UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
- --------------------------------------------------------------------------------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Fiscal Year
Ended December 31, 1999 Commission File No. 0-25914
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CASTLE BANCGROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3238190
(State or other jurisdiction of (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 April 10, 2000, based upon average market price at that date:
The registrant's Common Stock is infrequently traded. The most recent known
trading price is $11.125 per share. Based on this price the aggregate market
value of voting shares held by non-affiliates of the registrant is $41,678,000.
The registrant had 4,375,008 shares of Common Stock outstanding as of April 10,
2000.
The following documents are incorporated by reference in this report:
1. Portions of the registrant's Proxy Statement for the 2000 Annual Meeting
of Stockholders are incorporated by reference to Part III hereof.
<PAGE>
TABLE OF CONTENTS
Part I.
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of 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
2
<PAGE>
PART I
Item 1. Business
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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 and data processing.
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, accounting, human resources, and data processing services
to the subsidiaries. It also provides management services, training, 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, and southern Wisconsin on the north.
Castle Bank N.A. (CB), First National Bank in DeKalb (FNB), and Castle Bank
Harvard, N.A. (CBH) (collectively, Subsidiary Banks) are wholly owned banking
subsidiaries of the Company. The Company previously operated a fourth banking
charter, The Bank of Yorkville (BOY), but effective June 25, 1999 the Company
merged BOY with and into CB. The banking business of BOY now continues under
the CB charter. 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.
CasBanc Mortgage, Inc. (CMI) is an Illinois corporation and wholly owned
subsidiary of the Company. CMI was closed in January 2000 and is currently
winding down its remaining business. Before its closure, it was a residential
mortgage originator and broker that engaged in the origination of residential
mortgages, which were subsequently sold in the secondary market. CMI also
provided processing services and delivery in the secondary market for
residential mortgage loans originated by the Subsidiary Banks.
Castle Finance Company (CFC) is an Illinois corporation and wholly owned
subsidiary of the Company. CFC was closed in January 1999 and sold a
substantial portion of its loan portfolio in March 1999. CFC continues to wind
down its remaining business, which is primarily the collection of a small
portfolio of loans that were not sold in March 1999. Before its closure, CFC
was a consumer finance company that engaged in making small consumer loans, as
well as acting as an agent to sell insurance relating to those loans.
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 the Subsidiary Banks are well balanced, with a large customer
base and no dominant segment of accounts. Each Subsidiary Bank's loan portfolio
is also characterized by a large customer base, including loans to commercial,
agricultural and consumer customers, with no dominant relationships. There is
no readily available source of information that delineates the market for
financial services offered by non-bank competitors in the Company's market.
3
<PAGE>
Regulation and Supervision
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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 as a bank holding company under 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 Banking Subsidiaries" below for discussion of regulators of the
banking 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. See "Financial Modernization Legislation"
below for a discussion of expanded activities permissible to bank holding
companies that become financial holding companies.
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. Under the FDIC's risk-based insurance assessment system,
each insured bank is placed in one of nine risk categories based on its level of
capital and other relevant information. Each insured bank's insurance
assessment rate is then determined by the risk category in which it has been
classified by the FDIC. There is currently a 27 basis point spread between the
highest and lowest assessment rates, so that banks classified as strongest by
the FDIC are subject in 2000 to no insurance assessment, and banks classified as
weakest by the FDIC are subject to an insurance assessment rate of .27%. In
addition to its insurance assessment, each insured bank is subject in 2000 to
quarterly debt service assessments in connection with bonds issued by a
government corporation that financed the federal savings and loan bailout. The
first quarter 2000 debt service assessment was .0212%.
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, 1999,
subject to minimum regulatory capital guidelines, the Subsidiary Banks could,
without prior approval of regulatory authorities, declare dividends of
approximately $6,659,000.
The Company's Banking Subsidiaries
- -------------------------------------
The Subsidiary Banks 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 laws and regulations generally applicable to the Subsidiary
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 extensions 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.
4
<PAGE>
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 which includes, among other things, limited life preferred stock,
subordinated debt, limited amounts of unrealized gains on equity securities, 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. The guidelines
require a tangible leverage capital ratio (defined as Tier 1 capital to average
assets) of 3.00% for bank holding companies and banks that meet certain
specified criteria, including having the highest regulatory rating. All other
banking organizations are required to maintain a leverage ratio of at least
4.00%. The Company had a tangible leverage capital ratio of 7.26% as of
December 31, 1999. 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 11.11% as of
December 31, 1999. 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
9.91% as of December 31, 1999. 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 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.
Financial Modernization Legislation
- -------------------------------------
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (GLB Act). The GLB Act significantly changes financial
services regulation by expanding permissible non-banking activities of bank
holding companies and removing barriers to affiliations among banks, insurance
companies, securities firms and other financial services entities. These new
activities and affiliations can be structured through a holding company
structure or, subject to certain limitations, through a financial subsidiary of
a bank. The GLB Act establishes a system of federal and state regulation based
on functional regulation, meaning that primary regulatory oversight for a
particular activity will generally reside with the federal or state regulator
having the greatest expertise in the area. Banking is to be supervised by
banking regulators, insurance by state insurance regulators and securities
activities by the SEC and state securities regulators. The GLB Act also
establishes a minimum federal standard of financial privacy and adopts various
other provisions designed to improve the delivery of financial services to
consumers while maintaining an appropriate level of safety in the financial
services industry.
5
<PAGE>
The GLB Act repeals the anti-affiliation provisions of the Glass-Steagall
Act and revises the Bank Holding Company Act to permit qualifying holding
companies, called "financial holding companies," to engage in, or to affiliate
with companies engaged in, a full range of financial activities including
banking, insurance activities (including insurance portfolio investing),
securities activities, merchant banking and additional activities that are
"financial in nature," incidental to financial activities or, in certain
circumstances, complementary to financial activities. A bank holding company's
subsidiary banks must be "well-capitalized" and "well-managed" and have at least
a "satisfactory" Community Reinvestment Act rating for the bank holding company
to elect status as a financial holding company. The Company, at present, has
not elected status as a "financial holding company."
A significant component of the GLB Act's focus on functional regulation
relates to the application of federal securities laws and SEC oversight to bank
securities activities previously subject to blanket exemptions. Among other
things, the GLB Act amends the definitions of "broker" and "dealer" under the
Securities Exchange Act of 1934 to remove the blanket exemption for banks.
Following effectiveness of these amendments, which are not effective until May
12, 2001, banks will no longer be able to rely solely on their status as banks
to avoid registration as broker-dealers. Instead, banks will need to carefully
consider their securities activities in light of a new set of limited exemptions
designed to allow banks to continue, without broker-dealer registration, only
those activities traditionally considered to be primarily banking or trust
activities. The GLB Act also amends, effective May 12, 2001, the Investment
Advisers Act of 1940 to require the registration of banks that act as investment
advisers for mutual funds.
Employees
- ---------
As of December 31, 1999, the Company and its subsidiaries had a total of
361 full-time equivalent employees. None of these employees are subject to a
collective bargaining agreement.
6
<PAGE>
Item 2. Properties
- --------------------
The following table sets forth information related to the Company's
properties utilized in the Company's business. These properties are suitable
and adequate for the Company's business needs.
<TABLE>
<CAPTION>
Approximate Owned/
Entity Description Address City / State Square Feet Lease
- ---------------------------- ---------------------- -------------------------- --------------- ----------- --------
<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(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 Branch facility 606 Countryside Center Yorkville, IL 21,100 Owned
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
CMI Main / Mortgage office 1315 West 22nd Street Oak Brook, IL 10,400 Leased
CMI Mortgage office 847 North Center Street Naperville, IL 3,200 Owned(3)
- ----------------------------
<FN>
(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.
(3) CMI entered into a sale agreement as of March 24, 2000, to sell the property located at 847 North Center Street,
Naperville, Illinois.
</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,
1999.
7
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- --------------------------------------------------------------------------------
Matters
- -------
Since June 29, 1998 the Company's stock has been traded over-the-counter
and has been quoted on the OTC Bulletin Board, under the symbol "CTBG." Before
June 29, 1998, there was no established market for the company's stock. The
Company completed in May 1999 a 2-for-1 stock split in the form of a 100% stock
dividend. All information presented herein reflects the stock split. The
following table reflects the quarterly high and low bid quotations for the
Company's stock since June 29, 1998:
<TABLE>
<CAPTION>
1999 High Low
- ----------------------------------------
<S> <C> <C>
Fourth Quarter $ 16.25 12.25
Third Quarter 16.375 16.25
Second Quarter 16.125 15.00
First Quarter 15.00 14.50
1998 High Low
- ----------------------------------------
Fourth Quarter $ 14.50 13.50
Third Quarter 13.75 12.00
Second Quarter 12.00 12.00
</TABLE>
These quotations are based on information provided by the company's
principal market maker, and reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
The approximate number of record holders of Common Stock of the Company as
of April 10, 2000 was 1,016.
Cash dividends on the above referenced common stock are declared
semi-annually. Dividends declared for the years ended December 31, 1999 and
1998 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------
1999 1998
----- ----
<S> <C> <C>
First semi-annual dividend $0.07 0.06
Second semi-annual dividend 0.09 0.07
----- ----
Total $0.16 0.13
===== ====
</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, 1999, the Company was limited to $1,213,000 for
dividend purposes, beyond dividends already paid in 1998 and 1999.
8
<PAGE>
Item 6. Selected Financial Data
- -----------------------------------
The following information relating to per common share data reflects the
May 1999 2-for-1 stock split in the form of a 100% stock dividend.
Five Year Summary of Selected Consolidated Financial Data
For years ended December 31 (Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- -------------------------------------------------- --------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Interest income $ 38,250 40,604 39,034 36,307 32,501
Interest expense 18,809 19,961 19,589 17,912 15,830
- -------------------------------------------------- --------- ------- ------- -------- --------
Net interest income before provision for possible
loan losses 19,441 20,643 19,445 18,395 16,671
Provision for possible loan losses 695 713 1,128 1,113 478
- -------------------------------------------------- --------- ------- ------- -------- --------
Net interest income after provision for possible
loan losses 18,746 19,930 18,317 17,282 16,193
Other operating income 5,233 5,382 4,228 4,294 4,070
Investment securities gains (losses) 250 154 210 41 (284)
Other operating expenses 18,373 19,165 18,284 17,773 15,404
- -------------------------------------------------- --------- ------- ------- -------- --------
Earnings before income taxes 5,856 6,301 4,471 3,844 4,575
Income tax expense 1,809 2,142 1,461 1,287 1,347
- -------------------------------------------------- --------- ------- ------- -------- --------
Net earnings from continuing operations $ 4,047 4,159 3,010 2,557 3,228
- -------------------------------------------------- --------- ------- ------- -------- --------
Discontinued operations $ (3,786) 576 3 (713) 136
- -------------------------------------------------- --------- ------- ------- -------- --------
Net earnings $ 261 4,735 3,013 1,844 3,364
- -------------------------------------------------- --------- ------- ------- -------- --------
Net earnings applicable to common stock $ 261 4,712 2,811 1,643 3,026
Per common share
Basic
Net earnings from continuing operations $ 0.93 0.96 0.68 0.57 0.71
Discontinued operations (0.87) 0.13 0.00 (0.17) 0.03
Net earnings 0.06 1.09 0.68 0.40 0.74
Diluted
Net earnings from continuing operations 0.92 0.95 0.67 0.56 0.70
Discontinued operations (0.86) 0.13 0.00 (0.17) 0.03
Net earnings 0.06 1.08 0.67 0.39 0.73
Cash dividends 0.16 0.13 0.11 0.10 0.09
Financial position - year-end
Investment securities available for sale $126,159 132,060 129,479 133,072 135,566
Mortgage loans held for sale 14,892 66,755 44,286 19,959 12,519
Net loans 359,451 322,058 308,540 285,380 251,274
Allowance for possible loan losses 4,636 4,750 4,646 3,774 3,298
Non-interest bearing deposits 52,274 50,371 42,589 43,233 41,467
Interest bearing deposits 408,143 404,621 382,728 361,695 345,646
Other borrowings 39,486 54,497 49,307 29,738 17,591
Preferred stock 0 0 300 2,600 2,600
Total stockholders' equity 37,408 41,545 36,862 34,962 34,347
Total assets 540,850 558,282 517,183 474,243 444,580
================================================== ========= ======= ======= ======== ========
</TABLE>
9
<PAGE>
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.
Forward-Looking Statements
- ---------------------------
Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of Section 21E under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). For example,
forward-looking statements may be made with respect to the Company's earnings
prospects, pricing and fee trends, credit quality and outlook, new business
results, expansion plans, and anticipated expenses. The Company intends these
forward-looking statements to be subject to the safe harbor created by the
Exchange Act and is including this statement to avail itself of these safe
harbor provisions. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are identified by statements containing words and phrases such as
"may," "project," "are confident," "should be," "will be," "predict," "believe,"
"plan," "expect," "estimate," "anticipate" and similar expressions. These
forward-looking statements reflect the Company's current views with respect to
future events and financial performance, but are subject to many uncertainties
and factors relating to the Company's operations and business environment, which
could change at any time and which could cause actual results to differ
materially from those expressed or implied by the forward-looking statements.
There are inherent difficulties in predicting factors that may affect the
accuracy of forward-looking statements. Potential risks and uncertainties that
may affect the Company's operations, performance, development and business
results include the following:
- - the risk of adverse changes in business conditions in the banking industry
generally and in the specific Midwestern markets in which the Company's
subsidiary banks operate;
- - changes in the legislative and regulatory environment that result in
increased competition or operating expenses;
- - changes in the interest rates and changes in monetary and fiscal policies
and the corresponding effect on the Company's interest rate spread and net
interest margin;
- - effects on the Company's liquidity if CMI is required to repurchase a
significant amount of the fraudulent loans originated and sold by CMI as
described below;
- - increased competition from other financial and non-financial institutions;
- - the competitive impact of technological advances in the conduct of the
banking business; and
- - other risks set forth from time to time in the Company's filings with the
Securities and Exchange Commission.
These risks and uncertainties should be considered in evaluating
forward-looking statements, and undue reliance should not be placed on such
statements. The Company does not assume any obligation to update or revise any
forward-looking statements subsequent to the date on which they are made.
Results of Operations
- -----------------------
The Company's net earnings totaled $261,000 in 1999, down from $4,735,000
in 1998. This represents a decrease of $4,474,000, or 94.5%. Net earnings
totaled $3,013,000 for 1997. The decrease in net earnings is primarily
attributable to discontinued operations, which produced a loss of $3,786,000 in
1999, as compared to earnings of $576,000 in 1998 and $3,000 in 1997. The
discontinued operations relate to the Company's mortgage banking segment.
The Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1999 disclosed certain irregularities in the origination and sale of
mortgage loans by CMI. The Company has originated and sold in the secondary
mortgage market, through CMI, a substantial amount of one- to four-family
mortgage loans. These mortgage loans are sold to investors in the secondary
mortgage market with recourse back to CMI, meaning that CMI may be obligated to
repurchase these loans from investors under certain circumstances, which could
include the fraud and other irregularities uncovered by the Company as discussed
below.
10
<PAGE>
In the fourth quarter of 1999, the Company uncovered fraud and other
irregularities in CMI's underwriting and documentation of certain mortgage loans
originated and sold by CMI, which may ultimately result in the purchasers of
these loans putting them back to CMI under the recourse provisions of the loan
sale agreements and result in losses on such loans if and when they are put back
to CMI. The Company has engaged in an extensive investigation of the
irregularities at CMI, which investigation has been performed by both employees
of the Company and its subsidiaries as well as outside consultants. This
investigation revealed frauds committed by both CMI employees at several CMI
branches and third parties doing business with CMI. For example, false asset,
income and/or employment information was provided by CMI loan originators or
loan processors to make it appear that an applicant would qualify for a loan.
At times, an appraisal company working with employees of CMI provided false
appraisals. These appraisals inflated the value of the property, and thus, made
it appear that loans were secured fully when, in fact, they were not. In
addition, on some loans originated by CMI, persons that appear to be unrelated
to CMI committed a title fraud. This fraud resulted in mortgages being issued
to persons who did not have good title to the properties being mortgaged. In
each case, however, the seller had obtained a valid title insurance policy.
Based on the results of the investigation to date, it appears that this fraud
was limited to CMI employees, and third parties working with such employees, at
three CMI offices. No fraud was uncovered at other CMI offices or at the
Subsidiary Banks.
During its ongoing investigation into the fraud and other irregularities at
CMI, the Company decided to discontinue the mortgage banking segment. All
offices of CMI, which had not been previously closed, were closed in January
2000. A discussion of the discontinuance and the creation of a reserve
liability for possible losses on the loans affected by the fraud and the
irregularities is included below.
The Company's net earnings from continuing operations in 1999 totaled
$4,047,000, a 2.7% decrease from 1998 net earnings from continuing operations of
$4,159,000. Net earnings from continuing operations for 1997 was $3,010,000.
Net earnings from continuing operations in 1999 was adversely impacted by
$514,000 in losses related to the sale of a substantial portion of the CFC loan
portfolio and other related charges involved in closing that business. In
addition, an increase in interest rates in 1999 reduced the Company's net
interest income as well as its mortgage loan origination income from the
Subsidiary Banks. Those decreases were partially offset by decreases in other
operating expenses.
Net earnings applicable to common stock was $261,000 for 1999, $4,712,000
for 1998, and $2,811,000 for 1997. Net earnings applicable to common stock
differs from net earnings due to dividends paid on preferred stock. There were
no dividends paid on preferred stock in 1999 as compared to $23,000 in 1998 and
$202,000 in 1997. The Company redeemed $2,300,000 of its preferred stock in
1997 and the remaining $300,000 in 1998.
Basic earnings per share from continuing operations decreased to $.93 for
1999 as compared to $.96 for 1998 and $.68 for 1997. Basic earnings per share
decreased to $.06 for 1999 as compared to $1.09 for 1998 and $.68 for 1997.
Basic earnings (loss) per share from discontinued operations was ($.87) in 1999,
$.13 in 1998, and $.00 in 1997. Per common share data reflects the May 1999
2-for-1 stock split in the form of a 100% stock dividend. The following table
highlights significant factors that have contributed to the changes in basic net
earnings per share:
11
<PAGE>
<TABLE>
<CAPTION>
Changes in Basic Net Earnings per Share
<S> <C> <C>
1998 to 1999 1997 to 1998
- ---------------------------------------------------------------- ------------ ------------
Prior period basic earnings per share $ 1.09 $ 0.68
Changes due to
Net interest income (0.31) 0.09
Provision for possible loan losses 0.00 0.11
- ---------------------------------------------------------------- ------------- ------------
Net interest income after provision for possible loan losses (0.31) 0.20
- ---------------------------------------------------------------- ------------- ------------
Other operating income
Investment securities gains (losses), net 0.02 (0.01)
Mortgage loan origination income (0.18) 0.15
Other operating income items 0.14 0.07
- ---------------------------------------------------------------- ------------- ------------
Total other operating income (0.02) 0.21
- ---------------------------------------------------------------- ------------- ------------
Other operating expenses
Salaries and employee benefits 0.28 0.04
Net occupancy and furniture expenses 0.02 0.00
Outside services (0.01) (0.06)
Goodwill amortization 0.02 0.00
Other operating expense items (0.06) (0.01)
- ---------------------------------------------------------------- ------------- ------------
Total other operating expenses 0.21 (0.03)
Income tax expenses 0.08 (0.14)
Discontinued operations (1.00) 0.13
Preferred stock dividends 0.01 0.04
- ---------------------------------------------------------------- ------------- ------------
Current period basic earnings per share $ 0.06 $ 1.09
================================================================ ============= ============
</TABLE>
The Company's banking segment posted net earnings of $6,752,000 for 1999,
as compared to $6,214,000 for 1998 and $5,393,000 for 1997. Earnings for 1999
increased 8.6% from 1998. The increase is primarily attributable to lower other
operating expenses of $828,000, partially offset by a $262,000 decrease in net
interest income after provision for possible loan losses.
The Company's mortgage banking segment, posted a net loss of $3,786,000 for
1999, as compared to earnings of $576,000 for 1998 and $3,000 for 1997.
Following the discovery of the irregularities and fraud at CMI as discussed
above, in January 2000, the Company formally adopted a plan to liquidate the
mortgage banking segment, which is comprised entirely of the operations of CMI.
The mortgage banking segment does not include the Subsidiary Banks' mortgage
lending activities, which are a component of continuing operations. As a result
of the decision to discontinue the mortgage banking segment, all related
operating activity was reclassified and reported as discontinued operations for
financial reporting purposes.
The closure of CMI is accounted for as a discontinued operation, in
accordance with APB 30, because, among other criteria, it represented both a
separate major line of business and a class of customer. CMI represented a
distinct segment and served a customer base from a market distinct from that of
the Subsidiary Banks.
The mortgage lending activities of the Subsidiary Banks represent an
integral, inseparable component of the banking segment. CMI provided mortgage
brokerage services to the Subsidiary Banks that will now be provided by
independent third parties. The banking segment will continue to originate and
sell mortgage loans into the secondary market and hold mortgage loans for sale
on its balance sheet. The mortgage loan origination income presented on the
Company's Consolidated Statements of Earnings represents the income derived from
the mortgage lending activities of the banking segment. The mortgage loan
origination income produced by CMI is presented as a component of discontinued
operations in the Consolidated Statements of Earnings. The mortgage loans held
for sale presented on the Company's Consolidated Balance Sheets represent
mortgages currently held for sale by the Subsidiary Banks. These balances
relate to both mortgages originated in the banking segment, as well as mortgages
originated by CMI and subsequently sold to the Subsidiary Banks to hold for sale
to third party investors. The Company expects the level of mortgage loans held
for sale to decrease since CMI will no longer be originating loans to sell to
the Subsidiary Banks to hold for sale. Mortgage loans held for sale by CMI
(i.e., those not sold to the Subsidiary Banks) are presented in assets of
discontinued operations on the Consolidated Balance Sheets.
12
<PAGE>
The loss from discontinued operations of $3,786,000 in 1999 represents a
loss from operating activities, which includes a pre-tax charge of $2,300,000 to
establish a reserve liability for possible losses on loans previously sold, and
a pre-tax charge of $1,341,000 to write-off the remaining carrying value of
intangible assets related to the mortgage banking segment. The reserve
liability is included in other liabilities in the Consolidated Balance Sheet as
of December 31, 1999 at Item 8. While the Company's management believes that
the reserve should be adequate to cover such losses, the reserve is an estimate
based on, among other things, information gathered during the Company's
investigation of the fraud relating to amount of loans that may be affected by
the fraud and assumptions relating to the likelihood that CMI would be required
to repurchase loans from the investors and the diminution in the value of such
loans if such loans are repurchased by CMI. Actual results could differ from
the Company's estimates. The Company has notified its insurance carrier of the
fraud discussed above.
In addition to the charges discussed above, the mortgage banking segment
experienced an increase in other operating expenses of $3,975,000 in 1999
associated with the expansion of retail mortgage origination offices, higher
commission structures and other costs. These charges and increased operating
expenses, all net of their applicable tax effects, primarily account for the
change from net earnings from discontinued operations of $576,000 in 1998 to a
net loss from discontinued operations of $3,786,000 for 1999.
The first quarter 2000 financial statements will include additional charges
for 2000 operating activities of CMI and the loss on disposal of the mortgage
banking segment. The Company estimates that the first quarter charge for
discontinued operations will total $837,000, net of tax effect of $582,000.
Included in this charge are accruals for operating losses during the phase-out
period, accruals for salary and severance payments, write-downs of the value of
fixed assets, accruals for lease liabilities, and other items. For further
discussion of discontinued operations, see note 18 to the Financial Statements
included in Item 8.
Segment information presented under "Other" (see note 16 to the Financial
Statements included in Item 8) includes the holding company and consumer finance
business. This segment produced a net loss of $2,705,000 for 1999, compared to
net losses of $2,055,000 and $2,383,000 in 1998 and 1997, respectively. The
increase in net losses for 1999 is primarily due to net losses associated with
CFC regarding a sale of a substantial portion of its loan portfolio and other
related charges involved in closing that business.
The Company's return on average equity for 1999 was 0.64%, as compared to
11.95% in 1998 and 8.43% in 1997. Return on average assets was 0.05% in 1999
versus 0.92% in 1998 and 0.62% in 1997. The decrease in these ratios for 1999
were primarily due to the discontinued operations and losses at CFC as described
above.
Net Interest Income
- ---------------------
Net interest income before provision for possible loan losses, the
Company's primary source of earnings, totaled $19,441,000 in 1999, a $1,202,000,
or 5.8% decrease over 1998. This decrease can primarily be attributed to a
$1,056,000 decrease in net interest income before provision for possible loan
losses at CFC associated with the sale of a substantial portion of its portfolio
in March of 1999. In addition, an increase in interest rates in 1999 caused a
narrowing of the net interest margin due to the Company's one year cumulative
liability repricing difference. Net interest income before provision for
possible loan losses increased $1,198,000 in 1998 as compared to 1997, which
represented a 6.2% increase.
Management believes that net interest margins may continue to narrow as
competitive pressures in the market place expand. Competition from 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 decreased to $20,486,000 in
1999 from $21,237,000 in 1998 and increased from $19,892,000 in 1997. The tax
equivalent net interest margin decreased in 1999, averaging 4.15% as compared to
4.40% in 1998 and 4.37% in 1997.
13
<PAGE>
Total average earning assets in 1999 were $493,478,000, an increase of
$10,453,000 or 2.5% over 1998. Average earning assets as a percentage of total
average assets decreased slightly to 93.7% during 1999 as compared to 94.0% in
1998 and 93.9% in 1997. The net average loan portfolio represented 68.9% of
total average earning assets in 1999, an increase from 64.4% in 1998 and an
increase from 66.3% in 1997. Mortgage loans held for sale represented 5.0% of
average earning assets in 1999, a decrease from 7.2% in 1998. Mortgage loans
held for sale represented 4.6% of average earning assets in 1997. In 1999,
average total interest-bearing liabilities were $431,738,000, a $5,931,000 or
1.4% increase over 1998. This increase can be attributed to a $9,636,000
increase in average interest-bearing deposits, offset by a decrease of
$3,705,000 in average other borrowings. The proportion of average
interest-bearing liabilities to average earning assets in 1999 decreased to
87.5% as compared to 88.2% in 1998.
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
allowance 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 possible loan losses to non-performing
loans and loans past due 90 days or more and still accruing was 137.2% at the
end of 1999 versus 168.6% and 104.4% at the end of 1998 and 1997, respectively.
This decrease in coverage was primarily due to an increase in non-accrual loans
from $2,262,000 at the end of 1998 to $2,685,000 at the end of 1999. The
allowance for loan losses as a percentage of total outstanding loans decreased
to 1.27% at December 31, 1999 as compared to 1.45% at December 31, 1998. The
allowance level was at 1.48% of total loans at December 31, 1997. The decreased
percentage is due, in part, to an increase in loans outstanding as well as the
sale of a substantial portion of the CFC loan portfolio, which had an allowance
of 5% attributed to its loan portfolio at December 31, 1998. The allowance for
possible loan losses does not include amounts for the CMI irregularities and
fraud discussed above. The reserve liability for possible losses on loans
previously sold by CMI, as discussed above, is included in other liabilities in
the Consolidated Balance Sheet as of December 31, 1999 at Item 8.
Gross charge-offs decreased $467,000 from 1998 to 1999, primarily due to
consumer charge-offs, which decreased $400,000. The ratio of net charge-offs to
average total loans outstanding decreased during 1999 to 0.11% as compared to
0.19% in 1998. The net charge-off ratio during 1997 was 0.10%. The decrease in
this ratio was primarily due to the decrease in consumer charge-offs as
described above, partially offset by a decrease in recoveries of $227,000
primarily due to commercial/agricultural and consumer loans.
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
$695,000 in 1999 as compared to $713,000 in 1998, an $18,000 decrease. The
provision for possible loan losses decreased $415,000 from 1997 to 1998.
Management's analysis of the allowance for possible loan losses indicates that
the level at December 31, 1999 of 1.27% of total outstanding loans is adequate
to cover the risk of losses inherent in the loan portfolio.
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 $3,579,000, or 0.66% of total assets, at December 31,
1999. This represents an increase from $2,817,000 or 0.50% of total assets at
December 31, 1998. Non-performing assets at December 31, 1997 were $4,452,000 or
0.86% of total assets.
14
<PAGE>
Other Operating Income
- ------------------------
Total other operating income is comprised of mortgage loan origination
income from Subsidiary Banks, trust services, deposit service charges, other
customer service charges, and other miscellaneous income. Excluding security
gains and losses, other operating income totaled $5,233,000 for 1999, a decrease
from $5,382,000 in 1998 and an increase from $4,228,000 in 1997. This change
represents a 2.8% decrease from 1998 to 1999, which can be primarily attributed
to a decrease in mortgage loan origination income from Subsidiary Banks of
$781,000, partially offset by increases in trust fees and other service charges.
Mortgage loan origination income from Subsidiary Banks increased $707,000 from
1997 to 1998. The decreased mortgage loan activity at the Subsidiary Banks was
a result of the unfavorably high interest rate environment in effect for fifteen
and thirty year mortgages on one-to-four-family residential properties.
Trust fees increased 7.4% to $826,000 in 1999 as compared to $769,000 in
1998 and $662,000 in 1997. 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 bank's trust department was $154.5 million at
December 31, 1999 as compared to $163.9 million and $155.7 million at year-end
1998 and 1997, respectively.
Net security gains, on a pre-tax basis, totaled $250,000 in 1999 as
compared to net gains of $154,000 in 1998 and $210,000 in 1997. 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 1999 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 reflected in 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, improvement in the interest rate gap, and
collateral (pledging) requirements of local municipalities.
Other Operating Expenses
- --------------------------
Other operating expenses totaled $18,373,000 in 1999 as compared to
$19,165,000 and $18,284,000 in 1998 and 1997, respectively. As a percentage of
average assets, total operating expenses decreased to 3.5% in 1999 versus 3.7%
in 1998 and 3.8% for 1997. The efficiency ratio, which measures the level of
non-interest expense to total net revenues, was 74.5% in 1999 as compared to
73.6% and 77.2% in 1998 and 1997, respectively.
Salaries and employee benefits expense represents the largest component of
other operating expenses. This category decreased $1,118,000, or 10.0% from
1998 to 1999. During 1998, this expense increased $274,000, or 2.5%, when
compared to 1997. The decrease for 1999 is primarily attributable to lower
bonus awards, profit sharing contributions, and the closure of CFC. In
addition, the Company has been able to reduce salary and benefits expense as it
has consolidated certain "back office" functions. The Company employed 361
full-time equivalent (FTE) employees at December 31, 1999 as compared to 364 and
317 at December 31, 1998 and 1997, respectively. Of the 361 FTE's at December
31, 1999, approximately 123 were employed at CMI, which was closed in January
2000.
Occupancy and furniture and fixtures expenses totaled $2,734,000 in 1999, a
decrease of $70,000, or 2.5%, from 1998. During 1998, occupancy and furniture
and fixture expenses increased $90,000 as compared to 1997. Outside services
and other expense increased 4.0% to $948,000 during 1999 as compared to $911,000
in the prior year. Advertising expense decreased 8.7% in 1999 to $400,000
versus $438,000 in 1998. 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.
15
<PAGE>
Financial Condition
- --------------------
Total assets at December 31, 1999 were $540,850,000, a $17,432,000 or 3.1%
decrease over December 31, 1998 total assets of $558,282,000. This decrease can
primarily be attributed to a decrease in mortgage loans held for sale at the
Subsidiary Banks of $51,863,000, partially offset by an increase in net loans
outstanding of $37,393,000. The decrease in mortgage loans held for sale at the
Subsidiary Banks, which represents loans originated at the Subsidiary Banks and
loans originated at CMI and subsequently sold to the Subsidiary Banks, was due
to lower production levels at the end of 1999 versus 1998. Cash and cash
equivalents are continually monitored and maintained at operational minimums to
minimize the Company's reliance on other borrowings. Higher cash balances were
maintained at December 31, 1999 to provide for the unlikely event that more cash
would be requested by customers concerned over the year 2000 date change.
Average assets for 1999 grew by $12,747,000 or 2.5% to $526,604,000 as compared
to $513,857,000 for 1998.
The Company's decrease in year-end assets is also represented by a decrease
in other borrowings of $15,011,000. Management continues to view "core"
deposits (individual, partnership and corporate deposits) as the primary long
term funding source for internal growth of the Company, but also recognizes the
growing need for alternative sources of funding. Alternative sources of funding
will be necessary if loans continue to grow faster than deposits in the future.
Average deposits increased $16,493,000, or 3.8%, during 1999, while average
other borrowings decreased $3,705,000, or 10.1%. Brokered deposits totaled
$297,000 at December 31, 1999, bearing interest at 6.75% and maturing in August
2000. 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 the
Subsidiary Banks and on a consolidated basis. Management monitors, analyzes and
forecasts capital positions for each entity to ensure that adequate capital is
available to support growth and maintain financial soundness. During 1999,
stockholders' equity decreased $4,137,000 over December 31, 1998, primarily due
to a decrease of $4,098,000 in accumulated other comprehensive earnings. This
decrease represents the change in unrealized gains/losses on investment
securities available-for-sale, which decreased from a gain of $934,000 at
December 31, 1998 to a loss of $3,164,000 at December 31, 1999. The decrease of
$4,098,000 represents a $6,431,000 gross unrealized loss plus $250,000 in
realized gains included in earnings, less the applicable tax effect of
$2,583,000. The decrease was primarily caused by an increase in interest rates.
The Company issued 25,953 shares of stock through its Dividend Reinvestment
and Stock Purchase Plan and its Stock Benefit Plan during 1999, which generated
$400,000 of new shareholders' equity. The Company's Tier 1 Leverage ratio at
December 31, 1999 was 7.26%, which increased from 6.31% as of December 31, 1998.
This ratio exceeds the minimum regulatory capital requirement. The Company's
Total Risk Weighted Capital ratio increased to 11.11% as of December 31, 1999
from 11.08% as of December 31, 1998. The Tier 1 Capital ratio increased to
9.91% at December 31, 1999 from 9.83% at December 31, 1998. For further
discussion of the regulatory capital requirements, see note 12 to the Financial
Statements included in Item 8.
Liquidity
- ---------
The Company ensures that 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. These sources of liquidity
should be more than sufficient to satisfy liquidity needs arising in the normal
course of business. The Company is a secondary source of liquidity for its
Subsidiary Banks through its discretionary access to short-term funding 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 1999 as compared to prior
years. These fluctuations primarily relate to increases in the loan portfolio
and decreases in mortgage loans held-for-sale at the Subsidiary Banks at
year-end, which have allowed for decreases in short-term borrowings and
long-term debt.
16
<PAGE>
Interest Rate Sensitivity
- ---------------------------
The Company's overall success is largely dependent upon its ability to
manage interest rate risk. Interest rate risk can be defined as the exposure of
the Company's net interest income to adverse movements in interest rates.
Because the Company has no trading portfolio, the Company is not exposed to
significant market risk from trading activities. Other types of market risk,
such as foreign currency exchange and commodity price risk, do not arise in the
normal course of the Company's business activities. The Company does not
currently use derivatives to manage market and interest rate risks. A
derivative financial instrument includes futures, forwards, interest rate swaps,
option contracts, and other financial instruments with similar characteristics.
The Company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit (see note 13 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 Asset/Liability Committee (ALCO) for each bank reviews the Subsidiary
Bank's interest rate exposure on a regular basis. The principal objective of
the Company's interest rate risk management function is to evaluate the interest
rate risk included in certain balance sheet accounts, determine the level of
risk appropriate given the Company's business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the funds management policy of the Company. Through such
management, the Company seeks to monitor the vulnerability of its operations to
changes in interest rates. The extent of the movement of interest rates is an
uncertainty that could have a negative effect on the earnings of the Company.
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.
17
<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, 1999:
<TABLE>
<CAPTION>
(Dollars in thousands)
Balances Subject to Repricing Within
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Over 1
90 Days 180 Days 1 Year Year Total
-------- ---------- --------- --------- -------
Interest earning cash and due from banks $ - - - - -
Excess funds sold - - - - -
Investment securities available for sale 2,649 4,545 9,081 115,082 131,357
Mortgage loans held for sale 14,892 - - - 14,892
Gross loans 102,156 30,697 49,931 181,635 364,419
- ------------------------------------------------------ ---------- --------- --------- -------- -------
Total earning assets 119,697 35,242 59,012 296,717 510,668
- ------------------------------------------------------ ---------- --------- --------- -------- -------
Savings and other interest-bearing deposits 185,785 - - - 185,785
Time deposits 46,448 41,320 30,245 104,345 222,358
Other borrowings 38,486 - - 1,000 39,486
- ------------------------------------------------------ ---------- --------- --------- -------- -------
Total interest-bearing liabilities 270,719 41,320 30,245 105,345 447,629
- ------------------------------------------------------ ---------- --------- --------- -------- -------
Net asset (liability) repricing difference (151,022) (6,078) 28,767 191,372 63,039
- ------------------------------------------------------ ---------- --------- --------- -------- -------
Cumulative asset (liability) repricing difference $(151,022) (157,100) (128,333) 63,039
- ------------------------------------------------------ ---------- --------- --------- --------
Cumulative earnings assets to cumulative
interest-bearing liabilities 0.44 0.50 0.63 1.14
- ------------------------------------------------------ ---------- --------- --------- --------
Cumulative asset (liability) repricing difference as a
percent of total earning assets -29.58% -30.76% -25.13% 12.35%
- ------------------------------------------------------ ---------- --------- --------- --------
</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 other 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, 1999. 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, 1999.
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.
18
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Fair
After Value
2000 2001 2002 2003 2004 2004 Total 12/31/99
--------- ------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RATE SENSITIVE ASSETS:
Mortgage loans held for sale $ 14,892 - - - - - 14,892 14,973
Average interest rate 8.21% - - - - - 8.21%
Fixed interest rate loans $ 87,981 34,101 22,600 15,656 3,428 22,881 186,647 184,818
Average interest rate 8.21% 8.18% 8.09% 7.91% 7.86% 7.80% 8.11%
Variable interest rate loans $ 94,803 20,633 28,279 18,388 3,963 11,706 177,772 175,697
Average interest rate 8.86% 8.24% 8.05% 8.00% 8.11% 7.94% 8.50%
Fixed interest rate securities $ 16,275 15,672 9,913 19,561 20,276 46,839 128,536 123,338
Average interest rate 6.65% 6.40% 6.29% 5.77% 6.53% 6.72% 6.46%
Variable interest rate securities - - - - - - - -
Average interest rate - - - - - - - -
Equity securities $ - - - - - 2,821 2,821 2,821
RATE SENSITIVE LIABILITIES:
Non interest-bearing checking
(with no stated maturity) $ - - - - - 52,274 52,274 52,274
Average interest rate - - - - - - - -
Savings and interest-bearing
checking (with no stated maturity) - - - - - 185,785 185,785 185,785
Average interest rate - - - - - 2.91% 2.91% -
Time deposits $118,013 23,740 64,749 13,098 2,758 - 222,358 222,955
Average interest rate 5.17% 5.34% 6.07% 5.74% 5.00% - 5.48% -
Other borrowings $ 38,486 1,000 - - - - 39,486 39,486
Average interest rate 5.97% 4.95% - - - - 5.95% -
</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, 1998.
Accounting Standards
- ---------------------
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. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the effective date of Statement No. 133." This statement
defers the adoption of SFAS 133 to fiscal quarters of fiscal years beginning
after June 15, 2000. SFAS No. 133 is not expected to have a material impact on
the Company's financial position, results of operations or liquidity.
19
<PAGE>
The following supplementary financial information of the registrant for
each of the last three years (unless otherwise stated) is included on pages 21
through 27 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 Other Borrowings
Table 9 Return on Equity and Assets (for last five years)
20
<PAGE>
TABLE 1
COMPARISON OF AVERAGE BALANCE SHEETS
The following table sets forth registrant's consolidated average daily condensed
balance sheet for each of the last three years:
<TABLE>
<CAPTION>
(Dollars in thousands)
Years ended December 31,
-----------------------------------------------------------
1999 1998 1997
------------------- ------------------ ------------------
% of % of % of
Amount Total Amount Total Amount Total
--------- -------- -------- -------- -------- --------
ASSETS:
<S> <C> <C> <C> <C> <C> <C>
Cash and due from banks $ 12,981 2.5% 10,797 2.1% 10,069 2.1%
Interest-bearing deposits in banks - - - - - -
Excess funds sold - - 2,907 0.6 547 0.1
--------- -------- -------- -------- -------- --------
Total cash and cash equivalents $ 12,981 2.5 13,704 2.7 10,616 2.2
Taxable securities available for sale $109,353 20.8 121,784 23.7 122,190 25.2
Tax-exempt securities available for sale 19,357 3.7 12,508 2.4 9,710 2.0
Mortgage loans held for sale 24,822 4.7 34,631 6.7 21,061 4.3
Loans and leases, net of unearned income 339,946 64.6 311,195 60.6 301,421 62.2
Less: Allowance for loan losses 4,564 0.9 4,593 0.9 4,121 0.9
--------- -------- -------- -------- -------- --------
Loans, net 335,382 63.7 306,601 59.7 297,300 61.3
Premises and equipment $ 11,502 2.2 10,647 2.1 10,150 2.1
Goodwill, net of amortization 2,364 0.4 2,715 0.5 3,136 0.6
Assets of discontinued operations 4,768 0.9 4,832 0.9 3,794 0.8
Other assets 6,075 1.1 6,435 1.3 6,674 1.5
--------- -------- -------- -------- -------- --------
TOTAL ASSETS $526,604 100.0% 513,857 100.0% 484,630 100.0%
======== ======== ======== ======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
LIABILITIES:
Non-interest bearing deposits $ 49,662 9.4% 42,805 8.3% 40,585 8.4%
Interest bearing deposits 398,584 75.7 388,948 75.7 369,728 76.2
--------- -------- -------- -------- -------- --------
Total deposits $448,246 85.1 431,753 84.0 410,313 84.6
--------- -------- -------- -------- -------- --------
Other borrowings 33,154 6.3 36,859 7.2 33,982 7.0
Other liabilities 4,127 0.8 5,611 1.1 4,609 1.0
TOTAL LIABILITIES $485,527 92.2 474,223 92.3 448,904 92.6
--------- -------- -------- -------- -------- --------
STOCKHOLDERS' EQUITY:
Preferred stock $ - -% 298 0.1% 2,591 0.5%
Common stock 1,177 0.2 721 0.1 693 0.1
Additional paid-in capital 7,094 1.3 6,954 1.4 5,100 1.1
Accumulated other comprehensive (loss) earnings (1,103) (0.2) 781 0.2 198 0.0
Retained earnings $ 33,910 6.5 30,880 6.0 27,144 5.7
--------- -------- -------- -------- -------- --------
STOCKHOLDERS' EQUITY $ 41,077 7.8 39,634 7.7 35,726 7.4
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $526,604 100.0% 513,857 100.0% 484,630 100.0%
======== ======== ======== ======== ======== ========
</TABLE>
21
<PAGE>
TABLE 2
ANALYSIS OF NET INTEREST INCOME - TAX EQUIVALENT BASIS
The tables below show information about the Company's average interest earning
assets and interest bearing liabilities, and 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>
(Dollars in thousands)
Average Balance Average Rate
--------------------------------------------- --------------------------
INTEREST EARNINGS ASSETS: 1999 1998 1997 1999 1998 1997
----------------- -------------- ---------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Taxable securities available for sale $ 109,353 121,784 122,190 6.24% 6.65% 6.81%
Tax-exempt securities available for sale(1) 19,357 12,508 9,710 8.65 8.58 9.78
----------------- -------------- ---------- -------- ------- -------
Total Securities 128,710 134,292 131,900 6.60 6.83 7.03
----------------- -------------- ---------- -------- ------- -------
Time deposits - - - N/A N/A 2.39
Excess funds sold - 2,907 547 N/A 2.51 6.03
Mortgage loans held for sale(2) 24,822 34,631 21,061 7.47 6.91 7.39
Loans, net(1,3) 339,946 311,195 301,421 8.48 9.50 9.49
----------------- -------------- ---------- -------- ------- -------
Total Earning Assets (FTE) 493,478 483,025 454,929 7.96% 8.53% 8.68%
================= ============== ========== ======== ======= =======
INTEREST BEARING LIABILITIES:
Interest bearing deposits $ 398,584 388,948 369,728 4.24% 4.58% 4.69%
Other borrowings 33,154 36,859 33,982 5.73 5.87 6.57
----------------- -------------- ---------- -------- ------- -------
Total Interest Bearing Liabilities $ 431,738 425,807 403,710 4.36% 4.69% 4.85%
================ ============== =========== ======== ======= =======
Interest Rate Spread (FTE) 3.61% 3.85% 3.88%
Net interest margin (FTE) 4.15% 4.40% 4.37%
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1999/1998 1998/1997
Interest Earned or Paid Change due to Change due to
-------------------------- --------------- ---------------
1999 1998 1997 Volume Rate Volume Rate
------ ------ ------- ------- ------- ------- -----
INTEREST EARNING ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Taxable securities available for sale $ 6,825 8,095 8,325 (795) (475) (28) (202)
Tax-exempt securities available for sale1 1,675 1,073 950 593 9 250 (127)
------- ------ ------ ------- ------- ------- -------
Total securities 8,500 9,168 9,275 (202) (466) 222 (329)
------- ------ ------ ------- ------- ------- -------
Time deposits $ - - - - - - -
Excess funds sold 92 73 33 10 9 69 (29)
Mortgage loans held for sale(2) 1,855 2,394 1,557 (721) 182 944 (107)
Net loans(1,3) 28,848 29,563 28,615 2,596 (3,311) 929 19
------- ------ ------ ------- ------- ------- -------
Total Earnings Asset (FTE) $ 39,295 41,198 39,480 1,683 (3,586) 2,164 (446)
====== ====== ======= ======= ======= ======= =====
INTEREST BEARING LIABILITIES:
Interest bearing deposits $ 16,910 17,796 17,354 433 (1,319) 887 (445)
Other borrowings 1,899 2,165 2,234 (214) (52) 180 (249)
------- ------ ------ ------- ------- ------- -------
Total Interest Bearing Liabilities $ 18,809 19,961 19,588 219 (1,371) 1,067 (694)
------- ------ ------ ------- ------- ------- -------
Net interest income (FTE) $ 20,486 21,237 19,892 1,464 (2,215) 1,097 (248)
====== ====== ======= ======= ======= ======= =====
______________________
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 38.74%.
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.
</TABLE>
22
<PAGE>
TABLE 3
MATURITY OF INVESTMENT SECURITIES
The following table sets forth the maturity of the registrant's investment
portfolio:
<TABLE>
<CAPTION>
States and Corporate Total Total
U.S. Government Political Obligations Amortized Fair
U.S. Treasury Agencies Subdivisions(1) and Other Cost Value
--------------- ----------------- ---------------- ----------- ----------- -------
Amount Yield Amount Yield Amount Yield Amount Amount Amount
------- ------ -------- ------- ------- ------- ----------- ----------- -------
Securities available for sale(2):
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 year or less $ 4,008 5.41% 1,000 5.60% 1,247 7.02% - 6,255 6,242
1 through 5 years 4,092 5.59% 26,937 5.77% 4,196 6.68% - 35,225 34,259
5 through 10 years 774 6.50% 22,947 6.46% 8,857 6.46% - 32,578 31,308
After 10 years - - 6,859 7.60% 6,050 6.92% - 12,909 11,893
Mortgage backed securities(3) - - 41,569 6.58% - - - 41,569 39,636
------- ------ -------- ------- ------- ------- ----------- ----------- -------
Total debt securities $ 8,874 5.59% 99,312 6.39% 20,350 6.68% - 128,536 123,338
Federal Home Loan Bank stock - - - - - - 2,052 2,052 2,052
Other equity securities - - - - - - 769 769 769
------- ------ -------- ------- ------- ------- ----------- ----------- -------
Total securities available for sale $ 8,874 5.59% 99,312 6.39% 20,350 6.68% 2,821 131,357 126,159
======= ====== ======== ======= ======= ======= =========== =========== =======
____________________________
1 Yields were calculated on a tax equivalent basis assuming a blended federal and state tax rate of 38.74%.
2 At December 31, 1999, the Company did not own any investment securities from a single issuer other than the U.S.
Federal Government, U.S. Federal Government agencies, or U.S. Federal Government sponsored agencies 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.
</TABLE>
23
<PAGE>
TABLE 4
ANALYSIS OF LOAN PORTFOLIO AND LOSS EXPERIENCE
The following table sets forth the registrant's loan portfolio by major category
for each of the last five years.
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31,
-------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural $105,163 85,790 73,908 69,593 63,196
Real estate mortgages 204,743 213,760 208,500 186,599 159,902
Consumer 18,144 29,168 32,606 35,242 33,094
Leases 369 478 524 892 1,455
--------- -------- -------- -------- --------
Gross loans $364,419 329,196 315,538 292,326 257,646
Less:
Unearned discount and deferred loan fees $ 332 2,388 2,352 3,172 3,074
Allowance for possible loan losses 4,636 4,750 4,646 3,774 3,298
--------- -------- -------- -------- --------
Net loans $359,451 322,058 308,540 285,380 251,274
========= ======== ======== ======== ========
SUMMARY OF LOAN LOSS EXPERIENCE:
- -----------------------------------------------
Allowance for loan and lease losses, beginning $ 4,750 4,646 3,774 3,298 3,475
Amounts charged-off:
Commercial, financial and agricultural 24 11 60 270 268
Real estate mortgages 195 275 - 43 175
Consumer 348 748 677 783 547
--------- -------- -------- -------- --------
Total charge-offs $ 567 1,034 737 1,096 990
--------- -------- -------- -------- --------
Recoveries on amounts previously charged-off:
Commercial, financial and agricultural $ 101 230 274 236 133
Real estate mortgages 23 17 - 17 -
Consumer 74 178 174 88 151
--------- -------- -------- -------- --------
Total recoveries $ 198 425 448 341 284
--------- -------- -------- -------- --------
Net charge-offs $ 369 609 289 755 706
Provision charged to expense $ 695 713 1,128 1,113 478
Addition to dealer reserve - - 33 118 51
Allowance for loans sold (440) - - - -
--------- -------- -------- -------- --------
Allowance for loans and lease losses $ 4,636 4,750 4,646 3,774 3,298
========= ======== ======== ======== ========
Non-performing loans at year-end:
Non-accrual $ 2,685 2,262 3,968 2,348 2,064
Restructured 120 208 139 314 270
--------- -------- -------- -------- --------
Total non-performing loans $ 2,805 2,470 4,107 2,662 2,334
========= ======== ======== ======== ========
Past due 90 days or more, not included above $ 573 347 345 49 15
Other real estate, not included above 201 - - 75 -
RATIOS:
- -----------------------------------------------
Allowance to year-end loans, net of unearned 1.27% 1.45% 1.48% 1.31% 1.30%
Allowance to non-performing loans 165.28 192.31 113.12 141.77 141.30
Net charge-offs to average loans (gross) 0.11 0.19 0.10 0.28 0.29
Recoveries to charge-offs 34.92 41.10 60.79 31.11 28.69
Non-performing loans to loans, net of unearned
discount and deferred loan fees 0.77 0.76 1.31 0.92 0.92
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
TABLE 5
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table shows the registrant's allowance for loan losses for the last five years.
(Dollars in thousands)
Commercial Real
Financial & Estate
Agricultural Mortgage Consumer Leases Unallocated Total
-------------- --------- --------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 $ 1,889 1,185 1,357 5 200 4,636
% of loans in category to total loans 29.09% 65.85% 4.96% 0.10% N/A 100.00%
December 31, 1998 $ 1,811 1,148 1,586 5 200 4,750
% of loans in category to total loans 26.06% 64.93% 8.86% 0.15% 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 1,129 1,054 15 200 3,774
% of loans in category to total loans 23.85% 63.80% 12.05% 0.30% N/A 100.00%
December 31, 1995 $ 1,420 1,133 519 26 200 3,298
% of loans in category to total loans 24.77% 61.86% 12.80% 0.56% N/A 100.00%
</TABLE>
<TABLE>
<CAPTION>
TABLE 6
MATURITY AND INTEREST SENSITIVITY OF LOANS
The following table shows the maturity of the registrant's loan portfolio.
(Dollars in thousands)
As of December 31, 1999
-------------------------------------------------------------------------
Loans Due
Time Remaining to Maturity After One Year
------------------------------------------------------- ----------------
Fixed Floating
Due Within One to Five After Five Interest Interest
One Year Years Years Total Rate Rate
----------------- -------------- ---------- -------- -------- ------
Commercial, financial, agricultural,
<S> <C> <C> <C> <C> <C> <C>
and leases $ 64,853 28,847 11,832 105,532 27,918 12,761
Real estate mortgages 107,628 111,247 21,868 240,743 62,938 70,177
Consumer 10,303 6,954 887 18,144 7,810 31
----------------- -------------- ---------- -------- -------- ------
Total $ 182,784 147,048 34,587 364,419 98,666 82,969
- ------------------------------------ ================= ============== ========== ======== ======== ======
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
TABLE 7
AVERAGE DEPOSITS
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:
(Dollars in thousands)
DECEMBER 31,
---------------------------------------------------------
Non-Interest Interest
Bearing Bearing
Demand Demand Savings Time Total
Deposits Deposits Accounts Deposits Deposits
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
1999 Average
Balance $ 49,662 84,821 93,997 219,776 448,246
Rate -- 2.51% 2.81% 5.45% 4.20%
1998 Average
Balance $ 42,805 78,465 78,725 231,758 431,753
Rate -- 2.61% 2.82% 5.75% 4.52%
1997 Average
Balance $ 40,585 71,527 72,899 225,302 410,313
Rate -- 2.83% 3.10% 5.79% 4.76%
1996 Average
Balance $ 39,292 68,621 76,087 207,248 391,248
Rate -- 2.52% 3.14% 5.79% 4.58%
1995 Average
Balance $ 36,702 66,416 75,884 181,746 360,748
Rate -- 2.51% 3.39% 5.67% 4.49%
</TABLE>
The following table sets forth the registrant's maturity distribution for all
time deposits of $100,000 or more as of December 31, 1999.
MATURITY DISTRIBUTION FOR ALL TIME DEPOSITS OF $100,000 OR MORE
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------
3 Months 3 - 6 6 - 12 Over 12
or Less Months Months Months Total
------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C>
Time deposits of $100,000 or more $ 20,773 7,293 14,493 16,134 58,693
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
TABLE 8
OTHER BORROWINGS
The following table sets forth a summary of the registrant's other borrowings
for each of the last three years.
(Dollars in thousands)
December 31,
------------------------
1999 1998 1997
-------- ------ ------
<S> <C> <C> <C>
Repurchase agreements $ 336 313 4,268
Federal funds purchased 24,500 33,900 21,850
Federal Home Loan Bank borrowings 7,700 7,700 8,932
Secured Term Loan 6,050 8,300 9,250
Other 900 4,284 5,007
-------- ------ ------
Total $ 39,486 54,497 49,307
======== ====== ======
</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,
---------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
------------- ------ ------ ------ ------
Return on average assets 0.05% 0.92% 0.62% 0.40% 0.80%
Return on average equity 0.64 11.95 8.43 5.36 9.94
Common stock dividend payout ratio 267.43 11.91 15.20 22.45 10.97
Average equity to average asset ratio 7.80 7.71 7.37 7.45 8.03
</TABLE>
27
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- ---------------------------------------------------------------------------
See Item 7 above.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------------
Consolidated Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(Dollars in thousands, except share data)
- ------------------------------------------------------------------ --------- -------
<S> <C> <C>
ASSETS 1999 1998
- ------------------------------------------------------------------ --------- -------
Cash and due from banks (note 2) $ 17,501 12,269
- ------------------------------------------------------------------ --------- -------
Investment securities available for sale (note 3) 126,159 132,060
- ------------------------------------------------------------------ --------- -------
Mortgage loans held for sale, lower of cost or market 14,892 66,755
- ------------------------------------------------------------------ --------- -------
Loans (note 4) 364,419 329,196
Less:
Allowance for possible loan losses (note 4) 4,636 4,750
Unearned income and deferred loan fees 332 2,388
- ------------------------------------------------------------------ --------- -------
Net loans 359,451 322,058
Premises and equipment (note 5) 11,547 10,936
Goodwill, net of amortization 2,210 2,515
Assets of discontinued operations (note 18) 2,878 5,686
Other assets 6,212 6,003
- ------------------------------------------------------------------ --------- -------
$540,850 558,282
================================================================== ========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
================================================================== ========= =======
Liabilities:
Deposits:
Noninterest-bearing 52,274 50,371
Interest-bearing (note 6) 408,143 404,621
- ------------------------------------------------------------------ --------- -------
Total deposits 460,417 454,992
Other borrowings (note 7) 39,486 54,497
Other liabilities 3,539 7,248
- ------------------------------------------------------------------ --------- -------
Total liabilities 503,442 516,737
- ------------------------------------------------------------------ --------- -------
Stockholders' equity:
Common stock, $.33 1/3 par value; 25,000,000 shares authorized,
4,369,663 and 4,343,710 shares issued and outstanding in 1999
and 1998, respectively 1,457 1,448
Additional paid-in capital 6,830 6,439
Accumulated other comprehensive (loss) earnings (note 8) (3,164) 934
Retained earnings (notes 11 and 12) 32,285 32,724
- ------------------------------------------------------------------ --------- -------
Total stockholders' equity 37,408 41,545
Commitments and contingent liabilities (notes 13 and 14)
- ------------------------------------------------------------------ --------- -------
$540,850 558,282
================================================================== ========= =======
See accompanying notes to consolidated financial statements.
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
Consolidated Statements of Earnings
Years Ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except share data)
- ----------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------- --------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 28,452 29,385 28,537
Interest and dividends on investment securities available for sale:
Taxable 6,825 8,095 8,325
Nontaxable 1,025 657 582
Interest on excess funds sold 93 73 33
Interest on mortgage loans held for sale 1,855 2,394 1,557
- ---------------------------------------------------------------------- --------- -------- --------
Total interest income 38,250 40,604 39,034
- ---------------------------------------------------------------------- --------- -------- --------
Interest expense:
Interest on deposits 16,910 17,796 17,355
Interest on other borrowings 1,899 2,165 2,234
- ---------------------------------------------------------------------- --------- -------- --------
Total interest expense 18,809 19,961 19,589
- ---------------------------------------------------------------------- --------- -------- --------
Net interest income before provision for possible loan losses 19,441 20,643 19,445
Provision for possible loan losses (note 4) 695 713 1,128
- ---------------------------------------------------------------------- --------- -------- --------
Net interest income after provision for possible loan losses 18,746 19,930 18,317
- ---------------------------------------------------------------------- --------- -------- --------
Other operating income:
Trust fees 826 769 662
Deposit service charges 401 358 375
Other service charges 1,647 1,224 1,178
Investment securities gains, net (note 3) 250 154 210
Mortgage loan origination income 1,039 1,820 1,113
Other income 1,320 1,211 900
- ---------------------------------------------------------------------- --------- -------- --------
Total other operating income 5,483 5,536 4,438
- ---------------------------------------------------------------------- --------- -------- --------
Other operating expenses:
Salaries and employee benefits (note 9) 10,084 11,202 10,928
Net occupancy expense of premises 1,294 1,405 1,332
Furniture and fixtures 1,440 1,399 1,382
Office supplies 377 412 339
Outside services 948 911 636
Advertising expense 400 438 412
FDIC insurance assessment 52 51 49
Postage and courier expense 377 472 352
Telephone expense 343 309 431
Loss on sale of loans 514 - -
Amortization expense-goodwill 305 388 388
Other expenses 2,239 2,178 2,035
- ---------------------------------------------------------------------- --------- -------- --------
Total other operating expenses 18,373 19,165 18,284
- ---------------------------------------------------------------------- --------- -------- --------
Earnings before income taxes 5,856 6,301 4,471
Income tax expense (note 8) 1,809 2,142 1,461
- ---------------------------------------------------------------------- --------- -------- --------
Net earnings from continuing operations $ 4,047 4,159 3,010
- ---------------------------------------------------------------------- --------- -------- --------
Discontinued operations (note 18) $ (3,786) 576 3
- ---------------------------------------------------------------------- --------- -------- --------
Net earnings $ 261 4,735 3,013
- ---------------------------------------------------------------------- --------- -------- --------
Net earnings applicable to common stock $ 261 4,712 2,811
- ---------------------------------------------------------------------- --------- -------- --------
Basic earnings per common share from
Continuing operations $ 0.93 0.96 0.68
Discontinued operations (0.87) 0.13 0.00
Net earnings 0.06 1.09 0.68
Diluted earnings per common share from
Continuing operations $ 0.92 0.95 0.67
Discontinued operations (0.86) 0.13 0.00
Net earnings 0.06 1.08 0.67
====================================================================== ========= ======== ========
See accompanying notes to consolidated financial statements.
29
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1999, 1998, and 1997
(Dollars in thousands, except share data)
- --------------------------------------------------------------------------------------------------------------------------------
Accumulated Other
Comprehensive
Preferred Common Retained (loss)
stock stock Surplus earnings earnings Total
- ---------------------------------------------------------------------- --------- -------- -------- ------- ------- -------
Balance as of January 1, 1997 $ 2,600 1,382 4,310 26,223 447 34,962
Comprehensive earnings
Net earnings - - - 3,013 - 3,013
Unrealized gain on investment securities - - - - 425 425
Reclassified adjustments for gains included
in net earnings - - - - (210) (210)
Income tax effect - - - - (85) (85)
-------
Total comprehensive earnings - - - - - 3,143
Issuance of 27,326 shares of common stock - 10 248 - - 258
Redemption of preferred stock with issuance of
132,622 shares of common stock (2,300) 44 1,415 - - (841)
Cash dividends on preferred stock - - - (202) - (202)
Cash dividends on common stock ($0.11 per share) - - - (458) - (458)
- ---------------------------------------------------------------------- --------- -------- -------- ------- ------- -------
Balance as of December 31, 1997 $ 300 1,436 5,973 28,576 577 36,862
Comprehensive earnings
Net earnings - - - 4,735 - 4,735
Unrealized gain on investment securities - - - - 727 727
Reclassified adjustments for gains included
in net earnings - - - - (154) (154)
Income tax effect - - - - (216) (216)
-------
Issuance of 38,524 shares of common stock - 12 466 - - 478
Redemption of preferred shares (300) - - - - (300)
Cash dividends on preferred stock - - - (23) - (23)
Cash dividends on common stock ($0.13 per share) - - - (564) - (564)
- ---------------------------------------------------------------------- --------- -------- -------- ------- ------- -------
Balance as of December 31, 1998 $ 0 1,448 6,439 32,724 934 41,545
Comprehensive loss
Net earnings - - - 261 - 261
Unrealized loss on investment securities - - - - (6,431) (6,431)
Reclassified adjustments for gains included
in net earnings - - - - (250) (250)
Income tax effect - - - - 2,583 2,583
-------
Total comprehensive loss - - - - - (3,837)
Issuance of 25,953 shares of common stock - 9 391 - - 400
Cash dividends on common stock ($0.16 per share) - - - (700) - (700)
- ---------------------------------------------------------------------- --------- -------- -------- ------- ------- -------
Balance at December 31, 1999 $ 0 1,457 6,830 32,285 (3,164) 37,408
====================================================================== ========= ======== ======== ======= ======= =======
See accompanying notes to consolidated financial statements.
30
<PAGE>
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998, and 1997
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------------- --------- -------- --------
Cash flows from continuing operating activities:
Interest received $ 36,335 40,231 38,507
Fees received 4,779 5,488 4,451
Net decrease (increase) in mortgage loans held for sale 52,091 (22,600) (24,411)
Interest paid (19,101) (19,965) (19,162)
Cash paid to suppliers and employees (17,806) (16,712) (16,136)
Income taxes paid (1,002) (2,695) (1,784)
- ---------------------------------------------------------------------- --------- -------- --------
Net cash provided by (used in) continuing operating activities 55,296 (16,253) (18,535)
- ---------------------------------------------------------------------- --------- -------- --------
Cash flows from investing activities:
Proceeds from:
Maturities of investment securities available for sale 16,696 40,639 29,837
Sales of investment securities available for sale 26,828 38,406 59,152
Purchases of investment securities available for sale (44,611) (80,197) (85,310)
Net increase in loans (37,297) (14,331) (23,371)
Premises and equipment expenditures (1,885) (1,883) (1,925)
- ---------------------------------------------------------------------- --------- -------- --------
Net cash used in investing activities (40,269) (17,366) (21,617)
- ---------------------------------------------------------------------- --------- -------- --------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW accounts,
and savings accounts 7,685 34,885 (1,026)
Net (decrease) increase in certificates of deposit (2,260) (5,210) 21,415
Dividends paid on preferred stock - (23) (202)
Dividends paid on common stock (609) (510) (208)
Net proceeds from short-term debt (10,761) 5,141 19,468
Issuance of long term debt - 1,000 1,000
Repayment of long-term debt (4,250) (950) (900)
Redemption of preferred stock - (300) (2,300)
Issuance of common stock 400 478 1,717
- ---------------------------------------------------------------------- --------- -------- --------
Net cash (used in) provided by financing activities (9,795) 34,511 38,964
- ---------------------------------------------------------------------- --------- -------- --------
Net change in cash and due from banks from continuing operations 5,232 892 (1,188)
Cash and due from banks at beginning of year 12,269 11,377 12,565
- ---------------------------------------------------------------------- --------- -------- --------
Cash and due from banks at end of year $ 17,501 12,269 11,377
- ---------------------------------------------------------------------- --------- -------- --------
Reconciliation of net earnings to net cash provided
by (used in) continuing operating activities:
Net earnings $ 261 4,735 3,013
Adjustments to reconcile net earnings to net cash provided
by continuing operating activities:
Discontinued Operations 3,786 (576) (3)
Depreciation and amortization 1,681 1,796 1,801
Provision for possible loan losses 695 713 1,128
Gains on sale of investment securities (250) (154) (210)
Increase (decrease) in:
Income taxes payable 807 (553) (323)
Interest payable (292) (5) 426
Unearned income (2,056) 36 (821)
Other liabilities (1,114) 833 348
Decrease (increase) in:
Interest receivable 208 (358) 363
Other assets (454) 105 223
Decrease (increase) in mortgage loans held for sale 52,091 (22,600) (24,411)
Discount accretion recorded as income (369) (485) (380)
Premium amortization charged against income 302 260 311
- ---------------------------------------------------------------------- --------- -------- --------
Net cash provided by (used in) continuing operating activities $ 55,296 (16,253) (18,535)
====================================================================== ========= ======== ========
Net change in cash and due from banks from discontinued operations $ (2,080) 1,194 813
====================================================================== ========= ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
31
<PAGE>
Years Ended December 31, 1999, 1998, and 1997
- ----------------------------------------------------
(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). Significant
intercompany transactions and accounts have been eliminated in consolidation.
CMI is reported as a discontinued operation (see note 18).
(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. The mortgage loans
held for sale presented on the Company's Consolidated Balance Sheets represent
mortgages currently held for sale by the Subsidiary Banks. These balances
relate to both mortgages originated in the banking segment, as well as mortgages
originated by CMI and subsequently sold to the Subsidiary Banks to hold for sale
to third party investors. Mortgage loans held for sale by CMI (i.e., those not
sold to the Subsidiary Banks) are presented in assets of discontinued operations
on the Consolidated Balance Sheets.
(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. The mortgage
loan origination income presented on the Company's Consolidated Statements of
Earnings represents the income derived from the mortgage lending activities of
the banking segment. The mortgage loan origination income produced by CMI is
presented as a component of discontinued operations in the Consolidated
Statements of Earnings.
(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. 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 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.
32
<PAGE>
(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 losses in the loan portfolio. The allowance is based upon a
continuing review of specific loans, past loan loss experience, current economic
conditions that 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 relating to continuing operations exceeded their fair value of net
assets acquired by approximately $5,892,000. This amount, net of accumulated
amortization of $3,682,000 and $3,377,000 at December 31, 1999 and 1998,
respectively, is shown as goodwill in the accompanying consolidated balance
sheets.
The cost of the Company's acquisition of CMI (i.e. discontinued operations)
exceeded the fair value of the net assets acquired by approximately $1,922,000.
The remaining carrying value of CMI's goodwill was written-off at December 31,
1999, such that the accumulated amortization was $1,922,000 and $470,000 at
December 31, 1999 and 1998, respectively.
The goodwill for continuing operations 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 carry
forwards. 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 and State income
tax returns.
(L) EARNINGS PER SHARE. Basic earnings per share (EPS) is based on the
weighted average number of common shares outstanding. Diluted EPS is based on
the weighted average number common shares outstanding, increased by the assumed
conversion of the convertible preferred stock and exercise of the Company's
stock options. All information relating to per common share data reflects
the May 1999 2-for-1 stock split in the form of a 100% stock dividend.
The components of basic and diluted EPS for the years ended December 31,
1999, 1998, and 1997 were as follows:
33
<PAGE>
The components of basic and diluted EPS for the years ended December 31,
1999, 1998, and 1997 were as follows:
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------- ----------- ---------- ----------
<S> <C> <C> <C>
Basic EPS:
Net earnings 261 4,735 3,013
Less: preferred stock dividends - (23) (202)
----------- ----------- -----------
Net earnings available to common stockholders $ 261 4,712 2,811
----------- ----------- -----------
Average common shares 4,358,888 4,327,28 4,158,502
=========== =========== ===========
Basic EPS $ 0.06 1.09 0.68
----------- ----------- -----------
Diluted EPS
Net earnings available to common stockholders $ 261 4,712 2,811
Assumed conversion of preferred stock (anti-dilutive in 1997) - 23 N/A
Net earnings available to common stockholders after assumed conversion $ 261 4,735 2,811
=========== =========== ===========
Average common shares 4,358,888 4,327,288 4,158,502
Assumed conversion of preferred stock (anti-dilutive in 1997) - 21,818 N/A
Assumed exercise of stock options 56,459 37,438 44,376
----------- ----------- -----------
Average common shares after assumed conversions 4,415,347 4,386,544 4,202,878
=========== =========== ===========
Diluted EPS $ 0.06 1.08 0.67
=========== =========== ===========
</TABLE>
(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 $3,275,000 and $1,060,000 in 1999 and 1998, 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, 1999 and 1998 follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, 1999
- ----------------------------------------------- ----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------- ------------------ ---------- ----------- -------
<S> <C> <C> <C> <C>
U.S. Treasury and agency obligations $ 66,617 3 (2,352) 64,268
Obligations of state and political subdivisions 20,350 14 (930) 19,434
Mortgage-backed securities 41,569 6 (1,939) 39,636
- ----------------------------------------------- ------------------ ---------- ----------- -------
Total debt securities $ 128,536 23 (5,221) 123,338
- ----------------------------------------------- ------------------ ---------- ----------- -------
Federal Home Loan Bank stock $ 2,052 - - 2,052
Other equity securities 769 - - 769
- ----------------------------------------------- ------------------ ---------- ----------- -------
Total securities $ 131,357 23 (5,221) 126,159
=============================================== ================== ========== =========== =======
34
<PAGE>
December 31, 1998
- ----------------------------------------------- ----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------- ------------------ ---------- ----------- -------
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 433 - - 443
- ----------------------------------------------- ------------------ ---------- ----------- -------
Total securities $ 130,577 1,666 (183) 132,060
=============================================== ================== ========== =========== =======
</TABLE>
The amortized cost and fair value of securities available for sale at
December 31, 1999 by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
(Dollars in thousands)
December 31, 1999
---------------------------
<TABLE>
<CAPTION>
Amortized Cost Fair Value
--------------- ----------
<S> <C> <C>
Due in one year or less $ 6,255 6,242
Due after one year through five years 35,225 34,259
Due after five years through ten years 32,578 31,308
Due after ten years 12,909 11,893
- -------------------------------------- --------------- ----------
86,967 83,702
Mortgage-backed securities 41,569 39,636
- -------------------------------------- --------------- ----------
Total debt securities 128,536 123,338
Federal Home Loan Bank stock 2,052 2,052
Other equity securities 769 769
- -------------------------------------- --------------- ----------
Total securities $ 131,357 126,159
====================================== =============== ==========
</TABLE>
Gross gains of approximately $312,000, $167,000, and $409,000 occurred from
security activity during 1999, 1998, and 1997, respectively. Gross losses of
approximately $62,000, $13,000, and $199,000 occurred from security activity
during 1999, 1998, and 1997, respectively. All security gains and losses were
as a result of transactions involving available-for-sale securities.
Investment securities carried at approximately $82,802,000 and $83,062,000
at December 31, 1999 and 1998, 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>
1999 1998
-------- -------
<S> <C> <C>
Commercial, financial, and agricultural $105,163 85,790
Real estate mortgage 240,743 213,760
Consumer 18,144 29,168
Lease financing receivables 369 478
- --------------------------------------- -------- -------
Total $364,419 329,196
======================================= ======== =======
</TABLE>
35
<PAGE>
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>
1999 1998
- ------------------------------------- ------ -----
<S> <C> <C>
Non-accrual loans and leases $2,685 2,262
Restructured loans 120 208
- ------------------------------------- ------ -----
Total non-performing loans and leases $2,805 2,470
===================================== ====== =====
</TABLE>
Loans past due 90 days or more and still accruing interest are not included
above and totaled $573,000 and $347,000 at December 31, 1999 and 1998,
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>
<S> <C> <C> <C>
1999 1998 1997
----- ---- ----
Income recognized $ 101 65 27
Income which would have been recognized under original terms 168 175 344
===== ==== ====
</TABLE>
Impaired loan information at December 31, 1999, 1998, and 1997 is as
follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
- ---------------------------------------------------------------- ------ ---- -----
Impaired loans for which a related allowance has been allocated $ 883 54 821
Impaired loans for which no allowance has been allocated 907 864 1,841
- ---------------------------------------------------------------- ------ ---- -----
Total loans determined to be impaired $1,790 918 2,662
- ---------------------------------------------------------------- ------ ---- -----
Allowance allocated to impaired loans, included in the allowance
for possible loan losses $ 182 10 210
================================================================ ====== ==== =====
</TABLE>
Impaired loans averaged $1,354,000, $1,790,000, and $2,152,000 for the
years ended December 31, 1999, 1998, and 1997, respectively. Of the $1,790,000
of impaired loans at December 31, 1999, $473,000 represented loans still
accruing interest and $1,317,000 represented non-accrual loans. Of the $918,000
of impaired loans at December 31, 1998, $232,000 represented loans still
accruing interest and $686,000 represented non-accrual loans.
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.
36
<PAGE>
The following summarizes activity on loans, including renewals, made to
related parties during 1999 and 1998:
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
- ------------------------------------ -------- -------
Loans outstanding, beginning of year $ 5,666 3,829
New loans, renewals, and advances 295 3,367
Loan payments (3,871) (1,530)
- ------------------------------------ -------- -------
Loans outstanding, end of year $ 2,090 5,666
==================================== ======== =======
</TABLE>
The following is a summary of activity in the allowance for possible loan
losses:
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
------ ----- -----
Balance, beginning of year $4,750 4,646 3,774
Provision charged to expense 695 713 1,128
Additions to dealer reserves - - 33
Recoveries on loans previously charged off 198 425 448
- ------------------------------------------ ------ ----- -----
5,643 5,784 5,383
Less loans charged off 567 1,034 737
Less allowance for loans sold 440 - -
- ------------------------------------------ ------ ----- -----
Balance, end of year $4,636 4,750 4,646
========================================== ====== ===== =====
</TABLE>
(5) PREMISES AND EQUIPMENT - The components of premises and equipment at
December 31 were as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------- ------
Land and land improvements $ 2,057 1,574
Building and improvements 11,659 11,228
Furniture, fixtures, and equipment 7,380 7,363
- ---------------------------------- ------- ------
21,096 20,165
Less accumulated depreciation 9,549 9,229
- ---------------------------------- ------- ------
Total $11,547 10,936
================================== ======= ======
</TABLE>
(6) DEPOSITS - The aggregate amount of large time deposits, each with a
minimum denomination of $100,000, was $58,693,000 and $56,612,000 at December
31, 1999 and 1998, respectively. Included in these totals were $297,000 and
$693,000 of brokered deposits at December 31, 1999 and 1998, respectively, with
an interest rate of 6.75% in 1999 and interest rates from 6.20% to 6.75% in
1998.
37
<PAGE>
(7) OTHER BORROWINGS - The components of other borrowings at December 31 are
as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
------- ------
Repurchase agreements $ 336 313
Federal funds purchased 24,500 33,900
Federal Home Loan Bank borrowings 7,700 7,700
Secured term loan dated July 10, 1990, as amended, with interest at the
60 day LIBOR rate plus 1.625% (7.135% at December 31, 1999), principal
payable in 2 semi-annual payments remaining from June 30, 1999 through
December 31, 2000 6,050 8,300
Other 900 4,284
------- ------
Total $39,486 54,497
======= ======
</TABLE>
The secured term loan with a balance outstanding of $6,050,000 at December
31, 1999, 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 Company is in compliance with all restrictive covenants as of
December 31, 1999. The restriction on dividends to stockholders is described
further in note 11.
Federal Home Loan Bank borrowings are collateralized by Federal Home Loan
Bank stock and first mortgage real estate loans. As of December 31, 1999, the
notes mature from 2000 through 2008 and have variable interest rates with an
average of 5.67%. Certain Federal Home Loan Bank borrowings with call features
have been classified as short-term borrowings by the Company. CB and FNB 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.
Included in other borrowings is a line of credit agreement of $7,500,000
with an outstanding balance at December 31, 1999 and 1998 of $0 and $3,825,000,
respectively. The rate applicable to the outstanding balance at December 31,
1998 was 6.63%. The line of credit is secured by outstanding stock of the
Subsidiaries, which are 100% owned by the Company. The Company also had another
line of credit of $3,000,000 at December 31, 1998 with no outstanding balance,
which was canceled during 1999.
Scheduled payments on other borrowings, through maturity, are:
(Dollars in thousands)
Year ended December 31 Amount
---------------------- -------
2000 $38,486
2001 $ 1,000
====================== =======
38
<PAGE>
(8) INCOME TAXES - The components of Federal income tax expense (benefit)
for 1999, 1998, and 1997 were as follows:
(Dollars in thousands)
1999 1998 1997
------- ------ ------
Current $2,037 2,270 2,081
Deferred (228) (128) (620)
-------- ------- ------ ------
Total $1,809 2,142 1,461
======== ======= ====== ======
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 1999, 1998 and 1997 are as follows:
(Dollars in thousands)
1999 1998 1997
------- ------ ------
Tax expense at statutory rate $1,991 2,142 1,520
Tax-exempt interest, net of premium amortization (462) (253) (211)
Nondeductible amortization 154 158 156
Other, net 126 95 (4)
- ------------------------------------------------ ------- ------ ------
Total income tax expense $1,809 2,142 1,461
================================================ ======= ====== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Deferred loan fees $ - 40
Allowance for loan losses 1,324 1,266
Unrealized losses on investment securities 1,968 -
Other 110 13
Deferred compensation 195 281
- --------------------------------------------- ------- -------
Total gross deferred tax assets 3,597 1,600
- --------------------------------------------- ------- -------
Deferred tax liabilities:
Purchase accounting adjustments (407) (464)
Accretion on investments (10) (45)
Depreciation (265) (257)
Unrealized gains on investment securities - (504)
Net lease adjustment (9) (52)
Other, net (25) (97)
- --------------------------------------------- ------- -------
Total gross deferred tax liabilities (716) (1,419)
- --------------------------------------------- ------- -------
Net deferred tax assets (liabilities) 2,881 181
============================================= ======= =======
</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.
39
<PAGE>
(9) EMPLOYEE BENEFIT PLANS - The Company maintains a profit-sharing plan,
which was amended and restated as of January 1, 1999. The amended plan covers
substantially all officers and employees of the Company. Under provisions of
the plan, the Company may elect to provide discretionary contributions. Prior
to the amendment as of January 1, 1999, the Company was required to make minimum
annual contributions of 7.5% of net operating profits, as defined in the
previous plan. Contributions by the Company to the plan totaled $449,000,
$908,000, and $672,000 in 1999, 1998, and 1997, respectively.
In 1995, the Company instituted a non-qualified supplemental employee
profit sharing plan. The supplemental plan covers certain 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 $18,000, $14,000, and $15,000 in 1999,
1998, and 1997, respectively.
In 1992, the Company instituted an Employee Stock Purchase Plan covering
substantially all officers and employees of the Company. In 1999, that plan was
replaced by a newly instituted Dividend Reinvestment and Stock Purchase Plan
(Plan). The Company incurs no costs associated with the Plan except for nominal
administration expenses. Under the stock purchase portion of the Plan,
employees may purchase original issue Company stock at market prices up to a
maximum limit established within the Plan. Under the dividend reinvestment
portion of the Plan, shareholders of the Company may elect to purchase original
issue Company stock at market prices in lieu of receiving the cash dividend.
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 $7.00 to $16.00 per share at December 31, 1999. 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, 1999 December 31, 1998
--------------------------------------
Average Average
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options outstanding at beginning of year 263,600 $ 9.05 218,500 $ 7.77
Options granted 16,000 $ 16.00 50,000 $14.64
Options exercised (1,600) $ 8.63 (3,150) $ 7.02
Options forfeited (2,400) $ 14.42 (1,750) $12.64
- -------------------------------------------------------- -------- ------- -------- ------
Options outstanding at end of year 275,600 $ 9.41 263,600 $ 9.05
- -------------------------------------------------------- -------- ------- -------- ------
Options exercisable at end of year 205,475 $ 7.88 146,826 $ 7.35
- -------------------------------------------------------- -------- ------- -------- ------
Options available to grant under the plan at end of year 28,825 40,478
======================================================== ======== ======= ======== ======
</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 earnings
and earnings per share would have been reduced to the pro forma amounts
indicated below:
40
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
1999 1998
- ---------------------------------------- ----------- ------ ------
<S> <C> <C> <C>
Net earnings from continuing operations As reported $4,047 4,159
Pro forma 4,002 4,029
Net earnings As reported $ 261 4,735
Pro forma 216 4,605
Basic earnings per share from continuing As reported $ 0.93 0.96
operations Pro forma 0.92 0.93
Basic earnings per share As reported $ 0.06 1.09
Pro forma 0.05 1.06
- ---------------------------------------- ----------- ------ ------
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model.
(10) 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 132,622 shares of the
Company's common stock. On December 31, 1998, the remaining 300 shares were
redeemed for cash.
(11) 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 7. 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, 1999, the Company had $1,213,000 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, 1999,
subject to minimum regulatory capital guidelines, FNB, CBH, and CB could,
without prior approval of regulatory authorities, declare dividends of
approximately $3,927,000, $299,000, and $2,433,000, respectively.
(12) 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, 1999 and 1998, that the Company and subsidiaries meet all capital
adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the federal
banking agencies categorized each of the Company and subsidiaries as well
capitalized at December 31, 1999 and 1998 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, 1999 and 1998 are as follows:
41
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
December 31, 1999
-------------------------------------
Well
Actual Actual Capitalized Minimum
Amount Ratio Ratio Ratio
- ------------------------------------------------- ------- ------------ -------- -----
Total risk-based capital to risk-weighted assets:
<S> <C> <C> <C> <C>
Castle BancGroup, Inc. $42,999 11.11% 10.00% 8.00%
First National Bank in DeKalb 21,801 10.90% 10.00% 8.00%
Castle Bank N.A. 16,871 12.54% 10.00% 8.00%
Castle Bank Harvard, N.A. 7,333 14.37% 10.00% 8.00%
- ------------------------------------------------- ------- ------------ -------- -----
Tier I capital to risk-weighted assets:
Castle Bancgroup, Inc. $38,362 9.91% 6.00% 4.00%
First National Bank in DeKalb 19,736 9.87% 6.00% 4.00%
Castle Bank N.A. 15,194 11.30% 6.00% 4.00%
Castle Bank Harvard, N.A. 6,695 13.12% 6.00% 4.00%
- ------------------------------------------------- ------- ------------ -------- -----
Tier I capital to average assets:
Castle BancGroup, Inc. $38,362 7.26% 5.00% 4.00%
First National Bank in DeKalb 19,736 7.33% 5.00% 4.00%
Castle Bank N.A. 15,194 7.80% 5.00% 4.00%
Castle Bank Harvard, N.A. 6,695 9.60% 5.00% 4.00%
================================================= ======= ============ ======== =====
December 31, 1998
-------------------------------------
Well
Actual Actual Capitalized Minimum
Amount Ratio Ratio Ratio
- ------------------------------------------------- ------- ------------ -------- -----
Total risk-based capital to risk-weighted assets:
Castle BancGroup, Inc. $41,284 11.08% 10.00% 8.00%
First National Bank in DeKalb 20,341 11.22% 10.00% 8.00%
Castle Bank N.A. 15,679 11.59% 10.00% 8.00%
Castle Bank Harvard, N.A. 7,020 13.15% 10.00% 8.00%
- ------------------------------------------------- ------- ------------ -------- -----
Tier I capital to risk-weighted assets:
Castle BancGroup, Inc. $36,625 9.83% 6.00% 4.00%
First National Bank in DeKalb 18,496 10.20% 6.00% 4.00%
Castle Bank N.A. 14,176 10.48% 6.00% 4.00%
Castle Bank Harvard, N.A. 6,353 11.90% 6.00% 4.00%
- ------------------------------------------------- ------- ------------ -------- -----
Tier I capital to average assets:
Castle BancGroup, Inc. $36,625 6.31% 5.00% 4.00%
First National Bank in DeKalb 18,496 6.74% 5.00% 4.00%
Castle Bank N.A. 14,176 7.06% 5.00% 4.00%
Castle Bank Harvard, N.A. 6,353 8.58% 5.00% 4.00%
- ------------------------------------------------- ------- ------------ -------- -----
</TABLE>
(13) 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.
42
<PAGE>
Financial instruments representing potential credit risk at December 31,
1999 and 1998 are as follows:
(Dollars in thousands)
----------------------
<TABLE>
<CAPTION>
1999 1998
- ---------------------------- ------- ------
<S> <C> <C>
Standby letters of credit $ 3,981 3,695
Commitments to extend credit 94,023 54,869
- ---------------------------- ------- ------
$98,004 58,564
- ---------------------------- ------- ------
</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.
(14) 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 or its liquidity and results of operations of the Company.
(15) 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.
(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, 1999 and 1998,
the carrying value of the Company's mortgage loans held for sale was $14,892,000
and $66,755,000, respectively. The estimated fair value of these loans was
$14,973,000 and $67,064,000 at December 31, 1999 and 1998, based on commitments
to purchase from the end investors. The mortgage loans held for sale presented
on the Company's Consolidated Balance Sheets represent mortgages currently held
for sale by the Subsidiary Banks. These balances relate to both mortgages
originated in the banking segment, as well as mortgages originated by CMI and
subsequently sold to the Subsidiary Banks to hold for sale to third party
investors. Mortgage loans held for sale by CMI (i.e., those not sold to the
Subsidiary Banks) are presented in assets of discontinued operations on the
Consolidated Balance Sheets (see note 18).
(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, 1999 and 1998. 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.
43
<PAGE>
(F) OTHER BORROWINGS. For the short-term instruments, the carrying
amount is a reasonable estimate of fair value. For long-term instrument, rates
currently available to the Company for debt with similar terms and remaining
maturities are used to estimate fair value of existing borrowings.
(G) 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, 1999 and 1998.
The estimated fair values of the Company's financial instruments at
December 31 are as follows:
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998
------------------ ----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 17,501 17,501 12,269 12,269
Investment securities available for sale 126,159 126,159 132,060 132,060
Mortgage loans held for sale 14,892 14,973 66,755 67,064
Loans 364,419 360,515 329,196 332,486
Financial Liabilities:
Non-interest-bearing deposits $ 52,274 52,274 50,371 50,371
Interest-bearing deposits 408,143 408,740 404,621 409,149
Other borrowings 39,486 39,486 54,497 54,497
</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 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.
44
<PAGE>
(16) OPERATING SEGMENTS - The Company's operations include two primary
segments: banking and mortgage banking. Through its banking subsidiaries'
network of 10 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 (which has been discontinued as discussed in note 18), included
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. CMI was legally, financially,
operationally, and physically separate from the Subsidiary Banks, and had a
separate Board of Directors, management team, compensation structure, etc.
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 principles, with profit and losses of equity
method investees excluded. Inter-segment revenues and expenses are eliminated
in reporting consolidated results of operations. Operating segment information
is on the following page:
45
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Mortgage Consolidated
Banking Banking Other Total
--------- ------------- -------- --------
<S> <C> <C> <C> <C>
1999
Interest income $ 38,199 51 38,250
Interest expense 18,683 126 18,809
- ------------------------------------------------------------- --------- ------------- -------- --------
Net interest income before provision for possible loan losses 19,516 (75) 19,441
Provision for possible loan losses 308 387 695
- ------------------------------------------------------------- --------- ------------- -------- --------
Net interest income after provision for possible loan losses 19,208 (462) 18,746
Other operating income 5,422 61 5,483
Other operating expenses 14,454 3,919 18,373
- ------------------------------------------------------------- --------- ------------- -------- --------
Earnings before income taxes 10,176 (4,320) 5,856
Income tax expense 3,424 (1,615) 1,809
- ------------------------------------------------------------- --------- ------------- -------- --------
Net earnings from continuing operations $ 6,752 (2,705) 4,047
- ------------------------------------------------------------- --------- ------------- -------- --------
Discontinued operations $ - (3,786) - (3,786)
- ------------------------------------------------------------- --------- ------------- -------- --------
Net earnings $ 6,752 (3,786) (2,705) 261
- ------------------------------------------------------------- --------- ------------- -------- --------
Assets $ 554,910 2,878 (16,938) 540,850
- ------------------------------------------------------------- --------- ------------- -------- --------
1998
Interest income $ 39,206 1,398 40,604
Interest expense 19,448 513 19,961
- ------------------------------------------------------------- --------- ------------- -------- --------
Net interest income before provision for possible loan losses 19,758 885 20,643
Provision for possible loan losses 288 425 713
- ------------------------------------------------------------- --------- ------------- -------- --------
Net interest income after provision for possible loan losses 19,470 460 19,930
Other operating income 5,351 185 5,536
Other operating expenses 15,282 3,883 19,165
- ------------------------------------------------------------- --------- ------------- -------- --------
Earnings before income taxes 9,539 (3,238) 6,301
Income tax expense 3,325 (1,183) 2,142
- ------------------------------------------------------------- --------- ------------- -------- --------
Net earnings from continuing operations $ 6,214 (2,055) 4,159
- ------------------------------------------------------------- --------- ------------- -------- --------
Discontinued operations $ - 576 - 576
- ------------------------------------------------------------- --------- ------------- -------- --------
Net earnings $ 6,214 576 (2,055) 4,735
- ------------------------------------------------------------- --------- ------------- -------- --------
Assets $ 581,431 5,686 (28,835) 558,282
- ------------------------------------------------------------- --------- ------------- -------- --------
1997
Interest income $ 37,205 1,829 39,034
Interest expense 18,604 985 19,589
- ------------------------------------------------------------- --------- ------------- -------- --------
Net interest income before provision for possible loan losses 18,601 844 19,445
Provision for possible loan losses 478 650 1,128
- ------------------------------------------------------------- --------- ------------- -------- --------
Net interest income after provision for possible loan losses 18,123 194 18,317
Other operating income 4,393 45 4,438
Other operating expenses 14,276 4,008 18,284
- ------------------------------------------------------------- --------- ------------- -------- --------
Earnings before income taxes 8,240 (3,769) 4,471
Income tax expense 2,847 (1,386) 1,461
- ------------------------------------------------------------- --------- ------------- -------- --------
Net earnings from continuing operations $ 5,393 (2,383) 3,010
- ------------------------------------------------------------- --------- ------------- -------- --------
Discontinued operations $ - 3 - 3
- ------------------------------------------------------------- --------- ------------- -------- --------
Net earnings $ 5,393 3 (2,383) 3,013
- ------------------------------------------------------------- --------- ------------- -------- --------
Assets $ 511,143 4,451 1,589 517,183
- ------------------------------------------------------------- --------- ------------- -------- --------
</TABLE>
46
<PAGE>
(17) 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 1999 1998
- --------------------------------------------------------------------- -------- -------
Assets:
<S> <C> <C>
Investments in subsidiaries $40,421 46,384
Cash and cash equivalents 1,400 287
Other assets 2,054 7,678
- --------------------------------------------------------------------- -------- -------
Total assets 43,875 54,349
- --------------------------------------------------------------------- -------- -------
Liabilities and stockholders' equity:
Liabilities 6,467 12,804
Stockholders' equity 37,408 41,545
- --------------------------------------------------------------------- -------- -------
Total liabilities and stockholders' equity $43,875 54,349
Years ended December 31
--------------------------
CONDENSED STATEMENTS OF EARNINGS 1999 1998 1997
- --------------------------------------------------------------------- -------- ------- -------
Income - primarily subsidiary dividends $ 6,590 6,334 5,405
- --------------------------------------------------------------------- -------- ------- -------
Expenses:
Interest 589 944 1,081
Other 4,878 4,365 4,420
- --------------------------------------------------------------------- -------- ------- -------
Total expense 5,467 5,309 5,501
- --------------------------------------------------------------------- -------- ------- -------
Earnings (loss) before income tax benefit and equity in undistributed
earnings of subsidiaries 1,123 1,025 (96)
Income tax benefit (1,235) (1,135) (1,248)
- --------------------------------------------------------------------- -------- ------- -------
Earnings before equity in undistributed earnings of subsidiaries 2,358 2,160 1,152
Equity in undistributed earnings of subsidiaries (2,097) 2,575 1,861
- --------------------------------------------------------------------- -------- ------- -------
Net earnings $ 261 4,735 3,013
===================================================================== ======== ======= =======
Net earnings applicable to common stock $ 261 4,712 2,811
===================================================================== ======== ======= =======
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
(Dollars in thousands)
Years ended December 31
--------------------------
CONDENSED STATEMENTS OF CASH FLOWS 1999 1998 1997
- ---------------------------------------------------------------------------- -------- ------- -------
Reconciliation of net earnings to net cash provided by operating activities:
<S> <C> <C> <C>
Net earnings $ 261 4,735 3,013
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries 2,097 (2,575) (1,861)
Depreciation and amortization 450 495 514
Loss (gain) loss on sale of fixed assets - - 1
Increase (decrease) in:
Income taxes payable (109) (248) 141
Other liabilities (243) 325 103
Decrease (increase) in other assets 135 (21) 22
- ---------------------------------------------------------------------------- -------- ------- -------
Net cash provided by operating activities $ 2,591 2,711 1,933
- ---------------------------------------------------------------------------- -------- ------- -------
Cash flow from investing activities:
Capital contribution to subsidiary (150) - -
Loans to subsidiary (200) - -
Other 5,156 (1,695) (340)
- ---------------------------------------------------------------------------- -------- ------- -------
Net cash provided by (used in) investing activities 4,806 (1,695) (340)
- ---------------------------------------------------------------------------- -------- ------- -------
Cash flows from financing activities:
Net proceeds from short-term debt (3,825) 575 (1,750)
Redemption of preferred stock - (300) (2,300)
Issuance of common stock 400 479 1,717
Repayment of long-term debt (2,250) (950) (900)
Dividends paid (609) (533) (410)
- ---------------------------------------------------------------------------- -------- ------- -------
Net cash used in financing activities (6,284) (729) (3,643)
- ---------------------------------------------------------------------------- -------- ------- -------
Increase (decrease) in cash and cash equivalents 1,113 287 (2,050)
Cash and cash equivalents at beginning of year 287 - 2,050
- ---------------------------------------------------------------------------- -------- ------- -------
Cash and cash equivalents at end of year $ 1,400 287 (0)
Supplemented disclosure:
Interest received $ 132 393 334
Interest paid (589) (944) (1,081)
Income taxes received from subsidiaries 2,302 3,336 2,794
Income taxes paid by Parent Company (1,002) (2,695) (1,784)
- ---------------------------------------------------------------------------- -------- ------- -------
Net income taxes received from subsidiaries $ 1,300 641 1,010
- ---------------------------------------------------------------------------- -------- ------- -------
</TABLE>
(18) DISCONTINUED OPERATIONS - In January 2000, the Company formally adopted
a plan to liquidate the mortgage banking segment, which is comprised entirely of
the operations of CMI. The mortgage banking segment does not include the
Subsidiary Banks' mortgage lending activities, which are a component of
continuing operations. As a result of the decision to discontinue the mortgage
banking segment, all related operating activity was reclassified and reported as
discontinued operations for financial reporting purposes.
The closure of CMI is accounted for as a discontinued operation, in
accordance with APB 30, because, among other criteria, it represented both a
separate major line of business and a class of customer. CMI represented a
distinct segment and served a customer base from a market distinct from that of
the Subsidiary Banks. CMI was legally, financially, operationally, and
physically separate from the Subsidiary Banks, and had a separate Board of
Directors, management team, and compensation structure.
The mortgage lending activities of the Subsidiary Banks represent an
integral, inseparable component of the banking segment. CMI provided mortgage
brokerage services to the Subsidiary Banks that will now be provided by
independent third parties. The banking segment will continue to originate and
sell mortgage loans into the secondary market and hold mortgage loans for sale
on its balance sheet. The mortgage loan origination income presented on the
Company's Consolidated Statements of Earnings represents the income derived from
the mortgage lending activities of the banking segment. The mortgage loan
origination income produced by CMI is presented as a component of discontinued
operations in the Consolidated Statements of Earnings. The mortgage loans held
for sale presented on the Company's Consolidated Balance Sheets represent
mortgages currently held for sale by the Subsidiary Banks. These balances
relate to both mortgages originated in the banking segment, as well as mortgages
originated by CMI and subsequently sold to the Subsidiary Banks to hold for sale
to third party investors. Mortgage loans held for sale by CMI (i.e., those not
sold to the Subsidiary Banks) are presented in assets of discontinued operations
on the Consolidated Balance Sheets.
48
<PAGE>
In the Company's September 30, 1999 Quarterly Report on Form 10-Q, the
Company reported that it had uncovered irregularities in CMI's underwriting and
documentation of certain mortgage loans originated for sale by CMI, which could
ultimately result in the inability to sell certain loans currently held for
sale, or the purchasers of sold loans putting them back to CMI under the
recourse provisions of the loan sale agreements. Since then, the Company's
investigation has uncovered additional information, including discovery of
fraudulent documents, underwriting, and other lending practices that allowed
certain mortgage loans to be sold into the secondary market, which would have
otherwise not qualified. These identified irregularities were limited to three
offices of CMI and were not present at the other offices of CMI, nor were the
irregularities present in the Subsidiary Banks. After further investigation of
these irregularities and review of the future prospects of CMI, the Company
decided to discontinue the operations of CMI. All offices of CMI, which had not
been previously closed, were closed in January 2000. All new mortgage
origination from CMI has ceased and current operations are limited to winding
down remaining issues.
The loss from discontinued operations of $3,786,000 in 1999 represents a
loss from operating activities, which includes a pre-tax charge of $2,300,000 to
establish a reserve liability for possible losses on loans previously sold, and
a pre-tax charge of $1,341,000 to write-off the remaining carrying value of
intangible assets related to the mortgage banking segment. The reserve
liability is included in other liabilities in the Consolidated Balance Sheet as
of December 31, 1999.
The loss from discontinued operations of $3,786,000 in 1999 is net of tax
benefit of $2,458,000. The earnings from discontinued operations of $576,000 in
1998 and $3,000 in 1997 are net of tax expense of $445,000 and $7,000,
respectively.
The first quarter 2000 financial statements will include additional charges
for 2000 operating activities and the loss on disposal of the mortgage banking
segment. The Company estimates that the first quarter charge for discontinued
operations will total $837,000, net of tax effect of $582,000. Included in this
charge are accruals for operating losses during the phase-out period, accruals
for salary and severance payments, write-downs of the value of fixed assets,
accruals for lease liabilities, and other items.
The consolidated financial statements of the Company have been restated to
reflect the closing of CMI as a discontinued operation. Accordingly, the
revenues and expenses, assets and liabilities, and cash flows of the mortgage
banking segment have been excluded from the respective captions in the
Consolidated Balance Sheets, Consolidated Statements of Earnings, and
Consolidated Statements of Cash Flows, and have been reported as "Discontinued
Operations," and "Assets of discontinued operations." The assets include fixed
assets, cash, mortgage loans held for sale, and other assets. The liabilities
generated by the discontinued operation are reflected in other liabilities in
the Consolidated Balance Sheets.
(19) YEAR 2000 - The cost of the Year 2000 project through 1999 totaled
$338,000, which included $248,000 in capitalized costs incurred to replace
non-compliant hardware and software. Costs incurred do not include the cost of
internal staff time. Projects costs incurred in 1999 totaled $62,000, which
included $33,000 in capitalized costs. Final project costs of approximately
$15,000 are expected to be incurred in 2000.
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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
April 10, 2000
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 May 25, 2000 (Proxy Statement) under the caption
"Proposal No. 1 - Election of Directors" which information is incorporated
herein by reference.
Item 11. Executive Compensation
- ----------------------------------
The information contained under the captions "Directors' Compensation" and
"Executive Compensation" 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, 1999 and 1998.
Consolidated Statements of Earnings for the years ended December 31,
1999, 1998 and 1997.
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998, and 1997.
(b) Reports on Form 8-K
----------------------
The registrant has not filed any reports on Form 8-K for the quarter
ended December 31, 1999.
(c) Exhibits:
--------
3.1 Certificate of Incorporation of registrant as amended.
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 as of September 26, 1997, and
amendment dated as of March 12, 1999 are incorporated herein
by reference to Exhibit 10.2 of the registrant's Form 10-K
for the fiscal year ended December 31, 1998.
10.3 Employment agreement by and between Dewey R. Yaeger and
Castle BancGroup, Inc., dated as of January 1, 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: April 13, 2000
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/ Dewey R. Yaeger
- ----------------------------------------------- -------------------------------
By: John W. Castle By: Dewey R. Yaeger
Chairman of the Board, Chief Executive President, Chief Operating
Officer (Principal Executive Officer and Director
Officer) and Director Date: April 13, 2000
Date: April 13, 2000
/s/ Micah R. Bartlett /s/ Bruce P. Bickner
- ----------------------------------------------- -------------------------------
By: Micah R. Bartlett By: Bruce P. Bickner
Vice President and Controller Director
(Principal Financial Officer Date: April 13, 2000
and Principal Accounting Officer)
Date: April 13, 2000
/s/ Peter H. Henning /s/ Robert T. Boey
- ----------------------------------------------- -------------------------------
By: Peter H. Henning By: Robert T. Boey
Director Director
Date: April 13, 2000 Date: April 13, 2000
/s/ Kathleen L. Halloran /s/ Donald E. Kieso
- ----------------------------------------------- -------------------------------
By: Kathleen L. Halloran By: Donald E. Kieso
Director Director
Date: April 13, 2000 Date: April 13, 2000
/s/ Richard C. McGinity
- -----------------------------------------------
By: Richard C. McGinity
Director
Date: April 13, 2000
53
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Certificate of Incorporation of registrant as amended.
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 as of September 26, 1997, and
amendment dated as of March 12, 1999 are incorporated herein by
reference to Exhibit 10.2 of the registrant's Form 10-K for the
fiscal year ended December 31, 1998.
10.3 Employment agreement by and between Dewey R. Yaeger and Castle
BancGroup, Inc., dated as of January 1, 1999.
21.1 Subsidiaries of Registrant
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
54
<PAGE>
CERTIFICATE OF INCORPORATION
OF
CASTLE BANCGROUP, INC.
ARTICLE FIRST
Name
----
The name of the corporation is Castle BancGroup, Inc.
ARTICLE SECOND
Registered Office and Agent
---------------------------
The address of the corporation's registered office in the State of Delaware
is 32 Loockerman Square, Suite L-100, in the City of Dover, County of Kent. The
name of its registered agent at such address is United States Corporation
Company.
ARTICLE THIRD
Purposes
--------
The nature of the business or purposes to be con-ducted or promoted by the
corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.
ARTICLE FOURTH
Capital Stock
-------------
The total number of shares of all classes of stock which the Corporation
shall have the authority to issue is 25,100,000 shares, which are divided into
two classes as follows:
100,000 shares of Preferred Stock, without par value, and
25,000,000 shares of Common Stock of the par value of $.33 1/3 per share.
The designations, voting powers, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions of the above classes of stock are as follows:
-1-
<PAGE>
Preferred Stock
----------------
The board of directors is authorized, at any time and from time to time, to
provide for the issuance of shares of Preferred Stock in one or more series with
such designations, preferences and relative, participating, optional or other
special rights and qualifications, limitations or restrictions thereof as are
stated and expressed in the resolution or resolutions providing for the issue of
such Preferred Stock adopted by the board of directors, including, but not
limited to, determination of any of the following:
(a) the distinctive serial designation and the number of shares
constituting a series;
(b) the dividend rate or rates, whether dividends are cumulative and
from which date, the payment date or dates for dividends, and the participating
or other special rights, if any, with respect to dividends;
(c) in addition to the voting rights provided by law, the voting
powers, full or limited, if any, of the shares of the series, which might
include the right to elect a specified number of directors in any case or if
dividends on the series are not paid for a specified period of time;
(d) whether the shares of the series are redeemable and the price or
prices at which, and the terms and conditions on which, the shares may be
redeemed, which prices, terms and conditions may vary under different conditions
and at different redemption dates;
(e) the amount or amounts, if any, payable upon the shares of the
series in the event of voluntary or involuntary liquidation, dissolution or
winding up of the corporation prior to any payment or distribution of the assets
of the corporation to any class or classes of stock of the corporation ranking
junior to the series;
(f) whether the shares of the series are entitled to the benefit of a
sinking or retirement fund to be applied to the purchase or redemption of shares
of the series and the amount of the fund and the manner of its application,
including the price or prices at which the shares of the series may be redeemed
or purchased through the application of the fund;
(g) whether the shares are convertible into, or exchangeable for,
shares of any other class or classes or of any other series of the same or any
other class or classes of stock of the corporation and the conversion price or
prices, or the rates of exchange, and the adjustments thereof, if any, at which
the conversion or exchange may be made, and any other terms and conditions of
the conversion or exchange; and
(h) any other preferences, privileges and powers, and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions of a series, as the board of directors may deem advisable and as
are not inconsistent with the provisions of this Certificate of Incorporation.
-2-
<PAGE>
II
Common Stock
-------------
A. Dividends.
---------
Subject to the preferential rights of the Preferred Stock, the holders of
the Common Stock are entitled to receive, to the extent permitted by law, such
dividends as may be declared from time to time by the board of directors.
B. Liquidation.
-----------
In the event of the voluntary or involuntary liquidation, dissolution,
distribution of assets or winding up of the corporation, after distribution in
full of the preferential amounts, if any, to be distributed to the holders of
shares of Preferred Stock, holders of Common Stock shall be entitled to receive
all of the remaining assets of the corporation of whatever kind available for
distribution to stockholders ratably in proportion to the number of shares of
Common Stock held by them respectively. The board of directors may distribute
in kind to the holders of Common Stock such remaining assets of the corporation
or may sell, transfer or otherwise dispose of all or any part of such remaining
assets to any other corporation, trust or other entity and receive payment
therefor in cash, stock or obligations of such other corporation, trust or other
entity, or any combination thereof, and may sell all or any part of the
consideration so received and distribute any balance thereof in kind to holders
of Common Stock. Neither the merger or consolidation of the corporation into or
with any other corporation or corporations, nor the purchase or redemption of
shares of stock of the corporation of any class, nor the sale or transfer by the
corporation of all or any part of its assets, nor the reorganization or
recapitalization of the corporation, shall be deemed to be a dissolution,
liquidation or winding up of the corporation for the purposes of this paragraph.
C. Voting Rights.
--------------
Except as may be otherwise required by law or this Certificate of
Incorporation, each holder of Common Stock has one vote in respect of each share
of stock held by him of record on the books of the corporation on all matters
voted upon by the stockholders.
D. Cumulative Voting.
------------------
At all elections of directors of the corporation, each stockholder entitled
generally to vote for the election of directors shall be entitled to as many
votes as shall equal the number of votes which (except for this provision as to
cumulative voting) he would be entitled to cast for the election of directors
with respect to his shares of stock multiplied by the number of directors to be
elected, and he may cast all of such votes for a single director or may
distribute them among the number to be voted for, or for any two or more of them
as he may see fit.
-3-
<PAGE>
III
Other Provisions
-----------------
A. No Preemptive Rights.
----------------------
No stockholder shall have any preemptive right to subscribe to an
additional issue of stock of any class or series or to any securities of the
corporation convertible into such stock.
B. Changes in Authorized Capital Stock.
---------------------------------------
Subject to the protective conditions and restrictions of any outstanding
Preferred Stock, any amendment to this Certificate of Incorporation which
increases or decreases the authorized capital stock of any class or classes may
be adopted by the affirmative vote of the holders of a majority of the
outstanding shares of the voting stock of the corporation without regard to
class or series.
C. Unclaimed Dividends.
--------------------
Any and all right, title, interest and claim in and to any dividends
declared by the corporation, whether in cash, stock or otherwise, which are
unclaimed by the stockholder entitled thereto for a period of six years after
the close of business on the payment date, shall be and be deemed to be
extinguished and abandoned, and such unclaimed dividends in the possession of
the corporation, its transfer agents or other agents or depositaries, shall at
such time become the absolute property of the corporation, free and clear of any
and all claims of any persons whatsoever.
ARTICLE FIFTH
Incorporator and First Board of Directors
----------------------------------------------
The name and mailing address of the incorporator of this corporation are:
John W. Castle
208 Miller Avenue
DeKalb, Illinois 60115
-4-
<PAGE>
The powers of the incorporator shall terminate upon the filing of this
certificate of incorporation. The names and mailing addresses of the persons
who are to serve as directors until the first annual meeting of stockholders or
until their respective successors are elected and qualified are as follows:
NAME MAILING ADDRESS
---- ----------------
John W. Castle 208 Miller Avenue
DeKalb, Illinois 60115
Louis P. Brady 407 North DeKalb Street
Sandwich, Illinois 60548
James N. McInnes 26 Edgebrook Drive
Sandwich, Illinois 60548
Franklyn L. Ament RR#2, Oak Knolls
Sandwich, Illinois 60548
Donald E. Breunig 108 East Arnold Road
Sandwich, Illinois 60548
Armand A. Legner 103 East Arnold Road
Sandwich, Illinois 60548
Nancy D. Castle 208 Miller Avenue
DeKalb, Illinois 60115
ARTICLE SIXTH
Board of Directors
--------------------
A. Powers of the Board.
----------------------
In furtherance and not in limitation of the powers conferred by statute,
the board of directors of the corporation is expressly authorized:
(a) To make, alter or repeal the by-laws of the corporation.
(b) To authorize and cause to be executed mortgages and liens upon the
real and personal property of the corporation.
(c) To set apart out of any of the funds of the corporation available
for dividends a reserve or reserves for any proper purpose and to abolish any
such reserve in the manner in which it was created.
-5-
<PAGE>
(d) By resolution of a majority of the whole board, to designate one or
more committees, each committee to consist of two or more of the directors of
the corporation. The board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. The bylaws may provide that in the absence or
disqualification of any member of such committee or committees, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution or in the by-laws of the corporation, shall have and may exercise all
the powers and authority of the board of directors in the management of the
business and affairs of the corporation, and may authorize the seal of the
corporation to be affixed to all papers which may require it; and no committee
shall have the power or authority to declare a dividend or to authorize the
issuance of stock unless the resolution or by-laws expressly so provide.
(e) To sell, lease or exchange all or substantially all of the property
and assets of the corporation, including its goodwill and its corporate
franchises, upon such terms and conditions and for such consideration, which may
consist in whole or in part of money or property, including shares of stock in,
and/or other securities of, any other corporation or corporations, as the board
of directors shall deem expedient and for the best interests of the corporation,
when and as authorized by the affirmative vote of the holders of a majority of
the stock of the corporation issued and outstanding having voting power.
(f) To provide for the indemnification, within the limits permitted by
law, of directors, officers, employees and agents of the corporation (or of
other corporations absorbed into the corporation by merger or consolidation),
and of persons who serve other enterprises in such or similar capacities at the
request of the corporation (or at the request of other corporations absorbed
into the corporation by merger or consolidation), against expenses and liability
for actions they take in such capacities.
B. Written Ballot.
---------------
Elections of directors need not be by written ballot unless the by-laws of
the corporation shall so provide.
C. Classified Board of Directors.
--------------------------------
Section 1. Number, Election and Terms of Directors. The business and
-------------------------------------------
affairs of the Corporation shall be managed by or under the direction of a board
of directors consisting of not less than five (5) nor more than fifteen (15)
persons. The exact number of directors within the minimum and maximum
limitations specified in the preceding sentence shall be fixed from time to time
by the board of directors pursuant to a resolution adopted by a majority of the
board of directors then in office. The board of directors shall be divided into
three classes, the number of directors in each class to be fixed by the board of
directors. The initial term of office of Class I directors shall expire at the
annual meeting of stockholders to be held in 1998; the initial term of office of
Class II directors shall expire at the annual meeting of stockholders to be held
in 1999; and the initial term of office of Class III directors shall expire at
the annual meeting of stockholders to be held in 2000, and in each case until
their respective successors are elected and qualified. At each annual meeting
of stockholders, directors shall be chosen to succeed those whose terms then
expire and shall be elected for a term of office expiring at the third
succeeding annual meeting of stockholders after their election, and in each case
until their respective successors are elected and qualified.
-6-
<PAGE>
The names of the persons who are to serve as the initial directors of each
class of directors of the Corporation until their successors are elected and
qualified or until their earlier resignation or removal are as follows:
Name Class Designation
------------------- -------------------
John B. Hiatt I
------------------- -------------------
William R. Monat I
------------------- -------------------
Robert T. Boey II
------------------- -------------------
Donald E. Kieso II
------------------- -------------------
James N. McInnes II
------------------- -------------------
Bruce P. Bickner III
------------------- -------------------
John W. Castle III
------------------- -------------------
Peter H. Henning III
------------------- -------------------
Section 2. Newly Created Directorships and Vacancies. Newly created
---------------------------------------------
directorships resulting from any increase in the authorized number of directors
or any vacancies in the board of directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause shall be filled
by a majority vote of the directors then in office, although less than a quorum,
or by a sole remaining director. Directors so chosen shall hold office for a
term expiring at the annual meeting of stockholders at which the term of the
class to which they have been elected expires. No decrease in the number of
directors constituting the board of directors shall shorten the term of any
incumbent director. Newly created directorships shall be allocated among the
classes of directors so that each class of directors shall consist, as nearly as
possible, of one-third of the total number of directors.
Section 3. Removal. Subject to the rights of the holders of any class or
-------
series of Preferred Stock of the Corporation, any director, or the entire board
of directors, may be removed from office at any time, but only for cause and
only by the affirmative vote of the holders of at least a majority of the
outstanding shares of all classes of stock of the Corporation generally entitled
to vote in the election of directors, considered for purposes of this Section as
one class.
-7-
<PAGE>
Section 4. Amendment, Alteration or Repeal. In addition to any
----------------------------------
affirmative vote that may be otherwise required, the affirmative vote of the
holders of at least eighty percent (80%) of the outstanding shares of all
classes of stock of the Corporation generally entitled to vote in the election
of directors, considered for purposes of this Section as one class, shall be
required to amend, alter or repeal in any respect, or adopt any provision
inconsistent with, this Subpart C of Article Sixth.
ARTICLE SEVENTH
Stockholder Action by Consent
--------------------------------
Action may be taken by the stockholders of the corporation, without a
meeting, by written consent as and to the extent provided at the time by the
General Corporation Law of the State of Delaware, provided that the matter to be
acted upon by such written consent previously has been approved by the board of
directors of the corporation and directed by such board to be submitted to the
stockholders for their action thereon by written consent.
ARTICLE EIGHTH
Merger, Consolidation or Disposition of Assets
---------------------------------------------------
In the event that the stockholders of the corporation are asked to vote on
a merger or consolidation with any Person (as hereinafter defined) or on a
proposal that the corporation sell, lease or exchange substantially all of its
assets or business to or with any Person or any affiliate of such Person, or
that any Person or any affiliate of such Person sell, lease or exchange
substantially all of its assets or business to or with the corporation, and such
Person and/or its affiliates singly or in the aggregate, own or control directly
or indirectly shares representing five percent (5%) or more of the voting power
of the corporation at the record date for determining stockholders entitled to
vote, the favorable vote of not less than eighty percent (80%) of all of the
votes which the holders of the issued and outstanding shares of the voting stock
of the corporation, voting as a single class, are entitled to cast thereon shall
be required for the approval of any such action; provided, however, that the
foregoing shall not apply to any such merger, consolidation or sale, lease or
exchange of assets or business which was approved by resolutions of the board of
directors of the corporation prior to the acquisition of the ownership or
control of shares representing at least five percent (5%) of the voting power of
the corporation by such Person and/or its affiliates, nor shall it apply to any
such merger, consolidation or sale of assets or business between the corporation
and another Person of which shares or other ownership interests representing
fifty percent (50%) or more of the voting power is owned by the corporation.
-8-
<PAGE>
For the purposes of this Article, a "Person" is any corporation,
partnership, association, trust, business entity, estate or individual; an
"affiliate" is any Person who directly or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the Person specified; and "control" means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of a person, whether through the ownership of voting securities, by
contract, or otherwise.
This ARTICLE EIGHTH may not be amended, nor may it be repealed in whole or
in part, unless authorized by the favorable vote of not less than eighty percent
(80%) of all the votes entitled to be cast thereon by the holders of the issued
and outstanding shares of voting stock of the corporation voting as a single
class, regardless of class or series of stock.
ARTICLE NINTH
Amendment
---------
The corporation reserves the right to amend its certificate of
incorporation, and to thereby change or repeal any provision therein contained
from time to time, in the manner prescribed at the time by statute, and all
rights conferred upon stockholders by such certificate of incorporation are
granted subject to this reservation.
ARTICLE TENTH
Limited Liability of Directors
---------------------------------
No person who was or is a director of the corporation shall be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for breach of the duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) under Section 174 of the Delaware General Corporation Law; or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Delaware General Corporation Law is amended after the effective
date of this Article Tenth to further eliminate or limit, or to authorize
further elimination or limitation of, the personal liability of directors for
breach of fiduciary duty as a director, then the personal liability of a
director of the corporation to the corporation or its stock-holders shall be
eliminated or limited to the full extent permitted by the Delaware General
Corporation Law, as so amended. For purposes hereof, "fiduciary duty as a
director" shall include any fiduciary duty arising out of serving at the request
of the corporation as a director of another corporation, partnership, joint
venture, trust or other enterprise, and "personally liable to the corporation"
shall include any liability to such other corporation, partnership, joint
venture, trust or other enterprise, and any liability to the corporation in its
capacity as a security holder, joint venturer, partner, beneficiary, creditor or
investor of or in any such other corporation, partnership, joint venture, trust
or other enterprise.
-9-
<PAGE>
ARTICLE ELEVENTH
Indemnification
---------------
A. Certificate of Incorporation Article Not Exclusive; Change in Law.
------------------------------------------------------------------------
The indemnification and advancement of costs, charges and other expenses
(including attorneys' fees) ("Expenses") provided by, or granted pursuant to,
this Article Eleventh shall not be deemed exclusive of any other rights to which
those seeking indemnification or advancement of Expenses may be entitled under
any law (common or statutory), by-law, agreement, vote of stockholders or
disinterested directors, or otherwise, both as to action in his official
capacity and as to action in another capacity while holding such office, and
shall continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators of such a
person. Notwithstanding the provisions of this Article Eleventh or the by-laws
of the corporation, the corporation shall indemnify and make advancement of
Expenses to each person who is or was or has agreed to become a director or
officer of the corporation, and each person who is or was serving or has agreed
to serve at the request of the corporation as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, to the
fullest extent permitted under the laws of the State of Delaware and any other
ap-plicable laws, as they now exist or as they may be amended in the future.
B. Contract Rights.
----------------
All rights to indemnification and advancement of Expenses provided by this
Article Eleventh and the by-laws of the corporation shall be deemed to be a
contract between the corporation and each person who is or was or has agreed to
become a director or officer of the corporation, and each person who is or was
serving or has agreed to serve at the request of the corporation as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise. Any repeal or modification of this Article Eleventh or the by-laws
of the corporation or any repeal or modification of relevant provisions of the
Delaware General Corporation Law or any other applicable law shall not in any
way diminish any rights to indemnification or advancement of Expenses with
respect to any state of facts then or previously existing or any action, suit or
proceeding previously or thereafter brought or threatened based in whole or in
part on such state of facts.
C. Indemnification for Certain Persons for Breach of Fiduciary Duty.
------------------------------------------------------------------------
In addition to the indemnification provided for in the by-laws of the
corporation, the corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of another corporation, partnership, joint venture,
trust or other enterprise by reason of the fact that he is or was serving or has
-10-
<PAGE>
agreed to serve at the request of the corporation as a director of such other
corporation, partnership, joint venture, trust or other enterprise against
Expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action or suit and any appeal
thereof, for breach of fiduciary duty as such director, except for liability (i)
for breach of the duty of loyalty to such other corporation, partnership, joint
venture, trust or other enterprise; (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law; (iii) for
unlawful payment of a dividend or unlawful purchase or redemption of stock; or
(iv) for any transaction from which the director derived an improper personal
benefit.
-11-
<PAGE>
EMPLOYMENT AGREEMENT
--------------------
This Agreement, made this 1st day of January, 1999, by and between Castle
BancGroup, Inc., a Delaware corporation (the "Company"), and Dewey R. Yaeger of
DeKalb, Illinois ("Employee").
WITNESSETH:
WHEREAS, the Company desires to employ Employee, and Employee desires to be
employed by the Company, upon the terms and conditions set forth herein,
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed as follows:
1. Employment. The Company hereby employs Employee as its President
----------
and Chief Operating Officer, and Employee hereby accepts such employment by the
Company, upon the terms and conditions herein set forth. The primary place of
employment shall be at the Company's principal offices in DeKalb, Illinois, or
at such other location as the Company may designate.
2. Term. The term of this Agreement shall commence as of January 1,
----
1999, and shall expire on December 31, 2000, unless sooner terminated as
hereinafter set forth. After expiration of the initial term, and subject to the
termination provisions hereinafter contained, the Agreement will be
automatically renewed, on the terms and conditions set forth herein, bi-annually
for a 24 month term as of January 1, 2001 and January 1 of each second calendar
year thereafter; provided neither party has given written notice to the other
party of its or his intent not to renew at least 90 days prior to the renewal
date.
3. Duties. Employee will, during the term hereof:
------
<PAGE>
(a) faithfully and diligently do and perform all such acts and duties and
furnish such services in his capacity as President and Chief Operating
Officer of the Company, or in a similar senior executive position with
the Company, as the Board of Directors or the Chief Executive Officer
of the Company shall direct, and do and perform all acts in the
ordinary course of the Company's business (with such limits as the
Board of Directors or the Chief Executive Officer of the Company may
prescribe) necessary and conducive to the Company's best interests;
(b) devote his full time, energy, and skill to the business of the Company
and to the promotion of the Company's best interests, except for
vacations and absences made necessary because of illness; and
(c) be subject to the Company's retirement policy from time to time in
effect for officers and directors, and to all other Company policies
related to employee conduct and performance.
4. Compensation. (a) The Company shall pay to Employee for all
------------
services to be performed by Employee during the term of this Agreement:
(i) a Base Salary at the rate of $165,000 per annum, payable in
periodic payments in accordance with the Company's practices for other
executive, managerial, and supervisory employees, as such practices may be
determined from time to time. The Board of Directors will review such Base
Salary annually and, in its discretion, may grant increases thereof based
upon Employee's performance; and
(ii) any additional or special compensation, such as incentive pay or
bonuses, based upon Employee's performance, as the Board of Directors of
the Company in its or his discretion, may from time to time determine.
All such payments will be subject to such deductions as may be required to be
made pursuant to law, government regulation or order, or by agreement with, or
consent of, Employee.
(b) In addition to the compensation payments set forth above, the
Company agrees that during the term of this Agreement:
<PAGE>
(i) Employee shall be entitled to reimbursement by the Company for all
reasonable expenses actually and necessarily incurred by him on its behalf
in the course of his employment hereunder, for which he shall submit
vouchers in a form satisfactory to the Company and which are approved by
the Company in its sole discretion;
(ii) the Company will reimburse Employee for membership dues and special
assessments at a country club in the DeKalb, Illinois area chosen by the
Company.
5. Benefits. Employee shall be entitled to participate in such life
--------
insurance, medical, dental and disability plans ("Welfare Plans") and such
pension. savings, profit sharing and retirement plans ("Retirement Plans") and
stock option plans as may be adopted from time to time by the Company for the
benefit of its employees. Employee also shall be entitled to 4 weeks of
vacation with pay during each consecutive 12-month period commencing on January
1, 1999, and each January 1 thereafter during the term of his employment
hereunder, to be taken at such times and in such periods as Employee and the
Company shall mutually determine and provided that no vacation time shall
interfere with the duties required to be rendered by Employee hereunder.
6. Disability. In the event that Employee is permanently disabled so
----------
as to be unable to fully perform his services hereunder, Employee's obligation
to perform such services will terminate and the Company may terminate this
Agreement upon ten days' written notice to Employee. In the event of such
termination (a) Employee's Base Salary as defined in subparagraph 4(a) hereof
shall continue during the then remaining term of the Agreement, reduced by any
payments received by Employee during such term under a long-term disability plan
or policy maintained by the Company; and (b) Employee will not be entitled to
the benefits described in subparagraph 7(e) below. The Company shall have sole
discretion, based on competent medical advice, to determine whether Employee is
and continues to be permanently disabled for purposes of this paragraph.
7. Termination. (a) The Board of Directors of the Company may
-----------
terminate the employment of Employee with the Company at any time for "Good
Cause". For purposes of the preceding sentence, "Good Cause" shall be deemed to
exist if, and only if:
<PAGE>
(i) Employee shall engage, during the performance of his duties
hereunder, in acts or omissions constituting dishonesty,
intentional breach of fiduciary obligation or intentional
wrongdoing or malfeasance;
(ii) Employee shall be convicted of a criminal violation involving
fraud or dishonesty;
(iii)Employee shall materially breach the Agreement (other than by
engaging in acts or omissions enumerated in clauses (i) and (ii)
above or (iv) below), and such breach by its nature, is incapable
of being cured, or such breach remains uncured for more than 30
days following receipt by Employee of written notice from the
Company specifying the nature of the breach and demanding the
cure thereof. The Company, in its discretion, may suspend all
payments to Employee pursuant to paragraph 4 above, during such
30 day period. Any such suspended payments shall be paid to
Employee as soon as possible after the end of such 30 day period
if such breach is, in the judgment of the Company, cured by
Employee during such 30 day period. For purposes of this clause
(iii), inattention by Employee to his duties under the Agreement
shall be deemed a breach capable of cure;
(iv) Employee performs or fails to perform any act, which, in the
judgment of the Board of Directors of the Company, if known to
the customers, clients, stockholders or any regulators of the
Company, or any of its affiliates, would materially and adversely
impact on the business of the Company, or such affiliates; or
(v) Employee performs or fails to perform any act that causes any
regulatory body with jurisdiction over the Company, or any of its
affiliates to demand, request, or recommend that Employee be
suspended or removed from any position in which Employee serves
with the Company or any of its affiliates or to initiate other
enforcement actions against the Company, or any of its
affiliates.
<PAGE>
Without limiting the generality of the foregoing, the following shall not
constitute Good Cause for the termination of the employment of Employee or the
modification or diminution of any of his authority hereunder:
(i) any personal or policy disagreement between Employee and the
Company, or Employee and any member of the Board of Directors of
the Company; or
(ii) any action taken by Employee in connection with his duties
hereunder if Employee acted in good faith and in a manner he
reasonably believed to be in, and not opposed to, the best
interest of the Company and had no reasonable cause to believe
his conduct was unlawful.
(b) Employee shall have the right at any time during the term of the
Agreement to terminate his employment with the Company for "Good Reason". "Good
Reason" shall be deemed to exist if Employee terminates his employment because,
without his express written consent, (A) the Company materially breaches any of
the terms of the Agreement, (B) Employee is assigned duties materially
inconsistent with his present position, duties, responsibilities, and status
with the Company at the time of termination, (C) Employee's duties and
responsibilities are substantially reduced, or (D) Employee's "Total
Compensation" is substantially reduced. For purposes of this subparagraph (b)
Total Compensation shall include Employee's Base Salary set forth in
subparagraph 4(a)(i) above, cash bonuses or cash awards payable to Employee
under any programs or plans maintained by the Company, contributions under any
Retirement Plan maintained by the Company, stock options granted to Employee
pursuant to a stock option plan maintained by the Company, paid vacation time,
and benefits under Welfare Plans as may be approved from time to time by the
Company for the benefit of its employees. A reason set forth in the preceding
sentences shall constitute Good Reason only if it remains uncured for more than
30 days following receipt by the Company of written notice from Employee
specifying the nature of the reason and demanding the cure thereof.
<PAGE>
(c) Employee shall have the right at any time during the term of the
Agreement to terminate his employment with the Company without Good Reason upon
giving thirty (30) days written notice of said termination to the Company.
(d) The employment of Employee hereunder shall terminate upon the effective
date of a Change in Control. A "Change in Control" shall be deemed to occur on
the earliest of:
(i) The acquisition by an entity, person, or group of beneficial
ownership, as that term is defined in Rule 13d-3 under the
Securities Exchange Act of 1934, (other than members of the Board
of Directors of the Company or a subsidiary of the Company, or a
tax qualified retirement plan maintained by the Company or a
subsidiary of the Company) of more than 30 percent of the
outstanding capital stock of the Company entitled to vote for the
election of directors ("Voting Stock");
(ii) The commencement by any entity, person, or group (other than the
Company or a subsidiary of the Company) of a tender offer or an
exchange offer for more than 30 percent of the outstanding Voting
Stock of the Company;
(iii)Notwithstanding the foregoing, sections 7(d)(i) and 7(d)(ii)
shall not apply to any acquisition, tender offer, exchange offer
or other transaction that is recommended by the Company's senior
management and approved by the Company's board of directors.
(iv) The effective time of a merger or consolidation of the Company
with one or more other corporations as a result of which the
holders of the outstanding Voting Stock of the Company
immediately prior to such merger or consolidation hold less than
51 percent of the Voting Stock of the surviving or resulting
corporation;
(v) The election to the Board of Directors of the Company, without
the recommendation or approval of the incumbent Board of
Directors of the Company, of the lesser of (I) three directors or
(II) directors constituting a majority of the number of directors
of the Company then in office; or
<PAGE>
(vi) The sale by the Company of a majority of the Voting Stock, or
substantially all of the property of the Company, to an entity of
which the Company owns less than 51 percent of the Voting Stock.
(e) The following provisions will apply (A) during the initial or any
renewal term of the Agreement (1) if the employment of Employee with the Company
is terminated by the Company for any reason other than Good Cause, (2) if
Employee terminates his employment for Good Reason, or (3) if the employment of
Employee terminates following a "Change in Control" and Employee is not, within
90 days following the Change in Control, offered a contract for employment in a
position comparable in compensation, location, duties and responsibilities to
those then applicable under the Agreement, by the successor in control of the
Company, or by another employer, or (B) if the Company gives a notice of
nonrenewal to Employee, pursuant to paragraph 2 above, and within 90 days after
the date of expiration of the term of this Agreement, (1) the employment of
Employee with the Company is terminated by the Company for any reason other than
Good Cause, or (2) Employee terminates his employment for Good Reason.
(i) An amount equal to $600,000 shall be payable to Employee either (1) in
a lump sum as soon as practicable following the date of termination of
employment, or (2) in annual installments over a period not to exceed
five years, commencing as soon as practicable after the date of
termination of employment, as shall be selected by the Board of
Directors in its sole and uncontrolled discretion. In the event
payments are made in installments, each installment shall include
interest on the then unpaid balance at a rate equal to the rate on
five year United States Treasury Notes in effect on the date each such
installment is paid. Payments to Employee pursuant to this clause (i)
shall be in lieu of any payment or benefit that might otherwise be
payable under any severance plan or policy maintained by the Company.
<PAGE>
(ii) Employee shall receive any and all benefits accrued under any of the
Retirement Plans, to the date of his termination, the amount, form and
time of payment of such benefits to be determined by the terms of such
Plans.
(iii)If, upon termination of his employment pursuant to subparagraph (b),
(d) or (e), Employee holds any options with respect to stock of the
Company that are not then exercisable, the Company will pay Employee
an amount by which the aggregate fair market value of the stock
purchasable upon exercise of such options exceeds the aggregate
exercise price.
<PAGE>
(iv) During the period equal to the greater of (a) 24 months, or (b) the
remainder of the initial term of the Agreement pursuant to paragraph 2
(the "Severance Period"), Employee and his dependents will continue to
be covered by all Welfare Plans made available by the Company in which
he or his dependents were participating immediately prior to the date
of his termination as if he continued to be an employee of the
Company, provided that, if participation in any one or more of such
Plans is not possible under the terms thereof, the Company will
provide substantially identical benefits. If, however Employee obtains
employment with another employer during the Severance Period, such
coverage shall be provided only to the extent that the coverage
exceeds the coverage of any substantially similar plans provided by
his new employer. Coverage under this clause (iv) shall be applied in
satisfaction of the obligations of the Company to provide continued
group health coverage under Section 4980B of the Internal Revenue Code
of 1986, as amended, and Sections 601-609 of the Employee Retirement
Income Security Act of 1974, as amended.
(v) No payments or benefits payable to or with respect to Employee during
the Severance Period pursuant to this subparagraph (e) shall be
reduced by any amount Employee or his dependents, spouse or
beneficiary may earn or receive from employment with another employer
or from any other source, except as expressly provided in the last
sentence of subparagraph (iv) of this paragraph (e).
<PAGE>
(vi) Upon the death of Employee all amounts payable hereunder to Employee
pursuant to this subparagraph (e) shall be paid to his heirs or
personal representatives.
(f) If the employment of Employee with the Company is terminated by the
Company for Good Cause, or by the voluntary action of Employee without Good
Reason, other than due to a Change in Control, Employee's Base Salary (at the
rate most recently determined) and a bonus (a pro rata portion of the bonus paid
for the most recent calendar year) shall be paid to him through the date of his
termination, and the Company shall have no further obligation to Employee under
the Agreement. Such termination shall have no effect upon Employee's other
rights, including but not limited to rights under the Welfare Plans and
Retirement Plans referred to in paragraph 5 above.
8. Death. If Employee dies during the term of the Agreement:
-----
(a) The Company agrees to pay to Employee's spouse, or if not then living,
to his lawful descendants per stirpes, or if none are then living, to
--- -------
the personal representative of his estate, or if no such estate is
opened within three months following the date of death of Employee, to
the trustee of a trust established by Employee pursuant to the terms
of his last will and testament or during his lifetime, in a lump sum
within 30 days after the date of death (unless the recipient and the
Company materially agree in writing that such payments shall be made
in some other manner), an amount equal to the aggregate Base Salary
that would have been paid to Employee during the remaining term of the
Agreement. The Company, in its discretion, shall have the right to
purchase a policy or policies of insurance on the life of Employee for
the purpose of providing funds to pay benefits pursuant to this clause
(a). The Company shall at all times be the owner and beneficiary of
such policy or policies and such policies and the proceeds therefrom
shall at all times be subject to the claims of creditors of the
Company; and
<PAGE>
(b) During the twelve month period commencing on the date of Employee's
death, the spouse and dependents of Employee shall continue to
participate under all Welfare Plans made available by the Company in
which Employee or his spouse and dependents were participating
immediately prior to the date of his death; provided that, if
participation in any one or more of such Plans is not possible under
the terms thereof, the Company will provide substantially identical
benefits.
Any death benefits payable under this paragraph 8 are in addition to any other
benefits due to Employee or his beneficiaries, spouse or dependents from the
Company including, but not limited to, payments under any of the Welfare Plans
and Retirement Plans.
9. Restrictive Covenant. During the term of the Agreement, and for a
----------------------
period of two years following the termination of Employee's employment with the
Company for any reason, including termination occasioned by the expiration of
the terms of the Agreement, Employee shall not,
<PAGE>
(a) within a sixty (60) mile radius of DeKalb, Illinois, engage in, or
work for, or own, manage, operate, control or participate in the
ownership, management, operation or control of, or be connected with,
or have any financial interest in, any individual, partnership, firm,
corporation or institution engaged in the same or similar activities
to those now or hereafter carried on by the Company;
(b) directly or indirectly interfere with the relationship of the Company
and any of its employees, agents or representatives;
(c) directly or indirectly divert or attempt to divert from the Company
any business in which the Company has been actively engaged during the
term hereof, nor interfere with the relationships of the Company with
its dealers, distributors, sources of supply or customers; and
<PAGE>
(d) contact any customers of the Company.
Any breach of this restrictive covenant by Employee will result in the
forfeiture by Employee and all other persons of any and all rights to benefits
under the Agreement that are unpaid at the time of breach and in such event the
Company shall have no further obligation to pay any amounts related thereto.
<PAGE>
10. Nondisclosure of Confidential Information. Employee acknowledges
--------------------------------------------
that the Company may disclose certain confidential information to Employee
during the term of the Agreement to enable him to perform his duties hereunder.
Employee hereby covenants and agrees that he will not, without the prior written
consent of the Company, during the term of the Agreement or at any time
thereafter, disclose or permit to be disclosed to any third party by any method
whatsoever any of the confidential information of the Company. For purposes of
the Agreement, "confidential information" shall include, but not be limited to,
any and all records, notes, memoranda, data, ideas, processes, methods,
techniques, systems, formulas, patents, models, devices, programs, computer
software, writings, research, personnel information, customer information,
financial information, plans, or any other information of whatever nature in the
possession or control of the Company which has not been published or disclosed
to the general public, or which gives to the Company an opportunity to obtain an
advantage over competitors who do not know of or use it. Employee further
agrees that if his employment hereunder is terminated for any reason, he will
leave with the Company and will not take originals or copies of any and all
records, papers, programs, computer software and documents and all matter of
whatever nature which bears secret or confidential information of the Company.
The foregoing paragraph shall not be applicable if and to the extent
Employee is required to testify in a judicial or regulatory proceeding pursuant
to an order of a judge or administrative law judge issued after Employee and his
legal counsel urge that the aforementioned confidentiality be preserved.
<PAGE>
Employee agrees promptly to reduce to writing and to disclose and assign,
and hereby does assign, to the Company, its parent, subsidiaries, successors,
assigns and nominees, all inventions, discoveries, improvements, copyrightable
material, trademarks, programs, computer software and ideas concerning the same,
capable of use in connection with the business of the Company, which Employee
may make or conceive, either solely or jointly with others, during the period of
his employment by the Company, its parent, subsidiaries or successors.
Employee agrees, without charge to the Company and at the Company's
expense, to execute, acknowledge and deliver to the Company all such papers,
including applications for patents, applications for copyright and trademark
registrations, and assignments thereof, as may be necessary, and at all times to
assist the Company, its parent, subsidiaries, successors, assigns and nominees
in every proper way to patent or register said programs, computer software,
ideas, inventions, discoveries, improvements, copyrightable material or
trademarks in any and all countries and to vest title thereto in the Company,
its parent, subsidiaries, successors, assigns or nominees.
Employee will promptly report to the Company all discoveries, inventions,
or improvements of whatsoever nature conceived or made by him at any time he was
employed by the Company, its parent, subsidiaries or successors. All such
discoveries, inventions and improvements which are applicable in any way to the
Company's business shall be the sole and exclusive property of the Company.
The covenants set forth in this paragraph which are made by Employee are in
consideration of the employment, or continuing employment of, and the
compensation paid to, Employee during his employment by the Company. The
foregoing covenants will not prohibit Employee from disclosing confidential or
other information to other employees of the Company or to third parties to the
extent that such disclosure is necessary to the performance of his duties under
the Agreement.
<PAGE>
Any breach of this covenant of nondisclosure will result in the forfeiture
by Employee and all other persons of any and all rights to benefits under the
Agreement that are unpaid at the time of breach and in such event the Company
shall have no further obligation to pay any amounts related thereto.
11. Additional Remedies. Employee recognizes that irreparable injury will
---------------------
result to the Company and to its business and properties in the event of any
breach by Employee of any of the provisions of paragraphs 9 and 10 of the
Agreement or either of them, and that Employee's continued employment is
predicated on the commitments undertaken by him pursuant to said paragraphs. In
the event of any breach of any of Employee's commitments pursuant to paragraphs
9 and 10 or either of them, the Company shall be entitled, in addition to any
other remedies and damages available, to injunctive relief to restrain the
violation of such commitments by Employee or by any person or persons acting for
or with Employee in any capacity whatsoever.
12. Nonassignment. The Agreement is personal to Employee and shall not be
--------------
assigned by him. Employee shall not hypothecate, delegate, encumber, alienate,
transfer or otherwise dispose of his rights and duties hereunder. The Company
may assign the Agreement without Employee's consent to any other entity who, in
connection with such assignment, acquires all or substantially all of the
Company's assets or into or with which the Company is merged or consolidated.
13. Waiver. The waiver by the Company of a breach by Employee of any
------
provision of the Agreement shall not be construed as a waiver of any subsequent
breach by Employee.
14. Severability. If any clause, phrase, provision or portion of the
-------------
Agreement or the application thereof to any person or circumstance shall be
invalid or unenforceable under any applicable law, such event shall not affect
or render invalid or unenforceable the remainder of the Agreement and shall not
affect the application of any clause, provision, or portion hereof to other
persons or circumstances.
<PAGE>
15. Benefit. The provisions of the Agreement shall inure to the
--------
benefit of the Company, its successors and assigns, and shall be binding upon
the Company and Employee, its and his heirs, personal representatives and
successors, including without limitation Employee's estate and the executors,
administrators, or trustees of such estate.
16. Relevant Law. The Agreement shall be construed and enforced
--------------
in accordance with the laws of the State of Illinois.
17. Notices. All notices, requests, demands and other communications in
--------
connection with the Agreement shall be made in writing and shall be deemed to
have been given when delivered by hand or 48 hours after mailing at any general
or branch United States Post Office, by registered or certified mail, postage
prepaid, addressed as follows, or to such other address as shall have been
designated in writing by the addressee:
(a) If to the Company:
Castle BancGroup, Inc.
121 W. Lincoln Highway
DeKalb, Illinois 60115
Attn: Chief Executive Officer
(b) If to Employee:
<PAGE>
18. Entire Agreement. The Agreement sets forth the entire
------------------
understanding of the parties and supersedes all prior agreements, arrangements,
and communications, whether oral or written, pertaining to the subject matter
hereof; and the Agreement shall not be modified or amended except by written
agreement of the Company and Employee.
IN WITNESS WHEREOF, the parties hereto have executed the Agreement on the date
first set forth above.
<PAGE>
CASTLE BANCGROUP, INC.
By: /s/ John W. Castle
---------------------
Chairman and Chief Executive Officer
/s/ Dewey R. Yaeger
----------------------
President and Chief Operating 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)
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 April 10, 2000, relating to the consolidated balance sheets of Castle
BancGroup, Inc. and subsidiaries as of December 31, 1999 and 1998, 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,
1999, which report appears in the December 31, 1999 annual report on Form 10-K
of Castle BancGroup, Inc.
/s/ KPMG LLP
Chicago, Illinois
April 13, 2000
<PAGE>
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<PAGE>
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<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 17501
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
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<INVESTMENTS-HELD-FOR-SALE> 126159
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<ALLOWANCE> 4636
<TOTAL-ASSETS> 540850
<DEPOSITS> 460417
<SHORT-TERM> 38486
<LIABILITIES-OTHER> 3539
<LONG-TERM> 1000
0
0
<COMMON> 1457
<OTHER-SE> 35951
<TOTAL-LIABILITIES-AND-EQUITY> 540850
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<INTEREST-INVEST> 7850
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<INTEREST-DEPOSIT> 16910
<INTEREST-EXPENSE> 18809
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<EXPENSE-OTHER> 18373
<INCOME-PRETAX> 5856
<INCOME-PRE-EXTRAORDINARY> 5856
<EXTRAORDINARY> 0
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<NET-INCOME> 261
<EPS-BASIC> .06
<EPS-DILUTED> .06
<YIELD-ACTUAL> 4.15
<LOANS-NON> 2685
<LOANS-PAST> 573
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<LOANS-PROBLEM> 3579
<ALLOWANCE-OPEN> 4750
<CHARGE-OFFS> 567
<RECOVERIES> 198
<ALLOWANCE-CLOSE> 4636
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<ALLOWANCE-FOREIGN> 0
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</TABLE>
