<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
-------------------------------
NORTHERN STATES FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 0-19300 36-3449727
(State of incorporation) (Commission (I.R.S. Employer
File Number) Identification No.)
1601 North Lewis Avenue
Waukegan, Illinois 60085
(847) 244-6000
(Address, including zip code, and telephone number, including
area code, of principal executive office)
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for 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: XXX NO:
--------- ---------
888,973 shares of common stock were outstanding
as of June 30, 1996.
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
JUNE 30, 1996
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at June 30,
1996, December 31, 1995, and June 30, 1995................2
Condensed consolidated statements of income for
the three months and six months ended
June 30, 1996 and 1995....................................3
Condensed consolidated statements of cash flows
for the six months ended June 30, 1996 and 1995...........4
Notes to condensed consolidated financial
statements...........................................5 - 14
Item 2. Management's discussion and analysis of
financial condition and results of
operations..................................15 - 25
PART II. OTHER INFORMATION
Signatures..............................................26
1
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
- -------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
- -------------------------------------
June 30, 1996, December 31, 1995,
and June 30, 1995
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
Assets 1996 1995 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash and due from banks........................................ $17,419 $18,119 $16,154
Interest-bearing deposits in financial institutions............ 93 355 433
Federal funds sold............................................. 11,300 15,500 18,500
---------- ---------- ----------
Total cash and cash equivalents............................. 28,812 33,974 35,087
---------- ---------- ----------
Interest-bearing deposits in financial institutions -
maturities over 90 days.................................... 100 100 1,100
Securities available-for-sale.................................. 143,816 155,170 56,607
Securities held-to-maturity (Fair value of
$75,367 on June 30, 1995)................................... 0 0 75,020
Loans.......................................................... 230,034 225,379 225,111
Less: Allowance for loan losses................................ 4,497 4,514 4,470
---------- ---------- ----------
Loans, net.................................................. 225,537 220,865 220,641
---------- ---------- ----------
Direct lease financing......................................... 605 622 592
Office buildings and equipment, net............................ 6,398 6,587 6,819
Other real estate owned, net of allowance for losses
of $521, $510 and $538, respectively........................ 3,322 2,311 3,165
Accrued interest receivable.................................... 4,723 4,366 4,060
Other assets................................................... 4,042 3,896 2,890
---------- ---------- ----------
Total assets................................................ $417,355 $427,891 $405,981
---------- ---------- ----------
---------- ---------- ----------
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest-bearing................................ $39,150 $43,774 $37,190
NOW accounts................................................ 36,866 39,818 38,905
Money market accounts....................................... 46,769 43,639 43,694
Savings..................................................... 47,608 47,259 48,585
Time, $100,000 and over..................................... 66,983 62,309 66,958
Time, under $100,000........................................ 89,334 90,756 87,807
---------- ---------- ----------
Total deposits........................................... 326,710 327,555 323,139
Securities sold under repurchase agreements
and other short-term borrowings............................. 34,176 43,278 28,878
Advances from borrowers for taxes and insurance................ 1,018 1,281 1,364
Accrued interest payable and other liabilities................. 4,505 4,772 4,076
---------- ---------- ----------
Total liabilities........................................ 366,409 376,866 357,457
Stockholder's Equity
Common stock - $2 par value: 1,750,000 shares authorized;
888,973, 887,431, and 887,431 shares
issued and outstanding, respectively........................ 1,778 1,775 1,775
Capital surplus................................................ 11,184 11,123 11,105
Retained earnings.............................................. 39,385 37,617 35,762
Unrealized net gain/(loss) on securities available-for-sale,
net of tax.................................................. (1,401) 490 (118)
---------- ---------- ----------
Total stockholders' equity.................................. 50,946 51,005 48,524
---------- ---------- ----------
Total liabilities and stockholders' equity.................. $417,355 $427,891 $405,981
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------
Three months and six months
ended June 30, 1996 and 1995
In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Interest income ---------- ---------- ---------- ----------
Loans (including fee income).................. $5,629 $5,478 $10,816 $10,807
Securities
Taxable..................................... 1,926 1,720 3,926 3,558
Exempt from federal income tax.............. 276 289 541 588
Interest-bearing deposits in financial
institutions................................ 7 27 14 100
Federal funds sold............................ 99 134 270 141
---------- ---------- ---------- ----------
Total interest income....................... 7,937 7,648 15,567 15,194
---------- ---------- ---------- ----------
Interest expense
Time deposits................................. 2,141 2,009 4,391 3,805
Other deposits................................ 1,081 1,041 2,188 2,043
Other borrowings.............................. 415 488 881 947
---------- ---------- ---------- ----------
Total interest expense...................... 3,637 3,538 7,460 6,795
---------- ---------- ---------- ----------
Net interest income........................... 4,300 4,110 8,107 8,399
Provision for loan losses..................... 360 360 720 720
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses................................. 3,940 3,750 7,387 7,679
--------- ---------- ---------- ----------
Noninterest income
Service fees on deposits...................... 314 352 648 723
Trust income.................................. 132 121 245 237
Net gains on sales of securities.............. 0 0 5 0
Net gains on sales of loans................... 17 39 72 61
Other operating income........................ 160 122 283 326
---------- ---------- ---------- ----------
Total noninterest income.................... 623 634 1,253 1,347
---------- ---------- ---------- ----------
Noninterest expenses
Salaries and employee benefits................ 1,451 1,451 2,860 3,055
Occupancy and equipment expenses, net......... 367 347 670 704
Data processing expense....................... 140 149 272 291
FDIC deposit insurance expense................ 54 186 108 372
Other real estate owned expenses.............. 64 46 112 94
Other operating expenses...................... 555 534 1,028 1,237
---------- ---------- ---------- ----------
Total noninterest expenses.................. 2,631 2,713 5,050 5,753
---------- ---------- ---------- ----------
Income before income taxes...................... 1,932 1,671 3,590 3,273
Provision for income taxes...................... 543 474 977 944
---------- ---------- ---------- ----------
Net income...................................... $1,389 $1,197 $2,613 $2,329
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings per common share....................... $1.56 $1.35 $2.94 $2.63
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares outstanding...... 888,806 887,331 888,553 886,731
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
- -----------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------
Six months ended June 30, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
Six months ended
1996 1995
<S> <C> <C>
Cash flows from operating activities ---------- ----------
Net income $2,613 $2,329
Adjustments to reconcile net income to cash from
operating activities
Depreciation 291 339
Provision for loan losses 720 720
Provision for losses on other real estate owned 11 12
Deferred loan fees (89) (70)
Gain on sales of securities available-for-sale (5) 0
Proceeds from sales of loans 6,075 2,617
Loans originated for sale (5,646) (2,264)
Gain on sales of loans (72) (61)
Change in interest receivable (357) (273)
Change in interest payable 34 46
Change in other assets 796 447
Change in other liabilities (52) (352)
---------- ----------
Net cash provided by operating activities 4,319 3,490
---------- ----------
Cash flows from investing activities
Net change in interest-bearing deposits in
financial institutions - maturities over 90 days 0 3,100
Proceeds from sales of securities available-for-sale 2,675 0
Proceeds from maturities of securities available-for-sale 58,238 25,888
Proceeds from maturities of securities held-to-maturity 0 10,486
Purchases of securities available-for-sale (52,636) (8,508)
Purchases of securities held-to-maturity 0 (7,018)
Increase in loans made to customers (6,844) (9,608)
Property and equipment expenditures (102) (47)
Net change in direct lease financing 17 (219)
Proceeds from sales of other real estate owned 162 399
---------- ----------
Net cash provided by investing activities 1,510 14,473
---------- ----------
Cash flows from financing activities
Net increase (decrease) in:
Deposits (845) (6,224)
Securities sold under repurchase agreements
and other short-term borrowings (9,102) (1,776)
Advances from borrowers for
taxes and insurance (263) (172)
Net proceeds from exercising stock options 64 54
Dividends paid (845) (710)
---------- ----------
Net cash used in financing activities (10,991) (8,828)
---------- ----------
Net increase (decrease) in cash and cash equivalents (5,162) 9,135
Cash and cash equivalents at beginning of period 33,974 25,952
---------- ----------
Cash and cash equivalents at end of period $28,812 $35,087
---------- ----------
---------- ----------
Supplemental disclosures
Cash paid during the period for
Interest $7,426 $6,749
Income taxes 1,075 700
Noncash investing activities
Transfers made from loans to other real estate owned 1,184 848
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements are
prepared without audit and reflect all adjustments which are of a normal and
recurring nature and, in the opinion of management, are necessary to present
interim financial statements of Northern States Financial Corporation (the
"Company") in accordance with generally accepted accounting principles. The
interim financial statements do not purport to contain all the necessary
financial disclosures covered by generally accepted accounting principles that
might otherwise be necessary for complete financial statements.
The condensed consolidated statements of income are for the three and six
months ended June 30, 1996 and 1995. The condensed consolidated statements of
cash flows are for the six months ended June 30, 1996 and 1995. The condensed
consolidated balance sheets are as of June 30, 1996, December 31, 1995 and June
30, 1995.
The interim condensed consolidated financial statements should be read in
conjunction with the audited financial statements and accompanying notes (or
"notes thereto") of the Company for the years ended December 31, 1995, 1994, and
1993.
The results of operations for the six-month period ended June 30, 1996, are
not necessarily indicative of the results to be expected for the full year.
Earnings per Share - Earnings per share are based upon the weighted average
shares outstanding during the period. The effect of stock options was not
material to earnings per share for any period presented.
5
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
Note 2 - SECURITIES
Securities classified as available-for-sale are those securities which are
likely to be sold if the Company needs to raise cash for liquidity purposes, to
adjust the portfolio for interest rate risk purposes, or to adjust for income
tax purposes. Generally, until late in 1995, securities that were subject to
repricing or had an original maturity date of two years or less were classified
as available-for-sale.
During 1995, the Company, as permitted by the Statement of Financial
Accounting Standards (SFAS) No. 115 implementation guide, exercised a one time
opportunity to reassess the appropriateness of the classification of all
securities held. Based on this review, the Company reclassified securities
having an amortized cost of $96,547 and a net unrealized gain of $772 from
held-to-maturity to available-for-sale. This reclassification transferred all
held-to- maturity securities to the available-for-sale classification. With
this reclassification the Company intends to classify all securities as
available-for-sale.
The fair value adjustment to stockholders' equity, net of tax, as required
by SFAS No. 115 for securities available-for-sale was a reduction of $1,401 as
of June 30, 1996. The Company has excess capital to absorb the impact of this
pronouncement on stockholders' equity.
6
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
The amortized cost, gross unrealized gains and losses, and fair values of
securities available-for-sale and held-to-maturity as of June 30, 1996, December
31, 1995, and June 30, 1995 are as follows:
-------------- JUNE 30, 1996 ---------------
Securities Amortized GROSS UNREALIZED Fair
available-for-sale Cost Gains Losses Value
- ------------------- ----------- -------- --------- ------------
U.S. Treasury $ 24,410 $ 26 $ (41) $ 24,395
U.S. Government
agencies and
corporations 75,840 2 (2,212) 73,630
States and political
subdivisions 26,583 389 (167) 26,805
Mortgage-backed
securities and
collateralized
mortgage obligations 18,103 77 (337) 17,843
Equity securities
and mutual fund
investment in
debt securities 1,157 102 (116) 1,143
-------- ------- -------- --------
Total $146,093 $ 596 $(2,873) $143,816
-------- ------- -------- --------
-------- ------- -------- --------
------------- DECEMBER 31, 1995 -------------
Securities Amortized GROSS UNREALIZED Fair
available-for-sale Cost Gains Losses Value
- ------------------- ----------- -------- --------- ------------
U.S. Treasury $ 37,176 $ 93 $ (21) $ 37,248
U.S. Government
agencies and
corporations 71,718 162 (299) 71,581
States and political
subdivisions 21,337 763 (35) 22,065
Mortgage-backed
securities and
collateralized
mortgage obligations 20,320 211 (59) 20,472
Equity securities
and mutual fund
investment in
debt securities 3,814 89 (99) 3,804
-------- ------- -------- --------
Total $154,365 $ 1,318 $ (513) $155,170
-------- ------- -------- --------
-------- ------- -------- --------
7
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
-------------- JUNE 30, 1995 ---------------
Securities Amortized GROSS UNREALIZED Fair
available-for-sale Cost Gains Losses Value
- ------------------- ----------- -------- --------- ------------
U.S. Treasury $ 22,166 $ 72 $ (32) $ 22,206
U.S. Government
agencies and
corporations 20,073 31 (137) 19,967
Mortgage-backed
securities and
collateralized
mortgage obligations 10,784 29 (42) 10,771
Equity securities
and mutual fund
investment in
debt securities 3,732 33 (102) 3,663
-------- ------- -------- --------
Total $ 56,755 $ 165 $ (313) $ 56,607
-------- ------- -------- --------
-------- ------- -------- --------
Securities
held-to-maturity
- -----------------
U.S. Treasury $ 13,123 $ 39 $ (70) $ 13,092
U.S. Government
agencies and
corporations 27,156 115 (233) 27,038
States and political
subdivisions 23,490 701 (105) 24,086
Mortgage-backed
securities and
collateralized
mortgage obligations 11,251 45 (145) 11,151
-------- ------- -------- --------
Total $ 75,020 $ 900 $ (553) $ 75,367
-------- ------- -------- --------
-------- ------- -------- --------
8
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
The amortized cost and fair value of securities at June 30 1996, by
contractual maturity, are shown on the following table. Expected maturities
will differ from contractual maturities because some issuers may have the right
to call or prepay obligations with or without call or prepayment penalties.
Amortized Fair
Securities available-for-sale Cost Value
- ------------------------------------- ----------- -----------
Due in one year or less $ 34,449 $ 34,422
Due after one year through five years 74,870 73,279
Due after five years through ten years 17,514 17,129
----------- -----------
126,833 124,830
Mortgage-backed securities
and collateralized
mortgage obligations 18,103 17,843
Equity securities
and mutual fund
investment in
debt securities 1,157 1,143
----------- -----------
Total $146,093 $143,816
----------- -----------
----------- -----------
Mortgage-backed securities are comprised of investments in pools of
residential mortgages. The mortgage pools are issued and guaranteed by the
Federal Home Loan Mortgage Corporation, and the Federal National Mortgage
Association.
As of June 30, 1996, the Company held structured notes with an amortized
cost of $4,101 and fair value of $4,043. These securities are issued by the
Federal Home Loan Bank, the Federal Home Loan Mortgage Association and the
Student Loan Marketing Association. The structured notes are comprised
primarily of securities that have coupon interest rates which "step up"
periodically during the term to maturity.
There were no sales of securities during the three months ended June 30,
1996. There were two sales during the six months ended June 30, 1996 of
securities available-for-sale which resulted in proceeds of $2,675 and a gain of
$5.
There were no sales of securities during the three months and six months
ended June 30, 1995.
9
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
Note 3 - LOANS
The Company makes loans to, and obtains deposits from, customers primarily
in Lake County, Illinois and surrounding areas. Most loans are secured by
specific items of collateral, including commercial and residential real estate
and other business and consumer assets.
Loans consisted of the following at June 30, 1996, December 31, 1995, and
June 30, 1995:
June 30, December 31, June 30,
1996 1995 1995
------------ ------------ ------------
Commercial $ 51,943 $ 53,886 $ 56,420
Real estate - construction 27,710 23,720 24,366
Real estate - mortgage 141,200 137,941 133,006
Installment 10,116 10,903 12,571
------------ ------------ ------------
Total loans 230,969 226,450 226,363
Unearned income (324) (370) (489)
Deferred loan fees (611) (701) (763)
------------ ------------ ------------
Loans, net of unearned
income and deferred
loan fees 230,034 225,379 225,111
Allowance for loan losses (4,497) (4,514) (4,470)
------------ ------------ ------------
Loans, net $225,537 $220,865 $220,641
------------ ------------ ------------
------------ ------------ ------------
Loans held for sale on June 30, 1996, December 31, 1995 and June 30, 1995
were approximately $2,104, $3,641, and $2,195 respectively, and are classified
as real estate mortgage loans.
Non-performing loans, which include loans contractually past due ninety
days or more, loans accounted for on a nonaccrual basis, and loans whose terms
have been renegotiated to provide a reduction or deferral of interest or
principal because of deterioration in the financial position of the borrower,
amounted to $3,455 at June 30, 1996, $7,345 at December 31, 1995, and $6,579 at
June 30, 1995.
10
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
At June 30, 1996, the balance of impaired loans and the portion of the
allowance for loan losses allocated to impaired loans amounted to $2,560 and
$368, respectively. There were no impaired loans without an allowance
allocation. Impaired loans averaged $3,770 for the six months ended June 30,
1996. Interest income recognized on impaired loans for the three months ended
and six months ended June 30, 1996 approximated $80 and $93, respectively which
was all cash based income.
The Company is a party to financial instruments with off- balance sheet
risk in the normal course of business to meet financing needs of its customers.
These financial instruments include commitments to make loans, standby letters
of credit, and unused lines of credit. The Company's exposure to credit loss
in the event of non-performance by the other parties to these financial
instruments is represented by the contractual amount of the instruments. The
Company uses the same credit policy to make such commitments as it uses for
on-balance-sheet items.
At June 30, 1996, December 31, 1995, and June 30, 1995, the contract amount
of the Company's off-balance sheet commitments was as follows:
June 30, December 31, June 30,
1996 1995 1995
----------- ------------- ------------
Unused lines of credit
and commitments to
make loans:
Fixed rate $15,793 $12,995 $ 9,725
Variable rate 48,683 49,984 61,330
------------ ------------ ------------
Total $64,476 $62,979 $71,055
------------ ------------ ------------
------------ ------------ ------------
Standby letters of credit $ 4,333 $ 5,579 $ 5,155
Since many commitments to make loans expire without being used, the amounts
above do not necessarily represent future cash commitments. Collateral obtained
upon exercise of the commitments is determined using management's credit
evaluation of the borrower, and may include commercial and residential real
estate and other business and consumer assets.
11
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
Note 4 - ALLOWANCES FOR LOAN LOSSES AND
OTHER REAL ESTATE OWNED LOSSES
Activity in the allowance for loan losses for the six months ended June 30,
1996, year ended December 31, 1995, and six months ended June 30, 1995, is as
follows:
June 30, December 31, June 30,
1996 1995 1995
--------- ------------ ---------
Balance at beginning of year $4,514 $3,965 $3,965
Provision charged to
operating expense 720 1,480 720
Loans charged off (774) (1,009) (255)
Recoveries on loans
previously charged off 37 78 40
--------- ------------ ---------
Balance at end of period $4,497 $4,514 $4,470
--------- ------------ ---------
--------- ------------ ---------
Activity in the allowance for other real estate owned losses for the six
months ended June 30, 1996, year ended December 31, 1995, and six months ended
June 30, 1995, is as follows:
June 30, December 31, June 30,
1996 1995 1995
--------- ------------ ---------
Balance at beginning of year $ 510 $ 526 $ 526
Provision charged to
operating expense 11 23 12
Losses on other real
estate owned -0- (39) -0-
--------- ------------ ---------
Balance at end of period $ 521 $ 510 $ 538
--------- ------------ ---------
--------- ------------ ---------
12
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
Note 5 - PROVISION FOR INCOME TAXES
The provision for income taxes represents federal and state income tax
expense calculated using annualized rates on taxable income generated during the
respective periods.
Note 6 - STOCKHOLDERS' EQUITY
For the six months ended June 30, 1996 total stockholders' equity decreased
$59. The decrease is a result of net income of $2,613, less the change in the
valuation allowance from December 31, 1995 for the fair value of securities
available-for-sale, net of tax, of $1,891, plus $64 due to 1,542 stock options
being exercised pursuant to the Omnibus Incentive Plan, less the dividend
payment of $845.
For the six months ended June 30, 1995, total stockholders' equity
increased $2,824 due to net income of $2,329, plus the change in the valuation
allowance from December 31, 1994 for the fair value of securities
available-for-sale, net of tax, of $1,151 plus $54 due to 1,300 stock options
being exercised pursuant to the Omnibus Incentive Plan, less the dividend
payment of $710.
13
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
Note 7 - OMNIBUS INCENTIVE PLAN
In April, 1992, the stockholders approved the 1992 Omnibus Incentive Plan
(the "Plan") which authorizes the issuance of up to 75,000 shares of the
Company's common stock. The Plan allows for the granting of nonqualified stock
options, restricted stock and stock appreciation rights. As of June 30, 1996
the company had issued 8,500 nonqualified stock options, of which 3,022 have
been exercised. During the six months ended March 31, 1996, 1,342 stock options
were exercised at $41.60 per share and 200 stock options were excercised at
$42.00 per share. The remaining 5,478 stock options are outstanding and
exercisable as of June 30, 1996 at either $41.60 or $42.00 per share.
On May 1, 1992, the Company issued 9,344 stock appreciation rights at a
price of $41.60. Stock appreciation rights outstanding as of June 30, 1996 and
June 30, 1995, were 3,904 and 7,468, respectively. As the market value in the
Company's stock increases, a like amount is expensed as compensation. For the
six months ending June 30, 1996, 2,908 stock appreciation rights were exercised
and paid out while the expense was $23. For the six months ending June 30,
1995, 500 stock appreciation rights were exercised and paid out and the
compensation expense was $15.
14
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion focuses on the consolidated financial condition of
the Northern States Financial Corporation at June 30, 1996 and the consolidated
results of operations for the three and six month periods ending June 30, 1996,
compared to the same periods in 1995. The purpose of this discussion is to
provide a better understanding of the condensed consolidated financial
statements and the operations of its subsidiaries, the Bank of Waukegan ("The
Bank") and First Federal Bank, fsb ("First Federal" or "The Thrift"). This
discussion should be read in conjunction with the interim condensed consolidated
financial statements and notes thereto included herein.
FINANCIAL CONDITION
The consolidated total assets were $417.4 million at the end of the current
period, decreasing $10.5 million or 2.46% from the the Company's fiscal year-
end, December 31, 1995.
Securities in total decreased $11.4 million or 7.32% from year-end. This
decrease in part resulted from the decline in market valuations of $3.1 million
as the bond market experienced volitility and increased rates. At the Thrift,
two securities totalling $2.7 million were sold for liquidity purposes. The
statement of cash flows shows that $5.6 million more in securities matured than
were purchased. Federal funds sold decreased $4.2 million from December 31,
1995. The Company experiences seasonality in its levels of nonretail deposits
and other borrowings which normally decrease midyear. The Company offsets these
seaonal changes to its deposit and other borrowings by making adjustments to its
securities and Federal funds sold. For example, during 1995, consolidated assets
decreased $5.7 million at June 30, 1995 from December 31, 1994, with a
corresponding drop in securities and Federal funds sold of $9.9 million.
The loan porfolio for the Company increased $4.7 million or 2.07% from
December 31, 1995. Loan growth of $3.2 million occurred at the Bank where real
estate construction loans went up $4.7 million, and real estate mortgages
increased $1.0 million while commercial loans decreased $1.8 million and
installment loans declined $.7 million. At the Thrift total loans increased
$1.3 million which was mainly in real estate mortgages. Due to favorable home
mortgage rates, loans originated for sale by First Federal for sale on the
secondary market through the Federal Home Loan Mortgage Corporation (FHLMC) and
the Federal National Mortgage Association (FNMA) programs during the first six
months of
15
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1996 were $5.6 million as compared to $2.3 million during the same six month
period in 1995. The Company's levels of nonper forming loans decreased 52.96% to
$3,455,000 from December 31, 1995 primarily as the result of increased
collection efforts, the charging off of loans totalling $774,000 to the
allowance for loan losses and the transfer of $1,184,000 from loans to other
real estate owned.
During the first six months of 1996 deposits at the Company decreased
$845,000. Noninterest-bearing demand accounts decreased $4.6 million while NOW
accounts declined $3.0 million. These declines were mostly offset by increases
of $3.1 million in money market deposits, $3.3 million in total time deposits
and $.3 million in savings accounts.
At the Bank of Waukegan total deposits increased $2.4 million or 1.03%. The
Bank experienced increases in Money Market deposits of $3.1 million, in savings
of $.9 million , and in time deposits of $100,000 and over of $5.3 million. The
Bank had declines of $3.4 million, $2.7 million, and $.8 million in the area of
noninterest-bearing demand deposits, NOW account deposits, and time deposits
under $100,000, respectively. The decline in checking and NOW accounts at the
Bank is in part attributable to businesses customers transferring funds to
higher earning Money Market deposits. Commercial Money Market deposits at the
Bank increased $6.2 million from year-end.
Deposit totals at First Federal declined $3.3 million or 3.45%.
Noninterest-bearing demand balances decreased $1.3 million, NOW accounts
declined $.3 million, regular savings balances were $.5 million lower, and time
deposits of all types decreased $1.2 million. These decreases are attributable
to customers shifting funds to other savings and loan institutions which
traditionally have offered higher interest rates and lower account balance
requirements. First Federal now offers the same rates and terms as the Bank and
as a result, some clients have withdrawn their funds to achieve the higher rates
at competing savings associations.
Securities sold under repurchase agreements and other short- term borrowing
at the Company decreased $9.1 million from December 31, 1995 to $34.2 million at
June 30, 1996. These funds consist of securities sold under repurchase
agreements by the Bank of Waukegan that are offered through an overnight
repurchase agreement product and a term product with maturities from 7 days to
one year. Repurchase agreements provide a source of funds to the Company that
do not increase the reserve requirements with the Federal Reserve Bank or create
an expense relating to FDIC
16
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
insurance and, therefore, are less costly to the Company. The decrease in
repurchase agreement funds was a result of commercial customers
drawing down their balances to make capital expenditures which is indicative of
the upturn in the local economy.
Total stockholders' equity decreased $59,000 during the first six months of
1996. The decrease is a result of net income of $2,613,000 less the
adjustment in the valuation allowance for the market value of securities
available-for-sale, net of tax, of $1,891,000, plus $64,000 due to the
exercising of 1,542 stock options pursuant to the Omnibus Incentive Plan,
less dividends paid of $845,000.
The tangible equity capital-to-asset ratio at June 30, 1996 was 10.06% and
the total capital-to-asset ratio, on a risk adjusted basis, amounted to 17.35%
compared to the respective required levels of 5.00% and 8.00%. Book value per
share was $57.30 at June 30, 1996 compared to $57.47 at December 31, 1995. On
June 30, 1996, the Company and its subsidiaries were in compliance with all
applicable regulatory capital requirements.
RESULTS OF OPERATIONS
NET INCOME
The consolidated net income was $1,389,000 for the quarter ended June 30,
1996, an increase of $192,000 or 16.04%, as compared to net income of $1,197,000
for the same period the previous year. The annualized return on average assets
was 1.32% for the quarter as compared to 1.20% for the previous year. The net
consolidated income for the six months ended June 30, 1996 was $2,613,000, an
increase of $284,000 or 12.19% over the first half of 1995. The annualized
return on average assets for the first half of 1996 was 1.24% as compared to
1.17% for same period the previous year.
NET INTEREST INCOME
Net interest income, the difference between interest income earned on
average interest-earning assets and interest expense on average interest-bearing
liabilities, increased $190,000 or 4.62% for the three months ended June 30,
1996, compared to the same three months in 1995. This increase in net interest
margin can in part be explained by the receipt during the second quarter of 1996
by the Bank of payment in full on an impaired loan on nonaccrual status with a
corresponding recognization of $80,000 in
17
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
interest and fees. The balance of the increase in net interest income is a
result of increased volumes of average earning assets during the second quarter
of 1996 as compared to the same quarter of 1995. This is evidenced in Table 1,
"Analysis of Average Balance and Tax Equivalent Rates for the Three Months Ended
June 30, 1996 and 1995", which shows that, although the net yield on interest
earning assets was almost identical, there was an increase of interest earning
assets to $391.9 million or $18.2 million greater than last year.
Net interest income for the first six months of 1996 decreased $292,000 or
3.48% compared to the first half of 1995. Table 2, "Analysis of Average Balance
and Tax Equivalent Rates for the Six Months Ended June 30, 1996 and 1995",
indicates that the Company's net yield on interest earning assets dropped to
4.34% for the first six months of 1996 as compared to 4.68% for the same period
last year. Generally, loan interest rates for the first six months of 1996 are
at lower levels than during the same period of 1995 as indicated by the prime
rate which was 8.25% on June 30, 1996 as compared to 9.00% on June 30, 1995.
Table 2 shows that the yield on loans during the first half of 1996 was 9.40% as
compared to 9.77% during the first half of 1995, a decrease 37 basis points.
Yields on total interest earning assets declined only 18 basis points during the
first six months of 1996 as compared to the first six months of 1995 as
management was able to increase the yields earned on taxable securities. Usually
when loan rates decrease, rates on interest bearing liabilities decrease as
well. As Table 2 indicates, yields on interest bearing liabilities did the
opposite and increased 22 basis points compared to last year. This is a result
of local competitive pressures that have kept deposit rates at higher levels.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $360,000 during the quarter ended June
30, 1996 which is no change from the same period the previous year. For the
first six months of 1996 the provision for loan losses was $720,000 which was
the same as the provision for the same period of 1995.
On January 1, 1995, the Company adopted FASB standards No. 114 and 118.
Under these standards, loans considered to be impaired are reduced to the
present value of expected future cash
18
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
FOR THE THREE MONTHS ENDED JUNE 30, 1996 AND 1995
($ 000s)
<TABLE>
<CAPTION>
1996 1995
--------------------------------------- ---------------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3) $237,791 $5,712 9.61% $225,075 $5,532 9.83%
Taxable securities 125,256 1,926 6.09% 117,383 1,720 5.83%
Securities exempt from
federal income taxes (2) 20,529 418 8.34% 21,268 437 8.22%
Interest bearing deposits
in banks 543 7 5.16% 1,429 27 7.56%
Federal funds sold 7,814 99 5.07% 8,624 134 6.22%
--------- --------- --------- ---------
Interest earning assets 391,933 8,162 8.31% 373,779 7,850 8.38%
Noninterest earning assets 25,829 --------- 24,098 ---------
--------- ---------
Average assets $417,762 $397,877
--------- ---------
--------- ---------
Liabilities and stockholders'
equity
NOW deposits $42,108 $322 3.06% $38,268 $269 2.81%
Money market deposits 41,317 409 3.96% 36,958 429 4.64%
Savings deposits 47,496 350 2.95% 49,383 343 2.78%
Time deposits 154,135 2,141 5.56% 146,105 2,009 5.50%
Other borrowings 34,156 415 4.86% 34,897 488 5.59%
--------- --------- --------- ---------
Interest bearing
liabilities 319,212 3,637 4.56% 305,611 3,538 4.63%
Demand deposits 40,187 --------- 37,903 ---------
Other noninterest bear-
ing liabilities 7,184 6,821
Stockholders' equity 51,179 47,542
--------- ---------
Average liabilities and
stockholders' equity $417,762 $397,877
--------- ---------
--------- ---------
Net interest income $4,525 $4,312
---------- ---------
---------- ---------
Net yield on interest
earning assets 4.62% 4.61%
--------- ---------
--------- ---------
Interest-bearing lia-
bilities to earning
assets ratio 81.45% 81.76%
--------- ---------
--------- ---------
</TABLE>
(1) - Interest income on loans includes loan origination fees of $ 124
and $ 120 for the three months ended June 30, 1996 and June 30,
1995.
(2) - Tax-exempt income is reflected on a fully tax equivalent basis
utilizing a 34% rate.
(3) - Non-accrual loans are included in average loans.
19
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Six Months Ended June 30, 1996 and 1995
($ 000s)
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- --------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
-------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3) $233,789 $10,993 9.40% $222,678 $10,883 9.77%
Taxable securities 129,490 3,926 6.04% 122,623 3,558 5.80%
Securities exempt from
federal income taxes (2) 20,266 819 8.33% 21,228 891 8.39%
Interest bearing deposits
in banks 495 14 2.83% 2,688 100 7.44%
Federal funds sold 10,345 270 5.22% 4,567 141 6.17%
--------- --------- --------- ---------
Interest earning assets 394,385 16,022 8.13% 373,7841 5,573 8.33%
Noninterest earning assets 25,484 --------- 25,383 ---------
--------- ---------
Average assets $419,869 $399,167
--------- ---------
Liabilities and stockholders'
equity
NOW deposits $41,559 $632 3.04% $39,682 $554 2.79%
Money market deposits 42,011 857 4.08% 36,529 783 4.29%
Savings deposits 47,206 699 2.96% 50,497 706 2.80%
Time deposits 155,593 4,391 5.64% 145,822 3,805 5.22%
Other borrowings 35,538 881 4.96% 35,529 947 5.33%
--------- --------- --------- ---------
Interest bearing
liabilities 321,907 7,460 4.63% 308,059 6,795 4.41%
Demand deposits 39,573 --------- 37,701 ---------
Other noninterest bear-
ing liabilities 6,983 6,428
Stockholders' equity 51,406 46,979
--------- ---------
Average liabilities and
stockholders' equity $419,869 $399,167
--------- ---------
--------- ---------
Net interest income $8,562 $8,778
--------- ---------
--------- ---------
Net yield on interest
earning assets 4.34% 4.70%
--------- ---------
--------- ---------
Interest-bearing lia-
bilities to earning
assets ratio 81.62% 82.42%
--------- ---------
--------- ---------
</TABLE>
(1) - Interest income on loans includes loan origination fees of $ 217
and $ 275 for the six months ended June 30, 1996 and June 30,
1995.
(2) - Tax-exempt income is reflected on a fully tax equivalent basis
utilizing a 34% rate.
(3) - Non-accrual loans are included in average loans.
20
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
flows or to the fair value of the collateral, by allocating a portion of the
allowance for loan losses to such loans. If these allocations create the need
to increase the allowance for loan losses, such increase is reported as bad debt
expense. The effect of adopting this standard has not been material and the
Company's allowance for loan losses is considered adequate after considering the
effect of these statements.
The allowance for loan losses on June 30, 1996, was $4,497,000 or 1.95% of
total loans. The Bank of Waukegan's allowance for loan losses as of June 30,
1996 was 2.13% of loans. During the first six months of 1996 the Bank charged
off loans totalling $774,000 to the allowance for loan losses. Although the
Bank's allowance for loan losses as a percentage of total loans is higher than
the Bank's peer group, management has determined that this level is appropriate
based on loan growth the Bank has experienced, the Bank's level of nonperforming
loans, the recent amount of loan charge offs at the Bank. At First Federal, the
allowance for loan losses as of June 30, 1996 was $1,064,000 or 1.54% of loans.
The adequacy of the loan loss allowance at both the Bank and Thrift is analyzed
by both management and the Board of Directors' Credit Committee at each
institution at least quarterly. Loans judged to be impaired, loans with
potential loss exposure, loans that are no longer accruing interest, and
historical net loan loss percentages are reviewed in the analysis of the loan
loss allowance adequacy. Based upon management and the Board Committee's
analysis, the allowance for loan losses and the monthly provision at June 30,
1996, is adequate to cover future possible loan losses.
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 1996, was $623,000
as compared to $634,000 for the three months ended June 30, 1995, a decrease of
$11,000. Service fees on deposits for the Company decreased $38,000 as compared
to the same quarter last year. Service fees on deposits declined at the Bank by
$12,000 as the result of decreased overdraft fee income which declined $14,000
as average levels of overdawn balances decreased in 1996 as compared to 1995. At
First Federal service charges on deposits were down $26,000 during the second
quarter as First Federal had a decline of 331 checking accounts or 10.38% from
June 30, 1995 due to competition. Trust income increased $11,000 during the
three months ended June 30, 1996 as compared to the three months ended June 30,
1995. Other income from gain on sales of loans decreased $22,000 during the
second quarter of
21
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
1996 which was due to increased competition and rate changes on the secondary
market where First Federal sells mortgages. Miscellaneous other operating
income, which includes loan servicing fees and other loan fee income, increased
$38,000 during the quarter.
For the first half of 1996 noninterest income was $1,253,000 as compared to
$1,347,000 for the same period in 1995, a decrease of 6.98%. Service fee income
on deposits was $75,000 less during the first six months of 1996 as compared to
the same period last year. At the Bank, service fee income declined $38,000
during the first six months of 1996 primarily as the result of the decreasing
overdraft charge income. At First Federal, service charge income was down
$37,000 for the first half of 1996 due to the Thrift losing checking account
customers to the competition. Trust income for the six months ended June 30,
1996 modestly increased by $8,000. During the first half of 1996 there were
gains on sales of securities of $5,000 resulting from the sale of two securities
available for sale by the Thrift for liquidity purposes that resulted in
proceeds of $2,675,000. Gains on sales of loans were $11,000 greater during the
six months ended June 30, 1996 than during the same period last year as there
was a higher volume of loan sales during 1996. Other operating income, which
includes loan servicing fees and other loan fee income, declined $43,000 during
the first half of 1996. At the Bank of Waukegan, other loan fee income
decreased $40,000 during the first half of 1996 as compared to the same period
in 1995. Loan fee income declined at the Bank during 1996 as competitve
pressures forced the Bank to reduce fees collected in the origination of loans.
NONINTEREST EXPENSES
Noninterest expenses decreased $82,000 or 3.02% to $2,631,000 for the three
months ended June 30, 1996. There was no change in salaries and employee
benefits expenses for the second quarter of 1996 compared to the same period of
1995.
Occupancy expenses for the second quarter of 1996 increased $20,000 over
last year as some necessary repairs and maintenance were made at the Bank.
Data processing expenses delined $9,000 during the three months ended June
30, 1996 as compared to the same period of 1995. The Company changed data
processing service bureaus during the fourth quarter of 1994 and there were
still some conversion expenses during the second quarter of 1995 that were not
repeated in 1996.
22
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FDIC deposit insurance decreased $132,000 during the three months ended
June 30, 1996 as compared to the same period of 1995 as the Bank had no FDIC
insurance expense due to the FDIC Bank Insurance Fund (BIF) being fully funded.
The Bank has been notified by the FDIC that there will be no FDIC expense during
the third quarter of 1996. The FDIC Savings Association Fund (SAIF), which
insures First Federal's deposits, is still not fully funded. There are
proposals at the federal level to assess thrift institutions a one-time
assessment to fully fund SAIF. Such a one-time assessment, if approved, would
significantly raise the Thrift's FDIC insurance expense.
Other real estate owned expenses increased $18,000 during the quarter
compared to last year. The increase in other real estate owned expenses is
attributable to increases in properties held as real estate owned at June 30,
1996 which increased $1,011,000 from December 31, 1995.
Miscellaneous other operating expenses increased $21,000 compared to the
same quarter last year as legal and loan and collection expenses at the Bank
increased $19,000 due to efforts in reducing nonperforming assets.
Noninterest expenses were $5,050,000 for the six months ended June 30,
1996, a decrease of $703,000 or 12.22% from the prior year. Salaries and
employee benefits were $195,000 lower when compared to the same six months last
year. Salaries decreased compared to 1995 as four members of senior management
were no longer with the Company in 1996. One member of senior management took a
position elsewhere while the other three retired. As employees left or retired
their responsibilities were closely examined by management and delegated to
others if possible.
During the six months ended June 30, 1996 occupancy expenses decreased
$34,000 as compared to the first half of 1995. Older equipment became fully
depreciated during the first half of 1996 and depreciation expense decreased
$50,000 from the previous year.
Data processing expense was $19,000 lower during the first half of 1996 as
compared to the same period last year because of one-time expenses early in 1995
related to the data processing conversion.
FDIC deposit insurance decreased $264,000 during the six months ended June
30, 1996 as compared to the same period of 1995 as the Bank had no FDIC
insurance expense due to the FDIC Bank Insurance Fund (BIF) being fully funded.
23
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Other real estate owned expenses increased $18,000 during the six months
ended June 30, 1996 as compared to same period last year as the result of
increases in the other real estate portfolio.
Miscellaneous other operating expenses were $209,000 lower compared to the
same period last year. Much of this decrease is attributable to one-time
expenses during the first half of 1995 related to the conversion to a new data
processing service bureau and the installation of new data processing equipment
that went along with the conversion. For example, printing and supplies
decreased in 1996 by $21,000 as last year new forms had to be ordered for the
new system and equipment and professional fees declined $104,000 as consultants
were used during the conversion to assist and train employees on using the new
system and equipment. Other expenses decreased in 1996 by $18,000 as the Company
had costs associated with the employment of new employees during 1995. Other
expenses for correspondent service charges declined by $16,000 as the Company in
1996 maintained higher balances in its correspondent bank accounts which
resulted in lower service charges.
FEDERAL AND STATE INCOME TAXES
For the six months ended June 30, 1996 and 1995, the Company's provision
for federal and state income taxes as a percentage of pretax earnings were
27.21% and 28.84%, respectively. The decreased tax rate is attributed to the
increase in the interest earned on United States Treasury and Government Agency
securities which are nontaxable for state income tax purposes. Interest income
on these securities for the first half of 1996 was $3,206,000 or $542,000 higher
than during the same period of 1995.
24
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ACCOUNTING CHANGES, RECENT PRONOUNCEMENTS, AND REGULATORY ISSUES
SFAS 122
Effective January 1, 1996 the Company adopted Statement of Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights." For mortgages
loan sales after 1995, a cost basis or value is allocated to the servicing
rights. Mortgage servicing rights are amortized in proportion to and over the
period of estimated net servicing income, and if material, are evaluated for
impairment based on their fair value. The impact over time of this pronouncement
depends on mortgage volume. Through June 30, 1996 the adoption of SFAS 122 did
not have a material impact on the Company.
SFAS 123
Effective January 1, 1996 the Company adopted Statement of Accounting
Standards No. 123, "Accounting for Stock Based Compensation." This statement
encourages companies to use a fair value method to account for stock based
compensation plans. If such a method is not used, companies must disclose the
proforma effect on net income and earnings per share had this method been
adopted. During the six months ended June 30, 1996 no stock options were
issued. The Company will apply this statement to any future stock options
granted.
REGULATORY ISSUES
The Company is not aware of any current recommendations by the regulatory
authorities which, if they were to be implemented, would have or are reasonably
likely to have material effects on the liquidity, capital resources or
operations of the Company.
Under order of one of the Bank's regulators, the FDIC, the Bank has agreed
to revise certain management functions and take corrective action particularly
in the consumer law area of the Bank. Correctible actions relate to staffing
levels, employee education, transaction documentation, consumer disclosure and
monitoring procedures. The effects of these actions are not expected to
materially affect the Bank's operations or the Company's financial condition and
results of operations. As of July 22, 1996 the FDIC had terminated this order.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to signed on
its behalf by the undersigned hereunto duly authorized, on this 1st day of
August, 1996.
NORTHERN STATES FINANCIAL CORPORATION
(REGISTRANT)
Date: AUGUST 1, 1996 By: /S/ FRED ABDULA
------------------------ --------------------------
Fred Abdula
Chairman of the Board of
Directors and President
Date: AUGUST 1, 1996 By: /S/ THOMAS M. NEMETH
------------------------ --------------------------
Thomas M. Nemeth
Assistant Vice President
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 17,419
<INT-BEARING-DEPOSITS> 193
<FED-FUNDS-SOLD> 11,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 143,816
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 230,639
<ALLOWANCE> 4,497
<TOTAL-ASSETS> 417,355
<DEPOSITS> 326,710
<SHORT-TERM> 34,176
<LIABILITIES-OTHER> 5,523
<LONG-TERM> 0
0
0
<COMMON> 1,778
<OTHER-SE> 49,168
<TOTAL-LIABILITIES-AND-EQUITY> 417,355
<INTEREST-LOAN> 10,816
<INTEREST-INVEST> 4,467
<INTEREST-OTHER> 284
<INTEREST-TOTAL> 15,567
<INTEREST-DEPOSIT> 6,579
<INTEREST-EXPENSE> 7,460
<INTEREST-INCOME-NET> 8,107
<LOAN-LOSSES> 720
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 5,050
<INCOME-PRETAX> 3,590
<INCOME-PRE-EXTRAORDINARY> 3,590
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,613
<EPS-PRIMARY> 2.94
<EPS-DILUTED> 2.94
<YIELD-ACTUAL> 4.34
<LOANS-NON> 3,332
<LOANS-PAST> 123
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,514
<CHARGE-OFFS> 774
<RECOVERIES> 37
<ALLOWANCE-CLOSE> 4,497
<ALLOWANCE-DOMESTIC> 2,813
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,684
</TABLE>
