<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 March 31, 1997
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 March 31, 1997.
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at March 31,
1997, December 31, 1996, and March 31, 1996 . . . . . . . . . . . . . .2
Condensed consolidated statements of income for
the three months ended March 31, 1997 and 1996. . . . . . . . . . . . .3
Condensed consolidated statements of cash flows
for the three months ended March 31, 1997 and 1996. . . . . . . . . . .4
Notes to condensed consolidated financial
statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 - 15
Item 2. Management's discussion and analysis of
financial condition and results of
operations . . . . . . . . . . . . . . . . . . . . . . . .16 - 23
PART II. OTHER INFORMATION
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
1
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
- -------------------------------------
CONSOLIDATED BALANCE SHEETS
- -------------------------------------
March 31, 1997, December 31, 1996,
and March 31, 1996
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
Assets 1997 1996 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash and due from banks.............................. $12,257 $15,247 $16,018
Interest-bearing deposits in financial institutions -
maturities less than 90 days..................... 655 1,235 394
Federal funds sold................................... 15,100 15,500 8,200
---------- ---------- ----------
Total cash and cash equivalents................... 28,012 31,982 24,612
Interest-bearing deposits in financial institutions -
maturities over 90 days.......................... 100 100 100
Securities available-for-sale........................ 146,443 149,750 148,908
Loans................................................ 238,174 232,653 235,221
Less: Allowance for loan losses...................... 5,014 4,839 4,757
---------- ---------- ----------
Loans, net........................................ 233,160 227,814 230,464
Direct lease financing............................... 952 999 645
Office buildings and equipment, net.................. 6,181 6,250 6,457
Other real estate owned, net of allowance for losses
of $537, $532 and $516............................ 2,765 2,846 2,815
Accrued interest receivable.......................... 4,130 3,955 4,874
Other assets......................................... 2,687 2,868 5,093
---------- ---------- ----------
Total assets...................................... $424,430 $426,564 $423,968
========== ========== ==========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest-bearing...................... $41,234 $43,223 $39,101
NOW accounts...................................... 36,207 38,159 40,797
Money market accounts............................. 42,716 44,426 42,379
Savings........................................... 44,969 44,843 47,846
Time, $100,000 and over........................... 70,134 69,052 70,030
Time, under $100,000.............................. 92,407 89,092 90,810
---------- ---------- ----------
Total deposits................................. 327,667 328,795 330,963
Securities sold under repurchase agreements
and other short-term borrowings................... 33,381 36,758 34,842
Advances from borrowers for taxes and insurance...... 1,371 1,021 1,635
Accrued interest payable and other liabilities....... 6,097 5,155 5,029
---------- ---------- ----------
Total liabilities.............................. 368,516 371,729 372,469
---------- ---------- ----------
Stockholders' Equity
Common stock - $2 par value: 1,750,000 shares
authorized; 889,273, 889,273 and 888,473 shares
issued and outstanding............................ 1,779 1,779 1,777
Additional paid-in capital........................... 11,216 11,216 11,165
Retained earnings.................................... 43,431 41,849 38,841
Unrealized loss on securities available-for-sale,.... (512) (9) (284)
---------- ---------- ----------
Total stockholders' equity........................ 55,914 54,835 51,499
---------- ---------- ----------
Total liabilities and stockholders' equity........ $424,430 $426,564 $423,968
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
-----------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
-----------------------------------------------------
Three months ended March 31, 1997 and 1996
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
1997 1996
---------- ----------
<S> <C> <C>
Interest income
Loans (including fee income)..................... $5,282 $5,187
Securities
Taxable....................................... 1,968 2,000
Exempt from federal income tax................ 296 265
Interest-bearing deposits in financial
institutions.................................. 8 7
Federal funds sold............................... 229 171
---------- ----------
Total interest income......................... 7,783 7,630
---------- ----------
Interest expense
Time deposits.................................... 2,232 2,250
Other deposits................................... 1,022 1,107
Other borrowings................................. 404 466
---------- ----------
Total interest expense........................ 3,658 3,823
---------- ----------
Net interest income................................. 4,125 3,807
Provision for loan losses........................... 180 360
---------- ----------
Net interest income after provision for
loan losses...................................... 3,945 3,447
---------- ----------
Noninterest income
Service fees on deposits......................... 334 334
Trust income..................................... 144 113
Net security gains (losses)...................... 0 5
Net gains on sales of loans...................... 35 55
Other operating income........................... 235 123
---------- ----------
Total other income............................ 748 630
---------- ----------
Noninterest expenses
Salaries and employee benefits................... 1,322 1,409
Occupancy and equipment expenses, net............ 333 303
Data processing expense.......................... 140 132
FDIC deposit insurance expense................... 22 54
Other real estate owned expenses................. 68 48
Other operating expenses......................... 524 473
---------- ----------
Total other expenses.......................... 2,409 2,419
---------- ----------
Income before income taxes.......................... 2,284 1,658
Provision for income taxes.......................... 702 434
---------- ----------
Net income.......................................... $1,582 $1,224
========== ==========
Earnings per common share........................... $1.78 $1.38
========== ==========
Weighted average common shares outstandin........... 889,273 888,300
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
-----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------
Three months ended March 31, 1997 and 1996
(In thousands of dollars)
<TABLE>
<CAPTION>
Three months ended
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net income....................................................... $1,582 $1,224
Adjustments to reconcile net income to cash from
operating activities:
Depreciation.................................................. 132 145
Provision for loan losses..................................... 180 360
Provision for losses on other real estate owned............... 5 6
Deferred loan fees............................................ (3) (37)
Gain on sales of securities available-for-sale................ 0 (5)
Proceeds from sales of loans.................................. 1,897 2,996
Loans originated for sale..................................... (2,128) (7,596)
Net gains on sales of loans................................... (29) (55)
Net gains on sales of other real estate owned................. (134) 0
Net change in interest receivable............................. (175) (508)
Net change in interest payable................................ 18 143
Net change in other asset..................................... 480 (949)
Net change in other liabilities............................... 924 363
---------- ----------
Net cash from operating activitie.......................... 2,749 (3,913)
---------- ----------
Cash flows from investing activities
Proceeds from sales of securities available-for-sale.......... 0 2,675
Proceeds from maturities of securities available-for-sale..... 16,696 37,193
Purchases of securities available-for-sale.................... (14,191) (34,872)
Change in loans made to customers............................. (5,263) (5,939)
Property and equipment expenditures........................... (63) (15)
Net change in direct lease financing.......................... 47 (23)
Proceeds from sales of other real estate owned................ 210 162
---------- ----------
Net cash from investing activitie.......................... (2,564) (819)
---------- ----------
Cash flows from financing activities
Net change in:
Deposits.................................................... (1,128) 3,408
Securities sold under repurchase agreements
and other short-term borrowings........................... (3,377) (8,436)
Advances from borrowers for
taxes and insurance....................................... 350 354
Net proceeds from exercise of stock options................... 0 44
---------- ----------
Net cash from financing activities............................. (4,155) (4,630)
---------- ----------
Net change in cash and cash equivalents............................. (3,970) (9,362)
Cash and cash equivalents at beginning of period.................... 31,982 33,974
---------- ----------
Cash and cash equivalents at end of period.......................... $28,012 $24,612
========== ==========
Supplemental disclosures
Cash paid during the period for
Interest................................................... $3,640 $3,680
Noncash investing activities
Transfers made from loans to other real estate owned....... 0 672
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(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 and cash flows are for the
three months ended March 31, 1997 and March 31, 1996. The condensed
consolidated balance sheets are as of March 31, 1997, December 31, 1996 and
March 31, 1996.
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, 1996, 1995, and
1994.
The results of operations for the three-month period ended March 31, 1997,
are not necessarily indicative of the results to be expected for the full year.
Earnings per Common and Common Equivalent Share - Earnings per share are
computed by dividing net income by the average shares of common stock and common
stock equivalents outstanding. Common stock equivalents represent the dilutive
effect of the assumed exercise of outstanding stock options.
5
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollar Amounts in thousands, except per share data)
(Unaudited)
Note 2 - SECURITIES
The amortized cost, gross unrealized gains and losses, and fair values of
securities available-for-sale and held-to-maturity as of March 31, 1997,
December 31, 1996, and March 31, 1996 are as follows:
-------------- March 31.,1997 --------------
----- --------
Gross Unrealized
Securities Amortized ----- ---------- Fair
available-for-sale Cost Gains Losses Value
- ------------------- ---------- ------- -------- ---------
U.S. Treasury $ 12,063 $ 7 $ (12) $ 12,058
U.S. Government
agencies and
corporations 93,855 7 (1,260) 92,602
States and political
subdivisions 23,782 495 (76) 24,201
Mortgage-backed
securities and
collateralized
mortgage obligations 15,487 118 (163) 15,442
Equity securities 2,091 141 (92) 2,140
-------- ------- -------- --------
Total $147,278 $ 768 $(1,603) $146,443
======== ======= ======== ========
6
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollar Amounts in thousands, except per share data)
(Unaudited)
------------- December 31, 1996 ---------------
-------- --- ----
Gross Unrealized
Securities Amortized ----- ---------- Fair
available-for-sale Cost Gains Losses Value
- ------------------- ---------- ------- --------- ----------
U.S. Treasury $ 16,098 $ 25 $ (9) $ 16,114
U.S. Government
agencies and
corporations 90,359 32 (787) 89,604
States and political
subdivisions 24,827 699 (44) 25,482
Mortgage-backed
securities and
collateralized
mortgage obligations 16,408 131 (109) 16,430
Equity securities 2,091 128 (99) 2,120
-------- ------- ------- --------
-------- ------- ------- --------
Total $149,783 $ 1,015 $(1,048) $149,750
-------------- March 31, 1996 ----------------
----- --- ----
Gross Unrealized
Securities Amortized ----- ---------- Fair
available-for-sale Cost Gains Losses Value
- ------------------- ---------- -------- ------- -------------
U.S. Treasury $ 31,669 $ 54 $ (29) $ 31,694
U.S. Government
agencies and
corporations 76,836 35 (1,152) 75,719
States and political
subdivisions 20,473 657 (49) 21,081
Mortgage-backed
securities and
collateralized
mortgage obligations 19,239 157 (141) 19,255
Equity securities 1,157 106 (104) 1,159
-------- ------- --------- --------
Total $149,374 $1,009 $(1,475) $148,908
======== ======= ========= ========
7
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollar Amounts in thousands, except per share data)
(Unaudited)
Contractual maturity of debt securities at March 31 1997 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
Amortized Fair
Securities available-for-sale Cost Value
- ------------------------------------- ----------- ---------
Due in one year or less $ 16,231 $ 16,227
Due after one year through five years 101,646 100,696
Due after five years through ten years 11,823 11,938
----------- ---------
129,700 128,861
Mortgage-backed securities 15,487 15,442
Equity securities 2,091 2,140
----------- ----------
Total $147,278 $146,443
=========== ==========
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 (FHLMC), the Federal National Mortgage
Association (FNMA), and the Goverment National Mortgage Association (GNMA).
As of March 31, 1997, the Company held structured notes with an
amortizedcost of $3,100 and fair value of $3,072. These securities are issued
by the Federal Home Loan Bank (FHLB). 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 March
31, 1997.
There were two sales of equity securities during the three months ended
March 31, 1996 which resulted in proceeds of $2,675 and a gain of $5.
Securities carried at fair values of $100,495 and $95,404 at March 31,
1997 and 1996 were pledged to secure public deposits, repurchase agreements and
for other purposes as required or permitted by law.
8
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(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 March 31, 1997, December 31, 1996, and
March 31, 1996:
March 31, December 31, March 31,
1997 1996 1996
------------ ------------- -----------
Commercial $ 53,162 $ 50,762 $ 56,210
Real estate - construction 26,735 26,905 26,928
Real estate - mortgage 149,821 146,552 142,561
Installment 9,182 9,203 10,512
------------ ------------ -----------
Total loans 238,900 233,422 236,211
Unearned income (200) (240) (325)
Deferred loan fees (526) (529) (665)
------------ ------------ -----------
Loans, net of unearned
income and deferred
loan fees 238,174 232,653 235,221
Allowance for loan losses (5,014) (4,839) (4,757)
------------ ------------ -----------
Loans, net $233,160 $227,814 $230,464
============ ============ ===========
Loans held for sale on March 31, 1997, December 31, 1996 and March 31,
1996 were approximately $1,153, $893 and $8,296, 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 $1,480 at March 31, 1997, $1,166 at December 31, 1996, and $7,424
at March 31, 1996.
9
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollar Amounts in thousands, except per share data)
(Unaudited)
Impaired loans were as follows for March 31, 1997, December 31, 1996 and
March 31, 1996:
March 31, December 31, March 31,
1997 1996 1996
------------ ------------ ------------
Loans with no allowance
for losses allocated $ 0 $ 0 $ 0
Loans with allowance
for losses allocated 1,212 828 4,515
Amount of the allowance
allocated 121 146 678
Average balance information and income recognized on impaired loans were as
follows for the three months ended March 31, 1997 and March 31, 1996:
March 31, March 31,
1997 1996
------------ ------------
Average of impaired
loans during the period $ 1,056 $ 4,434
Interest income recognized
during the period 3 13
Cash-basis income recognized
during the period 3 13
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.
10
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollar Amounts in thousands, except per share data)
(Unaudited)
At March 31, 1997, December 31, 1996, and March 31, 1996, the contract
amount of the Company's off-balance sheet commitments was as follows:
March 31, December 31, March 31,
1997 1996 1996
----------- ------------- ----------
Unused lines of credit
and commitments to
make loans:
Fixed rate $19,205 $17,696 $13,343
Variable rate 48,562 57,979 47,130
----------- ------------- ----------
Total $67,767 $75,675 $60,473
=========== ============= ==========
Standby letters of credit $ 6,140 $ 6,250 $ 5,505
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
March 31, 1997
(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 three months ended March
31, 1997, twelve months ended December 31, 1996, and three months ended March
31, 1996, is as follows:
March 31, December 31, March 31,
1997 1996 1996
--------- ------------ ---------
Balance at beginning of year $4,839 $4,514 $4,514
Provision charged to
operating expense 180 1,190 360
Loans charged off (56) (1,141) (128)
Recoveries on loans
previously charged off 51 276 11
--------- ------------ ---------
Balance at end of period $5,014 $4,839 $4,757
========= ============ =========
Activity in the allowance for other real estate owned losses for the
three months ended March 31, 1997, twelve months ended December 31, 1996, and
three months ended March 31, 1996, is as follows:
March 31, December 31, March 31,
1997 1996 1996
--------- ------------ ---------
Balance at beginning of year $ 532 $ 510 $ 510
Provision charged to
operating expense 5 22 6
Losses on other real
estate owned -0- -0- -0-
--------- ------------ ---------
Balance at end of period $ 537 $ 532 $ 516
========= ============ =========
12
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(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 three months ended March 31, 1997 total stockholders' equity
increased $1,079. The increase is a result of net income of $1,582, less the
change in the valuation allowance from December 31, 1996 for the fair value of
securities available-for-sale, net of tax, of $503.
For the three monnths ended March 31, 1996 total stockholders' equity
increased $494. The increase is a result of net income of $1,224, less the
change in the valuation allowance from December 31, 1995 for the fair value of
securities available-for-sale, net of tax, of $774, plus $44 due to 1,042 stock
options being exercised pursuant to the Omnibus Incentive Plan.
13
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollar Amounts in thousands, except per share data)
(Unaudited)
Note 7 - OMNIBUS INCENTIVE PLAN
The 1992 Omnibus Incentive Plan (the "Plan") authorizes the issuance of up
to 75,000 shares of the Company's common stock, including the granting of
non-qualified stock options, restricted stock and stock appreciation rights.
Statement of Financial Accounting Standards No. 123 which became effective
for 1996, requires pro forma disclosures for companies that do not adopt its
fair value accounting method for stock- based employee compensation. The
Company did not grant any stock options during the three months ended March 31,
1997 or during the entire year, 1996.
Stock options may be used to reward directors and employees and provide
them with an additional equity interest in the Company. Options have been
issued for 10 year periods and are fully vested when granted. Information about
option grants follow:
Number of Weighted-Avg.
Options Exercise Price
---------- --------------
Outstanding at
January 1, 1996 7,020 $ 41.63
Exercised during period
ended March 31, 1996 1,042 41.63
---------- --------------
Outstanding at
March 31, 1996 5,978 $ 41.63
==========
Outstanding at
January 1, 1997 5,178 $ 41.62
Exercised during period
ended March 31, 1997 0 0
---------- --------------
Outstanding at
March 31, 1997 5,178 $ 41.62
==========
At March 31, 1997, options outstanding ranged in exercise price from $41.60
to $42.00 and had a weighted average remaining option life of 4.9 years.
14
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
(Dollar Amounts in thousands, except per share data)
(Unaudited)
On May 1, 1992, 2,950 restricted stock shares were awarded without payment
to the Company. Recipients have all the rights of stockholders except that the
shares cannot be disposed of until the restrictions have lapsed. On the date of
the grant, the estimated market price of the shares was added to common stock
and surplus and an equal amount was deducted from stockholders' equity (unearned
portion of the restricted stock awards).
The Company at its discretion may grant stock appreciation rights under the
Plan. A stock appreciation right entitles the holder to receive from the Company
an amount equal to the excess, if any, of the aggregate fair market value of the
Company's common stock which is the subject of such grant over the market price.
As of March 31, 1997 and 1996, 3,904 and 5,060 stock appreciation rights were
outstanding that had been awarded at $41.60. The Company's expense was $20 and
$15 for the three months ended March 31, 1997 and 1996. The stock appreciation
rights will expire on April 30, 2002.
15
<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 March 31, 1997 and the consolidated
results of operations for the three month period ending March 31, 1997, compared
to the same period in 1996. The purpose of this discussion is to provide a
better understanding of the consolidated financial statements and the operations
of the Company and 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.
The statements contained in this management's discussion and analysis that
are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers of this report that a number of important factors could
cause the Company's actual results in 1997 and beyond to differ materially from
those expressed in any such forward-looking statements.
FINANCIAL CONDITION
The consolidated total assets were $424.4 million at March 31, 1997,
decreasing $2.1 million or .50% from the the Company's fiscal year-end,
December 31, 1996.
Securities available-for-sale decreased $3.3 million or 2.21% from
year-end. Market pressures decreased the fair value of securities
available-for-sale by $802,000 from December 31, 1996. The balance of the
decrease is primarily attributable to maturities of securities which were used
to fund loan growth. Federal funds sold decreased $400 thousand during this
same period.
The loan portfolio for the Company increased $5.5 million or 2.37% from
December 31, 1996 as loan demand continued due to a strong local economy even
though the prime rate increased to 8.50% on March 26, 1997 from 8.25%. Loans at
the Bank of Waukegan increased $5.2 million with commercial loans and real
estate mortgages increasing $2.0 million and $4.2 million while construction
loans declined $1.0 million. Most of the real estate mortgage portfolio at the
Bank consists of commercial related properties. At the Thrift, total loans
increased only $291 thousand due to increases in commercial loans and
construction loans of $416 thousand and $840 thousand while real estate
mortgages declined $990 thousand. At the Thrift most real estate loans are
residential mortgages which were affected by the increase in home
16
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
mortgage rates during the quarter is the reason for the decline in the Thrift's
real estate loan portfolio. The increased home mortgage rates during the three
months ended March 31, 1997 also affected mortgages originated for sale on the
secondary market by First Federal through the Federal Home Loan Mortgage
Corporation (FHLMC) and the Federal National Mortgage Association (FNMA)
programs which declined to $2.1 million as compared to $7.6 million during the
same three month period in 1996.
During the first quarter of 1997, deposits at the Company declined slightly
by $1.1 million to $327.7 million. Noninterest-bearing demand, NOW accounts,
and money market accounts decreased $2.0 million, $2.0 million, and $1.7 million
while total time deposits increased $4.4 million. Depositors transferred their
funds from liquid deposits to certificates of deposit which pay higher yields.
Securities sold under repurchase agreements and other short- term
borrowings at the Company decreased $3.4 million from December 31, 1996 to $33.4
million at March 31, 1997. 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 insurance and, therefore are less costly to
the company. The decrease in repurchase agreement funds was caused by commercial
customers who drew down their balances to make capital expenditures which is
indicative of the continued growth in the local economy.
Total stockholders' equity increased $1,079,000 during the first three
months of 1997. The increase is a result of net income of $1,582,000 less the
adjustment in the valuation allowance for the market value of securities
available-for-sale, net of tax of $503,000.
The tangible equity capital-to-asset ratio at March 31, 1997 was 13.24% and
the total capital-to-asset ratio, on a risk adjusted basis, amounted to 21.68%
compared to the required levels of 5.00% and 10.00% in order to be considered
well capitalized under prompt corrective action regulations. Book value per
share was $62.88 at March 31, 1997 compared to $61.66 at December 31, 1996. On
March 31, 1997, the Company and its subsidiaries were in compliance with all
applicable regulatory capital requirements.
17
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET INCOME
The consolidated net income was $1,582,000 for the quarter ended March 31,
1997, as compared to net income of $1,224,000 for the same period the previous
year, an increase of 29.25%. The annualized return on average assets was 1.50%
for the quarter as compared to 1.16% for the previous year.
NET INTEREST INCOME
Net interest income, the difference between interest income earned on
interest-earning assets and interest expense on interest-bearing liabilities,
increased $318,000 or 8.35% for the three months ended March 31, 1997, compared
to the same three months in 1996. As Table 1, "Analysis of Average Balance and
Tax Equivalent Rates for the Three Months Ended March 31, 1997 and 1996"
indicates the Company's net yield on interest-earning assets increased to 4.33%
for the first quarter of 1997 as compared to 4.08% for the same period last
year.
Yields on interest earning assets remained stable, increasing slightly to
8.01% during the first quarter of 1997 as compared to 7.94% during the first
three months of 1996 as indicated in Table 1. Yields on loans decreased slightly
to 9.10% from 9.19% during the same period last year although the prime rate was
slightly higher at March 31, 1997 at 8.50% as compared to 8.25% at March 31,
1996. This slight decline is attributable to increased competition for loans
which has kept loan rates down. Even though the prime rate did increase it did
not go up until almost the end of the quarter ending March 31, 1997 and the full
impact of the increase will not be apparent until the second quarter of 1997.
Management was able to increase the yields earned on the Company's taxable
securities to 6.32% during the first three months of 1997 as the Company
invested in higher yielding U.S. Govenment agency issues that have call
provisions and help to minimize state income taxes.
18
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the first quarter of 1997 the rates on average interest-bearing
liabilities declined to 4.58% from 4.71% as indicated in Table 1, a decrease of
13 basis points. This mainly occurred because of the decline in rates paid to
time depositors which decreased to 5.54% from 5.73%, a decline of 19 basis
points. This decline in time deposit rates has resulted from our customers
purchasing shorter term certificates of deposits which are paid generally lower
rates than longer term time deposits. Certificates of deposits with remaining
maturities of one year or greater at March 31, 1997 were $6.6 million lower than
at March 31, 1996.
Another factor influencing net interest income is the "interest-bearing
liabilities to earning assets ratio" as shown in table 1. The ratio
indicates how many cents of each dollar of earning assets are funded by an
interest-bearing liability. As table 1 indicates this ratio declined to
80.36% for the three months ended March 31, 1997 from 81.80% for the same
period last year. The decline in this ratio has a positive impact on
interest income.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $180,000 during the quarter ended March
31, 1997 which is half of the provision $360,000 put through during the same
period the previous year. Management and the Board of Directors' Credit
Committee lowered the provision after careful review of the adequacy of the loan
loss allowance and the levels of non-performing loans and impaired loans. At
March 31, 1997 non-performing loans were $1,480,000 or $5,944,000 less than at
March 31, 1996. Average impaired loans for the first quarter of 1997 were
$1,056,000 declining $3,378,000 from $4,434,000 during the same period last
year.
The allowance for loan losses on March 31, 1997, was $5,014,000 or 2.10% of
total loans. The adequacy of the loan loss allowance is analyzed by both
management and the Board of Directors' Credit Committee at least quarterly.
Loans with potential loss exposure, impaired loans, loans that are no longer
accruing interest, and historical net loan loss percentages are reviewed in the
analysis of the loan loss allowance adequacy. Based upon management and the
Board Committee's analysis, the allowance for loan losses and the provision for
loan losses at March 31, 1997, is adequate to cover future possible loan losses.
19
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended March 31, 1997 and 1996
($ 000s)
1997
---------------------------
Average
Balance Interest Rate
---------------------------
Assets
Loans (1)(2)(3) $233,496 $5,313 9.10%
Taxable securities 123,703 1,968 6.32%
Securities exempt from
federal income taxes (2) 22,007 449 8.39%
Interest bearing deposits
in banks 670 8 4.78%
Federal funds sold 17,613 229 5.20%
-------- -------
Interest earning assets 397,489 7,967 8.01%
-------
Noninterest earning assets 23,275
--------
Average assets $420,764
========
Liabilities and stockholders'
equity
NOW deposits $37,179 $270 2.90%
Money market deposits 43,371 427 3.94%
Savings deposits 44,234 325 2.94%
Time deposits 161,128 2,232 5.54%
Other borrowings 33,524 404 4.82%
-------- -------
Interest bearing
liabilities 319,436 3,658 4.58%
-------
Demand deposits 39,371
Other noninterest bear-
ing liabilities 6,585
Stockholders' equity 55,372
--------
Average liabilities and
stockholders' equity $420,764
========
Net interest income $4,309
=======
Net yield on interest
earning assets 4.33%
=======
Interest-bearing lia-
bilities to earning
assets ratio 80.36%
=======
1996
----------------------------
Average
Balance Interest Rate
----------------------------
Assets
Loans (1)(2)(3) $229,787 $5,281 9.19%
Taxable securities 133,724 2,000 6.00%
Securities exempt from
federal income taxes (2) 20,003 401 8.32%
Interest bearing deposits
in banks 447 7 6.26%
Federal funds sold 12,876 171 5.31%
-------- -------
Interest earning assets 396,837 7,860 7.94%
-------
Noninterest earning assets 25,139
--------
Average assets $421,976
========
Liabilities and stockholders'
equity
NOW deposits $41,010 $310 3.02%
Money market deposits 42,705 448 4.20%
Savings deposits 46,916 349 2.98%
Time deposits 157,051 2,250 5.73%
Other borrowings 36,920 466 5.05%
-------- -------
Interest bearing
liabilities 324,602 3,823 4.71%
-------
Demand deposits 38,959
Other noninterest bear-
ing liabilities 6,782
Stockholders' equity 51,633
--------
Average liabilities and
stockholders' equity $421,976
========
Net interest income $4,037
=======
Net yield on interest
earning assets 4.08%
=======
Interest-bearing lia-
bilities to earning
assets ratio 81.80%
=======
(1) - Interest income on loans includes loan origination fees of $ 88 and
$ 93 for the three months ended March 31, 1997 and March 31, 1996.
(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
NONINTEREST INCOME
Total noninterest income for the three months ended March 31, 1997, was
$748,000 as compared to $630,000 for the three months ended March 31, 1996, an
increase of $118,000.
Service fees on deposits for the Company remained unchanged at $334,000 as
compared to the same quarter last year.
Trust income was $31,000 higher during the three months ended March 31,
1997 as compared to the three months ended March 31, 1996 as trust business was
expanded.
Other income from gains on sales of loans at First Federal decreased
$20,000 during the three months ended March 31, 1997 compared to the previous
year as a consequence of declining loan sales by the Thrift. Proceeds from loan
sales on the secondary market by the Thrift decreased to $1.9 million during the
first quarter of 1997 compared to $3.0 million during the same three month
period last year as mortgage demand declined as home mortgage rates increased.
Miscellaneous other operating income increased $112,000. The majority of
this increase is the result of a one-time gain of $134,000 that the Bank of
Waukegan took on the sale of a property held in the Bank's portfolio of other
real estate owned.
NONINTEREST EXPENSES
Total noninterest expenses declined slightly by $10,000 to $2,409,000 for
the three months ended March 31, 1997. Compared to its holding company peers,
the Company's ability to control overhead expenses is one of its operating
strengths.
Salaries and employee benefits decreased $87,000 during the first quarter
of 1997. This decrease is a result of reductions to staff. At March 31, 1997 the
number of full time equivalent employees for the Company was 126 as compared to
143 at March 31, 1996. It should be noted that no layoffs of staff occurred,
but as employees left or retired their responsibilities are closely examined by
management and delegated to others if possible.
21
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Occupancy expenses increased $30,000 during the period as compared to the
same quarter of 1996. This decrease in occupancy expenses is due in part to
increased building maintenance expenses of $15,000 relating to expenses incurred
for work being done to remove an underground fuel storage tank located at one of
the branch offices of the Bank. This removal project should be completed during
the second quarter of 1997. Utility expenses increased $20,000 during the first
quarter of 1997 due to the harsh winter.
Data processing expenses for the Company increased slightly by $8,000 to
$140,000 during the first quarter of 1997 as compared to the same period last
year and reflects contractual data processing service bureau price increases.
FDIC deposit insurance decreased $32,0000 during the three months ended
March 31, 1997 as compared to the same three months of 1996 as the Thrift had
decreased FDIC insurance expense of $38,000. During the third quarter of 1996
the Thrift booked a one-time $603,000 FDIC expense due to legislation requiring
recapitalization of the FDIC Savings Association Insurance Fund (SAIF). During
the first quarter of 1997 the Thrift's FDIC insurance assessment dropped as a
consequence of the FDIC SAIF being fully funded.
Other real estate owned expenses increased $20,000 for the quarter due to
increased expenses relating to the selling of the properties in the Company's
other real estate owned portfolio.
Miscellaneous other operating expenses increased $51,000 to $524,000
compared to $473,000 during the same period last year. Expenses relating to the
charging off of overdrawn checking accounts increased $18,000 during the first
quarter of 1997. Business development expenses increased $16,000 as compared to
last year as advertising expenses for retail deposits with emphasis on time
deposits were incurred. Postage expenses increased $11,000 during the first
quarter of 1997 due to increased mailings of year end 1098 and 1099 notices.
The amortization of mortgage servicing rights during the first quarter of 1997
was $7,000 greater than last year as the impact of the Statement of Financial
Accounting Standards (SFAS) No. 122, "Accounting for Mortgage Servicing Rights"
took effect. This statement was adopted January 1, 1996 and the value allocated
to mortgage servicing rights are amortized in proportion to and over the period
of estimated net servicing income.
22
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FEDERAL AND STATE INCOME TAXES
For the three months ended March 31, 1997 and 1996, the Company's provision
for federal state income taxes were $702,000 and $434,000. The increased taxes
during 1997 correspond to increased levels of income.
ACCOUNTING CHANGES AND RECENT PRONOUNCEMENTS
SFAS No. 125
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities"
revises the accounting for transfers of financial assets, such as loans and
securities, and for distinguishing between sales and secured borrowings.
Portions of this statement have become effective for some transactions in 1997
while other transactions for this statement will be effective in 1998. The
effect of this statement on the March 31, 1997 financial statements was not
material.
SFAS No. 128
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
became effective on March 3, 1997. Statement 128 simplifies the calculation of
earnings per share by replacing primary Earnings Per Share with basic Earnings
Per Share. The effect of this statement on the March 31, 1997 financial
statements was not material.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized, on this 2nd day of May, 1997.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Date: May 2, 1997 By: /s/ Fred Abdula
------------------------ ------------------------
Fred Abdula
Chairman of the Board of
Directors and President
Date: May 2, 1997 By: /s/ Thomas M. Nemeth
------------------------ -------------------------
Thomas M. Nemeth
Assistant Vice President
24
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<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
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