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, 2000
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 registrant as specified in its charter)
Minnesota 41-1912467 (State of
Incorporation) (IRS Employer ID #)
1650 Madison Avenue
Mankato, MN 56001
(Address of Principal Executive Offices)
507-387-2265
(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, 2000: 425,600
<PAGE>
Northern Star Financial, Inc.
Index to Form 10-QSB
December 31, 1999
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Statements of Financial Condition at
March 31, 2000 (unaudited) and June 30, 1999 (audited) 3
Unaudited Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999 and for the nine month
ended March 31, 2000 and 1999 4
Unaudited Consolidated Statement of Cash Flows for the
three months ended March 31, 2000 and 1999 and for the nine
months ended March 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Default Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 23
<PAGE>
<TABLE>
<CAPTION>
Northern Star Financial, Inc. and Subsidiary
Consolidated Statements of Financial Condition
March 31, 2000 June 30, 1999
(Unaudited) (Audited)
------------------ -----------------
ASSETS
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 323,504 $ 210,662
Federal funds sold 1,053,835 2,533,236
------------------ -----------------
Total cash and cash equivalents 1,377,338 2,743,898
Securities available for sale at fair value 4,217,220 745,119
FHLB stock, at cost 49,700 16,400
Loans held for sale - 681,593
Loans receivable, net of allowance for loan and
lease losses of $149,000 and $56,250 12,688,300 4,881,502
Accrued interest receivable 223,021 59,527
Property and equipment, net of depreciation 448,412 486,685
Other assets 180,850 20,884
Investment in joint venture 96,658 -
------------------ -----------------
Total Assets $ 19,281,500 $ 9,635,608
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits $ 1,753,856 $ 1,121,450
Savings deposits 5,261,088 3,244,444
Time deposits 8,614,045 1,798,675
------------------ -----------------
Total deposits 15,628,989 6,164,569
Advances from FHLB 725,000 -
Advances from borrowers for taxes and insurance 6,943 23,941
Other liabilities 16,759 23,396
------------------ -----------------
Total Liabilities 16,377,691 6,211,906
------------------ -----------------
Shareholders Equity:
Common Stock, $.01 par value, 15,000,000 shares
authorized; 425,600 shares issued 4,256 4,256
Undesignated stock, par value $.01per share; 5,000,000
shares authorized, no shares issued
- -
Paid in capital 3,919,577 3,919,577
Accumulated deficit (990,120) (497,631)
Accumulated comprehensive (loss) (29,904) (2,500)
------------------ -----------------
Total Shareholders' Equity 2,903,809 3,423,702
------------------ -----------------
Total Liabilities and Shareholders Equity $ 19,281,500 $ 9,635,608
================== =================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
Northern Star Financial, Inc. and Subsidiary
Unaudited Consolidated Statements of Operations
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
------------------------------------- --------------------------------------
2000 1999 2000 1999
------------------ --------------- ------------------- --------------
<S> <C> <C> <C> <C>
Interest income
Loans receivable $ 240,290 $ 25,007 $ 563,329 $ 25,007
Securities available for sale 73,166 5,058 137,451 5,058
Due from banks 58 578 58 5,191
Federal funds sold 15,815 - 49,001 -
------------------ ------------------ -------------------- --------------
Total interest income 329,330 30,643 749,839 35,256
Interest expense
Deposits 152,363 5,245 305,121 5,245
Borrowed funds 8,606 - 11,575 -
------------------ ------------------ -------------------- --------------
Total interest expense 160,969 5,245 316,696 5,245
Net interest income 168,361 25,398 433,143 30,011
Provision for loan losses 25,250 22,500 92,750 22,500
------------------ ------------------ -------------------- ------------------
Net interest income after
provision for loan loss 143,111 2,898 340,393 7,511
------------------ ------------------ -------------------- ------------------
Noninterest income:
Other fees and service charges 4,267 922 18,303 922
Gain/(loss) on sale of loans 7,298 - 33,122 -
------------------ ------------------ -------------------- ------------------
Total noninterest income 11,565 922 51,425 922
------------------ ------------------ -------------------- ------------------
Noninterest expense
Compensation and employee benefits 109,049 82,303 311,035 82,303
Board fees 20,409 37,000 69,045 37,000
Occupancy 13,141 27,783 61,397 27,783
Legal and accounting 13,297 1,005 49,087 1,005
Printing & supplies 6,918 18,438 28,012 18,438
Property and equipment depreciation 13,345 7,709 46,683 7,709
Data processing 13,613 4,710 37,569 4,710
Organization expense - 12,275 - 54,349
Merger expenses 11,750 - 49,060 -
Start up costs - 3,959 - 81,819
Other 57,919 30,798 126,214 30,798
Joint venture 19,581 - 106,205 -
------------------ ------------------ -------------------- ------------------
Total noninterest expense 279,022 225,980 884,307 345,914
------------------ ------------------ -------------------- ------------------
Net loss before income tax benefit (124,346) (222,160) (492,489) (337,481)
Income tax benefit - - - -
------------------ ------------------ -------------------- ------------------
Net Loss $ (124,346) $ (222,160) $ (492,489) $ (337,481)
================== ================== ==================== ==================
Basic (loss) per share of common stock $ (0.29) $ (0.58) $ (1.16) $ (0.89)
================== ================== ==================== ==================
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Northern Star Financial, Inc. and Subsidiary
Unaudited Consolidated Statements of Cash Flows
For the Three Months For the Nine Months
Ended March 31, Ended March 31,
-------------------------------- -------------------------------
2000 1999 2000 1999
--------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Interest received on loans and investments $ 231,326 $ 10,112 $ 584,250 $ 14,725
Interest paid (113,730) (5,245) (209,391) (5,245)
Other fees, commissions, and income received 4,267 922 18,303 922
Cash paid to suppliers, employees and others (216,504) (223,905) (766,460) (347,284)
Loans originated for sale (400,332) - (2,631,306) -
Proceeds from sale of loans 466,772 - 3,338,722 -
-------------- ------------- -------------- --------------
Net cash provided by (used in) operating
activities (28,201) (218,116) 334,118 (336,882)
Cash flows from investing activities:
Purchases of available-for-sale securities (249,688) - (4,347,410) -
Purchases of FHLB stock (28,400) - (33,300) -
Proceeds from maturities of available-for-sale 500,000 - 850,000 -
Investment in joint venture - - (196,000) -
Loan originations and principal payments on loans,
net (3,763,495) (3,007,160) (7,899,548) (3,007,160)
Purchase of property and equipment - (456,420) (12,609) (456,420)
-------------- ------------- -------------- --------------
Net cash used in investing activities (3,541,583) (3,463,580) (11,638,867) (3,463,580)
Cash flows from financing activities:
Net proceeds from common stock - 728,937 - 3,923,533
Net increase in non-interest bearing demand and
savings deposit accounts (284,437) 747,608 2,541,203 747,608
Net increase in time deposits 2,521,183 1,037,100 6,688,984 1,037,100
FHLB borrowings 300,000 - 725,000 -
Net decrease in mortgage escrow funds 1,507 - (16,998) -
-------------- ------------- -------------- --------------
Net cash provided by financing activities 2,538,253 2,513,645 9,938,189 5,708,241
-------------- ------------- -------------- --------------
Net increase (decrease) in cash and cash equivalents (1,031,531) (1,168,051) (1,366,560) 1,907,779
Cash and cash equivalents beginning 2,408,869 3,075,830 2,743,898 -
-------------- ------------- -------------- --------------
Cash and cash equivalents ending $ 1,377,338 $ 1,907,779 $ 1,377,338 $ 1,907,779
============== ============= ============== ==============
Non-cash investing activities:
Net equity loss, joint venture $ (19,164) $ - $ (99,342) $ -
============== ============= ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Northern Star Financial, Inc. and Subsidiary
Unaudited Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended March 31 Ended March 31
--------------------------------- -------------------------------
2000 1999 2000 1999
--------------- ------------ ------------- ------------
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss $ (124,346) $ (222,160) $ (492,490) $ (337,481)
Adjustments
Depreciation 17,545 7,709 50,882 7,709
Joint venture loss 19,164 - 99,342 -
Provision for loan losses 25,250 22,500 92,750 22,500
(Increase) decrease in:
Loans held for sale 66,440 - 681,593 -
Loan costs deferred 4,435 - 6,304 -
Accrued interest receivable (94,040) (20,531) (163,494) (20,531)
Other assets (143,672) (15,795) (168,366) (2,589)
Increase (decrease) in:
Accrued interest payable 47,239 - 107,306 -
Other liabilities 153,784 10,161 120,291 (6,490)
--------------- ------------ ------------- ------------
Net cash used in operating $ (28,201) $ (218,116) $ 334,118 $ (336,882)
activities =============== ============ ============= ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Northern Star Financial, Inc. and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (Unaudited)
Note 1: PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
and nine month periods ended March 31, 2000, include the accounts of Northern
Star Financial, Inc. (the "Company") and its wholly owned subsidiary Northern
Star Bank (the "Bank"). All significant inter-company accounts and transactions
have been eliminated in consolidation.
Note 2: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all
information and disclosures required by generally accepted accounting principles
for complete financial statements. The accompanying consolidated financial
statements do not purport to contain all the necessary financial disclosures
required by generally accepted accounting principles that might otherwise be
necessary in the circumstances and should be read with the fiscal 1999
consolidated financial statements and notes of Northern Star Financial, Inc. and
Subsidiary included in their annual report to shareholders for the year ended
June 30, 1999.
In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentations have been
included. The results of operations for the three and nine month periods ended
March 31, 2000, are not necessarily indicative of the results that may be
expected for the entire fiscal year or any other period.
Note 3: ORGANIZATION OF THE BUSINESS
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. The Bank's charter became effective January 25,
1999. The Company prior to January 25, 1999, reported as a development stage
enterprise because its activities included raising capital and establishing a
new bank. Upon opening the Bank, the Company's primary attention turned to
routine, ongoing bank activities and it ceased to be a development stage
enterprise.
Note 4: EARNINGS PER SHARE
The earnings per share amounts were computed using the weighted average
number of shares outstanding during the periods presented. For the three and
nine month periods ended March 31, 2000, the weighted average number of shares
outstanding for basic and diluted earnings per share computation were 425,600.
There were 79,600 common stock shares from stock options that were not included
in the calculation of diluted earnings per share because they were
anti-dilutive.
Stock subscriptions were contingently issuable subject to the Bank
charter approval which occurred on January 25, 1999 resulting in 380,125
weighted average shares outstanding for the three and nine month periods ended
March 31, 1999.
<PAGE>
Note 5: COMPREHENSIVE (LOSS)
Accumulated comprehensive (loss) is composed of the following:
For the period ended
March 31, 2000
Three months Nine months
Unrealized Gains
(Losses) on Securities
Beginning balance $ (27,980) $ (2,500)
Current - period change net
of tax ( 1,924) (27,404)
------------- ----------------
Ending balance $ (29,904) $ (29,904)
============= ================
Comprehensive (Loss)
Net loss $ (124,343) $ (492,489)
Other comprehensive loss ( 1,924) ( 27,404)
----------- ----------
$ (126,267) $ (519,893)
============= ================
Note 6: JOINT VENTURE
In July 1999, the Company acquired a 49 percent joint venture interest
in Homeland Mortgage Company, LLC (Homeland Mortgage), a limited liability
company, in exchange for a total cash consideration of $196,000. The investment
in Homeland Mortgage is being accounted for using the equity method. Homeland
Mortgage's primary business is originating residential real estate loans that
are secured by first and second mortgages and sold into the secondary mortgage
market.
Note 7: BUSINESS COMBINATION INITIATED
The Company and First Federal Holding Company of Morris, Inc.
("Morris") on September 30, 1999 entered into an Agreement and Plan of
Reorganization for the merger of Morris with and into the Company. Under terms
of the Agreement, Morris shareholders will exchange their Morris common stock
for approximately 870,559 common stock shares of the Company, subject to certain
adjustments as specified in the Agreement. Completion of the merger is subject
to regularly approvals, approval by the shareholders of both companies and the
sale of the minimum number of shares offered to the public pursuant to the stock
offering discussed in note 8. The transaction will be accounted for using the
pooling of interest method.
Morris is a savings and loan holding company and through its
subsidiary, First Federal Savings Bank, provides various financial services
including mortgage, commercial and consumer lending and deposit accounts. At
September 30, 1999 Morris had total assets of $57.5 million and shareholder
equity of $3.7 million. Upon completion of the merger, the Company will have
offices located in Mankato, Morris, Benson, Breckenridge, and Big Lake
Minnesota.
Note 8: SECONDARY STOCK OFFERING INITIATED
The Company filed a Registration Statement on Form SB-2 with the
Securities and Exchange Commission to register the sale of 1,000,000 shares of
its common stock on a best efforts basis. The Registration Statement and
Prospectus were declared effective by the SEC on March 28, 2000 and, assuming
the sale of the minimum and maximum number of shares offered, will result in net
proceeds of approximately $4,712,500 to $9,595,000, respectively.
<PAGE>
Northern Star Financial, Inc. Summary Financial Data
The following table summarizes certain historical financial data of Northern
Star Financial and its subsidiary on a consolidated basis as of and for the 3
months ended March 31, 2000 and 9 months ended March 31, 2000. You should read
this table in conjunction with our financial statements
and related notes appearing elsewhere in this document.
<TABLE>
<CAPTION>
For The Three Months For the Nine Months
Ended March 31 Ended March 31
----------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- -------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Statement of Income:
Interest income $ 329,330 $ 30,643 $ 749,839 $ 35,256
Interest expense 160,969 5,245 316,696 5,245
---------------- ------------- --------------- --------------
Net interest income 168,361 25,398 433,143 30,011
Provision for loan losses 25,250 22,500 92,750 22,500
Other non-interest income 11,565 922 51,425 922
Non-interest expense 279,022 225,980 884,307 345,914
---------------- ------------- --------------- --------------
Income (loss) before income tax expense (124,346) (222,160) (492,489) (337,481)
Income tax expense (benefit) - - - -
---------------- ------------- --------------- --------------
Net income (loss) $ (124,346) $ (222,160) $ (492,489) $ (337,481)
================ ============= =============== ==============
Balance Sheet:
Assets $ 19,281,500 $ 5,379,076
Allowance for loan losses $ 149,000 $ 22,500
Deposits $ 15,502,061 $ 1,784,709
Stockholders' equity $ 2,903,809 $ 3,582,193
Per Share Data:
Net income (loss) - basic $ (0.29) $ (0.58) $ (1.16) $ (0.89)
Net income (loss) - diluted $ (0.29) $ (0.58) $ (1.16) $ (0.89)
Book value $ 6.82 $ 8.42
Other Data
Average shares outstanding - basic 425,600 380,125 425,600 380,125
Average shares outstanding - diluted 425,600 380,125 425,600 380,125
Financial Ratios:
Equity to assets 15.06 % 66.59 %
Return on average assets (3.68)% (16.73)%
Return on average stockholders' equity (15.80)% (12.57)%
Net interest margin 4.67 % 3.43 %
Tier 1 leverage ratio 15.06 % 70.40 %
Tier 1 capital to risk-weighted assets 17.91 % 75.59 %
Total capital to risk-weighted assets 18.95 % 76.20 %
Asset Quality Ratios:
Nonperforming assets to total assets N/A N/A
Nonperforming assets to total loans and
other real estate owned N/A N/A
Allowance for loan losses to total loans 1.17 % 0.75 %
</TABLE>
<PAGE>
NORTHERN STAR FINANCIAL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Northern Star Financial, Inc. is the bank holding company of Northern Star
Bank (the "Bank"). Since the principal business of the Company is the Bank,
the following discussion pertains mainly to the Bank.
This report contains "forward-looking statements" as defined in section 27A of
the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended, which includes statements such as projections,
plans and objectives and assumptions about the future, and such forward looking
statements are subject to the safe harbor created by these sections. Many
factors could cause the actual results, amounts or events to differ materially
from those the Company expects to achieve or occur, such as changes in
competition, market interest rates, economic conditions and regulations.
Although the Company has based its plans and projections on certain assumptions,
there can be no assurances that its assumptions will be correct, or that its
plans and projections can be achieved.
FINANCIAL CONDITION
Total assets increased by $9.65 million from $9.64 million at June 30, 1999 to
$19.28 million at March 31, 2000. Loans receivable net of allowance for loan
losses and securities available for sale at fair value increased by $7.80
million and $3.47 million, respectively, at March 31, 2000 when compared to June
30, 1999. The increase in loans receivable was due to an increase in loans in
all loan classifications with the greatest increases occurring in commercial
real estate and consumer loans. Total Cash and Due From Other Banks increased
$112,852 from $210,662 at June 30, 1999 to $323,504 at March 31, 2000. Federal
Funds sold decreased from $2.53 million at June 30, 1999 to $1.05 million at
March 31, 2000 as $1.11 million was used to help fund increases in interest
earning assets in the form of loans and securities.
Liabilities increased by $10.17 million from $6.21 million at June 30, 1999 to
$16.38 million at March 31, 2000. This increase was due primarily to an increase
in total deposits of $9.46 million during the period. The shortfall of deposit
growth when compared to growth in the loan and investment portfolios was bridged
with the use of Federal Funds and $725,000 of funds borrowed from the Federal
Home Loan Bank. The Bank used Federal Funds, deposits and borrowed funds to make
new loans and to purchase investment securities.
Stockholder's equity (capital) decreased by $519,893 from $ 3,423,702 at June
30, 1999 to $2,903,809 at March 31, 2000. This change in equity is due to net
operating losses of $492,489; a $27,404 decrease in the market value of
securities held and available for sale. Pursuant to regulations under the FDIC
Improvement Act of 1991 (FDICIA), five capital levels were prescribed as
applicable for banks, ranging from well-capitalized to critically
under-capitalized. Banks are required to maintain a minimum risk-based capital
ratio of eight percent (8%). At March 31, 2000, the Bank was considered "well
capitalized." The total risk based capital ratio as of March 31, 2000 was 18.95%
for the Bank.
RESULTS OF OPERATIONS
Net Income. Northern Star had a net loss for the third quarter ended
March 31, 2000 of $124,346 compared with a net loss of $222,160 in the third
quarter of fiscal year 1999. The basic loss per share was $(0.29) for the third
<PAGE>
quarter of fiscal year 2000, compared with a basic loss per share of $ (0.58) in
the third quarter of fiscal year 1999. Net losses for the nine months ending
March 31, 2000 was $492,489 compared with a net loss of $337,481 for the nine
months ended March 31, 1999. The basic loss per share was $(1.16) for the nine
months ended March 31,2000, compared with losses per share of $(0.89) for the
nine months ended March 31, 1999. A direct comparison of results of operations
for the nine month period ended March 31, 2000 with the nine month period ended
March 31, 1999 is not necessarily indicative of the results that may be expected
for the entire fiscal year or any other period. The Company began operations
during the third quarter of fiscal year 1999 on January 25, 1999.
Interest Income. Interest income from the Bank's loan portfolio
increased by $215,283 and $538,322 for the three and nine-month periods ended
March 31, 2000 respectively, when compared to the same periods in fiscal year
1999. Interest income from investments in securities and interest earned on
interest bearing cash accounts increased by $83,404 and $176,261 for the three
and nine month periods ended March 31, 2000 when compared to the same periods in
fiscal year 1999. The increase in interest income from the loan portfolio for
the three and nine month periods ended March 31, 2000 was primarily the result
of an increase in the average amount of loans outstanding during the first nine
months of fiscal year 2000 when compared to the same period in fiscal year 1999.
The increase in interest income from investment securities and interest bearing
deposits was primarily the result of increases in the average amounts of these
investments during the first nine months of fiscal year 2000 when compared to
the same period in fiscal year 1999. Increases in interest income also resulted
from a general increase in interest rates. Early in 1999 the Federal Reserve
Board adopted a policy of increasing interest rates in an attempt to reduce
inflation in the economy. This action on the part of the Federal Reserve has
resulted in an increase in interest rates that the Bank receives on loans and
investments and in interest rates it pays on deposits and borrowings as they
mature or re-price. The Bank is currently in an asset-sensitive position. The
Bank has more loans or investments maturing and re-pricing within one year than
deposits or borrowings. As a result, an increase in interest rates would
contribute to an improvement in earnings, while a decline in interest rates
would contribute to a decrease in earnings.
Interest Expense. Total interest expense increased by $155,724 and $311,451 for
the three and nine month periods ended March 31, 2000, respectively, when
compared to the same periods in fiscal year 1999 primarily due to interest
expense on borrowed funds and on higher levels of deposits held by the Bank.
Increases in interest expenses were also a result of a general rise in interest
rates during the current periods as compared to prior periods.
Net Interest Income. Net interest income increased by $142,963 and $403,132 for
the three and nine month periods ended March 31, 2000, respectively, when
compared to the same periods in fiscal year 1999 due to the changes in interest
income and interest expenses described above.
Noninterest Income. Noninterest income increased by $10,643 and $50,503 for the
three and nine-month periods ended March 31, 2000, respectively, when compared
to the same periods in fiscal year 1999. The increase in noninterest income was
primarily due to the realization of gains on the sale of loans of $7,298 and
$33,122 for the three and nine-months ended March 31, 2000. The Bank realized no
gains or losses on the sale of loans during the same periods in fiscal year
1999. To a lesser extent, loan servicing fees and service charges also
contributed to improvements in noninterest income.
Noninterest Expenses. Noninterest expenses of $279,022 for the three-month
period ended March 31, 2000 remained relatively unchanged when compared to
<PAGE>
noninterest expenses of $225,980 for the three-month period ended March 31,
1999. This is primarily due to the fact that at current asset and liability
levels, the Bank's noninterest expenses are largely fixed expenses, and they do
not vary significantly with changes in activity levels. Noninterest expenses
during the nine-month period ended March 31, 2000 of $884,307 compares
unfavorably to noninterest expenses of $345,914 during the nine-month period
ended March 31, 1999. The Company did not engage in any operating activity
during the first six months of the nine-month period ended March 31, 1999. As a
result, the Company incurred lower compensation, occupancy, legal, accounting,
depreciation and printing and supplies expenses during the period ended March
31, 1999 as compared to the period ended March 31, 2000. Noninterest expenses
during the nine-month period ended March 31, 2000 included $106,205 of equity
loss associated with our investment in Homeland Mortgage, LLC and $49,060 of
expenses associated with our pending merger with First Federal Holding Company
of Morris, Inc.
Provisions for Loan Losses. In accordance with the Bank's internal
classification of assets policy, management evaluates the loan portfolio on a
quarterly basis, at a minimum, to identify and determine the adequacy of the
allowance for loan losses. Management's periodic evaluation of the adequacy of
the allowance is based on the Company's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, and
current economic conditions. As of March 31, 2000 and June 30, 1999 the balances
in the allowance for loan and lease losses were $149,000 and $56,250 and 1.16%
and 1.14%, respectively. The bank has not charged off any loans since commencing
operations and the Bank did not have any impaired loans at March 31, 2000 and
June 30, 1999. While the Company maintains its allowance for loan losses at a
level that is considered to be adequate to provide for potential losses, there
can be no assurances that further additions will not be made to the loss
allowance and that actual losses will not exceed estimated amounts.
Income Taxes. The effective tax rate for the Company and the Bank was 0% for
the nine-month period ended March 31, 2000 because the expected future tax
benefit of the net operating loss amounting to approximately $197,000 is reduced
by a deferred tax asset valuation allowance in accordance with generally
accepted accounting principles.
Pending Acquisition. On September 30, 1999 the Company entered into an
Agreement and Plan of Reorganization for the merger of First Federal Holding
Company of Morris, Inc. (Morris) into Northern Star Financial, Inc. Under the
terms of the agreement, Morris shareholders will exchange their Morris common
stock for approximately 870,559 shares of Northern Star Common Stock, subject to
adjustment. Completion of the merger is subject to regulatory approvals,
approval by the shareholders of both companies, and the sale of at least the
minimum number of shares offered to the public pursuant to the Company's public
offering of Common Stock. The transaction is expected to be completed by
Northern Star's fiscal year end of June 30, 2000.
Public Offering of Common Stock. On November 15, 1999 the Company
announced plans to raise up to $10 million dollars through a public offering of
its common stock. A registration statement with respect to the offering was
filed with the Securities and Exchange Commission, and declared effective on
March 28, 2000. The shares will be sold primarily by the Company's sales agent,
Banc Stock Financial, Services, Inc. The sales agent has agreed to use its best
efforts to sell the shares offered but must sell a minimum of 500,000 shares in
order to sell any shares. The offering is scheduled to end on June 26, 2000, but
the Company may extend the offering until September 24, 2000 at the latest. The
minimum purchase requirement is 100 shares and the maximum purchase is 45,000
shares. The purchase price has been established at $10.50 per share.
<PAGE>
Average Balances, Yields And Rates
The following tables summarize Northern Star's weighted average yields
earned, weighted average rates paid, interest rate spread and net yield on
earning assets and interest-bearing liabilities.
<TABLE>
<CAPTION>
For the Year Ended June 30, 1999
--------------------------------------------------------------
Average
Average Yield or
Balance Interest Rates
--------------------- ---------------- ---------------
<S> <C> <C> <C>
Assets
Federal Funds Sold $ 544,083 $ 26,089 4.79%
Investment Securities 60,531 3,590 5.93%
Loans 1,098,420 120,005 10.93%
Other Interest-Earning Assets 163,637 5,191 3.17%
------- ----- -----
Total Earning Assets 1,866,661 154,875 8.30%
Non Interest-Earning Assets 526,684
Total Assets $ 2,393,345
=========
Liabilities and Stockholders' Equity
Interest Bearing Deposits $ 901,088 $ 40,012 4.44%
Non Interest Bearing Deposits 255,238
Other Liabilities 71,765
Stockholders' Equity 1,165,254
---------
Total Liability and Stockholders' Equity $ 2,393,345
=========
Net Interest Spread 3.86%
Net Interest Income/Margin $ 114,863 6.15%
======= =====
Ratio of Average Interest
Earning Assets to Average Interest-Bearing
Liabilities 2.07x
</TABLE>
The average balances for the year ended June 30, 1999 were calculated
on an annualized basis, even though Northern Star did not have operations for
the entire fiscal year.
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
March 31, 2000 March 31, 2000
---------------------------------------- ----------------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Rates Balance Interest Rates
------------- ----------- --------- ---------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans receivable $ 10,509,969 $ 240,290 9.14% $ 8,393,054 $ 563,329 8.95%
Investment securities 4,309,477 73,224 6.80% 2,729,050 137,509 6.72%
Federal funds sold 1,152,318 15,815 5.49% 1,233,787 49,001 5.29%
--------------- ------------- ---------------- -------------
Total interest-earning assets 15,971,764 329,329 8.25% 12,355,891 749,839 8.10%
------------- -------------
Non-interest-earning assets 1,081,221 1,043,228
--------------- -------------
Total assets $ 17,052,985 $ 13,399,119
=============== ================
Liabilities and Stockholders' Equity
Interest Bearing Deposits $ 12,250,846 152,363 4.97% $ 8,786,143 305,121 4.63%
Other liabilities 573,276 8,606 6.00% 256,182 11,575 6.02%
--------------- ----------- ---------------- ----------
Total interest-bearing liabilities 12,824,122 160,969 5.02% 9,042,324 316,696 4.67%
----------- ----------
Non-interest-bearing liabilities 1,334,703 1,239,105
--------------- ----------------
Total liabilities 14,158,825 10,281,430
Stockholders' Equity 2,894,160 3,117,689
----------------
Total liabilities and stockholders'
equity $ 17,052,985 $ 13,399,119
=============== ================
Net interest income $ 168,361 $ 433,143
============= =============
Interest rate spread 3.23% 3.43%
Net yield on interest-earning assets 4.22% 4.67%
Ratio of average interest-earning
assets to average interest-bearing
liabilities 1.26x 1.37x
</TABLE>
<PAGE>
Rate/Volume Analysis
Net interest income can be analyzed in terms of the impact of changing
rates and changing volume. As described above, Northern Star commenced
operations in January 1999. Information analyzing period to period changes in
net interest income have been omitted because the change was substantially
related to the increase in loans outstanding.
Liquidity and Rate Sensitivity
Asset/liability management is the process by which Northern Star
monitors and controls the mix and maturities of its assets and liabilities. The
essential purposes of asset/liability management are to ensure adequate
liquidity and to maintain an appropriate balance between interest sensitive
assets and liabilities to minimize potentially adverse impacts on earnings from
changes in market interest rates.
Northern Star's primary sources of liquidity are a stable base of
deposits, scheduled repayments on loans, and interest on and maturities of
investments. Northern Star holds these funds in various forms of investments
with various degrees of liquidity. All securities holdings have been classified
as available-for-sale. If necessary, Northern Star has the ability to sell a
portion of its investment securities to manage interest sensitivity gap or
liquidity. Northern Star also may utilize its cash and due from banks and
federal funds sold to meet liquidity needs. Additionally, Northern Star has an
unsecured line of credit with a correspondent bank in the amount of $250,000. No
borrowings have been drawn on this line of credit.
As a monitoring technique, Northern Star measures its interest
sensitivity "gap", which is the positive or negative dollar difference between
assets and liabilities that are subject to interest rate repricing within a
given period of time. Interest rate sensitivity can be managed by repricing
assets or liabilities, selling securities available-for-sale, replacing an asset
or liability at maturity, or adjusting the interest rate during the life of an
asset or liability. Managing the amount of assets and liabilities repricing in
this same time interval helps to minimize interest rate risk and manage net
interest income in changing interest rate environments. Northern Star's net
interest income generally would benefit from rising interest rates when it is in
an asset-sensitive gap position. Conversely, net interest income generally would
benefit from decreasing rates of interest when Northern Star is in a
liability-sensitive gap position.
Gap analysis is not a precise indicator of Northern Star's interest
sensitivity position, because the analysis presents only a static view of the
timing of maturities and repricing opportunities without taking into
consideration that changes in interest rates do not affect all assets and
liabilities equally. For example, rates paid on a substantial portion of core
deposits may change contractually within a relatively short time frame, but
Northern Star views those rates as significantly less interest-sensitive than
market-based rates such as those paid on non-core deposits. Net interest income
may be impacted by other significant factors in a given interest rate
environment, including changes in the volume and mix of earning assets and
interest-bearing liabilities.
Northern Star continually evaluates the asset mix of its balance sheet
in terms of several variables: yields, credit quality, appropriate funding
sources and liquidity. To effectively manage the liability mix of the balance
sheet, Northern Star focuses on expanding various funding sources. The interest
rate sensitivity position at June 30, 1999 and March 31, 2000 is summarized in
the following tables. The difference between rate sensitive assets and rate
sensitive liabilities, or the interest rate sensitivity gap, for each period is
shown at the bottom of each table. Since all interest rates and yields do not
adjust at the same velocity, the gap is only a general indicator of rate
sensitivity. The tables may not be indicative of rate sensitivity position at
other points in time.
<PAGE>
<TABLE>
<CAPTION>
As of June 30, 1999
Within After Three After One
Three but within but within After
Months Twelve Months Five Years Five Years Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Federal Funds Sold......... $ 2,533 $ -- $ -- $ -- $ 2,533
Investment Securities...... -- -- -- 745 745
Loans...................... 2,877 241 1,488 1,014 5,620
------- ------- ------- ------- -------
Total Earning Assets......... $ 5,410 $ 241 $ 1,488 $ 1,759 $ 8,898
======= ======= ======= ======= =======
Interest Bearing Liabilities
Money Market & Now......... $ 127 $ -- $ -- $ -- $ 127
Regular Savings............ 3,244 -- -- -- 3,244
Time Deposits.............. 30 1,420 329 -- 1,779
------- ------- ------- ------- -------
Total Interest Bearing
Liabilities................ $ 3,401 $ 1,420 $ 329 $ 0 $ 5,150
======= ======= ======= ======= =======
Interest Sensitivity Gap..... $ 2,009 $(1,179) $ 1,159 $ 1,759 $ 3,748
Cumulative Interest Sensitivity
Gap........................ $ 2,009 $ 830 $ 1,989 $ 3,748 $ 3,748
Ratio of Interest Sensitivity
Gap to total earning assets.... 22.58% (13.25)% 13.03% 19.77% 42.13%
Ratio of Cumulative Interest
Sensitivity Gap to total
earning 22.58% 9.33% 22.36% 42.13% 42.13%
Assets.....................
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of March 31, 2000
Within After Three After One
Three but within but within After
Months Twelve Months Five Years Five Years Total
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Interest Earning Assets
Federal Funds Sold......... $ 1,054 $ -- $ -- $ -- $ 1,054
Investment Securities...... --- -- 3,275 942 4,217
Loans...................... 5,997 1,110 3,568 2,154 12,829
------- ------- ------ ------ --------
Total Earning Assets......... $ 7,051 $ 1,110 $6,843 $3,096 $ 18,100
======= ======= ====== ====== ========
Interest Bearing Liabilities
Money Market & Now......... $ 833 $ -- $ -- $ -- $ 833
Regular Savings............ 4,775 -- -- -- 4,775
Time Deposits.............. 1,622 5,402 1,590 -- 8,614
------- ------- ------ ------ --------
Total Interest Bearing
Liabilities................ $ 7,230 $ 5,402 $1,590 $ -- $ 14,222
======= ======= ====== ====== ========
Interest Sensitivity Gap..... $ (179) $(4,292) $5,253 $3,096 $ 3,878
Cumulative Interest Sensitivity
Gap........................ $ (179) $(4,471) $ 782 $3,878 $ 3,878
Ratio of Interest Sensitivity
Gap to total earning assets.... -0.99% -23.71% 29.02% 17.10% 21.43%
Ratio of Cumulative Interest
Sensitivity Gap to total
earning Assets............... -0.99% -24.70% 4.32% 21.43% 21.43%
</TABLE>
As evidenced by the tables above, Northern Star is cumulatively
asset-sensitive. In a rising interest rate environment, an asset-sensitive
position (a positive gap ratio) is generally more advantageous since assets
re-price sooner than liabilities. Conversely, in a declining interest rate
environment, a liability-sensitive position (a negative gap ratio) is generally
more advantageous as interest-bearing liabilities re-price sooner than earning
assets. In Northern Star's case, an increase in interest rates would result in
increased earnings, while a decline in interest rates would decrease income.
This, however, assumes that all other factors affecting income remain constant.
Loan Portfolio
Since loans typically provide higher interest yields than do other
types of earning assets, Northern Star's intent is to channel a substantial
percentage of earning assets into the loan category. However since Northern Star
Bank commenced operations only recently, that category has not yet grown to a
percentage of total earning assets comparable to other banks that are well
established. Average loans on an annualized basis were $1,098,420 for the year
ended June 30, 1999. Total gross loans outstanding, including loans held for
sale, were $5,619,345 as of June 30, 1999 and $12,828,901 as of March 31, 2000.
The following table summarizes the composition of Northern Star's loan
portfolio:
<TABLE>
<CAPTION>
As of June 30, 1999 As of March 31, 2000
Amount % of Total Amount % of Total
<S> <C> <C> <C> <C>
Commercial, Lease & Agricultural $1,843,707 32.81% $ 6,429,877 26.74%
Real Estate-- individual...... 1,496,460 26.63 1,854,746 14.46
Real Estate-- other........... 843,394 15.01 2,930,480 22.84
Consumer Loans................ 1,435,784 25.55 4,613,798 35.96
---------- ------ ---------- ------
Total Loans................... $5,619,345 100.00% $12,828,901 100.00%
---------- ====== ----------- ======
Less: Allowance for Loan Loss. (56,250) (149,000)
---------- ----------
Net deferred loans fees/cost --- 8,399
Total Net Loans............... $5,563,095 $12,688,300
========== ===========
</TABLE>
The principal components of Northern Star's loan portfolio were
mortgage loans and commercial loans which represented 74% of the portfolio at
June 30, 1999 and 87% at March 31, 2000. Due to the short time the portfolio has
existed, the current mix of loans may not be indicative of the ongoing portfolio
mix. Northern Star will attempt to maintain a relatively diversified loan
portfolio to help reduce the risk inherent in concentration of collateral.
Maturities and Sensitivity of Loans to Changes in Interest Rates
The information in the following tables is based on the contractual
maturities of individual loans, including loans which may be subject to renewal
at their contractual maturity. Renewal of these loans is subject to review and
credit approval, as well as modification of terms upon their maturity. Actual
repayments of loans may differ from maturities reflected below because borrowers
have the right to prepay obligations with or without prepayment penalties. The
following tables summarize loan maturities, by type, and related interest rate
characteristics:
<TABLE>
<CAPTION>
As of June 30, 1999
One Year After One but After
or Less Within Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial, Lease & Agricultural $ 916,272 $ 927,435 $ -- $1,843,707
Real Estate-- individual........ 812,173 334,318 349,969 1,496,460
Real Estate-- other............. 448,020 297,574 97,800 843,394
Consumer Loans.................. 1,144,982 290,802 -- 1,435,784
---------- ---------- -------- ----------
Total......................... $3,321,447 $1,850,129 $447,769 $5,619,345
========== ========== ======== ==========
Loans maturing after one year with:
Fixed Interest Rates.......... $ 903,715
Floating Interest Rates....... $1,394,183
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 2000
One Year After One but After
or Less Within Five Years Five Years Total
<S> <C> <C> <C> <C>
Commercial, Lease &
Agricultural................. $1,254,531 $1,634,322 $ 541,023 $ 3,429,877
Real Estate-- individual....... 68,744 748,626 1,037,376 1,854,746
Real Estate-- other............ 993,598 1,568,133 368,750 2,930,480
Consumer Loans................. 3,858,400 541,039 214,358 4,613,798
---------- ---------- ---------- -----------
Total........................ $6,175,274 $4,492,121 $2,161,506 $12,828,901
========== ========== ========== ===========
Loans maturing after one year
with:
Fixed Interest Rates......... $5,596,552
Floating Interest Rates...... $1,057,075
</TABLE>
Provision and Allowance for Loan Losses
Northern Star has developed policies and procedures for evaluating the
overall quality of its credit portfolio and the timely identification of
potential credit problems. Additions to the allowance for loan losses will be
<PAGE>
made periodically to maintain the allowance at an appropriate level based on an
analysis of the potential risk in the loan portfolio.
On June 30, 1999, Northern Star's allowance for loan losses was $56,250
or 1.14% of $4,937,752 in loans receivable (net of loans held for sale). On
March 31, 2000, Northern Star's allowance for loan losses was $149,000 or 1.16%
of $12,828,901 in loans receivable (net of loans held for sale). Northern Star
Bank has not charged off any loans since commencing operations. The provision
for loan losses was established primarily as a result of an assessment of
general loan loss risk as Northern Star Bank recorded its first loans.
The following tables summarize Northern Star Bank's loan loss
experience and the allowance for possible loan losses:
<TABLE>
<CAPTION>
For the Year Ended Nine Months Ended
June 30, 1999 March 31, 2000
<S> <C> <C>
Balance at Beginning of $ -- $ 56,250
Period......................
Charge-offs................. -- --
Recoveries.................. -- --
Net Charge Offs............. -- --
Additions charged to 56,250 92,750
------- --------
operations..................
Balance at End of Period.... $56,250 $149,000
======= ========
</TABLE>
The allowance for loan losses was allocated as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months Ended
June 30, 1999 March 31, 2000
-------------------------------- -----------------------
Percent of Loans Percent of Loans
in Each Category in Each Category
Amount to Total Loans Amount to Total Loans
<S> <C> <C> <C> <C>
Commercial Lease & Agricultural $13,310 32.81% $ 25,222 26.74%
Real Estate-- individual...... 10,974 26.63% 13,569 14.46%
Real Estate-- other........... 5,288 15.01% 18,922 22.84%
Consumer Loans................ 5,808 25.55% 54,409 35.96%
Unallocated................... 20,870 -- 36,878 --
------- ----- --------- -----
Total......................... $56,250 100.00% $ 149,000 100.00%
======= ====== ========= ======
</TABLE>
Investment Portfolio
At June 30, 1999, Northern Star's investment securities portfolio
represented approximately 8.42% of its earning assets of $8,897,899. Northern
Star held investments in U.S. Government agency securities with a fair market
value of $745,119 and an amortized cost of $749,286, for an unrealized loss of
$2,500, net of income taxes. Northern Star also held investments in stock of the
Federal Home Loan Bank in the amount of $16,400.
At March 31, 2000, Northern Star's investment securities portfolio
represented approximately 23% of its earning assets of $18,099,954. Northern
Star held securities available for sale with a fair market value of $4,217,219
and an amortized cost of $4,267,059, for an unrealized loss of $49,840. Northern
Star also held investments in stock of the Federal Home Loan Bank in the amount
of $49,700.
Contractual maturities and yields on investments (all available for
sale) are summarized in the following table. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<PAGE>
<TABLE>
<CAPTION>
Over one
Within But within Over Five
One Year Yield Five Years Yield Years Yield Total Yield
<S> <C> <C> <C> <C> <C> <C>
As of June 30,
1999:
US Government
Agencies..... -- -- $ 549,286 6.12% $200,000 7.04% $ 749,286 6.36%
As of March 31,
2000:
US Government
Agencies..... -- -- $ 3,274,871 6.62% $942,249 7.37% $4,217,220 6.79%
</TABLE>
Northern Star Bank had short-term investments in the amount of
$2,533,236 at June 30, 1999 and $1,053,834 at March 31, 2000. These funds were
invested in Federal funds sold on an overnight basis. As Northern Star Bank
continues to grow, they expect a continued shift from primarily overnight
investments into the loan portfolio and, to a lesser extent, into the investment
securities portfolio.
Deposits and Other Interest-Bearing Liabilities
Average total deposits were $1,159,439 and average interest-bearing
deposits were $899,386 for the year ended June 30, 1999, on an annualized basis.
For March 31, 2000 Average total deposits were $9,998,557 and average
interest-bearing deposits were $8,796,647. The following tables summarize
deposits by category.
<TABLE>
<CAPTION>
As of June 30, 1999
---------------------------------------------------------------------------
Percentage
Percentage of Total
Ending of Total Average Average Effective
Balance Deposits Balance Deposits Cost
------------- ----------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Demand Deposit $ 998,017 16.19% $ 255,512 22.04% 0.00%
Now 127,387 2.07% 52,395 4.52% 2.56%
Savings 3,244,444 52.63% 375,076 32.35% 3.89%
Time Accounts less than $100,000 1,379,249 22.37% 336,573 29.03% 6.17%
Time Accounts of $100,000 or more 400,000 6.49% 135,342 11.67% 6.24%
Accrued Interest Payable 15,472 0.25% 4,541 0.39%
------------- ----------- ------------- ------------
Total Deposits $ 6,164,569 100.00% $ 1,159,439 100.00%
================ =========== ================ ============
</TABLE>
<TABLE>
<CAPTION> As of March 31, 2000
---------------------------------------------------------------------------
Percentage
Percentage of Total
Ending of Total Average Average Effective
Balance Deposits Balance Deposits Cost
------------- ----------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Demand Deposit $ 1,279,825 8.19% $ 1,122,252 11.22% 0.00%
Now 347,103 2.22% 261,945 2.62% 2.56%
Savings 5,261,089 33.66% 4,346,763 43.47% 3.89%
Time Accounts less than $100,000 5,597,680 35.82% 2,668,331 26.69% 6.17%
Time Accounts of $100,000 or more 3,016,365 19.30% 1,519,609 15.20% 6.24%
---------
Accrued Interest Payable 126,927 0.81% 79,658 0.80%
------------- ----------- ------------- ------------
Total Deposits $ 15,628,989 100.00% $ 9,998,557 100.00%
================ =========== ================ ============
</TABLE>
<PAGE>
Core deposits, which exclude time deposits of $100,000 or more, provide
a relatively stable funding source for Northern Star's loan portfolio and other
earning assets. Northern Star's core deposits were $5,749,097 at June 30, 1999
and $12,654,481 at March 31, 2000. Northern Star's loan to deposit ratio was 90%
at June 30, 1999 and 82% at March 31, 2000. The maturity distribution of time
deposits is as follows:
<TABLE>
<CAPTION>
Over 3 Over 6
3 Months Months to Months to Over 12
or Less 6 Months 12 Months Months TOTAL
--------------------- ---------------------- ---------
<S> <C> <C> <C> <C> <C>
As of June 30, 1999:
Time Accounts less than $30,000 $133,787 $ 866,625 $348,837 $ 1,379,249
$100,000........................
Time Accounts of $100,000 or
More....................... -- -- 400,000 -- 400,000
------- -------- ----------- -------- -----------
Total...................... $30,000 $133,787 $ 1,266,625 $348,837 $ 1,779,249
======= ======== =========== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Over 3 Over 6
3 Months Months to Months to Over 12
or Less 6 Months 12 Months Months TOTAL
---------------------- ---------------------- ---------
<S> <C> <C> <C> <C> <C>
As of March 31, 2000:
Time Accounts less than
$100,000................ $1,106,268 $ 769,074 $ 2,332,575 $1,389,763$ 5,597,680
Time Accounts of $100,000 or
More.................... 516,365 1,900,000 400,000 200,000 3,016,365
--------- ---------- ----------- -------- -----------
Total................... $1,622,633 $2,669,074 $ 2,732,575 $1,589,763$ 8,614,044
========== ========== =========== =====================
</TABLE>
Return on Equity and Assets
The following table summarizes Northern Star's return (loss) on average
assets (net loss divided by average total assets), return on average equity (net
loss divided by average equity), and equity to assets ratio (average equity
divided by average total assets). Since inception, Northern Star has not paid
any cash dividends. The payment of dividends by Northern Star Bank is subject to
limitations imposed by law and governmental regulations.
For the For the
Year Ended Nine Months
June 30, 1999 Ended March 31, 2000
Return (loss) on average
assets...................... (22.61)% (3.68)%
Return (loss) on average
equity...................... (69.87)% (15.80)%
Equity to assets ratio......... 35.53% 15.06%
Short Term Borrowings
Northern Star had no short-term borrowings during fiscal year 1999.
During the quarter ended December 31, 1999, Northern Star borrowed $425,000 from
the Federal Home Loan Bank due October 18, 2000 bearing interest at an annual
rate of 5.85%. During the third quarter, Northern Star Bank borrowed $300,000
from the Federal Home Loan Bank due September 18, 2000 bearing interest at an
annual rate of 6.33%.
Capital Adequacy
There are now two primary measures of capital adequacy for banks and
banking holding companies: (i) risk-based capital guidelines and (ii) leverage
ratio.
The risk based capital guidelines measure the amount of a bank's
required capital in relation to the degree of risk perceived in its assets and
<PAGE>
its off-balance sheet items. Under the risk-based capital guidelines, capital is
divided into two "tiers." "Tier 1 capital" consists of common stockholders'
equity, qualifying preferred stock, and minority interests in the equity
accounts of consolidated subsidiaries, less certain items such as goodwill and
certain other intangible assets. Tier 2 capital consists of hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, preferred stock that does not qualify as Tier 1
capital, and a limited amount of the allowance for credit losses. Banks are
required to maintain a minimum risk-based capital ratio of 8.0% with at least
4.0% consisting of Tier 1 capital.
The second measure of capital adequacy relates to the leverage ratio.
The Federal Deposit Insurance Corporation has established a 3.0% minimum
leverage ratio requirement. Note that the leverage ratio is computed by dividing
Tier 1 capital into average assets. For all except the highest rated banks, the
minimum leverage ratio should be 3.0% plus an additional cushion of at least 1
to 2 percent, depending upon risk profiles and other factors.
The Federal Reserve Board and the FDIC rules add a measure of interest
rate risk to the determination of supervisory capital adequacy. In connection
with this rule, the agencies have adopted a measurement process to measure
interest rate risk. Under this rule, all items reported on the balance sheet, as
well as off-balance sheet items, are reported according to maturity, re-pricing
dates and cash flow characteristics. A bank's weighted position is used in
assessing capital adequacy. The objective of this complex rule is to determine
the sensitivity of banks to various rising and declining interest rate
scenarios.
The Federal Deposit Insurance Corporation Improvement Act ("FDICIA"),
as well as other requirements, established five capital tiers: well-capitalized,
adequately capitalized, under capitalized, significantly under capitalized, and
critically under capitalized. A depository institution's capital tier depends on
its capital levels in relation to various relevant capital measures and certain
other factors. Depository institutions that are not classified as well
capitalized are subject to various restrictions regarding capital distributions,
payment of management fees, acceptance of brokered deposits and other operating
activities.
The tables below illustrate Northern Star's regulatory capital (in
thousands) and ratios:
<TABLE>
<CAPTION>
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provision
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Tier II Capital (to Risk Weighted
Assets)................... $ 2,785 44.20% $ 504 8.00% $ 630 10.00%
Tier I Capital (to Risk Weighted
Assets)................... $ 2,729 43.30% $ 252 4.00% $ 378 6.00%
Leverage Ratio Tier I Capital to
Average Assets)........... $ 2,729 36.50% $ 299 4.00% $ 374 5.00%
As of March 31, 2000:
Tier II Capital (to Risk Weighted
Assets)................... $ 2,701 18.9% $1,140 8.0% $ 1,425 10.0%
Tier I Capital (to Risk Weighted
Assets)................... $ 2,552 17.9% $ 570 4.0% $ 855 6.0%
Tier I Capital (to Average
Assets)........................ $ 2,552 15.1% $ 678 4.0% $ 847 5.0%
</TABLE>
At March 31, 2000, Northern Star Bank is classified as well capitalized
and is in compliance with all regulatory capital requirements. Management
anticipates Northern Star Bank will continue to be classified as well
capitalized.
As of March 31, 2000, there were no significant commitments outstanding
for capital expenditures.
<PAGE>
Impact of Inflation and Changing Prices
The effect of relative purchasing power over time due to inflation has
not been taken into effect in Northern Star's financial statements. Rather, the
statements have been prepared on an historical cost basis in accordance with
generally accepted accounting principles.
Since most of the assets and liabilities of a financial institution are
monetary in nature, the effect of changes in interest rates will have a more
significant impact on Northern Star's performance than will the effect of
changing prices and inflation in general. Interest rates may generally increase
as the rate of inflation increases, although not necessarily in the same
magnitude.
Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). This statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. SFAS No. 133 is effective for fiscal years beginning after June 15,
2000. Retroactive application to financial statements of prior periods is not
required. Northern Star does not currently have any derivative instruments nor
is it involved in hedging activities.
Industry Developments
The recent adoption of the Gramm-Leach-Bliley Act commonly referred to
as the "New Financial Modernization Legislation" may present new opportunities
by allowing Northern Star to provide non-traditional banking services such as
insurance and securities brokerage services. See "Supervision and Regulation."
From time to time, various bills are introduced in the United States
Congress with respect to the regulation of financial institutions. Northern Star
cannot predict whether any of these proposals will be adopted or, if adopted,
how these proposals would affect Northern Star.
Year 2000
Like many financial institutions, Northern Star relies on computers to
conduct its business and information systems processing. Industry experts were
concerned that on January 1, 2000, some computers might not be able to interpret
the new year properly, causing computer malfunctions. Some banking industry
experts remain concerned that some computers may not be able to interpret
additional dates in the year 2000 properly. Northern Star has operated and
evaluated its computer operating systems following January 1, 2000 and has not
identified any errors or experienced any computer system malfunctions. Northern
Star will continue to monitor its information systems to assess whether its
systems are at risk of misinterpreting any future dates and will develop
appropriate contingency plans to prevent any potential system malfunction or
correct any system failures. Northern Star has surveyed its key customers to
determine their exposure to the year 2000 issue and, based upon key customers'
reports, Northern Star believes it will not have any material exposure to its
loan portfolio as a result of the year 2000 issue.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Changes in Securities.
In February 2000, the Company awarded and issued 2,000 shares of Common
Stock to its Chief Executive Officer, Thomas P. Stienessen, pursuant to a
Restricted Stock Agreement between the Company and Mr. Stienessen. The issuance
of the stock was deemed to be exempt from registration under the Securities Act
of 1933 by virtue of Section 4(2) thereof. The certificate representing the
shares bears a restrictive securities legend.
Item 3. Default Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index on page following Signatures.
(b) None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NORTHERN STAR FINANCIAL, INC.
Date: May 15, 2000 By /s/ Thomas P. Stienessen
Thomas P. Stienessen, President and
Chief Executive Officer
By /s/ Frank L. Gazzola
Frank L. Gazzola, Chief Financial
Officer
<PAGE>
EXHIBIT INDEX
NORTHERN STAR FINANCIAL, INC.
FORM 10-QSB
FOR QUARTER ENDED March 31, 2000
Exhibit Number Description
27 Financial Data Schedule (filed in electronic format only)
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 323,504
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,053,835
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,217,220
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 12,688,300
<ALLOWANCE> 149,000
<TOTAL-ASSETS> 19,281,500
<DEPOSITS> 15,628,989
<SHORT-TERM> 725,000
<LIABILITIES-OTHER> 23,702
<LONG-TERM> 0
0
0
<COMMON> 4,256
<OTHER-SE> 2,899,553
<TOTAL-LIABILITIES-AND-EQUITY> 19,281,500
<INTEREST-LOAN> 563,329
<INTEREST-INVEST> 186,510
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 749,839
<INTEREST-DEPOSIT> 305,121
<INTEREST-EXPENSE> 316,696
<INTEREST-INCOME-NET> 433,143
<LOAN-LOSSES> 92,750
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 884,307
<INCOME-PRETAX> (492,489)
<INCOME-PRE-EXTRAORDINARY> (492,489)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (492,489)
<EPS-BASIC> (1.16)
<EPS-DILUTED> (1.16)
<YIELD-ACTUAL> 8.10
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 56,250
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 149,000
<ALLOWANCE-DOMESTIC> 149,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 36,878
</TABLE>
