-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DMfteDc2pjB/FlEP+6cdT3B0mLqsTEMYMlZyFMXvytl5KJiO+S4wldnk8+GI1yn3 iVh1+unIIFAbU3RD5NPB6g== 0000897069-99-000456.txt : 19990909 0000897069-99-000456.hdr.sgml : 19990909 ACCESSION NUMBER: 0000897069-99-000456 CONFORMED SUBMISSION TYPE: 8-K/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19990908 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STATE FINANCIAL SERVICES CORP CENTRAL INDEX KEY: 0000745614 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 391489983 STATE OF INCORPORATION: WI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K/A SEC ACT: SEC FILE NUMBER: 000-18166 FILM NUMBER: 99707433 BUSINESS ADDRESS: STREET 1: 10708 W JANESVILLE RD CITY: HALES CORNERS STATE: WI ZIP: 53130 BUSINESS PHONE: 4144251600 MAIL ADDRESS: STREET 1: 10708 W. JANESVILLE ROAD CITY: HALES CORNERS STATE: WI ZIP: 53130 8-K/A 1 FORM 8-K AMENDMENT NO. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 8-K Amendment No. 1 to Original Form 8-K Filed on July 8, 1999 CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ----------------------- Date of Report (Date of earliest event reported): December 31, 1998 STATE FINANCIAL SERVICES CORPORATION (Exact name of registrant as specified in its charter) Wisconsin 0-18166 39-1489983 ------------------- ------------------- ------------------ (State or other (Commission File (IRS Employer jurisdiction of Number) Identification No.) incorporation) 10708 West Janesville Road Hales Corners, Wisconsin 53130 ----------------------------------------------------------------- (Address of principal executive offices including zip code) (414) 425-1600 ---------------------------------- (Registrant's telephone number) Page 1 of 3 Pages ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On June 23, 1999, State Financial Services Corporation ("SFSC") completed its acquisition of First Waukegan Corporation ("FWC") and its wholly-owned subsidiary. Details of the FWC acquisition were set forth in SFSC's original Form 8-K filed in regards to this transaction on July 8, 1999. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATIONAND EXHIBITS. (a) Financial Statements. Audited Consolidated Financial Statements of First Waukegan Corporation and Subsidiary and the Report of Independent Auditors for fiscal year ended December 31, 1998. (b) Pro Forma Financial information. Unaudited Pro Forma Condensed Consolidated Balance Sheets of State Financial Services Corporation and Subsidiaries as of June 30, 1999. Unaudited Pro Forma Condensed Consolidated Statements of Income of State Financial Services Corporation and Subsidiaries for the six months ended June 30, 1999. (c) The exhibits furnished with this Current Report on Form 8-K are listed on the attached Exhibit Index. Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Current Report on Form 8-K to be signed on its behalf by the undersigned thereunto duly authorized. STATE FINANCIAL SERVICES CORPORATION By:/s/ Michael A. Reindl -------------------------------- Michael A. Reindl, Senior Vice President, Controller and Chief Financial Officer Page 2 of 3 Pages EXHIBIT INDEX Exhibit Number Exhibit Description -------------- ------------------- 2.1 Agreement and Plan of Merger, dated as of March 11, 1999, by and between State Financial Services Corporation, FWC Acquisition Corp. and First Waukegan Corporation (incorporated by reference to Exhibit 2.1 to State Financial Services Corporation's Form 8-K filed with the Commission on March 29, 1999. 23.1 Consent of Scanlon & Mathews LLP Page 3 of 3 Pages
State Financial Services Corporation Pro Forma Condensed Consolidated Balance Sheet (Unaudited) Pro Forma June 30, 1999 Adjustments/ Pro Forma As Reported Eliminations Consolidated ---------------------------------------------------------- ----------------- ASSETS State Financial(1) Waukegan(1) ------------------ ------------- Cash and cash equivalents $ 61,871 $ 17,611 $ $ 61,871 Investment securities - held-to-maturity 6,414 2,133 6,414 Investment securities - available-for-sale 206,365 106,047 206,365 Investment in First Waukegan Corporation 0 0 0 Loans 724,618 87,052 724,618 Less allowance for loan losses 6,963 2,235 6,963 ---------------- -------------- -------------- ---------------- Net loans 717,655 84,817 0 717,655 Premises and equipment 20,731 6,484 20,731 Accrued interest receivable 4,681 0 4,681 Intangible assets 29,337 20,032 29,337 Other assets 8,968 3,016 0 8,968 ================ ============== ============== ================ $ 1,056,022 $ 240,140 $ 0 $ 1,056,022 ================ ============== ============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Deposits: Demand $ 114,118 $ 41,838 $ $ 114,118 Savings 411,152 53,061 411,152 Money market 153,273 53,443 153,273 Other time 150,620 50,069 150,620 ---------------- -------------- -------------- ---------------- Total deposits 829,163 198,411 0 829,163 Notes payable 10,000 0 10,000 Securities sold under agreements to repurchase 11,303 773 11,303 Federal Home Loan Bank advances 50,000 0 Federal funds purchased 12,400 5,000 Accrued expenses and other liabilities 4,021 902 4,021 Accrued interest payable 3,548 1,799 3,548 ---------------- -------------- -------------- ---------------- Total liabilities 920,435 206,885 0 920,435 Stockholders' equity Common Stock Common Stock - State Financial 1,009 1,009 Capital surplus - State Financial 94,852 94,852 Common Stock - Waukegan 0 653 0 Capital surplus - Waukegan 0 28,013 0 Retained earnings 45,457 5,700 45,457 Accumulated other comprehensive income (599) (1,111) (599) Less: Guaranteed ESOP obligation (5,132) 0 (5,132) ---------------- -------------- -------------- ---------------- 135,587 33,255 0 135,587 ================ ============== ============== ================ $ 1,056,022 $ 240,140 $ 0 $ 1,056,022 ================ ============== ============== ================
-1-
State Financial Services Corporation Pro Forma Condensed Consolidated Statement of Income (Unaudited) For the six months ended June 30, 1999 As Reported --------------------------------------- Pro Forma Pro Forma State Financial (1) Waukegan (1) Adjustments Consolidated ---------------------------------------------------------- ---------------- Interest income: Loans $ 24,964 $ 3,564 $ (60)(2c-e) $ 28,468 Investment securities Taxable 3,247 2,961 (457)(2h) 5,751 Tax-exempt 748 112 860 Federal funds sold 248 12 260 ------------------ ---------------- -------------- ---------------- Total interest income 29,207 6,649 (517) 35,339 Interest expense: Deposits 11,262 2,828 (42)(2f) 14,048 Notes payable and other borrowings 1,434 281 307 (2g) 2,022 ------------------ ---------------- -------------- ---------------- Total interest expense 12,696 3,109 265 16,070 ------------------ ---------------- -------------- ---------------- Net interest income 16,511 3,540 (782) 19,269 Provision for loan losses 345 1,060 1,405 ------------------ ---------------- -------------- ---------------- Net interest income after provision for loan losses 16,166 2,480 (782) 17,864 Other income: Service charges on deposit accounts 982 185 1,167 Merchant services 681 0 681 Building rent 126 0 126 ATM fees 348 54 402 Security transaction commissions 247 0 247 Asset management fees 300 0 300 Gains on sale of loans 418 620 1,038 Investment securities gains 746 92 838 Other 333 162 495 ------------------ ---------------- -------------- ---------------- 4,181 1,113 0 5,294 Other expenses: Salaries and employee benefits 6,063 3,760 9,823 Net occupancy expense 644 178 19 (2b) 841 Equipment rentals, depreciation and Maintenance 1,449 363 1,812 Data processing 1,035 191 1,226 Legal and professional 511 678 1,189 Merchant service charges 495 0 495 ATM charges 328 0 328 Advertising 420 62 482 Goodwill amortization 357 37 636 (2a) 1,030 Other 2,427 523 2,950 ------------------ ---------------- -------------- ---------------- 13,729 5,792 655 20,176 ------------------ ---------------- -------------- ---------------- Income (loss) before income taxes 6,618 (2,199) (1,437) 2,982 Income taxes 2,592 (788) (300)(3) 1,504 ================== ================ ============== ================ Net income (loss) $ 4,026 $ (1,411) $ (1,137) $ 1,478 ================== ================ ============== ================ Earnings per share Basic $0.42 $0.15 Weighted average shares outstanding 9,639,156 9,639,156 Diluted $0.42 $0.15 Weighted average shares outstanding 9,658,567 9,658,567
-2- STATE FINANCIAL SERVICES CORPORATION NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) State Financial Services Corporation (the "Company" or "State") completed its acquisition of First Waukegan Corporation and its subsidiary Bank of Northern Illinois, N.A. on June 23, 1999 (collectively referred to as "Waukegan"). Holders of Waukegan common stock received cash consideration totaling $27,511,600 in exchange for their shares of First Waukegan Corporation. In addition, State assumed First Waukegan Corporation's $2,403,463 in preferred stock and $3,717,909 in debt outstanding. Both the preferred stock and the outstanding debt were retired simultaneous with the acquisition. The amounts set forth in this report under the "State Financial" column heading of the Pro Forma Consolidated Balance Sheet (Unaudited) include the assets and liabilities of Waukegan, adjusted for the effects of purchase accounting. The amounts set forth in this report under the "Waukegan" column heading of the Pro Forma Consolidated Balance Sheet (Unaudited) represent Waukegan's assets and liabilities as of June 30, 1999 and are set forth for informational purposes to demonstrate the applicable categorical amounts which Waukegan added to the Company's June 30, 1999 Consolidated Balance Sheet. The Waukegan amounts have also include the purchase accounting adjustments resulting from the transaction which are set forth below. Under purchase accounting, Waukegan's assets and liabilities are required to be adjusted to their estimated fair values. The estimated fair value adjustments have been determined by SFSC based upon available information. State Financial cannot be sure that such estimated values represent fair value that would ultimately be determined at the acquisition date. The following sets forth the purchase accounting adjustments made to reflect Waukegan's estimated fair values at June 23, 1999. These amounts are included in the amounts set forth for "State Financial", "Waukegan", and "Pro Forma Consolidated" in the Pro Forma Consolidated Balance Sheet (Unaudited). Purchase price of Waukegan $27,512 Waukegan preferred stock redemption $2,403 Waukegan debt retirement $3,718 SFSC Acquisition Costs 53 -------------- $33,686 ============== Historical net assets of Waukegan @ at 6/23/99 $13,232 Fair market value adjustments as of June 23, 1999 based upon actual figures: Land & Building 1,195 Mortgage loans 143 Consumer loans 256 Commercial loans 31 Core deposit intangible (250) Cost in excess of net assets of business acquired 19,079 -------------- $33,686 ============== Application of purchase accounting principles require the Company to include the results of Waukgen from the date of acquisition to the end of the applicable reporting period. Operating results set forth in this report under the "State Financial" column heading of the Pro Forma Consolidated Statements of Income (Unaudited) include operating results of Waukegan for the period June 23 - June 30, 1999. Operating results set forth in this report under the "Waukegan" column of the Pro Forma Consolidated Statements of Income (Unaudited) present Waukegan's results from January 1 through June 22, 1999. The "Pro Forma Adjustments" column sets forth the additional expenses which the Company would have incurred for the six months ended June 30, 1999 if the Waukegan acquisition had occurred effective January 1, 1999. The "Pro Forma Consolidated" column heading of the Pro Forma Consolidated Statements of Income (Unaudited) combines the categorical figures for "State Financial", "Waukegan" and "Pro Forma Adjustments" to result in the Company's pro forma consolidated operating results as if the Waukegan acquisition had occurred effective January 1, 1999. The pro forma results may not be indicative of the results that actually would have occurred if the combination of State Financial and Waukegan had been in effect at the beginning of the period presented or which may be obtained in the future. -3- (2) For purposes of determining the pro forma effect of the Waukegan acquisition on the Company's Consolidated Statement of Income, the following pro forma adjustments have been made as if the acquisition had occurred as of January 1, 1999. # of months 6 For the 6 months ended June 30, 1999 (a) Amortization of cost in excess of net assets acquired 636 --Waukegan (15 years straight line) (b) Depreciation on Building FMV Adjustment 19 --Waukegan (31.5 years straight line) (c) Amortization of mortgage loan FMV adjustment 12 -Waukegan (6 years straight line) (d) Amortization of consumer loan FMV adjustment 43 -Waukegan (3 years straight line) (e) Amortization of commercial loan FMV adjustment 5 -Waukegan (3 years straight line) (f) Amortization of core deposit intangible (42) -Waukegan (3 years straight line) (g) Interest expense on notes payable for 6 months $10 million at 6.48% APR 307 (h) Foregone interest income on investment securities liquidated to finance acquisition for one year $17,512 @ average annual investment yield of 5.50% 457 (3) The following table sets forth the tax benefits of the pro forma adjustments to the Consolidated Statements of Income. All adjustments assume a 39.21% marginal tax rate. Tax benefit on notes payable interest expense 120 Tax benefit on foregone investment interest income 179 --------- Total Tax Benefit on pro forma adjustments 300 ------- Total pro forma income tax 300 ======= No income tax benefit was taken for the expenses related to items (a) through (f) in footnote #2. -4- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AND AUDITORS' REPORT December 31, 1998 and 1997 -5- INDEPENDENT AUDITORS' REPORT Board of Directors First Waukegan Corporation We have audited the accompanying consolidated balance sheets of First Waukegan Corporation and Subsidiary as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Waukegan Corporation and Subsidiary as of December 31, 1998 and 1997, and the consolidated results of their operations and cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ Scanlon & Mathews LLP Chicago, Illinois February 26, 1999 -6- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
1998 1997 ---- ---- Assets Cash and due from banks $ 6,013,551 $ 9,396,179 Federal funds sold 2,730,000 5,700,000 Securities available-for-sale 102,939,247 92,588,048 Loans, net of allowance for loan losses of $1,223,340 and $1,086,095 86,567,969 95,748,584 Loans held for sale 5,899,340 3,471,961 Premises and equipment, net 5,458,688 5,908,100 Accrued interest and other assets 2,874,847 3,567,534 --------------- --------------- Total assets $ 212,483,642 $ 216,380,406 =============== =============== Liabilities and Stockholders' Equity Deposits: Non-interest bearing - demand $ 37,753,225 $ 36,623,260 Interest bearing: NOW accounts 14,943,577 15,183,253 Savings and money market 86,698,668 88,087,636 Time, $100,000 and over 11,247,457 8,474,217 Other time 43,443,443 46,523,672 --------------- --------------- Total deposits 194,086,370 194,892,038 Federal funds purchased, securities sold under repurchase agreements, and other short-term borrowings 1,462,651 2,746,086 Notes payable 3,760,000 4,195,000 Accrued interest and other liabilities 1,730,079 2,758,281 --------------- --------------- Total liabilities 201,039,100 204,591,405 --------------- --------------- Stockholders' Equity: Preferred stock, $1,000 par value; 2,500 shares authorized; 2,350 shares issued and outstanding 2,350,000 2,350,000 Common stock, no par value; authorized 1,500,000 shares; 650,603 shares issued in 1998 and 660,443 shares issued in 1997 650,603 660,443 Additional paid in capital 1,373,353 1,546,221 Retained earnings 7,378,401 6,858,059 Accumulated other comprehensive income (307,815) 374,278 --------------- --------------- Total stockholders' equity 11,444,542 11,789,001 --------------- --------------- Total liabilities and stockholders' equity $ 212,483,642 $ 216,380,406 =============== =============== The accompanying notes are an integral part of these financial statements.
-7- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------- ------------- ------------- Interest income: Interest and fees on loans $ 7,842,643 $ 8,221,011 $ 8,980,061 Interest on securities - taxable: U.S. Treasury 2,198 7,928 Obligations of other U.S. government agencies and corporations 5,854,166 5,839,907 4,156,342 Other 227,971 291,068 321,301 Interest on securities - tax-exempt: Obligations of states and political subdivisions 69,243 33,646 41,498 Interest on loans held for sale 483,247 116,906 261,923 Interest on federal funds sold 247,932 125,894 229,904 Interest on balances in depository institutions 3,524 2,176 ------------- ------------- ------------- Total interest income 14,728,726 14,632,806 13,998,957 ------------- ------------- ------------- Interest expense: Interest on deposits 6,848,414 6,447,579 5,207,407 Interest on short-term borrowings 136,489 255,693 344,326 Interest on notes payable 346,774 422,617 454,770 ------------- ------------- ------------- Total interest expense 7,331,677 7,125,889 6,006,503 ------------- ------------- ------------- Net interest income 7,397,049 7,506,917 7,992,454 Provision for loan losses 800,000 755,000 1,046,000 ------------- ------------- ------------- Net interest income after provision for loan losses 6,597,049 6,751,917 6,946,454 ------------- ------------- ------------- Non-interest income: Trust department 111,203 69,245 65,466 Investment security gains, net 191,721 229,950 127,374 Service charges on deposit accounts 674,800 648,478 708,463 Gain on sale of loans 2,181,056 780,497 766,693 Other 338,952 358,010 197,068 ------------- ------------- ------------- 3,497,732 2,086,180 1,865,064 ------------- ------------- ------------- Non-interest expense: Salaries and employee benefits 3,514,707 3,536,566 3,851,766 Occupancy 644,817 679,073 776,781 Loan sale expenses 1,513,855 636,494 623,959 Other 2,795,735 2,567,494 3,473,869 ------------- ------------- ------------- 8,469,114 7,419,627 8,726,375 ------------- ------------- ------------- Income from continuing operations before income taxes 1,625,667 1,418,470 85,143 Income tax expense 531,195 502,864 41,216 ------------- ------------- ------------- Income from continuing operations 1,094,472 915,606 43,927 Discontinued operations (Loss) from operations of Consumer Finance division (173,616) (928,732) Income tax (benefit) (59,029) (315,768) (Loss) on disposal of Consumer Finance division (Less applicable income tax benefit of $106,722) (207,165) ------------- ------------- ------------- Net income (loss) $ 1,094,472 $ 801,019 $ (776,202) ============= ============= ============= Net income (loss) applicable to common stock $ 847,787 $ 552,213 $ (1,029,262) ============= ============= ============= The accompanying notes are an integral part of these financial statements.
-8- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, 1998, 1997 and 1996
Accumulated Additional other Preferred Common paid in Retained Treasury comprehensive stock stock capital earnings stock income Total ---------- -------- ---------- ---------- --------- ------------- ----------- Balance, January 1, 1996 $2,500,000 $646,057 $1,601,154 $7,956,319 $(806,098) $263,246 $12,160,678 Redemption of 150 shares of preferred stock (150,000) (150,000) Issuance of 5,063 shares of common stock 5,063 81,008 86,071 Common stock dividends paid, $.50 per share (308,571) (308,571) Preferred stock dividends paid (Note 7) (253,060) (253,060) Comprehensive income Net loss (776,202) (776,202) Other comprehensive income, net of tax-change in unrealized appreciation on securities available- for-sale, net of tax of $34,017 66,034 66,034 Less: reclassification adjustment, net of tax of $43,307 (84,067) (84,067) Total comprehensive income 794,235 ---------- -------- ---------- ---------- --------- --------- ----------- Balance, December 31, 1996 2,350,000 651,120 1,682,162 6,618,486 (806,098) 245,213 10,740,883 Retirement of treasury stock (31,451) (774,647) 806,098 Issuance of common stock in repayment of debt 24,334 375,666 400,000 Issuance of 16,440 shares of common stock 16,440 263,040 279,480 Common stock dividends paid, $.50 per share (312,640) (312,640) Preferred stock dividends paid (Note 7) (248,806) (248,806) Comprehensive income Net income 801,019 801,019 Other comprehensive income, net of tax-change in unrealized appreciation on securities available- for-sale, net of tax of $144,671 280,832 280,832 Less: reclassification adjustment, net of tax of $78,183 (151,767) (151,767) Total comprehensive income 930,084 ---------- -------- ---------- ---------- --------- --------- ----------- Balance, December 31, 1997 2,350,000 660,443 1,546,221 6,858,059 - 374,278 11,789,001 Repurchase and retirement of 9,840 shares of common stock (9,840) (172,868) (182,708) Common stock dividend paid, $.50 per share (327,445) (327,445) Preferred stock dividend paid (Note 7) (246,685) (246,685) Comprehensive income Net income 1,094,472 1,094,472 Other comprehensive income, net of tax-change in unrealized depreciation on securities available-for-sale, net of tax of $286,195 (555,557) (555,557) Less: reclassification adjustment, net of tax of $65,185 (126,536) (126,536) Total comprehensive income 412,379 ---------- -------- ---------- ---------- --------- --------- ----------- Balance, December 31, 1998 $2,350,000 $650,603 $1,373,353 $7,378,401 $ - $(307,815) $11,444,542 ========== ======== ========== ========== ========= ========= =========== The accompanying notes are an integral part of these financial statements.
-9- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------- ------------- ------------- Cash flows provided by operating activities: Net income (loss) $ 1,094,472 $ 801,019 $ (776,202) Adjustments to reconcile net income (loss) to net cash provided by operating activities: (Gain) on sale of investment securities (191,721) (229,950) (127,374) (Gain) on sale of loans held for sale (2,181,056) (780,497) (696,186) Amortization of premium and accretion of discounts on investments, net 659,802 486,634 320,537 Provision for loan losses 800,000 980,000 2,787,800 Depreciation and amortization 653,440 714,044 894,723 Deferred income tax (87,164) 295,275 204,511 Loans held for sale originated (159,562,550) (61,319,880) (48,537,790) Proceeds from sale of loans held for sale 159,316,227 60,489,516 51,452,745 Net (gain) loss on sale of premises and equipment (2,225) (135,025) 248,859 Changes in assets and liabilities: Decrease (increase) in accrued interest receivable and other assets 613,130 1,991,184 (500,834) (Decrease) increase in accrued interest and other liabilities (589,657) (353,877) 786,305 ------------- ------------- ------------- Net cash provided by operating activities 522,698 2,938,443 6,057,094 ------------- ------------- ------------- Cash flows (used in) investment activities: Proceeds from sales of available-for-sale securities 16,143,139 25,593,677 12,025,344 Proceeds from maturities of available-for sale securities 29,234,275 20,086,090 14,495,655 Purchase of available-for-sale securities (57,230,168) (55,093,910) (58,518,091) Decrease (increase) in Federal funds sold 2,970,000 (500,000) (1,300,000) Net decrease in loans to customers 8,380,615 3,963,825 25,844,928 Purchase of premises and equipment (126,971) (227,808) (273,915) Proceeds from sale of premises and equipment 4,725 455,698 149,788 ------------- ------------- ------------- Net cash (used in) investing activities (624,385) (5,722,428) (7,576,291) ------------- ------------- ------------- Cash flows (used in) provided by financing activities: Net (decrease) increase in deposits (805,668) 3,865,740 6,143,038 Issuance of notes payable 65,000 Repayment of notes payable (500,000) (625,000) (185,000) Net proceeds of federal funds purchased, securities sold under repurchase agreements, and other short-term borrowings (1,283,435) (2,551,576) (2,092,944) Issuance of common stock 279,480 86,071 Repurchase and retirement of common stock (182,708) Redemption of preferred stock (150,000) Dividends paid (574,130) (561,446) (561,631) ------------- ------------- ------------- Net cash (used in) provided by financing activities (3,280,941) 407,198 3,239,534 ------------- ------------- ------------- Net (decrease) increase in cash and cash equivalents (3,382,628) (2,376,787) 1,720,337 Cash and cash equivalents, beginning of year 9,396,179 11,772,966 10,052,629 ------------- ------------- ------------- Cash and cash equivalents, end of year $ 6,013,551 $ 9,396,179 $ 11,772,966 ============= ============= ============= The accompanying notes are an integral part of these financial statements.
-10 FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles and conform to general practices within the banking industry. A summary of the significant accounting policies follows: Principles of Consolidation The consolidated financial statements include the accounts of First Waukegan Corporation (the Parent) and its wholly owned subsidiary, Bank of Northern Illinois, N.A. (collectively the Company). Significant intercompany accounts and transactions have been eliminated in consolidation. Nature of Operations The Company and its subsidiary provide full banking services, including trust, mortgage banking and consumer finance services, to loan and deposit customers primarily located in the north suburban Chicago metropolitan area and includes a wide range of individuals and businesses. A major portion of loans are collateralized by various forms of assets including real estate, business assets and consumer property although borrower cash flow may also be a primary source of repayment. The Company is subject to regulations of the Board of Governors of the Federal Reserve System and the Office of the Comptroller of the Currency. Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Collectibility of loans, fair value of financial instruments and status of contingencies are particularly subject to change. Investment Securities Securities have been classified in the consolidated statements of financial condition according to the Company's intent. Securities available-for-sale consist of debt securities which the company may sell before maturity. Securities available-for-sale are carried at fair market value, with unrealized holding gains and losses reported in accumulated other comprehensive income, net of tax. -11- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Investment Securities (continued) - --------------------------------- Premium and discount are amortized or accreted, respectively, to interest income on the level yield method over the period from acquisition to the earlier of maturity or call date of the related security. Realized gains on securities available-for-sale are included in noninterest income and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gain or loss on sale of investment securities is based on the adjusted cost of the specific security sold. Loans Held for Sale - ------------------- Loans held for sale are carried at the lower of cost or estimated market value in the aggregate. Loans and Allowance for Loan Losses - ----------------------------------- Loans are stated at the principal balance outstanding, reduced by unearned discount, deferred loan fees, the allowance for loan losses and charge-offs. Unearned discount on installment loans is recognized as income over the terms of the loans by the sum-of-the-months-digits method. Interest on other loans is calculated by using the simple interest method on daily balances of the principal amount outstanding. Net loan fees are deferred and amortized over the life of the loan as an adjustment to yield. Accrual of interest and related amortization of loan fees is discontinued on loans which management believes, after considering economic and business conditions and collection efforts, the borrower's financial condition is such that collection of interest is doubtful. The allowance for loan losses is established through a provision for loan losses charged to expenses. Loans are charged against the allowance for loan losses when management believes that the collectibility of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb possible losses on existing loans that may become uncollectible, based on evaluations of the collectibility of loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrowers' ability to pay. -12- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Loans and Allowance for Loan Losses(Continued) - ----------------------------------- Loan impairment is reported when full payment under the loan terms is not expected. Impairment is evaluated in total for smaller-balance loans of similar nature such as residential mortgage and consumer loans and on an individual loan basis for other loans. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate. Loans are evaluated for impairment when payments are delayed, typically, 90 days or more, or when the internal grading system indicates a doubtful classification. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for losses on loans. Such agencies may require recognition of additions to the allowance based on their judgments of information available to them at the time of their examination. Premises and Equipment - ---------------------- Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is provided principally on the straight line method at rates sufficient to relate the cost of depreciable assets to operations over their estimated service lives. The estimated useful lives used in determining depreciation are as follows: Buildings and improvements 15 to 33 years Equipment and furniture 3 to 15 years Maintenance and repairs are charged to expense as incurred, improvements and major renewals are capitalized. Items of property which are sold, retired or otherwise disposed of are removed from the asset and reserve accounts, and any gains or losses thereon are reflected in income. Income Taxes - ------------ Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities computed using enacted tax rates. To the extent that current available evidence about the future raises doubt about the realization of a deferred tax asset, a valuation allowance is established. -13- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Income Taxes (Continued) - ------------ The Parent and its subsidiary file consolidated Federal and state income tax returns. Consolidated Federal and state income tax expense is allocated to each company as if each company filed a separate return. Amortization of Goodwill - ------------------------ The excess of cost over book value of the subsidiary at date of acquisition is recorded as goodwill and amortized over approximately thirty years on a straight line basis. Goodwill included in other assets in the consolidated balance sheets totaled $991,000 and $1,068,000 at December 31, 1998 and 1997, respectively, net of accumulated amortization of $1,139,000 and $1,062,000, respectively. Amortization of goodwill amounted to $77,000 in 1998 and 1997 and $78,000 in 1996. Statement of Cash Flows - ----------------------- For purposes of the statement of cash flows, cash and cash equivalents include cash and due from banks. Retirement Plan - --------------- The Company has a defined contribution benefit plan covering substantially all employees. The Company's policy is to fund annually the retirement plan expense. Stock Compensation - ------------------ Expense for employee compensation under the stock option plan is based on Accounting Principles Board Opinion 25, with expense reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are provided as if the fair value method of Financial Accounting Standards Board Statement No. 123 were used for stock-based compensation if pro forma net income and earnings per share differ significantly from reported net income and earnings per share. -14- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Earnings Per Share - ------------------ Net income per common share is based on net income after preferred stock dividend requirements and is based on the weighted average number of shares of common stock outstanding. 1998 1997 1996 ---- ---- ---- Income (loss) per common share (based on weighted average shares outstanding of 655,651 in 1998, 626,485 in 1997 and 618,898 in 1996) from: Continuing operations $ 1.29 $ 1.06 $ (.34) Operations from Consumer Finance Division (.18) (.99) Disposal of Consumer Finance Division (.33) ------ ------ ------ Net income (loss) $ 1.29 $ .88 $(1.66) ====== ====== ====== Reclassifications - ----------------- Certain 1997 and 1996 amounts have been reclassified to conform with the 1998 presentation. These reclassifications had no effect on net income or stockholders' equity as previously reported. NOTE 2: SECURITIES Carrying amounts and approximate market values of securities available-for-sale are summarized as follows: December 31, 1998 ---------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Market Value --------- ---------- ---------- ------------ Obligations of U.S. government agencies and corporations $ 97,721,021 $299,625 $823,617 $ 97,197,020 Obligations of states and political subdivisions 3,397,131 30,332 8,850 3,418,613 Other securities 2,287,491 36,335 212 2,323,614 ------------ -------- -------- ------------ $103,405,634 $366,292 $832,679 $102,939,247 ============ ======== ======== ============ -15- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2: SECURITIES (Continued) December 31, 1997 ---------------------------------------------- Gross Gross Amortized Unrealized Unrealized Approximate Cost Gains Losses Market Value --------- ---------- ---------- ------------ Obligations of U.S. government agencies and corporations $87,501,218 $727,904 $226,278 $88,002,844 Obligations of states and political subdivisions 342,871 4,920 347,791 Other securities 4,176,871 61,092 550 4,237,413 ----------- -------- -------- ----------- $92,020,960 $793,916 $226,828 $92,588,048 =========== ======== ======== =========== The amortized cost and estimated market value of securities at December 31, 1998, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Market Cost Value --------- --------- Due after one year through five years $ 164,231 $ 166,103 Due after five years through ten years 4,235,426 4,255,743 Due in over ten years 7,474 8,118 Mortgage-backed securities and collateralized mortgage obligations 97,525,553 97,036,333 Federal Reserve Bank stock and Federal Home Loan Bank stock 1,472,950 1,472,950 ------------ ------------ Total $103,405,634 $102,939,247 ============ ============ Securities with carrying amounts of approximately $7,618,604 and $9,665,645 respectively, at December 31, 1998 and 1997 were pledged to secure public deposits and for other purposes as required or permitted by law. Gross realized gains and gross realized losses on sales of securities available-for-sale for the years ended December 31, 1998, 1997 and 1996 were: 1998 1997 1996 ---- ---- ---- Gross realized gains $ 195,942 $ 230,973 $ 151,479 Gross realized losses 4,221 1,023 24,105 -16- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: LOANS Major classifications of loans at December 31, 1998 and 1997 are as follows: 1998 1997 ---- ---- Consumer finance division $ 3,153,800 Banking division: Commercial and industrial $ 50,573,893 51,084,693 Installment 22,874,443 32,275,010 Real estate mortgages 14,576,492 10,715,443 ------------ ------------ Total loans 88,024,828 97,228,946 Less unearned discount 233,519 394,267 ------------ ------------ 87,791,309 96,834,679 Less allowance for loan losses 1,223,340 1,086,095 ------------ ------------ Loans, net $ 86,567,969 $ 95,748,584 ============ ============ The Company makes legally binding commitments to originate loans at predetermined interest rates for specified periods of time. These commitments may take the form of letter commitments to originate loans or formal revolving line of credit agreements to provide funds at customer request, provided certain conditions are met. The customer's creditworthiness is evaluated on a case-by-case basis and collateral may be required, based on management's judgment. In addition to the credit risk inherent in these instruments, there could also be demands on liquidity if a significant portion of outstanding commitments were drawn upon simultaneously. Management considers this unlikely, however, as many loan commitments or revolving lines of credit expire without having been drawn upon. The Company had commitments to fund loans totaling $27,649,000 at December 31, 1998. The Company had no commitments to purchase loans at December 31, 1998. In the ordinary course of business, the Company has made loans to certain officers and directors or their associates. Such loans totaled $1,686,000 and $1,275,000 at December 31, 1998 and 1997, respectively. During 1998, $416,000 of new loans were made and repayments totaled $5,000. -17- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3: LOANS (Continued) The outstanding principal balances of loans having payments delinquent more than ninety days and still accruing interest at December 31, 1998 and 1997 amounted to approximately $367,000 and $19,000, respectively. Changes in the allowance for loan losses for the years ended December 31, 1998, 1997 and 1996 were as follows: 1998 1997 1996 ---- ---- ---- Balance, January 1, $ 1,086,095 $ 1,581,606 $ 2,176,101 Provision charged to discontinued operations 225,000 1,741,800 Provision charged to operations 800,000 755,000 1,046,000 Loans charged off (905,498) (2,080,966) (3,866,425) Recoveries 242,743 605,455 484,130 ----------- ----------- ----------- Balance, December 31, $ 1,223,340 $ 1,086,095 $ 1,581,606 =========== =========== =========== Impaired loans at December 31, 1998 and 1997 were as follows. 1998 1997 ---- ---- Year-end loans with no allowance for loan losses allocated $ 46,649 $1,433,736 Year-end loans with allowance for loan losses allocated 1,715,138 1,376,142 Amount of the allowance allocated 485,244 639,905 Average of impaired loans during the year 1,737,087 2,553,759 Interest income recognized during impairment 11,081 35,340 Cash-basis interest income recognized 2,706 16,957 -18- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: LOANS HELD FOR SALE At December 31, 1998, management identified $5,899,340 of newly originated single family residential loans as held for sale. At December 31, 1997, there were $3,471,961 of newly originated single family residential loans identified as held for sale. At December 31, 1998, the Company had total commitments to originate approximately $7,097,450 of single family residential mortgage loans at prevailing rates. At December 31, 1998, the Company had commitments to sell single family residential loans of $12,996,790 at prevailing market rates. NOTE 5: PREMISES AND EQUIPMENT Major classifications of premises and equipment are summarized as follows: December 31, 1998 1997 ---- ---- Land $ 1,052,115 $ 1,052,115 Buildings and improvements 6,346,023 6,344,958 Equipment and furniture 6,415,065 6,340,423 ----------- ----------- 13,813,203 13,737,496 Less accumulated depreciation 8,354,515 7,829,396 ----------- ----------- $ 5,458,688 $ 5,908,100 =========== =========== Depreciation expense amounted to $573,883 in 1998, $634,487 in 1997 and $812,398 in 1996. The Company is obligated under a noncancelable operating lease for one of its facilities. Future minimum lease payments under the terms of the lease are as follows: 1999 39,000 2000 39,000 2001 39,000 2002 40,750 2003 42,000 thereafter 143,500 --------- $ 343,250 ========= Rental expense for all leased facilities was $41,100 in 1998, $37,300 in 1997 and $131,000 in 1996. In connection with the closing of certain facilities, an additional $115,000 of lease obligations was expensed in 1996. -19- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: INCOME TAXES Income tax expense, including the imposition of the alternative minimum tax, reflected in the statements of income is as follows: 1998 1997 1996 Federal: Current $ 618,359 $ 148,560 $ (585,785) Deferred (87,164) 295,275 204,511 --------------- --------------- --------------- $ 531,195 $ 443,835 $ (381,274) =============== =============== =============== Included in the above amounts are income taxes related to securities transactions of $65,000 in 1998, $78,000 in 1997 and $43,000 in 1996. The source of temporary differences resulting in deferred taxes for the years ending December 31, 1998, 1997 and 1996 and the tax effect of each are as follows: 1998 1997 1996 ---- ---- ---- Loan loss provision $(46,663) $177,308 $339,671 Depreciation (44,358) (30,417) (41,100) Loan fees 7,940 32,137 19,005 Accretion 8,533 10,492 Loans held for sale (2,590) (4,971) 12,016 Alternative minimum tax 7,910 114,103 (122,013) Other, net (9,403) (1,418) (13,560) -------- -------- -------- Total deferred income tax provision $(87,164) $295,275 $204,511 ======== ======== ======== -20- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: INCOME TAXES (Continued) The federal income tax provision (benefit) is less than that computed by applying the federal statutory rate of 34%, as indicated in the following analysis: 1998 1997 1996 ---- ---- ---- Tax (benefit) based on statutory rate $ 552,727 $ 423,250 $(393,542) Effect of tax-exempt income and excess tax loss on securities transactions (28,606) (10,044) (12,342) Other, net 7,074 30,629 24,610 ---------- --------- --------- $ 531,195 $ 443,835 $(381,274) ========== ========= ========= Accumulated net deferred income taxes of $424,035 and $862,580 at December 31, 1998 and 1997 is included in other liabilities. Net deferred taxes consisted of the following at December 31, 1998 and 1997: 1998 1997 ---- ---- Deferred tax assets: Loans held-for-sale $ 17,985 $ 15,395 Other 33,252 23,868 Alternative minimum tax 7,910 Unrealized depreciation on available-for-sale securities 158,571 --------- --------- Gross deferred tax assets 209,808 47,173 --------- --------- Deferred tax liabilities: Allowance for loan losses $ 204,879 $ 251,542 Depreciation 231,167 275,525 Bond discount accretion 177,370 177,370 Loan fees 16,656 8,716 Unrealized appreciation on available-for-sale securities 192,810 Prepaid expenses 3,771 3,790 --------- --------- Gross deferred tax liabilities 633,843 909,753 --------- --------- Net deferred tax (liability) $(424,035) $(862,580) ========= ========= Management believes all tax assets are fully recoverable and, therefore, no valuation allowance has been established. -21- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6: INCOME TAXES (Continued) The Company had no state income tax expense for the years ended December 31, 1998, 1997 and 1996. Net Federal taxes paid in 1998 were $547,000 and in 1996 were $320,718. Federal taxes received in 1997 were $728,917. NOTE 7: NOTES PAYABLE/PREFERRED STOCK At December 31, 1998, the Company is indebted on a $3,760,000 term loan. This term loan replaced the previous term loan and subordinated debenture. The covenants of the term loan agreement dated March 30, 1995 continue under the new term loan. The term loan is collateralized by the Company's ownership in its subsidiary. The term loan bears interest at the lender's prime rate. The interest rate at December 31, 1998 was 7.75% and is payable quarterly. The term loan is repayable as follows: 1999 $ 620,000 2000 3,140,000 ----------- $ 3,760,000 Among the covenants of the term loan agreement are requirements to maintain minimum net worth, return on average assets and restrictions on the payment of dividends. The Company is in compliance or has received waivers on the covenants as of December 31, 1998. Dividend payments by the Company are subject to maintenance of various satisfactory debt compliance ratios and regulatory capital to asset ratios. The Company has 2,500 shares of Adjustable Rate Cumulative Perpetual Preferred Stock (Preferred Stock) authorized and 2,350 shares outstanding with a par value of $1,000 per share. All of the shares are held by an affiliate of the same lender. The Preferred Stock ranks prior to common stock with regard to dividends and liquidation rights. Dividends are payable quarterly at a rate equal to 2% over the prime rate. The dividend rate at December 31, 1998 and 1997 was 9.75% and 10.50%, respectively. Dividends paid on Preferred Stock in 1996 amounted to approximately 10.6% of the stated value. -22- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8: RETIREMENT PLAN The Company has a contributory stock bonus plan with employee stock ownership plan (ESOP) features. Contributions made by the Company to the ESOP are discretionary and are determined semiannually by the Company. For the years ended December 31, 1998, 1997 and 1996, the employer contributions to the plan were $57,000, $49,000 and $69,000 respectively. NOTE 9: STOCK OPTION PLAN Under a stock option plan for certain officers and key executive employees adopted by the Board of Directors of the Company and approved by shareholders in 1995, the Company may grant options to purchase up to 64,500 shares of common stock. The option price per share may not be less than the fair market value of a Company share on the date of the grant. The term of each option is five years and may be exercised at the rate of 20% of the granted shares each twelve months beginning with the date of grant. Options which are not exercised in a period may be carried over and exercised in a subsequent period. Information regarding the options for the years ended December 31, 1998 and 1997 are as follows: Number of Shares ---------------------------- 1998 1997 ----------- ----------- Outstanding, January 1 47,422 - Granted 54,001 Forfeited 2,632 6,579 ----------- ----------- Outstanding, December 31 44,790 47,422 =========== =========== Options are exercisable at $19 per share. At December 31, 1998, options for 17,916 shares were exercisable. All options become exercisable upon a change in control of the Company. There was no compensation cost actually recognized for stock options for 1997 as the exercise price of options granted exceeded the fair market price of the shares at the grant date. Financial Accounting Standards Board Statement No. 123 requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. For 1997, pro forma net income and earnings per share had the Standard's fair value method been used to measure compensation cost for stock option plans does not vary materially from reported net income and earnings per share. -23- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10: CONTINGENT LIABILITIES In the normal course of its business, the Company is party to various legal actions. After consultation with counsel, management believes that any losses which may result from these legal actions would not materially affect the Company's financial position. Additionally, management does not believe that any of the Company's properties or foreclosed real estate presents material environmental risks. NOTE 11: 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 meet the financing needs of its customers. These financial instruments include credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The Company had $1,379,000 in standby letters of credit at December 31, 1998. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. The Company's portfolio of standby letters of credit consists primarily of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Customers' creditworthiness is evaluated on a case-by-case basis and collateral may be required in certain instances. The risk to the Company arises from their obligation to make a payment to a third party in the event of the customer's default on its contractual commitments. No material losses are anticipated by management as a result of these transactions. NOTE 12: REGULATORY RESTRICTIONS The Parent's principal source of funds for debt service and dividend payments is dividends received from its subsidiary. For the years ended December 31, 1998, 1997 and 1996, dividends received were $1,400,000, $975,000 and $1,360,000 respectively. Dividend payments by the Company are subject to maintenance of various satisfactory debt compliance ratios and regulatory capital to asset ratios. Provisions of Federal bank law place restrictions upon the amount of dividends which national banking associations may pay in any calendar year to the net profits of that year, as defined, combined with retained net profits for the two preceding years. Based on this limitation, the subsidiary Bank could not have declared additional dividends at December 31, 1998 without regulatory approval. -24- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13: FEDERAL RESERVE REQUIREMENT The Company is required to maintain certain daily reserve balances in accordance with Federal Reserve Board requirements. The reserve balances required to be maintained in accordance with such requirements at December 31, 1998 were $1,175,000. NOTE 14: SIGNIFICANT CONCENTRATIONS OF CREDIT RISK The Company's business activities are conducted with customers in a wide variety of industries. The Company does not have any significant concentrations in any industry categories at December 31, 1998. Credit risk, as it relates to the Company's business activities, tends to be geographically concentrated within the north suburban Chicago metropolitan area. NOTE 15: DEPOSITS Interest paid on deposits and other borrowings during 1998, 1997 and 1996 were $7,405,000, $7,525,000 and $7,598,000, respectively. Interest expense on certificates of deposit over $100,000 were: 1998 $ 510,000 1997 504,000 1996 378,000 At December 31, 1998 stated maturities of time deposits were: 1999 $ 44,998,598 2000 7,019,717 2001 2,672,585 Deposits from certain officers and directors or their associates totaled $1,717,000 at December 31, 1998 and $3,935,000 at December 31, 1997. -25- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents - ------------------------- For cash and cash equivalents, the carrying amount is a reasonable estimate of fair value. Securities and loans held for sale - ---------------------------------- For securities and loans held for sale, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. Loan receivables - ---------------- The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Deposits - -------- The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. Notes payable and securities sold under repurchase agreements - ------------------------------------------------------------- and other borrowings - -------------------- Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. Accrued interest receivable and payable - --------------------------------------- The carrying value approximates fair value for accrued interest receivable and payable. -26- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 16: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued) Commitments to extend credit and standby letters of credit - ---------------------------------------------------------- The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The fair value of these instruments is not material. The estimated fair values of the Company's financial instruments at December 31, 1998 and 1997 are as follows:
1998 1997 ----------------------------- ----------------------------- Carrying Fair Carrying Fair Amount Value Amount Value -------- ------- --------- ----- Financial assets: Cash, due from banks and Federal funds sold $ 8,743,551 $ 8,743,551 $ 15,096,179 $ 15,096,179 Securities 102,939,247 102,939,247 92,588,048 92,588,048 Loans held for sale 5,899,340 5,899,340 3,471,961 3,471,961 Loans, net of allowance 86,567,969 87,139,969 95,748,584 95,989,584 Accrued interest receivable 1,379,110 1,379,110 1,412,126 1,412,126 Financial liabilities: Deposits 194,086,370 194,398,370 194,892,038 195,155,038 Securities sold under repurchase agreements and other borrowings 1,462,651 1,462,651 2,746,086 2,746,086 Notes payable 3,760,000 3,760,000 4,195,000 4,195,000 Accrued interest payable 422,631 422,631 494,361 494,361
In estimating the fair value of deposit liabilities, the Company has not taken into account the value of its long-term relationships with depositors commonly known as core deposit intangibles. In addition, the Company has used single trading units in the most active market in determining fair value. Therefore, control premium or concentration discounts are not considered. -27- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 17: DISCONTINUED OPERATIONS In 1996, the Company adopted a plan to close its Consumer Finance Division and sell the division's loan portfolio. Pursuant to that plan, during 1996 the Company closed the Consumer Finance Division offices and sold or entered into agreements to sell substantially all of the Division's loans. Results of operations for the Consumer Finance Division during 1997 reflect the continued liquidation of remaining Consumer Finance Division loans. NOTE 18: CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY The following presents the condensed Balance Sheets as of December 31, 1998 and 1997, and Statements of Income and Statements of Cash Flows for each of the three years in the period ended December 31, 1998 for First Waukegan Corporation (parent company): Balance Sheets December 31 ---------------------------- 1998 1997 ---- ---- Cash $ 193,232 $ 282,576 Investment in subsidiary 14,724,227 15,367,813 Other assets 550,749 580,915 ------------ ------------ Total assets $ 15,468,208 $ 16,231,304 ============ ============ Notes payable $ 3,760,000 $ 4,195,000 Other liabilities 263,666 247,303 Shareholders' equity 11,444,542 11,789,001 ------------ ------------ Total liabilities and shareholders= equity $ 15,468,208 $ 16,231,304 ============ ============ -28- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18: CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY (Continued)
Statements of Income Years Ended December 3 ------------------------------------------------------ 1998 1997 1996 -------------- -------------- ------------- Income: Dividends from subsidiary $ 1,400,000 $ 975,000 $ 1,360,000 Other income 2,373 230 Expenses: Interest on notes payable 346,774 422,617 454,770 Salaries and employee benefits 27,600 27,600 27,600 Other expenses 135,666 140,791 136,667 -------------- -------------- ------------- Income before income taxes and equity in undistributed earnings (loss) of subsidiary 892,333 384,222 740,963 Income tax benefit 163,632 189,871 76,278 Equity in undistributed earnings (loss) of subsidiary 38,507 226,926 (1,593,443) -------------- -------------- ------------- Net income (loss) $ 1,094,472 $ 801,019 $ (776,202) ============== ============== ============= Statements of Cash Flows Operating Activities: Net income (loss) $ 1,094,472 $ 801,019 $ (776,202) Adjustments to reconcile net income to cash provided by operating activities: Equity in undistributed (earnings) loss of subsidiary (38,507) (226,926) 1,593,443 Depreciation and amortization 27,666 27,666 27,666 Decrease (increase) in other assets 2,500 284,057 (71,655) Increase (decrease) in other liabilities 16,363 (19,523) 43,716 -------------- -------------- ------------- Net cash provided by operating activities 1,102,494 866,293 816,968 -------------- -------------- ------------- Financing Activities: Principal payments on notes payable $ (500,000) $ (625,000) $ (185,000) Redemption of preferred stock (150,000) Issuance of notes payable 65,000 Issue of common shares 279,480 86,071 Repurchase and retirement of common stock (182,708) Dividends paid (574,130) (561,446) (561,631) -------------- -------------- ------------- Net cash used in financing activities (1,191,838) (906,966) (810,560) -------------- -------------- ------------- Net (decrease) increase in cash (89,344) (40,673) 6,408 Cash at beginning of year 282,576 323,249 316,841 -------------- -------------- ------------- Cash at end of year $ 193,232 $ 282,576 $ 323,249 ============== ============== ============= Supplemental disclosures: Interest paid $ 346,955 $ 431,229 $ 455,085 Income tax benefit received 150,022 440,159 145,328
-29- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 19: OTHER EXPENSES Other expenses excluding expenses of the discontinued Consumer Finance division for the years ending December 31, 1998, 1997 and 1996 are as follows: 1998 1997 1996 ---------- ---------- ----------- Stationary and supplies $ 117,948 $ 111,528 $ 160,334 Telephone 153,377 141,315 159,913 Data processing 421,663 450,977 466,746 Legal 243,023 185,757 194,590 Loan expenses 119,147 198,803 128,323 FDIC insurance 22,388 22,999 1,493 Marketing 85,641 105,452 144,501 Outside services 136,103 110,548 61,707 Furniture and equipment 448,078 513,157 596,771 Expenses related to former employee 399,463 59,243 725,364 Other 648,904 667,715 834,127 ---------- ---------- ---------- $2,795,735 $2,567,494 $3,473,869 ========== ========== ========== Legal fees paid to firms in which directors or significant shareholders have ownership interests totaled $127,000 in 1998, $180,000 in 1997 and $365,000 in 1996. NOTE 20: REGULATORY MATTERS The Company and Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Bank's capital amounts and classifications are also subject to qualitative judgements by the regulators about components, risk weightings and other factors. 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 and Bank's financial statements. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1998, that the Company and Bank meet all capital adequacy requirements to which they are subject. -30- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20: REGULATORY MATTERS (continued) The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are: Capital to risk- weighted assets Tier I Capital Total Tier I to average assets ----- ------ ----------------- Well capitalized 10% 6% 5% Adequately capitalized 8% 4% 4% Undercapitalized 6% 3% 3% According to the regulatory authorities' framework for prompt corrective action, as of December 31, 1998, the Company and the Bank were well capitalized. There are no conditions or events since that notification that management believes have changed these categories. At December 31, 1998 and 1997, Company and Bank actual capital levels (in thousands) and minimum required levels were: Minimum Required To Be Actual Well Capitalized ------------------ -------------------- 1998 Amount Ratio Amount Ratio - ---- ------ ----- ------ ----- Total capital (to risk weighted assets) Company $ 11,983 10.9% $ 10,986 10.0% Bank 15,796 14.4 10,984 10.0 Tier I capital (to risk weighted assets) Company 10,760 9.8 6,591 6.0 Bank 14,573 13.3 6,591 6.0 Tier I capital (to average assets) Company 10,760 5.1 10,481 5.0 Bank 15,573 7.0 10,481 5.0 -31- FIRST WAUKEGAN CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 20: REGULATORY MATTERS (continued) Minimum Required To Be Actual Well Capitalized ------------------ -------------------- 1997 Amount Ratio Amount Ratio - ---- ------ ----- ------ ----- Total capital (to risk weighted assets) Company $ 11,932 10.1% $ 11,840 10.0% Bank 15,569 13.2 11,838 10.0 Tier I capital (to risk weighted assets) Company 10,346 8.7 7,104 6.0 Bank 14,483 12.2 7,103 6.0 Tier I capital (to average assets) Company 10,346 5.0 10,415 5.0 Bank 14,483 7.0 10,414 5.0 -32- EX-23.1 2 CONSENT CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion of our report dated February 26, 1999 on our audits of the financial statements of First Waukegan Corporation appearing in this filing on Form 8-K (File No. 0-18166). /s/ Scanlon & Mathews LLP Scanlon & Mathews LLP Chicago, Illinois September 7, 1999 -----END PRIVACY-ENHANCED MESSAGE-----