
amounts indicated below: (DOLLARS IN THOUSAND, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Income As reported $ 4,735 3,013
Pro forma 4,605 2,944
Basic earnings per share As reported $ 2.18 1.35
Pro forma 2.12 1.32
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model.
(11) 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, 841 shares were redeemed
for cash, and 1,459 shares were exchanged into 66,311 shares of the
Company's common stock. On December 31, 1998, the remaining 300 shares
were redeemed for cash.
41
<PAGE>
(12) DIVIDEND LIMITATIONS
The amendment to the secured term loan agreement contains several
restrictive covenants, including restrictions on dividends to
stockholders, and other restrictions as described in Note 8. 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, 1998, the
Company had $2,628,000 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, 1998, subject to minimum regulatory capital guidelines, FNB
could, without prior approval of regulatory authorities, declare
dividends of approximately $3,244,000 CBH could, without prior approval
of regulatory authorities, declare dividends of approximately $262,000,
and assuming CB's conversion to a national bank charter was effective as
of December 31, 1998, CB could, without prior approval of regulatory
authorities, declare dividends of approximately $733,000.
BOY is 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.
(13) 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.
Quantitative measures established by regulations to ensure capital
adequacy require the Company and subsidiaries to maintain minimum amounts
and ratios of total and 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, 1998 and 1997, that the Company
and subsidiaries meet all capital adequacy requirements to which they are
subject.
42
<PAGE>
As of December 31, 1998, the most recent notification from the federal
banking agencies categorized each of the Company and subsidiaries as well
capitalized at December 31, 1998 and 1997 under the regulatory capital
framework for prompt corrective action. There are no conditions or events
since notification that management believes have changed the Company and
subsidiaries' status. Minimum capital requirements and actual capital
amounts and ratios as of December 31, 1998 and 1997 are as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, 1998
Actual Regulatory Minimum
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total risk-based capital to risk-weighted assets:
Castle BancGroup, Inc. $ 41,284 11.08% $ 29,817 8.00%
First National Bank in DeKalb 20,341 11.22% 14,503 8.00%
The Sandwich State Bank(1) 9,959 11.37% 7,007 8.00%
Castle Bank Harvard, N.A. 7,020 13.15% 4,271 8.00%
The Bank of Yorkville 5,720 12.00% 3,813 8.00%
- ---------------------------------------------------------------------------------------------------------------------------
Tier I capital to risk-weighted assets:
Castle BancGroup, Inc. $ 36,625 9.83% $ 14,909 4.00%
First National Bank In DeKalb 18,496 10.20% 7,251 4.00%
The Sandwich State Bank(1) 8,865 10.12% 3,503 4.00%
Castle Bank Harvard, N.A. 6,353 11.90% 2,136 4.00%
The Bank of Yorkville 5,311 11.14% 1,906 4.00%
- ---------------------------------------------------------------------------------------------------------------------------
Tier I capital to average assets:
Castle BancGroup, Inc. $ 36,625 6.31% $ 23,200 4.00%
First National Bank in DeKalb 18,496 6.74% 10,972 4.00%
The Sandwich State Bank(1) 8,865 7.09% 5,001 4.00%
Castle Bank Harvard, N.A. 6,353 8.58% 2,962 4.00%
The Bank of Yorkville 5,311 6.98% 3,042 4.00%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<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(1) 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(1) 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(1) 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>
(1) Effective January 1, 1999 The Sandwich State Bank converted to a national
charter and changed its name to Castle Bank, N.A.
43
<PAGE>
(14) 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,
1998 and 1997 are as follows: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------------------------------
<S> <C> <C>
Standby letters of credit $ 3,695 $ 3,943
Commitments to extend credit 132,771 138,647
----------------------------------------------------------------------------------------
$136,466 $142,590
----------------------------------------------------------------------------------------
</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.
The commitments to extend credit presented above included $77,902,000 and
$81,250,000 at December 31, 1998 and 1997, respectively, relating to
approved mortgage loan applications at CMI.
At December 31, 1998 and 1997, the Company had commitments to sell
approximately $91,450,000 and $68,131,000 of first mortgage loans. At
December 31, 1997, commitments to sell consisted of loan-by-loan
commitments with investors.
(15) 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.
(16) 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 DUE FROM BANKS
The carrying amount of cash and due from banks approximate fair value
because they mature daily and do not represent unanticipated credit
risks.
44
<PAGE>
(B) INVESTMENT SECURITIES AVAILABLE FOR SALE
The fair value of investment securities available for sale, with the
exception of certain state and municipal securities, is estimated based
on bid prices published in financial newspapers or bid quotations
received from securities dealers. The fair value of certain state and
municipal securities is not readily available through market sources
other than dealer quotations, so fair value estimates are based on quoted
market values of similar instruments, adjusted for differences between
the quoted instruments, and the instruments being valued.
(C) MORTGAGE LOANS HELD FOR SALE
As of December 31, 1998 and 1997, the carrying value of the Company's
mortgage loans held for sale was $67,354,000 and $44,761,000,
respectively. The estimated fair value of these loans was $67,663,000 and
$44,940,000 at December 31, 1998 and 1997, 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.
(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, 1998 and 1997. 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 Company 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, 1998 and 1997.
45
<PAGE>
The estimated fair values of the Company's financial instruments at
December 31 are as follows: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -- -------------- ------------- -- --------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 12,270 $ 12,270 $ 11,377 $ 11,377
Investment securities available
for sale 132,060 132,060 129,479 129,479
Mortgage loans held for sale 67,354 67,663 44,761 44,940
Loans 329,197 332,487 315,540 315,814
Financial Liabilities
Non-interest-bearing deposits 50,371 50,371 42,589 42,589
Interest-bearing deposits 401,794 406,322 381,094 383,279
Short-term borrowings 44,197 44,197 39,057 39,057
Long-term borrowings 10,300 10,300 10,250 10,249
</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 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.
(17) 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.
46
<PAGE>
Operating segment information is as follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Mortgage Consolidated
Banking Banking Other Total
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Interest income $ 39,206 282 1,137 40,625
Interest expense 19,448 2 252 19,702
- --------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for possible 19,758 280 885 20,923
loan losses
Provision for possible loan losses 288 24 425 737
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible 19,470 255 460 20,186
loan losses
Other operating income 5,351 9,915 (151) 15,114
Other operating expenses 15,282 9,020 3,677 27,978
- --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 9,539 1,151 (3,368) 7,322
Income tax expense 3,325 445 (1,183) 2,587
- --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 6,214 706 (2,185) 4,735
- --------------------------------------------------------------------------------------------------------------------------
Assets $ 581,431 5,686 (31,662) 555,455
- --------------------------------------------------------------------------------------------------------------------------
1997
Interest income $ 37,205 155 1,702 39,063
Interest expense 18,604 6 858 19,468
- --------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for possible 18,602 149 845 19,595
loan losses
Provision for possible loan losses 478 0 650 1,128
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible 18,124 149 195 18,467
loan losses
Other operating income 4,393 5,578 (208) 9,763
Other operating expenses 14,276 5,632 3,841 23,749
- --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 8,241 95 (3,855) 4,481
Income tax expense 2,847 7 (1,386) 1,468
- --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 5,394 88 (2,469) 3,013
- --------------------------------------------------------------------------------------------------------------------------
Assets $ 511,143 4,451 (44) 515,550
- --------------------------------------------------------------------------------------------------------------------------
1996
Interest income $ 34,725 262 1,450 36,437
Interest expense 17,134 78 647 17,858
- --------------------------------------------------------------------------------------------------------------------------
Net interest income before provision for possible 17,591 184 804 18,579
loan losses
Provision for possible loan losses 534 0 579 1,113
- --------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible 17,057 184 225 17,466
loan losses
Other operating income 4,036 4,221 122 8,380
Other operating expenses 13,828 5,466 3,782 23,076
- --------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 7,266 (1,061) (3,435) 2,770
Income tax expense 2,508 (361) (1,221) 926
- --------------------------------------------------------------------------------------------------------------------------
Net earnings $ 4,758 (700) (2,214) 1,844
- --------------------------------------------------------------------------------------------------------------------------
Assets $ 467,097 3,749 2,578 473,424
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE>
(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 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Investments in subsidiaries $ 46,384 43,453
Other assets 7,965 6,412
- ---------------------------------------------------------------------------------------------------------------------------
Total assets $ 54,349 49,865
- ---------------------------------------------------------------------------------------------------------------------------
Liabilities and stockholders' equity:
Liabilities 12,804 13,003
Stockholders' equity 41,545 36,862
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 54,349 49,865
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------------------------
CONDENSED STATEMENTS OF EARNINGS 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
Income - primarily subsidiary dividends $ 6,334 5,405 5,611
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expenses:
Interest 944 1,081 1,082
Other 4,365 4,420 3,867
- ---------------------------------------------------------------------------------------------------------------------------
Total expense 5,309 5,501 4,949
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income tax benefit and equity in undistributed
earnings of subsidiaries 1,025 (96) 662
Income tax benefit 1,135 1,248 1,128
- ---------------------------------------------------------------------------------------------------------------------------
Earnings before equity in undistributed earnings
of subsidiaries 2,160 1,152 1,790
- ---------------------------------------------------------------------------------------------------------------------------
Equity in undistributed earnings of subsidiaries 2,575 1,861 54
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings $ 4,735 3,013 1,844
- ---------------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 4,712 2,811 1,643
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Reconciliation of net earnings to net cash provided by operating
activities:
Net earnings $ 4,735 3,013 1,844
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Equity in undistributed earnings of subsidiaries (2,575) (1,861) (54)
Depreciation and amortization 495 514 595
Loss / (gain) loss on sale of fixed assets - 1 (22)
Increase (decrease) in:
Income taxes payable (248) 141 (234)
Other liabilities 379 353 87
(Increase) decrease in other assets (21) 22 262
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows provided by operating activities $ 2,765 2,183 2,478
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital contribution to subsidiary - - (700)
Loans to subsidiary - - (5,000)
Other (1,695) (340) (154)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,695) (340) (5,854)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Issuance of short-term debt 575 - 5,000
Repayment of short-term debt - (1,750) -
Redemption of preferred stock (300) (2,300) -
Issuance of common stock 479 1,717 311
Repayment of long-term debt (950) (900) (850)
Dividends paid (587) (660) (615)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (783) (3,893) 3,846
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 287 (2,050) 470
Cash and cash equivalents at beginning of year 0 2,050 1,580
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 287 (0) 2,050
- ---------------------------------------------------------------------------------------------------------------------------
Supplemented disclosure:
Interest received $ 393 334 290
Interest paid (944) (1,081) (1,082)
- ---------------------------------------------------------------------------------------------------------------------------
Income taxes received from subsidiaries 3,336 2,794 2,248
Income taxes paid by Parent Company (2,695) (1,784) (1,370)
Net income taxes received from subsidiaries 641 1,010 878
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<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, 1998 and 1997, 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, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
January 29, 1999
Chicago, Illinois
50
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding directors and executive officers of the Company
is included in the Company's Definitive Proxy Statement for the Annual Meeting
of Stockholders to be held April 28, 1999 (Proxy Statement) under the captions
"Proposal No. 1 - Election of Directors" 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.
51
<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, 1998 and 1997.
Consolidated Statements of Earnings for the years ended December 31,
1998, 1997 and 1996.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996.
(b) REPORTS ON FORM 8-K
The registrant has not filed any reports on Form 8-K for the quarter
ended December 31, 1998.
(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 ended March 31, 1997.
3.2 By-laws of the registrant as amended are incorporated herein by
reference to Exhibit 3.2 of the registrant's Form 10-K for the
fiscal year ended December 31, 1997.
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.
10.2 Agreement for Services by and between Ronald L. Hovermale and
Castle BancGroup, Inc., dated September 26, 1997, and amendment
dated March 12, 1999.
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
52
<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 18, 1999
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/S/ JOHN W. CASTLE /S/ BRUCE P. BICKNER
- ----------------------------------------------- ----------------------------
By: John W. Castle By: Bruce P. Bickner
Chairman of the Board, Chief Executive Director
Officer (Principal Executive Officer) Date: March 18, 1999
and Director
Date: March 18, 1999
/S/ MICAH R. BARTLETT /S/ PETER H. HENNING
- ----------------------------------------------- ----------------------------
By: Micah R. Bartlett By: Peter H. Henning
Vice President and Controller Director
(Principal Financial Officer and Date: March 18, 1999
Principal Accounting Officer)
Date: March 18, 1999
/S/ ROBERT T. BOEY /S/ KATHLEEN L. HALLORAN
- ----------------------------------------------- -----------------------------
By: Robert T. Boey By: Kathleen L. Halloran
Director Director
Date: March 18, 1999 Date: March 18, 1999
/S/ DONALD E. KIESO /S/ RICHARD C. MCGINITY
- ----------------------------------------------- -----------------------------
By: Donald E. Kieso By: Richard C. McGinity
Director Director
Date: March 18, 1999 Date: March 18, 1999
53
<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 quarter ended March 31, 1997.
3.2 By-laws of the registrant as amended are incorporated
herein by reference to Exhibit 3.2 of the registrant's
Form 10-K for the fiscal year ended December 31, 1997.
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.
10.2 Agreement for Services by and between Ronald L. Hovermale and
Castle BancGroup, Inc., dated September 26, 1997, and
amendment dated March 12, 1999.
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
54
<PAGE>
Exhibit 10.2
AGREEMENT FOR SERVICES
IT IS AGREED, by and between RONALD L HOVERMALE ("RLH"), and CASTLE
BANCGROUP, INC. ("CBI") as follows:
CBI hereby engages RLH, and RLH hereby accepts such engagement, to perform the
duties of CBI corporate Vice President for Information Services and Operations
and Administration which duties shall be specified from time to time by CBI
senior management upon the following terms and conditions,
TERM
1. The term of this Agreement shall be from October 25, 1997 to December 31,
1999 unless terminated earlier by mutual written consent or terminated with
cause by either party to this Agreement upon thirty (30) days written
notice to the other party.
2. The terms of this Agreement may be modified or extended at any time by
mutual written consent of the parties.
CONSIDERATION
1. CBI shall pay RLH for his services the sum of $233,077 and employer's FICA
contributions in 57 equal or nearly equal bi-weekly installments during the
term of this Agreement. In addition, CBI shall reimburse RLH for business
expenses incurred by him in the performance of his services during the term
of this Agreement.
2. In the event this Agreement is terminated prior to December 31, 1999, the
requirement for payment to RLH of the consideration stated herein shall be
deemed to be fulfilled and CBI shall not be obligated to make any further
payments to RLH other than any bi-weekly payments and reimbursable expenses
which became due to RLH prior to the date of termination and are unpaid at
the date of termination.
3. CBI shall pay RLH $10,000 for relocation expense incurred in moving his
residence from Springfield, Illinois to DeKalb, Illinois or its environs in
two installments: $5,000 shall be paid upon execution of this Agreement and
the balance of $5,000 shall be paid upon relocation.
4. CBI shall award RLH as additional consideration grants of CBI common shares
as follow:
800 shares on December 1, 1997
800 shares on December 1, 1998
800 shares on December 1, 1999
The foregoing grants of CBI common shares are contingent upon written
determination by CBI on the due date of each grant that this Agreement is
in full force and effect and that RLH has performed the services required
of him pursuant to this Agreement in a satisfactory manner.
5. In the event RLH sells the DeKalb residence acquired by him upon his
relocation from Springfield, Illinois due to termination of this Agreement
for any reason CBI will reimburse RLH for any loss in value realized by
RLH.
<PAGE>
The term "Loss in value" means the difference between the cost basis for
federal income tax purposes of the DeKalb residence acquired by RLH upon
relocation and a lower price received by RLH upon the sale of such
residence in an arm's length transaction which is closed within twelve (12)
months of the date of termination of this Agreement.
BENEFITS, VACATIONS, PROFIT SHARING
1. It is understood and agreed by CBI and RLH may not devote his full time to
the performance of the services required by this Agreement and that from
time to time RLH may accept other engagements which are not in direct
conflict with his engagement by CBI, may be out of state, and may provide
certain of his services from outside the CBI office.
Notwithstanding the above, it is agreed by CBI and RLH that RLH will not
absent himself from CBI for more than thirty (30) consecutive days in any
year or for more than a total of six (6) weeks in 1998 or more than a total
of eight (8) weeks in 1999.
2. RLH waives any right(s) which may have to participate in the benefit,
profit sharing, and bonus programs of CBI during the term of this
Agreement.
EXECUTED at DeKalb, Illinois this 26 day of September, 1997.
/S/ RONALD L. HOVERMALE /S/ JOHN W. CASTLE
- ----------------------- ------------------------------------
John W. Castle
Chairman and Chief Executive Officer
2
<PAGE>
AMENDMENT TO AGREEMENT FOR SERVICES
BETWEEN RONALD L. HOVERMALE AND CASTLE BANCGROUP, INC.
DATED SEPTEMBER 26, 1997
Ronald L. Hovermale ("RLH") and Castle BancGroup, Inc. ("CBI"), in consideration
of the premises, hereby agree to amend the written agreement heretofore entered
into by them dated September 26, 1997 for the services of RLH as Vice President
for Information Services and Operations ("Agreement for Services") as follows:
1. The term of the Agreement for Services shall be extended for twelve months
from December 31, 1999 to January 15, 2001.
2. The consideration to be paid RLH for his services during the extended term
shall be $112,500 plus employer's FICA contributions which shall be paid in
equal or nearly equal bi-weekly installments.
3. RLH shall spend a minimum of 8 1/2 months at the CBI corporate office in
DeKalb, Illinois in the performance of his duties during the extended term.
RLH shall be allowed 3 1/2 months for vacation. The required office time is
not required to be in consecutive days.
4. CBI shall purchase the RLH DeKalb residence on or about September 30, 2000
at a purchase price equal to the cost basis of the property less customary
expenses paid by the seller of DeKalb real estate. The purchase price shall
be paid in cash at closing and RLH shall have the right to continue to
occupy the premises until January 15, 2001 or until the property is resold
by CBI, whichever event occurs earlier. RLH shall pay all utility costs and
other charges, if there are any, related to his occupancy of the premises
after purchased by CBI.
5. RLH shall be responsible during the extended term of the Agreement for
Services to recruit from within or from outside the CBI organization a
person who is acceptable to CBI senior management to be his successor as
Vice President for Information Services and Operations. RLH shall be paid
800 shares of CBI common stock during January, 2001 if he successfully
completes the recruitment effort required by this paragraph 5.
6. All of the terms and conditions of the Agreement for Services which are not
amended by this Agreement or are not otherwise in conflict with this
agreement shall remain in full force and effect during the extended term of
the Agreement for Services.
Executed at DeKalb, Illinois this 12th day of March, 1999.
/S/ RONALD L. HOVERMALE /S/ JOHN W. CASTLE
- ----------------------- ------------------------------------
John W. Castle
Chairman and Chief Executive Officer
<PAGE>
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 corporation)
Castle Bank, N.A. (a national banking corporation)
Castle Finance Company (an Illinois corporation)
CasBanc Mortgage, Inc. (an Illinois corporation)
Mortgage Junction, Inc. (an Illinois corporation -- inactive)
SBI Illinois, Inc. (an Illinois corporation)
<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.
333-70867) on Form S-3 of Castle BancGroup, Inc., in the registration statement
(No. 333-70825) on Form S-8 of Castle BancGroup, Inc., and in the registration
statement (No. 33-87658) on Form S-8 of Castle BancGroup, Inc. of our report
dated January 29, 1999, relating to the consolidated balance sheets of Castle
BancGroup, Inc. and subsidiaries as of December 31, 1998 and 1997, 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,
1998, which report appears in the December 31, 1998 annual report on Form 10-K
of Castle BancGroup, Inc.
/s/ KPMG LLP
Chicago, Illinois
March 18, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000723043
<NAME> CASTLE BANCGROUP
<MULTIPLIER> 1,000
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<PERIOD-START> JAN-01-1998
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<INCOME-PRETAX> 7,322
<INCOME-PRE-EXTRAORDINARY> 7,322
<EXTRAORDINARY> 0
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<NET-INCOME> 4,735
<EPS-PRIMARY> 2.18
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