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
<PAGE>
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
<PAGE>
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
<PAGE>
<TABLE>
<CAPTION>
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)
------------------ -------------
<S> <C> <C> <C> <C>
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
================ ============== ============== ================
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
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
---------------------------------------------------------- ----------------
<S> <C> <C> <C> <C>
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
</TABLE>
-2-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
FIRST WAUKEGAN CORPORATION AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS AND AUDITORS' REPORT
December 31, 1998 and 1997
-5-
<PAGE>
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-
<PAGE>
<TABLE>
FIRST WAUKEGAN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<CAPTION>
1998 1997
---- ----
Assets
<S> <C> <C>
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.
</TABLE>
-7-
<PAGE>
<TABLE>
FIRST WAUKEGAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
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.
</TABLE>
-8-
<PAGE>
<TABLE>
FIRST WAUKEGAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1998, 1997 and 1996
<CAPTION>
Accumulated
Additional other
Preferred Common paid in Retained Treasury comprehensive
stock stock capital earnings stock income Total
---------- -------- ---------- ---------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
-9-
<PAGE>
<TABLE>
FIRST WAUKEGAN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1998, 1997 and 1996
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
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.
</TABLE>
-10
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- --------- -----
<S> <C> <C> <C> <C>
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
</TABLE>
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-
<PAGE>
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-
<PAGE>
FIRST WAUKEGAN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18: CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY (Continued)
<TABLE>
<CAPTION>
Statements of Income Years Ended December 3
------------------------------------------------------
1998 1997 1996
-------------- -------------- -------------
<S> <C> <C> <C>
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
</TABLE>
-29-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
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
