<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 September 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:
-------- --------
889,273 shares of common stock were outstanding
as of September 30, 1996.
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1996
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at September 30,
1996, December 31, 1995, and September 30, 1995 . . . . . . . . . . . . 2
Condensed consolidated statements of income for
the three months and nine months ended
September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . 3
Condensed consolidated statements of cash flows
for the nine months ended September 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 - 26
PART II. OTHER INFORMATION
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
1
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1996, December 31, 1995,
and September 30, 1995
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Sept. 30, December 31, Sept. 30,
Assets 1996 1995 1995
---------- ---------- ----------
<S> <C> <C> <C>
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . $ 14,584 $ 18,119 $ 15,482
Interest-bearing deposits in financial institutions. . . . . . . 241 355 246
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . 21,950 15,500 13,900
-------- -------- --------
Total cash and cash equivalents . . . . . . . . . . . . . . . 36,775 33,974 29,628
-------- -------- --------
Interest-bearing deposits in financial institutions -
maturities over 90 days. . . . . . . . . . . . . . . . . . . 100 100 100
Securities available-for-sale (Note 2) . . . . . . . . . . . . . 140,619 155,170 47,477
Securities held-to-maturity (Fair value of
$99,460 on September 30, 1995) (Note 2) . . . . . . . . . . . 0 0 99,030
Loans (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . 228,787 225,379 224,263
Less: Allowance for loan losses (Note 4) . . . . . . . . . . . . 5,017 4,514 4,512
-------- -------- --------
Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . 223,770 220,865 219,751
-------- -------- --------
Direct lease financing . . . . . . . . . . . . . . . . . . . . . 919 622 700
Office buildings and equipment, net. . . . . . . . . . . . . . . 6,339 6,587 6,689
Other real estate owned, net of allowance for losses
of $526, $510 and $544, respectively (Note 4) . . . . . . . . 3,583 2,311 2,801
Accrued interest receivable. . . . . . . . . . . . . . . . . . . 4,038 4,366 4,425
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 3,563 3,896 3,285
-------- -------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $419,706 $427,891 $413,886
-------- -------- --------
-------- -------- --------
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest-bearing. . . . . . . . . . . . . . . . . $ 40,343 $ 43,774 $ 39,295
NOW accounts. . . . . . . . . . . . . . . . . . . . . . . . . 38,796 39,818 37,655
Money market accounts . . . . . . . . . . . . . . . . . . . . 50,811 43,639 45,341
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,295 47,259 47,423
Time, $100,000 and over . . . . . . . . . . . . . . . . . . . 64,245 62,309 67,294
Time, under $100,000. . . . . . . . . . . . . . . . . . . . . 88,917 90,756 90,265
-------- -------- --------
Total deposits . . . . . . . . . . . . . . . . . . . . . . 329,407 327,555 327,273
Securities sold under repurchase agreements
and other short-term borrowings . . . . . . . . . . . . . . . 31,363 43,278 30,839
Advances from borrowers for taxes and insurance. . . . . . . . . 562 1,281 1,006
Accrued interest payable and other liabilities . . . . . . . . . 5,404 4,772 5,004
-------- -------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 366,736 376,886 364,122
-------- -------- --------
Stockholders' Equity
Common stock - $2 par value: 1,750,000 shares authorized;
889,273, 887,431, and 887,431 shares
issued and outstanding, respectively. . . . . . . . . . . . . 1,779 1,775 1,775
Capital surplus. . . . . . . . . . . . . . . . . . . . . . . . . 11,196 11,123 11,105
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . 40,833 37,617 36,931
Unrealized net gain (loss) on securities
available-for-sale, net of tax. . . . . . . . . . . . . . . . (838) 490 (47)
-------- -------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . . . 52,970 51,005 49,764
-------- -------- --------
Total liabilities and stockholders' equity. . . . . . . . . . $419,706 $427,891 $413,886
-------- -------- --------
-------- -------- --------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months and nine months
ended September 30, 1996 and 1995
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Interest income
Loans (including fee income). . . . $5,750 $5,392 $16,566 $16,199
Securities
Taxable. . . . . . . . . . . . . 1,837 1,729 5,763 5,287
Exempt from federal income tax . 328 290 869 878
Interest-bearing deposits in
financial institutions . . . . . 5 10 19 110
Federal funds sold. . . . . . . . . 172 320 442 461
------ ------ ------- -------
Total interest income. . . . . . 8,092 7,741 23,659 22,935
------ ------ ------- -------
Interest expense
Time deposits . . . . . . . . . . . 2,151 2,268 6,542 6,073
Other deposits. . . . . . . . . . . 1,063 1,165 3,251 3,208
Other borrowings. . . . . . . . . . 416 417 1,297 1,364
------ ------ ------- -------
Total interest expense . . . . . 3,630 3,850 11,090 10,645
------ ------ ------- -------
Net interest income. . . . . . . . . . 4,462 3,891 12,569 12,290
Provision for loan losses. . . . . . . 360 360 1,080 1,080
------ ------ ------- -------
Net interest income after provision
for loan losses . . . . . . . . . . 4,102 3,531 11,489 11,210
------ ------ ------- -------
Noninterest income
Service fees on deposits. . . . . . 325 356 973 1,079
Trust income. . . . . . . . . . . . 137 121 382 358
Net gains on sales of securities. . 0 0 5 0
Net gains on sales of loans . . . . 103 26 175 87
Other operating income. . . . . . . 383 221 666 547
------ ------ ------- -------
Total other income . . . . . . . 948 724 2,201 2,071
------ ------ ------- -------
Noninterest expenses
Salaries and employee benefits. . . 1,357 1,455 4,217 4,510
Occupancy and equipment
expenses, net. . . . . . . . . . 295 352 965 1,056
Data processing expense . . . . . . 134 128 406 419
FDIC deposit insurance expense. . . 656 139 764 511
Other real estate owned expenses. . 49 45 161 139
Other operating expenses. . . . . . 500 505 1,528 1,742
------ ------ ------- -------
Total other expenses . . . . . . 2,991 2,624 8,041 8,377
------ ------ ------- -------
Income before income taxes . . . . . . 2,059 1,631 5,649 4,904
Provision for income taxes (Note 5). . 611 462 1,588 1,406
------ ------ ------- -------
Net income . . . . . . . . . . . . . . $1,448 $1,169 $ 4,061 $ 3,498
------ ------ ------- -------
------ ------ ------- -------
Earnings per common share . . . . . . . $1.63 $1.32 $4.57 $3.94
------ ------ ------- -------
------ ------ ------- -------
Weighted average common shares
outstanding. . . . . . . . . . . . . . 889,273 887,431 888,793 886,964
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1996 and 1995
(In thousands of dollars)
<TABLE>
<CAPTION>
Nine months ended
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,061 $ 3,498
Adjustments to reconcile net income to cash from
operating activities
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 407 503
Provision for loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . 1,080 1,080
Provision for losses on other real estate owned. . . . . . . . . . . . . . . 16 18
Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (118) (86)
Gain on sales of securities available-for-sale . . . . . . . . . . . . . . . (5) 0
Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . . . . . 8,749 5,557
Loans originated for sale. . . . . . . . . . . . . . . . . . . . . . . . . . (6,535) (4,942)
Gain on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . (98) (87)
Gain on sales of other real estate owned . . . . . . . . . . . . . . . . . . (99) 0
Change in interest receivable. . . . . . . . . . . . . . . . . . . . . . . . 328 (638)
Change in interest payable . . . . . . . . . . . . . . . . . . . . . . . . . 48 387
Change in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 919 26
Change in other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 833 235
-------- --------
Net cash provided by operating activities. . . . . . . . . . . . . . . 9,586 5,551
-------- --------
Cash flows from investing activities
Net change in interest-bearing deposits in
financial institutions - maturities over 90 days. . . . . . . . . . . . . 0 4,100
Proceeds from sales of securities available-for-sale . . . . . . . . . . . . 2,675 0
Proceeds from maturities of securities available-for-sale. . . . . . . . . . 78,089 38,391
Proceeds from maturities of securities held-to-maturity. . . . . . . . . . . 0 14,700
Purchases of securities available-for-sale . . . . . . . . . . . . . . . . . (68,371) (11,784)
Purchases of securities held-to-maturity . . . . . . . . . . . . . . . . . . 0 (35,242)
Increase in loans made to customers. . . . . . . . . . . . . . . . . . . . (7,692) (9,298)
Property and equipment expenditures. . . . . . . . . . . . . . . . . . . . . (159) (176)
Net change in direct lease financing . . . . . . . . . . . . . . . . . . . . (297) (327)
Proceeds from sales of other real estate owned . . . . . . . . . . . . . . . 520 852
-------- --------
Net cash provided by investing activities. . . . . . . . . . . . . . . 4,765 1,216
-------- --------
Cash flows from financing activities
Net increase (decrease) in:
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,852 (2,090)
Securities sold under repurchase agreements
and other short-term borrowings. . . . . . . . . . . . . . . . . . . . . (11,915) 185
Advances from borrowers for
taxes and insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . (719) (530)
Net proceeds from exercising stock options . . . . . . . . . . . . . . . . . 77 54
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (845) (710)
-------- --------
Net cash used in financing activities. . . . . . . . . . . . . . . . . (11,550) (3,091)
-------- --------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . 2,801 3,676
Cash and cash equivalents at beginning of period.. . . . . . . . . . . . . . . . . . 33,974 25,952
-------- --------
Cash and cash equivalents at end of period.. . . . . . . . . . . . . . . . . . . . . $ 36,775 $ 29,628
-------- --------
-------- --------
Supplemental disclosures
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,042 $ 10,258
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,665 1,318
Noncash investing activities
Transfers made from loans to other real estate owned . . . . . . . . . . . 1,709 848
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 balance sheets are as of September 30, 1996,
December 31, 1995 and September 30, 1995. The condensed consolidated
statements of income are for the three and nine months ended September 30,
1996 and 1995. The condensed consolidated statements of cash flows are for
the nine months ended September 30, 1996 and 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 nine month period ended September 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 year. 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
September 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. Until late in 1995, securities that were
subject to repricing or had an original maturity date of two years or less
were generally classified as available-for-sale.
During 1995, the Company, as permitted by 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
$838 as of September 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
September 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 September 30,
1996, December 31, 1995, and September 30, 1995 are as follows:
September 30, 1996
----------------------------------------------
Gross Unrealized
Securities Amortized ------------------- Fair
available-for-sale Cost Gains Losses Value
- ------------------ --------- ----- -------- --------
U.S. Treasury $ 18,066 $ 13 $ (25) $ 18,054
U.S. Government
agencies and
corporations 79,326 8 (1,643) 77,691
States and political
subdivisions 26,286 571 (92) 26,765
Mortgage-backed
securities and
collateralized
mortgage obligations 17,141 74 (249) 16,966
Equity securities
and mutual fund
investment in
debt securities 1,157 102 (116) 1,143
-------- ----- ------- -------
Total $141,976 $768 $(2,125) $140,619
-------- ----- ------- -------
-------- ----- ------- -------
December 31, 1995
----------------------------------------------
Gross Unrealized
Securities Amortized ------------------- 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
September 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
September 30, 1995
----------------------------------------------
Gross Unrealized
Securities Amortized ----------------- Fair
available-for-sale Cost Gains Losses Value
- ------------------ --------- ----- ------ --------
U.S. Treasury $18,190 $ 49 $ (11) $18,228
U.S. Government
agencies and
corporations 15,178 25 (103) 15,100
Mortgage-backed
securities and
collateralized
mortgage obligations 10,387 74 (46) 10,415
Equity securities
and mutual fund
investment in
debt securities 3,773 71 (110) 3,734
------- ---- ----- -------
Total $47,528 $219 $(270) $47,477
------- ---- ----- -------
------- ---- ----- -------
Securities
held-to-maturity
- -----------------
U.S. Treasury $11,093 $ 27 $ (46) $11,074
U.S. Government
agencies and
corporations 54,137 122 (237) 54,022
States and political
subdivisions 23,236 723 (73) 23,886
Mortgage-backed
securities and
collateralized
mortgage obligations 10,564 59 (145) 10,478
------- ---- ----- -------
Total $99,030 $931 $(501) $99,460
------- ---- ----- -------
------- ---- ----- -------
8
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
The amortized cost and fair value of securities at September 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 $ 26,140 $ 26,132
Due after one year through five years 80,914 79,701
Due after five years through ten years 16,624 16,677
--------- ---------
123,678 122,510
Mortgage-backed securities
and collateralized
mortgage obligations 17,141 16,966
Equity securities
and mutual fund
investment in
debt securities 1,157 1,143
-------- ---------
Total $141,976 $140,619
-------- ---------
-------- ---------
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 September 30, 1996, the Company held structured notes with an
amortized cost of $4,101 and fair value of $4,057. 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
September 30, 1996. There were two sales during the nine months ended
September 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 nine
months ended September 30, 1995.
9
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30, 1996, December 31,
1995, and September 30, 1995:
Sept. 30, December 31, Sept. 30,
1996 1995 1995
--------- ------------ ---------
Commercial $ 47,286 $ 53,886 $ 54,073
Real estate - construction 25,796 23,720 25,137
Real estate - mortgage 147,083 137,941 134,704
Installment 9,482 10,903 11,526
--------- ---------- ---------
Total loans 229,647 226,450 225,440
Unearned income (278) (370) (428)
Deferred loan fees (582) (701) (749)
--------- ---------- ---------
Loans, net of unearned
income and deferred loan fees 228,787 225,379 224,263
Allowance for loan losses (5,017) (4,514) (4,512)
--------- ---------- ---------
Loans, net $223,770 $220,865 $219,751
--------- ---------- ---------
--------- ---------- ---------
Loans held for sale on September 30, 1996, December 31, 1995 and
September 30, 1995 were approximately $345, $3,641, and $1,959 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 $2,174 at September 30, 1996, $7,345 at December 31,
1995, and $6,730 at September 30, 1995.
10
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996
(Dollar Amounts in thousands, except per share data)
(Unaudited)
At September 30, 1996, the balance of impaired loans and the portion of
the allowance for loan losses allocated to impaired loans amounted to $1,803
and $385, respectively. There were no impaired loans without an allowance
allocation. Impaired loans averaged $1,793 and $3,111 for the three and nine
months ended September 30, 1996. Interest income recognized on impaired loans
for the three months ended and nine months ended September 30, 1996
approximated $3 and $7, respectively which was all cash based income.
Interest income which would have been recognized on nonaccrual loans had
these loans been on an accrual basis throughout the three and nine months
ended September 30, 1995 approximated $236 and $445, respectively.
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 September 30, 1996, December 31, 1995, and September 30, 1995, the
contract amount of the Company's off-balance sheet commitments was as follows:
Sept. 30, December 31, Sept. 30,
1996 1995 1995
--------- ------------ ---------
Unused lines of credit and
commitments to make loans:
Fixed rates $10,473 $12,995 $10,473
Variable rate 53,334 49,984 56,416
--------- ---------- --------
Total $63,807 $62,979 $66,889
--------- ---------- --------
--------- ---------- --------
Standby letters of credit $ 5,287 $ 5,579 $ 5,435
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
September 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 nine months ended
September 30, 1996, year ended December 31, 1995, and nine months ended
September 30, 1995, is as follows:
Sept. 30, December 31, Sept. 30,
1996 1995 1995
--------- ------------ ---------
Balance at beginning of year $4,514 $3,965 $3,965
Provision charged to
operating expense 1,080 1,480 1,080
Loans charged off (793) (1,009) (592)
Recoveries on loans
previously charged off 216 78 59
------ ------ ------
Balance at end of period $5,017 $4,514 $4,512
------ ------ ------
------ ------ ------
Activity in the allowance for other real estate owned losses for the nine
months ended September 30, 1996, year ended December 31, 1995, and nine months
ended September 30, 1995, is as follows:
Sept. 30, December 31, Sept. 30,
1996 1995 1995
--------- ------------ ---------
Balance at beginning of year $ 510 $ 526 $ 526
Provision charged to
operating expense 16 23 18
Losses on other real
estate owned -0- (39) -0-
------ ------ ------
Balance at end of period $ 526 $ 510 $ 544
------ ------ ------
------ ------ ------
12
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 30, 1996 total stockholders' equity
increased $1,965. The increase is a result of net income of $4,061, less the
change in the valuation allowance from December 31, 1995 for the fair value of
securities available-for-sale, net of tax, of $1,328, plus $77 due to 1,842
stock options being exercised pursuant to the Omnibus Incentive Plan, less
the cash dividend payment of $845.
For the nine months ended September 30, 1995 total stockholders' equity
increased $4,064 due to net income of $3,498, plus the change in the valuation
allowance from December 31, 1994 for the fair value of securities available-for-
sale, net of tax, of $1,222, plus $54 due to 1,300 stock options being exercised
pursuant to the Omnibus Incentive Plan, less the cash dividend payment of $710.
13
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 September 30,
1996 the company had issued 8,500 nonqualified stock options, of which 3,322
have been exercised. During the nine months ended September 30, 1996, 1,642
stock options were exercised at $41.60 per share and 200 stock options were
exercised at $42.00 per share. The remaining 5,178 stock options are
outstanding and exercisable as of September 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 September 30, 1996
and September 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 nine months ending September 30, 1996, 2,908 stock appreciation rights
were exercised and paid out while the expense was $35. For the nine months
ending September 30, 1995, 500 stock appreciation rights were exercised and paid
out and the compensation expense was $45.
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 September 30, 1996 and the
consolidated results of operations for the three and nine month periods
ending September 30, 1996, compared to the same periods in 1995. The purpose
of this discussion is to provide a better understanding of the 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 $419.7 million at the end of the
current period, decreasing $8.2 million or 1.91% from the Company's fiscal
year-end, December 31, 1995.
The Company maintains appropriate liquidity by making periodic
adjustments to its securities portfolio and its federal funds sold. Due to
liquidity needs required by the increase in the Company's loans and the
decline in balances in securities sold under repurchase agreements and other
short-term borrowings the Company's securities available-for-sale decreased
$14.6 million or 9.38% from year-end. This decrease in part resulted from the
decline in market valuations of $2.2 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 $9.7 million more in securities matured than were purchased. Federal
funds sold increased $6.5 million from December 31, 1995.
The loan portfolio for the Company increased $3.4 million or 1.51% from
December 31, 1995. Loan growth at the Bank was a nominal $.7 million. The loan
mix at the Bank did change as the commercial loan portfolio decreased
$6.1 million while real estate mortgages increased $6.0 million. The increase
in real estate mortgages at the Bank were for loans that are secured by
commercial properties. At the Thrift total loans increased $2.7 million which
was mainly in real estate mortgages secured by one to four family dwellings.
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 nine months of 1996 were $6.5 million as
compared to $4.9 million during the same nine month period in 1995.
15
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Impaired loans decreased $3.4 million from December 31, 1995 and were
$1.8 million at September 30, 1996. Impaired loans are loans that the Company
does not anticipate full payment of principal and interest. During the first
nine months of 1996 the Company, however, received payment in full on two
loans totalling $901,000 that were considered impaired at December 31, 1995.
The balance of the decrease in impaired loans resulted from charging off
impaired loans to the allowance for loan losses or transferring impaired
loans to other real estate owned.
During the first nine months of 1996 deposits at the Company increased
$1,852,000. Noninterest-bearing demand accounts decreased $3.4 million while
NOW accounts declined $1.0 million and savings deposits declined $1.0
million. These declines were offset by increases of $7.2 million in money
market deposits while growth in total time deposits was nominal, increasing
only $100,000.
At the Bank of Waukegan total deposits increased $6.3 million or 1.03%.
The Bank experienced increases in money market deposits of $7.3 million, and
in time deposits of $100,000 and over of $2.6 million. The Bank had declines of
$2.0 million, $.5 million, $.1 million, and $1.0 million in the area of
noninterest-bearing demand deposits, NOW account deposits, savings deposits,
and time deposits under $100,000, respectively. The decline in checking and
NOW accounts at the Bank is in part attributable to public depositors of
public funds transferring funds to higher earning money market deposits.
Public money market deposits at the Bank increased $7.6 million from year-end.
Deposit totals at First Federal declined $4.5 million or 4.74%.
Noninterest-bearing demand balances decreased $1.5 million, NOW accounts
declined $.5 million, money market accounts decreased $.2 million, regular
savings balances were $.8 million lower, and time deposits of all types
decreased $1.5 million. First Federal now offers the same rates and terms as
the Bank and as a result, some clients have withdrawn their funds to achieve
higher rates at competing savings associations which traditionally have
offered depositors higher rates and lower account balance requirements.
Securities sold under repurchase agreements and other short-term
borrowing at the Company decreased $11.9 million from December 31, 1995 to
$31.4 million at September 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
16
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the Company that do not increase the reserve requirements with the Federal
Reserve Bank or create an expense relating to FDIC 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 increased $1,965,000 during the first nine
months of 1996. The increase is a result of net income of $4,061,000 less the
adjustment in the valuation allowance for the market value of securities
available-for-sale, net of tax of $1,328,000, plus $77,000 due to the
exercising of 1,842 stock options pursuant to the Omnibus Incentive Plan,
less cash dividends paid of $845,000.
The tangible equity capital-to-asset ratio at September 30, 1996 was
12.75% and the total capital-to-asset ratio, on a risk adjusted basis,
amounted to 21.64% compared to the respective required levels of 5.00% and
8.00%. Book value per share was $59.56 at September 30, 1996 compared to
$57.47 at December 31, 1995. On September 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 $1,448,000 for the quarter ended
September 30, 1996, an increase of $279,000, as compared to net income of
$1,169,000 for the same period the previous year. The annualized return on
average assets was 1.39% for the quarter as compared to 1.14% for the
previous year. The consolidated income for the nine months ended September
30, 1996 was $4,061,000, an increase of $563,000 over the first nine months
of 1995. The annualized return on average assets for the first nine months of
1996 was 1.29% as compared to 1.15% for the 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 $571,000 or 14.67% for the three
months ended September 30, 1996, compared to
17
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
the same three months in 1995. This increase in net interest margin can in
part be explained by the receipt during the third quarter of 1996 by the
Thrift of payment to bring an impaired loan on nonaccrual status up to date
with a corresponding recognization of $400,000 in interest and fees. The
balance of the increase in net interest income is a result of lower deposit
rates during the third 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 September 30, 1996 & 1995", which
shows that rates paid on interest-bearing liabilities in the third quarter of
1996 were only 4.58% compared to 4.91% during the third quarter of 1995. At
the end of the third quarter rates offered for time deposits were increased
on average 25 basis points in order to meet competitive pressures. Company
management anticipates that the time deposit rate increase will lessen net
interest income during the fourth quarter of 1996.
Net interest income for the first nine months of 1996 increased $279,000
or 2.27% compared to the nine months of 1995. This increase in net interest
margin resulted from collections during the first nine months of 1996 of
interest and fees totalling $480,000 on impaired loans on nonaccrual status
that were brought up to date or paid off. As Table 2, "Analysis of Average
Balance and Tax Equivalent Rates for the Nine Months Ended September 30, 1996
and 1995" indicates the Company's net yield on interest-earning assets
dropped to 4.49% for the first nine months of 1996 as compared to 4.55% for
the same period last year. Factoring out the $480,000 in one-time interest
and fees lowers the Company's net yield on interest-earning assets for the
nine months ended September 30, 1996 from 4.49% to 4.33%.
Generally, loan interest rates for the first nine months of 1996 were at
lower levels than during the same period of 1995 as indicated by the prime
rate which was 8.25% on September 30, 1996 as compared to 8.75% on September
30, 1995. Table 2 shows that the yield on loans during the first nine months
of 1996 was 9.58% as compared to 9.74% during the first nine months of 1995,
a decrease 16 basis points. Factoring out the $480,000 of interest paid on
nonaccrual loans the yield on loans for the first nine months decreases to
9.30% a difference of 44 basis points from the same period of 1995. Usually
when loan rates decrease, rates on interest-bearing liabilities decrease as
well. However, rates on interest-bearing liabilities remained the same,
increasing only slightly to 4.62% during the first nine months of 1996 as
compared to 4.58% last year.
18
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended September 30, 1996 and 1995
($ 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) $233,048 $5,785 9.93% $225,966 $5,457 9.66%
Taxable securities 117,793 1,837 6.14% 113,752 1,729 6.07%
Securities exempt from
taxes (2) 24,106 498 8.41% 20,772 439 8.45%
Interest bearing deposits
in banks 372 5 5.38% 561 10 7.13%
Federal funds sold 13,051 172 5.27% 21,841 320 5.86%
-------- ------ -------- ------
Interest earning assets 388,370 8,297 8.51% 382,892 7,955 8.31%
------ ------
Noninterest earning assets 26,552 25,656
-------- --------
Average assets $414,922 $408,548
-------- --------
-------- --------
Liabilities and stockholders'
equity
NOW deposits $ 37,605 $ 274 2.91% $ 38,095 $ 277 2.91%
Money market deposits 43,208 434 4.02% 41,209 517 5.02%
Savings deposits 47,326 355 3.00% 47,695 370 3.10%
Time deposits 154,864 2,151 5.56% 156,442 2,269 5.80%
Other borrowings 34,233 416 4.86% 30,135 417 5.54%
-------- ------ -------- ------
Interest bearing
liabilities 317,236 3,630 4.58% 313,576 3,850 4.91%
------ ------
Demand deposits 39,585 39,498
Other noninterest bear-
ing liabilities 6,056 6,338
Stockholders' equity 52,045 49,136
-------- --------
Average liabilities and
stockholders' equity $414,922 $408,548
-------- --------
-------- --------
Net interest income $4,667 $4,105
------ ------
------ ------
Net yield on interest
earning assets 4.79% 4.29%
----- ----
----- ----
Interest-bearing lia-
bilities to earning
assets ratio 81.68% 81.90%
----- ----
----- ----
</TABLE>
(1) - Interest income on loans includes loan origination fees of $ 76
and $ 138 for the three months ended September 30, 1996 and
September 30, 1995. respectively.
(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 Nine Months Ended September 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) $233,542 $16,778 9.58% $223,774 $16,340 9.74%
Taxable securities 125,591 5,763 6.07% 119,666 5,287 5.86%
Securities exempt from
federal income taxes (2) 21,546 1,317 8.36% 21,076 1,330 8.41%
Interest bearing deposits
in banks 454 19 5.58% 1,979 110 7.41%
Federal funds sold 11,247 442 5.24% 10,325 461 5.95%
-------- ------- -------- -------
Interest earning assets 392,380 24,319 8.25% 376,820 23,528 8.31%
Noninterest earning assets 25,840 ------- 25,474 -------
-------- --------
Average assets $418,220 $402,294
-------- --------
-------- --------
Liabilities and stockholders'
equity
NOW deposits $ 40,241 $ 906 3.00% $ 39,153 $ 831 2.83%
Money market deposits 42,410 1,291 4.06% 38,089 1,300 4.55%
Savings deposits 47,246 1,054 2.97% 49,563 1,076 2.89%
Time deposits 155,350 6,542 5.61% 149,362 6,074 5.42%
Other borrowings 35,103 1,297 4.93% 33,731 1,364 5.39%
-------- ------- -------- -------
Interest bearing
liabilities 320,350 11,090 4.62% 309,898 10,645 4.58%
Demand deposits 39,577 ------- 38,300 -------
Other noninterest bear-
ing liabilities 6,674 6,398
Stockholders' equity 51,619 47,698
-------- --------
Average liabilities and
stockholders' equity $418,220 $402,294
-------- --------
-------- --------
Net interest income $13,229 $12,883
------- -------
------- -------
Net yield on interest
earning assets 4.49% 4.55%
----- -----
----- -----
Interest-bearing lia-
bilities to earning
assets ratio 81.64% 82.24%
----- -----
----- -----
</TABLE>
(1) - Interest income on loans includes loan origination fees of $ 293 and
$ 413 for the nine months ended September 30, 1996 and September 30,
1995., respectively.
(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
PROVISION FOR LOAN LOSSES
The provision for loan losses was $360,000 during the quarter ended
September 30, 1996 which is no change from the same period over the previous
year. For the first nine months of 1996 the provision for loan losses was
$1,080,000 which was the same as the provision for the same period of 1995.
During 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 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
amount of impaired loans at September 30, 1996 were $1,803,000 as compared to
$5,161,000 at December 31, 1995. At September 30, 1996, $385,000 of the
allowance for loan losses was allocated to impaired loans as opposed to
allocations of $975,000 at December 31, 1995.
The Company's allowance for loan losses on September 30, 1996 was
$5,017,000 or 2.19% of total loans. The Bank of Waukegan's allowance for loan
losses as of September 30, 1996 was 2.45% of loans. During the first nine
months of 1996 the Bank charged off loans totalling $793,000 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 the loan growth the
Bank has experienced and the Bank's level of nonperforming and impaired loans.
At First Federal, the allowance for loan losses as of September 30, 1996
was $1,124,000 or 1.59% 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 September 30, 1996 for the Company is adequate
to cover future possible loan losses.
21
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NONINTEREST INCOME
Noninterest income for the three months ended September 30, 1996, was
$948,000 as compared to $724,000 for the three months ended September 30,
1995, an increase of $224,000. Much of the increase can be explained by gains
booked by the Bank of $99,000 from the sale of two properties carried as
other real estate owned during the quarter. During the quarter the Bank
collected $131,000 in back interest and fees from a loan that had been
charged off the previous year. At the Thrift, an additional $77,000 of income
was booked for gains on loans sold in accordance with FASB 122 "Accounting
for Mortgage Servicing Rights".
Service fees on deposits for the Company decreased $31,000 as compared to
the same quarter last year. This decline resulted from decrease accounts at
the Bank which had 251 fewer checking accounts at September 30, 1996 as
compared to the previous year due to competition. Trust income increased
$16,000 during the three months ended September 30, 1996 as compared to the
three months ended September 30, 1995. Noninterest income from gains on sales
of loans increased $77,000 during the third quarter of 1996 resulting from
the booking of the FASB 122 adjustment by the Thrift. Miscellaneous other
operating income, which includes the gains on the sale of other real estate
owned and the one-time collection of back interest and fees on the charged
off loan were $162,000 greater during the quarter than last year.
For the nine months of 1996 noninterest income was $2,201,000 as compared
to $2,071,000 for the same period in 1995, an increase of 6.28%. Service fee
income on deposits was $106,000 less during the first nine months of 1996 as
compared to the same period last year due to competition. During the nine
months ended September 30, 1995 trust income increased by $24,000 due to
increased fiduciary activities. During the first nine months 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 $88,000
greater during the nine months ended September 30, 1996 than during the same
period last year as there was a higher volume of loan sales during 1996 and
the booking of the $77,000 gain for mortgage servicing rights. Other
operating income, which includes loan servicing fees and other loan fee
income grew $119,000 during the first nine months of 1996 resulting from
gains on sales of other real estate owned of $99,000 and the collection of
back interest and fees on a charged off loan of $131,000.
22
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NONINTEREST EXPENSES
Total noninterest expenses increased $367,000 or 13.99% to $2,991,000 for
the three months ended September 30, 1995. The increase was attributable to
increased FDIC deposit insurance expense which was $656,000 for the quarter or
$517,000 greater than the same quarter last year. Due to legislation enacted on
September 30, 1996 a one-time assessment was required by thrifts to fully
capitalize the FDIC Savings Association Insurance Fund (SAIF). First Federal
which is covered by the FDIC SAIF fund booked an additional $603,000 in FDIC
expense as a consequence. It is anticipated that First Federal's future FDIC
premiums will be reduced by approximately 70% as a result of the SAIF becoming
fully funded.
Salaries and employee benefits expenses decreased $98,000 during the
quarter as compared to the same quarter last year. As employees left or retired
during the quarter management has closely examined the responsibilities of those
leaving and delegated to others whenever it has been feasible.
Occupancy expenses for the third quarter of 1996 declined $57,000 from last
year. Depreciation expense for the third quarter was $48,000 less than last
year's third quarter depreciaion expense. This is a result of equipment
becoming fully depreciated during 1995.
Data processing expenses increased $6,000 during the three months ended
September 30, 1996 as compared to the same period if 1995.
FDIC deposit insurance increased $517,000 during the three months ended
September 30, 1996 as compared to the same period of 1995 primarily resulting
from First Federal booking $603,000 in FDIC expense due to legislation requiring
recapitalization of the FDIC SAIF. The Bank had only a nominal FDIC insurance
premium of $1,000 during the quarter which was $85,000 less than the same period
last year due to the FDIC Bank Insurance Fund (BIF) being fully funded. The
Bank anticipates that there will be no FDIC expense during the fourth quarter of
1996.
Other real estate owned expenses increased $4,000 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 which amounted
to $3,583,000 at September 30, 1996 as compared to $2,801,000 at September 30,
1995.
23
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Miscellaneous other operating expenses were $500,000 for the third quarter
as compared to $505,000 for the same period last year amounting to a decrease of
less than 1.00%.
Noninterest expenses were $8,041,000 for the nine months ended September
30, 1996, a decrease of $336,000 or 4.01%. Salaries and employee benefits were
$293,000 lower when compared to the same nine months last year. Salaries
decreased compared to 1995 as four members of senior management are no longer
with the Company in 1996. One member of senior management took a position
elsewhere while the other three retired.
During the three quarters ended September 30, 1996, occupancy expenses
decreased $91,000 as compared to same period of 1995. Older equipment became
fully depreciated in 1995 and consequently depreciation expense during the first
nine months of 1996 decreased $98,000 from the previous year.
Data processing expense was $13,000 lower during the three quarters ended
September 30, 1996 as compared to the same period last year because of
one-time expenses early in 1995 related to the data processing bureau
conversion which occurred during the fourth quarter of 1994.
FDIC deposit insurance increased $253,000 during the nine months ended
September 30, 1996 as compared to the same period of 1995 as First Federal had
the one-time expense of $603,000 required by legislation to recapitalize the
FDIC SAIF. The Bank had nominal FDIC insurance expense in 1996 due to the FDIC
BIF being fully funded and as a consequence the Bank's FDIC deposit insurance
expense was $345,000 less during the first nine months of 1996 compared to the
same period in 1995.
Other real estate owned expenses increased $22,000 during the nine months
ended September 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 $214,000 lower compared to the
same period last year. Much of this decrease is attributable to one-time
expenses during the early part 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. Printing and supplies decreased in 1996 by
$14,000 as last year new forms had to be ordered for the new data processing
system. Professional fees declined $110,000 during the first nine months of
1996 compared to the same period last year as consultants were used during the
conversion to
24
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
assist and train Company personnel on the new system and equipment. Other
expenses decreased in 1996 by $20,000 as the Company had costs associated
with the employment of new employees during 1995. Other expenses pertaining
to goodwill decreased $22,000 as goodwill associated with the purchase of a
branch office were fully amortized in 1995.
FEDERAL AND STATE INCOME TAXES
For the three months ended September 30, 1996 and 1995, the Company's
provision for federal and state income taxes were $611,000 and $462,000,
respectively. For the nine months ended September 30, 1996, the Company's
provisions for federal and state income taxes were $182,000 greater than
during the same period of 1995 due to higher income.
25
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
ACCOUNTING CHANGES, RECENT PRONOUNCEMENTS, & REGULATORY ISSUES
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 nine months ended September 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.
26
<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 28th day of October, 1996.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Date: October 31, 1996 By: /s/ Fred Abdula
------------------ ---------------------------
Fred Abdula
Chairman of the Board of
Directors and President
Date: October 31, 1996 By: /s/ Thomas M. Nemeth
------------------ ---------------------------
Thomas M. Nemeth
Assistant Vice President
27
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