Rates paid on other borrowings declined by 47 basis points in 1999. The majority of our other borrowings are in the form of repurchase agreements, which the Bank offers as an alternative to certificates of deposit. Average repurchase agreements in 1999 rose over 1998 and management expects to continue to offer them as an alternative to CDs. A repurchase agreement, in addition to being more secure than a time deposit, is less costly to the company because it is not subject to FDIC insurance or to reserve requirements.
      Securities provide flexibility to raise cash for liquidity purposes and to adjust the portfolio for interest rate risk. The portfolio consists primarily of U.S. Treasury and U.S. Government agency issues, bonds of state and local taxing bodies to support the local community, mortgage-backed securities and common stock in government-backed programs or agencies.
      Loan growth remained essentially flat in 1999 and commercial loans decreased due to competition. Real estate construction loans increased because we are known for our expertise in this category, and Lake County continues to grow. The commercial mortgage loan portfolio increased. The home equity loan portfolio continued to grow by 10% during 1999. This has proven a popular alternative to traditional consumer financing because customers may receive an interest deduction on their tax return. Of the commercial and real estate construction loan portfolio, 53.8% is scheduled to mature or is subject to rate change within one year.
      Non-performing assets declined by 48% resulting from the sale, at a profit, of one foreclosed loan on a building in Northbrook, Illinois during the third quarter.
      Non-interest income increased 19.3% from service fees for overdrafts, trust income that increased more than 10%, charges for non-customers using our ATM machines, gains from the sale of other real estate owned, and the gain on

the sale of a redundant First Federal Bank office only two blocks from the Bank of Waukegan’s headquarters branch. Mortgage banking fee income declined as higher home mortgage rates reduced volume. Noninterest expenses increased but only modestly. Compared to its bank holding company peers, the Company’s ability to control overhead expenses, primarily salaries, and occupancy and equipment expenses, is one of its operating strengths.
      During the third quarter of 1999, the Company introduced two new deposit products, called Classic Checking and Classic Gold Checking, that already are meeting with favorable acceptance. One is a retail checking account that packages banking services with insurance products, and the other is a checking account that pays a 1% interest rate and offers an expanded package of features for a monthly membership fee. These products should add to core deposits and increase service fees.
      For 2000, it is expected that interest rates will be higher, which will generate increased interest income for the Company. But competitive pressures will continue to affect loan pricing in 2000, and rates paid on time deposits will be higher as a result of the increase in interest rates in the second half of 1999.

Looking ahead, our view is that
the Company will maintain its dominant position in its market area,
marketing programs and continued attention to costs will contribute to rising profits, and
the projection by the Northeastern Illinois Planning Commission that Lake County will have the third highest population growth rate in the region over the next two decades should increase our customer base for both loans and deposits.

Sincerely,

Fred Abdula
Chairman of the Board &
Chief Executive Officer