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 December 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 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 February 11,
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 December 31, 1999
(unaudited) and June 30, 1999 (audited) 3
Unaudited Consolidated Statements of Operations for the three
months ended December 31, 1999 and 1998 and for the six months
ended December 31, 1999 and 1998 4
Unaudited Consolidated Statement of Cash Flows for the three
months ended December 31, 1999 and 1998 and for the six months
ended December 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements (unaudited) 7-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Default Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES
<PAGE>
Northern Star Financial, Inc. and Subsidiary
Consolidated Statements of Financial Condition
<TABLE>
<CAPTION>
December 31, 1999 June 30, 1999
(Unaudited) (Audited)
------------ ------------
ASSETS
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 249,088 $ 210,662
Federal funds sold 2,159,781 2,533,236
------------ ------------
Total cash and cash equivalents 2,408,869 2,743,898
Securities available for sale at fair value 4,465,492 745,119
FHLB stock, at cost 21,300 16,400
Loans held for sale 66,440 681,593
Loans receivable, net of allowance for loan and
lease losses of $123,750 and $56,250 8,950,055 4,881,502
Accrued interest receivable 128,981 59,527
Property and equipment, net of depreciation 465,957 486,685
Other assets 45,577 20,884
Investment in joint venture 115,822 0
------------ ------------
Total Assets $ 16,668,493 $ 9,635,608
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Demand deposits $ 2,497,720 $ 1,121,450
Savings deposits 4,674,284 3,244,444
Time deposits 5,966,384 1,798,675
------------ ------------
Total deposits 13,138,387 6,164,569
Advances from FHLB 425,000 0
Advances from borrowers for taxes and insurance 5,436 23,941
Other liabilities 69,591 23,396
------------ ------------
Total Liabilities 13,638,414 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 0 0
Paid in capital 3,919,577 3,919,577
Accumulated deficit (865,774) (497,631)
Accumulated comprehensive (loss) (27,980) (2,500)
------------ ------------
Total Shareholders' Equity 3,030,079 3,423,702
------------ ------------
Total Liabilities and Shareholders Equity $ 16,668,493 $ 9,635,608
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Northern Star Financial, Inc. and Subsidiary
Unaudited Consolidated Statements of Operations
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended December 31, Ended December 31,
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income
Loans receivable $ 180,408 $ 0 $ 323,040 $ 0
Securities available for sale 42,527 0 64,285 0
Due from banks 0 4,613 0 4,613
Federal funds sold 16,339 0 33,185 0
--------- --------- --------- ---------
Total interest income 239,274 4,613 420,510 4,613
Interest expense
Deposits 96,682 0 152,758 0
Borrowed funds 2,970 0 2,970 0
--------- --------- --------- ---------
Total interest expense 99,652 0 155,728 0
Net interest income 139,622 4,613 264,782 4,613
Provision for loan losses 33,750 67,500
--------- --------- --------- ---------
Net interest income after
provision for loan loss 105,872 4,613 197,282 4,613
--------- --------- --------- ---------
Noninterest income:
Other fees and service charges 5,035 0 14,036 0
Gain/(loss) on sale of loans 20,722 0 25,824 0
--------- --------- --------- ---------
Total noninterest income 25,757 0 39,860 0
--------- --------- --------- ---------
Noninterest expense
Compensation and employee benefits 101,205 0 201,985 0
Board fees 28,636 0 48,636 0
Occupancy 25,073 0 48,257 0
Legal and accounting 13,180 0 35,790 0
Printing & supplies 14,434 0 21,094 0
Property and equipment depreciation 19,294 0 33,337 0
Data processing 12,273 0 23,956 0
Organization expense 0 42,074 0 42,074
Merger expenses 36,918 0 37,310 0
Start up costs 0 76,604 0 77,860
Other 35,480 0 68,295 0
Joint venture 40,130 0 86,624 0
--------- --------- --------- ---------
Total noninterest expense 326,624 118,678 605,285 119,934
--------- --------- --------- ---------
Net loss before income tax benefit (194,994) (114,065) (368,143) (115,321)
Income tax benefit 0 0 0 0
--------- --------- --------- ---------
Net Loss $(194,994) $(114,065) $(368,143) $(115,321)
========= ========= ========= =========
Basic (loss) per share of common stock $ (0.46) $ N/A $ (0.86) $ N/A
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Northern Star Financial, Inc. and Subsidiary
Unaudited Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended December 31 Ended December 31
----------------------------- -----------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Interest received on loans and investments $ 230,708 $ 4,613 $ 352,924 $ 4,613
Interest paid (38,650) 0 (95,661) 0
Other fees, commissions, and income received 5,035 0 14,036 0
Cash paid to suppliers, employees and others (377,001) (16,136) (549,956) (16,136)
Loans originated for sale (1,133,299) 0 (2,230,974) 0
Proceeds from sale of loans 1,613,581 0 2,871,950 0
----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities 300,374 (11,523) 362,319 (11,523)
Cash flows from investing activities:
Purchases of available-for-sale securities (2,958,193) 0 (4,097,722) 0
Purchases of FHLB stock (4,900) 0 (4,900) 0
Proceeds from maturities of available-for-sale 200,000 0 350,000 0
Investment in joint venture 0 0 (196,000) 0
Loan originations and principal payments on loans, net (2,222,580) 0 (4,136,053) 0
Purchase of property and equipment (7,500) 0 (12,609) 0
----------- ----------- ----------- -----------
Net cash used in investing activities (4,993,173) 0 (8,097,284) 0
Cash flows from financing activities:
Net proceeds from common stock 0 3,087,353 0 3,087,353
Net increase in non-interest bearing demand and
savings deposit accounts 1,907,056 0 2,825,640 0
Net increase in time deposits 3,571,792 0 4,167,801 0
FHLB borrowings 425,000 0 425,000 0
Net decrease in mortgage escrow funds (5,082) 0 (18,505) 0
----------- ----------- ----------- -----------
Net cash provided by financing activities 5,898,766 3,087,353 7,399,936 3,087,353
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 1,205,967 3,075,830 (335,029) 3,075,830
Cash and cash equivalents beginning 1,202,902 0 2,743,898 0
----------- ----------- ----------- -----------
Cash and cash equivalents ending $ 2,408,869 $ 3,075,830 $ 2,408,869 $ 3,075,830
=========== =========== =========== ===========
Non-cash investing activities:
Net equity loss, joint venture $ (39,591) $ 0 $ (80,178) $ 0
=========== =========== =========== ===========
</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 Six Months
Ended December 31 Ended December 31
------------------------- -------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
RECONCILATION OF NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net loss $(194,994) $(114,065) $(368,144) $(115,321)
Adjustments
Depreciation 16,772 0 33,337 0
Joint venture loss 39,591 0 80,178 0
Provision for loan losses 33,750 0 67,500 0
Premiums accretion on investments (120) 0 (238) 0
Discount amortization on investments 1,436 0 2,107 0
(Increase) decrease in:
Loans held for sale 459,560 0 615,513 0
Accrued interest receivable (9,882) 0 (69,454) 0
Other assets (28,902) (1,600) (24,694) (1,600)
Increase (decrease) in:
Accrued interest payable 61,002 0 60,067 0
Other liabilities (77,839) 104,142 (33,493) 105,398
--------- --------- --------- ---------
Net cash used in operating activities $ 300,374 $ (11,523) $ 362,679 $ (11,523)
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
Northern Star Financial, Inc. and Subsidiary
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 (Unaudited)
Note 1: PRINCIPLES OF CONSOLIDATION
The unaudited consolidated financial statements as of and for the three
and six month periods ended December 31, 1999, 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 on Form 10-KSB 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 six month periods ended
December 31, 1999, 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 six
month periods ended December 31, 1999, the weighted average number of shares
outstanding for basic and diluted earnings per share computation were 425,600.
There were 66,200 common stock shares from stock options that were not included
in the calculation of diluted earnings per share because they were
anti-dilutive.
Ten shares were outstanding at December 31, 1998, and presentation of
basic earnings per share for the initial development stage operating periods
would not be meaningful. Stock subscriptions for 310,100 shares were
contingently issuable subject to the Bank charter approval, which had not
occurred by December 31, 1998.
<PAGE>
Note 5: COMPREHENSIVE (LOSS)
Accumulated comprehensive (loss) is composed of the following:
For the period ended
December 31, 1999
Three months Six months
--------- ---------
Unrealized Gains
(Losses) on Securities
Beginning balance $ (6,343) $ (2,500)
Current - period change net of tax (21,637) (25,480)
--------- ---------
Ending balance $ (27,980) $ (27,980)
========= =========
Comprehensive (Loss)
Net loss $(194,994) $(368,143)
Other comprehensive loss ( 21,637) ( 25,480)
--------- ---------
$(216,631) $(393,623)
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 in to 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 regulatory approvals and approval by the shareholders of both companies. 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 various deposits and
savings plan. 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.
<PAGE>
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 up to 1,000,000
shares of its common stock. The shares will be offered and sold to the public on
a best efforts basis at a price to be negotiated between the Company and its
agent.
AVERAGE BALANCES, YIELDS AND RATES
The following table sets forth, for the thee months and six months
ended December 31, 1999, the weighted average yields earned, the weighted
average rates paid, the interest rate spread and the net yield on earning assets
and interest-bearing liabilities, on an annualized basis.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, 1999 December 31, 1999
--------------------------------------------- --------------------------------------------
Average Average
Average Yield or Average Yield or
Balance Interest Rates Balance Interest Rates
------------- ------------ ---------- ---------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $ 8,225,528 $ 180,409 8.77% $ 7,344,675 $ 323,041 8.80%
Investment securities 2,565,608 42,527 6.63% 1,946,247 64,285 6.61%
Federal funds sold 1,158,506 16,339 5.64% 1,271,661 33,185 5.22%
------------- ------------ ---------------- -----------
Total interest-earning assets 11,949,642 239,275 8.01% 10,562,583 420,511 7.96%
Non-interest-earning assets 1,123,852 1,021,390
------------- -------------
Total assets $ 13,073,494 $ 11,583,974
=============== ================
Interest-bearing liabilities:
Interest Bearing Deposits $ 8,498,277 96,682 4.55% $ 7,072,125 152,758 4.32%
Other liabilities 198,333 2,970 5.98% 99,321 2,970 5.98%
--------------- ------------ ---------------- -----------
Total interest-bearing
liabilities 8,696,610 99,652 4.58% 7,171,446 155,728 4.34%
------------ -----------
Non-interest-bearing
liabilities 1,275,998 1,192,111
--------------- ----------------
Total liabilities 9,972,608 8,363,557
Stockholders' Equity 3,100,886 3,220,416
--------------- ----------------
Total liabilities and
stockholders' equity $ 13,073,494 $ 11,583,974
=============== ================
Net interest income $ 139,623 $ 264,783
============== ==============
Net interest rate spread 3.43% 3.62%
Net yield on interest-earning assets 4.67% 5.01%
Ratio of average interest-earning
assets to average
interest-bearing liabilities 1.37x 1.47x
</TABLE>
<PAGE>
LOAN PORTFOLIO
Since loans typically provide higher interest yields than do other
types of earning assets, the Company's intent is to channel a substantial
percentage of its earning assets into the loan category. However since the Bank
only commenced operations in January 1999, that category has not yet grown to a
percentage of total earning assets, comparable to other banks that are well
established. Total gross loans outstanding at December 31, 1999, including loans
held for sale, was $9,134,233.
The following table summarizes the composition of the loan portfolio:
<TABLE>
<CAPTION>
As of December 31, 1999 As of June 30, 1999
-------------------------------- ------------------------------
Amount % of Total Amount % of Total
--------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Commercial, Lease & Agricultural $ 2,668,664 29.22% $ 1,843,707 32.81%
Real Estate - individual 1,600,518 17.52% 1,496,460 26.63%
Real Estate - other 2,106,990 23.07% 843,394 15.01%
Consumer loans 2,758,061 30.19% 1,435,784 25.55%
------------------ ------------ --------------
Total loans $ 9,134,233 100.00% $ 5,619,345 100.00%
============ ============
Less: allowance for loan loss (123,750) (56,250)
------------------ --------------
Total net loans $ 9,010,483 $ 5,563,095
================== ==============
</TABLE>
PROVISION AND ALLOWANCE FOR LOAN LOSSES
The Company had 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
made periodically to maintain the allowance at an appropriate level based on
management's analysis of the potential risk in the loan portfolio.
<PAGE>
At December 31, 1999, the allowance for loan losses was $123,750 or
1.36% of $9,067,793 in loan receivables (net of loans held for sale). The bank
has not charged off any loans since commencing operations. The provision for
loan losses was made primarily as a result of management's assessment of general
loan loss risk as the Bank recorded its first loans. The allowance is allocated
as follows:
Percent of Loans
in
Each Category
December 31, 1999 of Total Loans
----------------- --------------
Commercial Lease and Agricultural $ 19,105 29.22 %
Real Estate - individual 11,669 17.52 %
Real Estate - other 13,041 23.07 %
Consumer loans 11,164 30.19 %
Unallocated 68,771 %
-------- -------
Total $123,750 100 %
========
DEPOSITS
The following is a table of deposits by category at December 31, 1999:
<TABLE>
<CAPTION>
Percentage
Percentage of Total
Ending of Total Average Average Effective
Balance Deposits Balance Deposits Cost
----------- ---------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Demand Deposit $ 2,205,378 16.79% $ 1,191,094 11.77% 0.00%
Now 292,342 2.23% 238,972 2.36% 2.59%
Savings 4,674,284 35.58% 4,842,436 47.84% 3.72%
Time Accounts less than $100,000 2,970,922 22.61% 2,476,489 24.47% 5.72%
Time Accounts of $100,000 or more 2,995,462 22.80% 1,372,655 13.56% 6.09%
----------- -------- ----------- -------------- -----
Total Deposits $13,138,387 100.00% $10,121,646 100.00%
=========== ======== =========== ==============
</TABLE>
<PAGE>
Northern Star Financial 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 December 31, 1999 and 6 months ended December 31, 1999. You
should read this table in conjunction with our financial statements and related
notes appearing elsewhere in this document.
<TABLE>
<CAPTION>
Three Months Six Months
Ended Ended
December 31, 1999 December 31, 1999
----------------- -----------------
(unaudited) (unaudited)
<S> <C> <C>
Statement of Income:
Interest income $ 239,274 $ 320,510
Interest expense 99,652 155,728
----------- -------------
Net interest income 139,622 264,782
Provision for loan losses 33,750 67,500
Other non-interest income 25,757 39,860
Non-interest expense 326,624 605,285
----------- -------------
Income (loss) before income tax expense (194,994) (368,143)
Income tax expense (benefit) 0 0
----------- -------------
Net income (loss) $ (194,994) $ (368,143)
=========== =============
Balance Sheet:
Assets $ 16,668,493
Allowance for loan losses $ 123,750
Deposits $ 13,138,387
Stockholders' equity $ 3,030,079
Per Share Data:
Net income (loss) - basic $ (0.46) $ (0.86)
Net income (loss) - diluted $ (0.46) $ (0.86)
Book value $ 7.12
Other Data
Average shares outstanding - basic 425,600 425,600
Average shares outstanding - diluted 425,600 425,600
Financial Ratios:
Equity to assets 18.18 %
Return on average assets (5.60)%
Return on average stockholders' equity (22.82)%
Net interest margin 5.01 %
Tier 1 leverage ratio 19.48 %
Tier 1 capital to risk-weighted assets 22.73 %
Total capital to risk-weighted assets 23.85 %
Asset Quality Ratios:
Nonperforming assets to total assets N/A
Nonperforming assets to total loans and
and other real estate owned N/A
Allowance for loan losses to total loans 1.37 %
</TABLE>
<PAGE>
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN 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.
Total consolidated assets equaled $16.67 million at fiscal quarter ended
December 31, 1999 compared to $9.64 million for fiscal year ending June 30,
1999. Cash and cash equivalents decreased $0.34 million since fiscal year 1999
end. Net loans receivable increased $4.07 million during the first six months
ending December 31, 2000 and loans held for sale decreased $0.62 million.
Deposits also increased $6.97 million during the first half of fiscal year 2000.
The net loss for the six months ending December 31, 1999 equaled $368,143
compared to a net loss of $115,321 for the six months ending December 31, 1998.
A direct comparison of the results of operations during these time periods would
not be meaningful. Although staffing at the Bank had been initiated in
preparation of the Bank's January 25, 1999 opening and other noninterest
expenses were incurred in opening the Bank, the Company did not engage in any
operating activity during 1998 other than in the organization of the Company and
the Bank.
Net Interest Income
Net interest income earned during the six-month period ending December 31, 1999
totaled $197,282. Net interest income for the three-month period ending December
31, 1999 was $105,872. The increase in net interest income in the three month
period ending December 31,1999 over the prior quarter is the result of the
higher level of earning assets held by the Company during the second quarter.
Total interest income for the six-month period ending December 31, 1999 was
$420,510 as compared to total interest income of $239,274 for the three-month
period ending December 31, 1999. The increase of $58,000 in total interest
income represents a 32% increase in interest income in the second quarter over
the first quarter. Interest income from loans receivable of $180,408 represented
the largest portion of interest income since the Company had the largest portion
of earning assets in its loan portfolio.
<PAGE>
Noninterest Income
Noninterest income is derived primarily from service charges on deposit accounts
and earnings on loan sales. During the six-month period ending December 31,
1999, the Bank sold residential mortgage loans totaling $2.87 million and
recognized gains on those sales of $25,824. This compares to residential
mortgage loan sales of $1.61 million for the three-month period ending December
31, 1999, which recognized gains of $20,722. Long termed, fixed rate residential
mortgage loans are sold without recourse on a best effort and price protected
basis. Loan servicing rights are released to the purchaser of the loan at the
time of sale. The Bank does not take a position in the market. The improvement
in earnings from loan sales is attributed to improvements in operating
efficiencies.
Noninterest Expenses
The Company's noninterest expenses were $326,624 during the three-month period
ending December 31, 1999 and $605,285 for the six-month period ending December
31, 1999. The second quarter increase of nearly $50,000 in noninterest expenses
over first quarter levels is attributed to the expansion of the Company's
activities into mortgage banking and the pending acquisition of First Federal
Holding Company of Morris, Inc. Significant increases in the Bank's noninterest
expenses are not anticipated in the near term as the bank's loan and deposit
generating capabilities have not yet reached its capacity.
Noninterest expenses for the period included $40,130 of equity loss associated
with the Company's joint venture in Homeland Mortgage, LLC and $36,918 of
expenses related to the pending merger with First Federal Holding Company of
Morris, Inc.
The Company's largest noninterest expense during the period was employee
compensation and benefits of $101,205. This expense category is expected to
remain relatively flat for the duration of fiscal year ending June 30, 2000.
Income Taxes
The effective tax rate for the Company and the Bank was 0% for the six months
ended December 31, 1999 because the expected future tax benefit of the net
operating loss amounting to approximately $145,000 is reduced by a deferred tax
asset valuation allowance in accordance with generally accepted accounting
principles.
Liquidity and Investment Portfolio
Liquidity is a bank's ability to meet possible deposit withdrawals, to meet loan
commitments and increased loan demand, and to take advantage of other investment
opportunities as they arise. The Bank's liquidity practices are defined in both
the Asset and Liability Policy and the Investment Policy. These policies define
acceptable liquidity measures in terms of ratios to total assets, deposits,
liabilities and capital.
<PAGE>
Cash and due from banks and federal funds sold totaled $2,408,869 as of December
31, 1999. Liquid assets were higher than anticipated at December 31, 1999 due to
delays in funding loans in process at the end of the period.
At present the Company's primary sources of liquidity are from interest on
deposits and loans. In addition, the Bank has been and continues to offer
special time deposits at slightly higher than market rates in order to attract
new deposits to fund its growth in loans and investments. The Bank has several
ways of providing liquidity in addition to special deposit campaigns, which
offer rates slightly higher than local market rates yet less than national
market rates. At December 31, 1999, the Bank had unused federal funds lines of
credit totaling $250,000. The Bank also has access to borrowings from the
Federal Home Loan Bank based upon the value of collateral (investments and
loans). Management believes these sources of secondary liquidity are adequate to
meet any cash demands that may arise.
The Company filed a Registration Statement on Form SB-2 with the Securities and
Exchange Commission to register the sale of up to 1,000,000 shares of its common
stock. The shares will be offered and sold to the public on a best efforts basis
at a price to be negotiated between the Company and its agent.
Deposits
Total deposits were $13.14 million at the period ending December 31, 1999, which
was an increase of $6.97 million for the six months.
Deposit balances held in the Bank's tiered savings accounts equaled $4.67
million at December 31, 1999. This is a regular savings account the terms of
which provide for payment of a floating rate of interest that may equal the
13-week treasury bill less a margin of 75 basis points. The rate offered on this
account has been very attractive and the Bank's customers have held their funds
in this deposit product rather than locking into a specific maturity. New
customers continue to find this deposit account attractive due to the immediate
availability of their funds versus a time certificate bearing a future maturity.
Certificates of deposit increased to $5.97 million as of December 31, 1999. The
Bank has increased certificates of deposit by offering attractive rates on
certificates for specific terms. The Bank has been successful in retaining the
majority of funds received through certificate campaigns.
As of December 31, 1999, demand deposits equaled $2.5 million. These Bank
transaction accounts have significant changes in daily balances, mainly due to
deposits held by commercial companies. Commercial company deposit accounts have
greater balance fluctuations than other types of deposits because of their
comparatively higher levels of activity.
<PAGE>
The low interest rate environment over the past few years and the increased
competition from the financial services industry has made it more difficult to
attract new deposits at favorable rates. The Bank continually monitors
competitors' rates, strives to be competitive in pricing deposits, and has
offered attractive time deposit rates to raise funds during periods of high loan
growth.
Loans
Loans receivable, net of allowance for loan and lease losses, equaled $8.95
million at December 31, 1999. The Bank continues to emphasize commercial and
real estate lending. At December 31, 1999, 52% of the loans held for investment
were commercial loans, commercial real estate and leases, and 18% were
residential real estate and construction loans. The Bank maintains high credit
qualifications and as a result did not have any loans past due 30 or more days
at fiscal quarter ending December 31, 1999.
The Bank offers residential mortgages on a limited basis, retaining adjustable
rate loans while selling long term, fixed rate loans into the secondary
residential mortgage markets.
The Bank consumer loan portfolio equaled 30% of the total loan portfolio at
December 31, 1999.
Allowance for Loan Losses
The allowance for loan losses equaled $123,750 at fiscal quarter ending December
31, 1999. This amount is equal to 1.36% of all loans receivable as of the period
end. The allowance for loan losses is reviewed on a monthly basis, based upon an
allocation for each loan category, plus an allocation for any outstanding loans
which have been classified by regulators or internally for the "Watch List".
Each loan that has been classified is individually analyzed for the risk
involved with a specific reserve allocation assigned according to the risk
assessment. Since the bank's inception, there have been no loan charge off or
recoveries.
Capital Resources
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 December 31, 1999,
the Bank was considered "well capitalized." The total risk-based capital ratios
were 23.85% for the Bank.
Joint Venture
On July 15, 1999 Northern Star Financial, Inc. entered into a joint venture with
First Federal Savings Bank of Morris, Minnesota to engage in the making and
servicing of residential real estate loans. The joint venture company
headquartered in Morris, Minnesota operates under the name Homeland Mortgage
LLC. Homeland Mortgage LLC originates mortgage loans directly with walk-in
<PAGE>
traffic in its office as well as through an out reach system of commissioned
loan officers originating loans in the field and through the purchase of
mortgages from community banks located within Minnesota. The mortgage company
had expanded and opened a mortgage loan origination office in Edina, Minnesota.
Immediately following development of the expansion plan, the Federal Reserve
Board initiated actions to raise interest rates. As a result of the action of
the Federal Reserve Board, residential mortgage loan interest rates have risen
sharply resulting in a significant reduction in the amount of loan refinancing
and purchasing activity. Further increases in residential mortgage financing
rates are anticipated. As a result, the Company has closed its Edina, Minnesota
office. Homeland Mortgage LLC continues to operate from its principal office in
Morris, Minnesota. The investment in the joint venture is accounted for on the
equity method resulting in a loss of $40,130 and $86,624 for the three and
six-month period ended December 31, 1999 respectively.
Pending Acquisition Agreement
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 and approval by the
shareholders of both companies. The transaction is expected to be completed by
Northern Star's fiscal year end of June 30, 2000.
Year 2000
Like many financial institutions, we rely on computers to conduct our 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. We have operated and evaluated our computer operating
systems following January 1, 2000 and have not identified any errors or
experienced any computer malfunctions. We will continue to monitor our
information systems to assess whether our systems are at risk of misinterpreting
any future dates and will develop appropriate contingency plans to prevent any
potential systems malfunction or correct any system failures. We have surveyed
our key customers to determine their exposure to the year 2000 issue and, based
upon our key customer's reports, we believe we will not have any material
exposure to our 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.
None
Item 3. Default Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the Shareholders of the Company was held on
October 11, 1999.
At the Annual Meeting a proposal to set the number of directors at
seven was adopted by a vote of 223,563 shares in favor, with 0 shares against, 0
shares abstaining and 0 shares represented by broker nonvotes.
Proxies for the Annual Meeting were solicited pursuant to Regulation
14A under the Securities Exchange Act of 1934, there was no solicitation in
opposition to management's nominees, and the following persons were elected
Class I directors to serve for a three-year term:
Nominee Number of Votes For Number of Votes Withheld
Michael P. Reynolds 223,563 0
Steven A. Loehr 223,563 0
The terms of office of the following directors continued after the
Annual Meeting: Robert H. Dittrich, Dean M. Doyscher, Frank L. Gazzola, Thomas
J. Reynolds and Thomas P. Stienessen.
At the Annual Meeting the shareholders approved a 75,000 share increase
in the number of shares reserved for the Company's 1998 Equity Incentive Plan by
a vote of 220,563 shares in favor, with 3,000 shares opposed, 0 shares
abstaining and 0 shares represented by broker nonvotes.
<PAGE>
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index on page following Signatures.
(b) During the quarter ended December 31, 1999, the Registrant filed
reports on Form 8-K, (i) dated October 7, 1999, reporting under Item 5 the
announcement on September 30, 1999 of a definitive agreement to acquire First
Federal Holding Company of Morris, Inc. and (ii) dated November 15, 1999
reporting under Item 5 its intention to file a Registration Statement with the
Securities and Exchange Commission.
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: February 14, 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 December 31, 1999
Exhibit Number Description
27 Financial Data Schedule (filed in electronic format only)
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<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
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