U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OF 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT
For the transition period from ___________ to ___________
Commission File No. 000-25231
Northern Star Financial, Inc.
(Exact name of small business issuer as specified in its charter)
Minnesota 41-1912467
(State of Incorporation) (IRS Employer ID #)
410 Jackson Street, Suite 510
Mankato, MN 56001
(Address of Principal Executive Offices)
507-388-4855
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No _________
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date.
Class: Common Stock, par value $.01 per share
Outstanding shares at March 31, 1999: 425,600
Transitional Small Business Disclosure Format (Check one): Yes ___ No X
<PAGE>
Northern Star Financial, Inc.
Index to Form 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Statements of Financial Condition at March 31,
1999 (unaudited) and June 30, 1998 (audited) 2
Consolidated Statements of Income for the three and nine months
ended March 31, 1999 (unaudited) 3
Consolidated Statements of Cash Flows for the nine months
ended March 31, 1999 (unaudited) 4
Notes to Condensed Consolidated Financial Statements (unaudited) 5-6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities 9
Item 3. Default Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES
1
<PAGE>
Northern Star Financial, Inc. and Subsidiary
Consolidated Statements of Financial Position
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
(Unaudited) (Audited)
-------------- -------------
<S> <C> <C>
ASSETS
Cash and Due from Banks $151,937
Federal Funds Sold 1,755,842
Loans Receivable, Net of Allowance for Loan and
Lease Losses of $22,500 2,984,660
Accrued Interest Receivable 20,531
Property and Equipment, Net of Depreciation 448,711
Other 17,395 $14,806
----------- --------
Total Assets $5,379,076 $14,806
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Demand Deposits $747,608
Savings Certificates 1,037,100
-----------
Total Deposits 1,784,708
Other Liabilities 12,175 $18,665
----------- --------
Total Liabilities 1,796,883 18,665
----------- --------
Stockholders Equity
Common Stock, $.01 par value, 15,000,000 shares
authorized; 425,600 shares issued;
425,600 and 10 shares outstanding 4,256 0
Undesignated stock, par value $.01 per share; 5,000,000
shares authorized, no shares issued 0 0
Paid in Capital 3,919,377 100
Deficit Accumulated during the Development Stage 0 (3,959)
Retained Earnings (Deficit) (341,440) 0
----------- --------
Total Stockholders Equity (Deficit) 3,582,193 (3,859)
----------- --------
Total Liabilities and Stockholders Equity $5,379,076 $14,806
=========== ========
See Notes to Consolidated Financial Statements
2
</TABLE>
<PAGE>
Northern Star Financial, Inc. and Subsidiary
Unaudited Consolidated Statement of Income
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
March 31, 1999 March 31, 1999
-------------- --------------
<S> <C> <C>
Interest Income
Loans $25,007 $25,007
Investments 5,636 10,249
--------- ---------
Total Interest Income 30,643 35,256
Interest Expense
Deposits 5,245 5,245
--------- ---------
Total Interest Expense 5,245 5,245
Net Interest Income 25,398 30,011
Provision for Loan Losses (22,500) (22,500)
--------- ---------
Net Interest Income after
provisions for loan loss 2,898 7,511
Noninterest Income
Other Fees and Service Charges 763 763
Other 159 159
--------- ---------
Total Noninterest Income 922 922
Noninterest Expense
Compensation and Employee Benefits 119,303 119,303
Occupancy 27,783 27,783
Office & Printing 18,438 18,438
Advertising 9,611 9,611
Organization Expenses 12,275 54,349
Professional Fees 20,625 98,485
Other 17,945 17,945
--------- ---------
Total Noninterest Expense 225,980 345,914
Net Income (Loss) ($222,160) ($337,481)
========= =========
Basic and Diluted Loss Per Share ($0.58) ($0.89)
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
Northern Star Financial, Inc. and Subsidiary
Statement of Cash Flows
For the Nine Months Ended September 30, 1999
Unaudited
---------
CASH USED FOR OPERATING ACTIVITIES
Net Loss ($337,481)
Adjustment to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization of premises and equipment 7,709
Provision for loan losses 22,500
(Increase) in other assets (2,589)
(Increase) in accrued interest receivable (20,531)
(Decrease) in other liabilities (6,490)
----------
Net cash (used by) operating activities (336,882)
----------
Cash flows from investing activities:
Loans originated, net of principal repayments (3,007,160)
Purchases of premises and equipment (456,420)
----------
Net cash (used by) investing activities (3,463,580)
----------
Cash flows from financing activities:
Sale of common stock 4,255,900
Costs associated with stock issuance (332,367)
Increase in deposits 1,784,708
----------
Net cash provided from financing activities 5,708,241
----------
Net increase in cash and cash equivalents 1,907,779
CASH AND CASH EQUIVALENTS, JUNE 30, 1998 0
----------
CASH AND CASH EQUIVALENTS, MARCH 31, 1999 $1,907,779
==========
See Notes to Consolidated Financial Statements
4
<PAGE>
Northern Star Financial, Inc. and Subsidiary
NOTES TO FINANCIAL STATEMENTS
March 31, 1999
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
Business activity and organization
Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions for Form 10-QSB. Accordingly, they do not include all
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine-month
period ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending June 30, 1999. For further information,
refer to June 30, 1998 financial statements and footnotes included in the
Company's Prospectus and Registration Statement on Form SB-1 dated October 9,
1998.
Organization of the Business
Northern Star Financial, Inc. (the "Company") was incorporated under the laws of
the State of Minnesota on January 22, 1998, for the purpose of becoming a bank
holding company for a state chartered commercial bank, Northern Star Bank (the
"Bank"). On October 9, 1998, the Company commenced an initial public offering of
its Common Stock at $10.00 per share. The Company has accepted subscriptions
(including subscriptions from the Bank's organizers to purchase an aggregate of
154,000 shares) to purchase an aggregate of 425,600 shares of its Common Stock.
The proceeds from the stock subscriptions amounted to $3,923,633, net of selling
expenses. The Bank's charter became effective January 25, 1999 and the Company
injected $3,000,500 into the Bank's capital accounts.
Summary of Significant Accounting Policies
Basis of Accounting. The accounting and reporting policies of the Company
conform to generally accepted accounting principles and to general practices in
the banking industry. The Company uses the accrual basis of accounting by
recognizing revenues when earned and expenses when incurred, without regarding
the time of receipt or payment of cash.
The consolidated financial statements include the accounts of the Company and
the Bank. All significant intercompany accounts and transactions have been
eliminated in consolidation.
The Company prior to January 25, 1999, reported as a development stage
enterprise because its activity included raising capital and establishing a new
bank. Upon opening, the Bank and the Company's primary attention turned to
routine, ongoing bank activities and it ceased to be a development stage
enterprise.
Statement of Cash Flows. For purposes of reporting cash flows, cash and cash
equivalents included cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are purchased or sold for a one-day period.
5
<PAGE>
Provisions for Loan Loss. The allowance for loan loss was established by a
charge to income based on management's evaluation of the known and inherent
risks in the loan portfolio, adverse situations that may affect the borrower's
ability to repay, the estimated value of any underlying collateral, and current
economic conditions.
Property and Equipment. Furniture and equipment are stated at cost, net of
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful lives of the related assets.
Organizational Costs. The Company has elected early adoption of Statement of
Position 98-5 ("Reporting on the Costs of Start-up Activities" issued April 3,
1998 by the Accounting Standard Executive Committee of the American Institute of
Certified Public Accountants) and has expensed its cumulative organization and
start-up costs. Costs deferred in the periods ended June 30, 1998 of $14,806
were expensed in the current period.
Earnings Per Share. The Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" (EPS). Basic earnings per share are
based on the weighted average outstanding common shares. Dilutive net income per
share is based on the weighted average outstanding shares reduced by the effect
of stock options and warrants. The stock subscriptions described above were
contingently issuable subject to the Bank charter approval which occurred on
January 25, 1999 and included in the denominator of EPS as of the date of the
Company's Registration Statement on Form SB-1, referred to above, resulting in
380,125 adjusted weighted average shares.
NOTE 2: STOCK OPTION PLAN
In October 1998, the Company adopted a stock option plan, the 1998 Equity
Incentive Plan (the EIP). As of March 31, 1999 certain officers, directors and
employees have been granted options to purchase 54,800 shares at an exercise
price of $10.00 per share. The options vest over a period ranging from three to
five years and must be exercised within ten years of the grant date. The option
shares are not included in the calculation of diluted earnings per share because
there have not been any shares traded and current market price per share is
assumed to be no greater than the option exercise price and the option shares
are not "in the money."
NOTE 3: NEW ACCOUNTING STANDARDS
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loan Held for Sale by a Mortgage Banking Enterprise"
- -issued October 1998, revises the accounting and reporting standard for certain
activities of mortgage banking enterprises and other enterprises that conduct
operations that are substantially similar to the primary operations of a
mortgage banking enterprise. It requires that after the securitization of a
mortgage loan held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed security as a trading security. It also
requires that after the securitization of mortgage loans held, an entity engaged
in mortgage banking activities classify the resulting mortgage-backed securities
or other retained interests based on its ability and intent to sell or hold
those investments. This statement was effective for the fiscal quarter beginning
January 1, 1999. Adoption did not have an effect on financial positions and the
results of operations.
6
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
materially from the results discussed in the forward-looking statements, and the
Company's operating performance each quarter is subject to various risks and
uncertainties that are discussed in detail in the Company's filings with the
Securities and Exchange Commission, including the "Risk Factors" section in the
Company's registration Statement on Form SB-1 (Registration Number 333-61655 as
filed with and declared effective by the Securities and Exchange Commission.
The Company was organized on January 22, 1998. Since January 22, 1998
the Company's principal activities have related to its organization, the
conducting of its initial public offering, the pursuit of approvals from the
Minnesota Department of Commerce (the "DOC") for its application to charter its
subsidiary bank, Northern Star Bank (the "Bank"), and the pursuit of approvals
from the Federal Deposit Insurance Corporation (the "FDIC") for its application
for insurance of the deposits of the Bank. On October 16, 1998, the Company
received preliminary approval from the DOC to charter the Bank, and the Bank
opened for business on January 25, 1999.
At March 31, 1999, the Company had total assets of $5,379,076
consisting of federal funds sold of $1,755,842, net loans of $2,984,660,
property, at cost less accumulated depreciation of $448,711, cash of $151,937,
and other assets totaling $37,926. The Company's liabilities at March 31, 1999,
were $1,796,883, consisting of deposits of $1,784,708, and accrued expenses and
other liabilities of $12,175. The Company's shareholder's equity totaled
$3,582,193 at March 31, 1999.
The Company had a net loss of $337,481 for the nine months ended March
31, 1999. These losses resulted from expenses incurred in connection with
activities related to the organization of the Company and the Bank. With respect
to the Company, these activities included (without limitation) the preparation
and filing of an application with the DOC to charter the Bank, the preparation
and filing of an application with the "FDIC" to obtain insurance of the deposits
of the Bank, responding to questions and providing additional information to the
DOC and the FDIC in connection with the application process, preparation and
filing of an application with the Federal Reserve Bank of Minneapolis for
approval as a bank holding company, and the selling of the Company's common
stock in the offering. With respect to the Bank, these activities included
(without limitation) completing all required steps for final approval from the
DOC for the Bank to open for business, hiring qualified personnel to work in the
office of the Bank, conducting public relations activities on behalf of the
Bank, developing prospective business contacts for the Bank and the Company, and
taking other actions necessary for a successful bank opening.
7
<PAGE>
From the Bank's opening date on January 25, 1999 through March 31,
1999, the Bank attracted $1.8 million in deposits, and made loans of $3.0
million. Net interest income for the three-month period ending March 31, 1999
totaled $2,898, after a provision for loan losses of $22,500 and operating
expenses of the Company totaled $225,980, including compensation and benefits of
$119,303 organization expenses of $12,275, occupancy and equipment expenses of
$46,221, professional and other outside services of $20,625, and other expenses
of $27,556.
YEAR 2000 READINESS
Like many financial institutions, the Company and the Bank rely upon
computers for their business operations and for information systems processing.
There is concern among industry experts that on January 1, 2000 computers will
be unable to "read" the new year and there may be wide spread computer
malfunctions. The Company and the Bank generally rely on software and hardware
developed by independent third parties to provide the information systems used
by the Company and the Bank. Presently the Company is obtaining and assessing
test results from these third parties to determine reliability and adequacy
towards satisfying Year 2000 related requirements. Based upon information
currently available, management does not believe that the Company or the Bank
will incur significant costs in connection with the Year 2000 issue. Management
at this time estimates that the direct project costs should not exceed $25,000.
However, Year 2000 costs are difficult to estimate, particularly since the
Company and the Bank rely largely on outside service providers for its computer
hardware and software products, and total costs could exceed this amount
substantially. Nevertheless, there can be no assurances that all hardware and
software that either the Company or the Bank uses will be Year 2000 compliant,
and the Company cannot predict with any certainty the costs the Company or the
Bank will incur to respond to any Year 2000 issues. Further, the business of
many of the Bank's customers may be negatively affected by the Year 2000 issue,
and any financial difficulties incurred by the Bank's customers in solving Year
2000 issues could negatively affect such customers' ability to repay any loans
which the Bank may have extended. Therefore, even if the Company and the Bank do
not incur significant direct costs in connection with responding to the Year
2000 issue, there can be no assurance that the failure or delay of the Bank's
customers or other third parties in addressing the Year 2000 issue or the costs
involved in such process will not have a material adverse effect on the Bank's
business, financial condition and results of operation. The Bank is currently
working to enhance Testing Methodology and Y2K Contingency Plan and all testing
is expected to be completed by mid-1999. Various members of the senior
management of the Bank are working on the Year 2000 issues.
8
<PAGE>
Northern Star Financial, Inc. and Subsidiary
March 31, 1999
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
There are no pending legal proceedings to which the Company or any of its
subsidiaries is a party or of which any of their property is the subject.
Item 2. Changes in Securities.
(a) Not applicable.
(b) Not applicable.
(c) Recent Sales of Unregistered Securities
By March 31, 1999 the Company had closed on the sale of subscriptions to
purchase 154,000 shares (for a total of $1,540,000) of the Company's common
stock by the Company's organizers which included the Company's officers and
directors. The Company claims an exemption from registration pursuant to Section
4(2) of the Securities Act of 1933.
(d) Use of Proceeds from Registered Securities
On October 9, 1998, the Company's Registration Statement File Number 333-61655,
on Form SB-1 was declared effective by the Securities and Exchange Commission.
The offering commenced on October 9, 1998, and by March 31, 1999, the Company
had accepted subscriptions for the purchase of an aggregate of 425,600 shares
(271,600 shares from investors in the public offering and subscriptions for
154,000 shares from the Bank's organizers). The Company entered into an Agency
Agreement with BancStock Financial Services, Inc. who agreed to use their best
efforts to sell a minimum of 157,000 and a maximum of 329,000 shares of the
Company's common stock, par value $.01. The Company registered 329,000 shares of
common stock at $10.00 per share for an aggregate price of $3,290,000. On April
1, 1999, the Company closed on the sale of 271,600 shares to non organizers, for
an aggregate purchase price of $2,716,000. The offering has terminated and
57,400 shares remained unsold. After deducting offering expenses the Company's
net proceeds from the offering were $2,383,633.
Gross Proceeds From the Offering $ 2,716,000
Offering Expenses (all of which represented direct or
indirect payments to others):
Sale agent commission and fees $217,340
Legal fees 71,285
Accountant fees 6,500
Escrow fees 1,030
Registration fees 4,796
Financial printing fees 31,416
---------
Total Offering Expenses 332,367
---------
Net Proceeds After Offering Expenses $ 2,383,633
=========
Use of Net Proceeds (all of which represented direct or
indirect payments to others):
Investment in capital stock of Northern Star Bank $ 2,383,633
=========
9
<PAGE>
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to security holders for a vote during the three
months ended March 31, 1999.
Item 5. Other Information.
The Company commenced banking operations on January 25, 1999.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.0 Financial Data Schedule (for electronic filing purposes)
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed by the Company during the
quarter ended March 31, 1999.
10
<PAGE>
NORTHERN STAR FINANCIAL, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Northern Star Financial, Inc.
Date: May 12, 1999 By: /s/ Thomas Stienessen
Thomas Stienessen
President and Chief Executive Officer
11
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 151,937
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,755,842
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 3,007,160
<ALLOWANCE> 22,500
<TOTAL-ASSETS> 5,379,076
<DEPOSITS> 1,784,708
<SHORT-TERM> 0
<LIABILITIES-OTHER> 12,175
<LONG-TERM> 0
0
0
<COMMON> 4,256
<OTHER-SE> 3,577,937
<TOTAL-LIABILITIES-AND-EQUITY> 5,379,076
<INTEREST-LOAN> 25,007
<INTEREST-INVEST> 10,249
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 35,256
<INTEREST-DEPOSIT> 5,245
<INTEREST-EXPENSE> 5,245
<INTEREST-INCOME-NET> 30,011
<LOAN-LOSSES> 22,500
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 345,914
<INCOME-PRETAX> (337,481)
<INCOME-PRE-EXTRAORDINARY> (337,481)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (337,481)
<EPS-PRIMARY> (0.89)
<EPS-DILUTED> (0.89)
<YIELD-ACTUAL> 4.890
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 22,500
<ALLOWANCE-DOMESTIC> 22,500
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
