<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, 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 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, 1997.
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
SEPTEMBER 30, 1997
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at September 30,
1997, December 31, 1996, and September 30, 1996........................2
Condensed consolidated statements of income for the three and
nine months ended September 30, 1997 and 1996..........................3
Condensed consolidated statements of cash flows for
the nine months ended September 30, 1997 and 1996......................4
Notes to condensed consolidated financial statements..............5 - 14
Item 2. Management's discussion and analysis of financial
condition and results of operations.......................15 - 23
PART II. OTHER INFORMATION
Signatures..................................................................24
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1997, December 31, 1996
and September 30, 1996
(In thousands of dollars, except per share data)
Sept. 30, December 31, Sept. 30,
1997 1996 1996
Assets -------- ----------- ---------
Cash and due from banks . . . . . . . . . $15,037 $15,247 $14,584
Interest-bearing deposits in financial
institutions. . . . . . . . . . . . . . . 36 1,235 241
Federal funds sold . . . . . . . . . . . 30,300 15,500 21,950
-------- --------- --------
Total cash and cash equivalents. . . . 45,373 31,982 36,775
Interest-bearing deposits in financial
institutions - maturities over
90 days. . . . . . . . . . . . . . . . 100 100 100
Securities available-for-sale . . . . . . 155,981 149,750 140,619
Loans . . . . . . . . . . . . . . . . . . 243,090 232,653 228,787
Less: Allowance for loan losses . . . . . 5,421 4,839 5,017
-------- --------- --------
Loans, net . . . . . . . . . . . . . . 237,669 227,814 223,770
Direct lease financing. . . . . . . . . . 1,132 999 919
Office buildings and equipment, net . . . 6,002 6,250 6,339
Other real estate owned, net of
allowance for losses
of $541, $532 and $526 . . . . . . . . 2,560 2,846 3,583
Accrued interest receivable . . . . . . . 4,079 3,955 4,038
Other assets. . . . . . . . . . . . . . . 1,777 2,868 3,563
-------- --------- --------
Total assets . . . . . . . . . . . . .$454,673 $426,564 $419,706
======== ========= ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest-bearing . . . . . $38,568 $43,223 $40,343
NOW accounts . . . . . . . . . . . . . 38,848 38,159 38,796
Money market accounts. . . . . . . . . 52,527 44,426 50,811
Savings. . . . . . . . . . . . . . . . 43,546 44,843 46,295
Time, $100,000 and over. . . . . . . . 86,802 69,052 64,245
Time, under $100,000 . . . . . . . . . 93,195 89,092 88,917
-------- -------- --------
Total deposits. . . . . . . . . . . 353,486 328,795 329,407
Securities sold under repurchase
agreements and other short-term
borrowings . . . . . . . . . . . 35,690 36,758 31,363
Advances from borrowers for taxes and
insurance. . . . . . . . . . . . 426 1,021 562
Accrued interest payable and other
liabilities. . . . . . . . . . . 5,692 5,155 5,404
-------- -------- --------
Total liabilities . . . . . . . . . 395,294 371,729 366,736
Stockholders' Equity
Common stock - $2 par value:
1,750,000 shares authorized;
889,273, 889,273 and 889,273 shares
issued and outstanding. . . . . . . 1,779 1,779 1,779
Additional paid-in capital. . . . . . . . 11,216 11,216 11,196
Retained earnings . . . . . . . . . . . . 45,809 41,849 40,833
Unrealized gain (loss) on securities
available-for-sale, net . . . . . . 575 (9) (838)
-------- -------- --------
Total stockholders' equity . . . . . . 59,379 54,835 52,970
-------- -------- --------
Total liabilities and stockholders'
equity. . . . . . . . . . . . . . . $454,673 $426,564 $419,706
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months and nine months
ended September 30, 1997 and 1996
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Interest income
Loans (including fee income) . . . . . . . . . . . . . . . $5,618 $5,750 $16,452 $16,566
Securities
Taxable . . . . . . . . . . . . . . . . . . . . . . . . 2,048 1,837 6,043 5,763
Exempt from federal income tax. . . . . . . . . . . . . 286 328 872 869
Interest-bearing deposits in financial institutions. . . . 7 5 23 19
Federal funds sold . . . . . . . . . . . . . . . . . . . . 324 172 679 442
-------- -------- --------- ---------
Total interest income . . . . . . . . . . . . . . . . . 8,283 8,092 24,069 23,659
-------- -------- --------- ---------
Interest expense
Time deposits . . . . . . . . . . . . . . . . . . . . . 2,453 2,151 6,969 6,542
Other deposits. . . . . . . . . . . . . . . . . . . . . 1,071 1,063 3,103 3,251
Other borrowings. . . . . . . . . . . . . . . . . . . . 439 416 1,257 1,297
-------- -------- --------- ---------
Total interest expense . . . . . . . . . . . . . . . 3,963 3,630 11,329 11,090
-------- -------- --------- ---------
Net interest income . . . . . . . . . . . . . . . . . . . . . 4,320 4,462 12,740 12,569
Provision for loan losses . . . . . . . . . . . . . . . . . . 120 360 480 1,080
-------- -------- --------- ---------
Net interest income after provision for loan losses . . . . . 4,200 4,102 12,260 11,489
-------- -------- --------- ---------
Noninterest income
Service fees on deposits . . . . . . . . . . . . . . . . . 322 325 965 973
Trust income . . . . . . . . . . . . . . . . . . . . . . . 156 137 454 382
Net security gains . . . . . . . . . . . . . . . . . . . . 0 0 0 5
Net gains on sales of loans. . . . . . . . . . . . . . . . 58 103 118 175
Other operating income . . . . . . . . . . . . . . . . . . 124 383 499 666
-------- -------- --------- ---------
Total noninterest income. . . . . . . . . . . . . . . . 660 948 2,036 2,201
-------- -------- --------- ---------
Noninterest expenses
Salaries and employee benefits . . . . . . . . . . . . . . 1,385 1,357 4,051 4,217
Occupancy and equipment expenses, net. . . . . . . . . . . 289 295 959 965
Data processing expense. . . . . . . . . . . . . . . . . . 135 134 400 406
FDIC deposit insurance expense . . . . . . . . . . . . . . 20 656 64 764
Other real estate owned expenses . . . . . . . . . . . . . 19 49 145 161
Other operating expenses . . . . . . . . . . . . . . . . . 428 500 1,444 1,528
-------- -------- --------- ---------
Total noninterest expenses. . . . . . . . . . . . . . . 2,276 2,991 7,063 8,041
-------- -------- --------- ---------
Income before income taxes. . . . . . . . . . . . . . . . . . 2,584 2,059 7,233 5,649
Provision for income taxes. . . . . . . . . . . . . . . . . . 813 611 2,250 1,588
-------- -------- --------- ---------
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . $1,771 $1,448 $4,983 $4,061
======== ======== ========= =========
Earnings per common share . . . . . . . . . . . . . . . . . . $1.99 $1.63 $5.60 $4.57
======== ======== ========= =========
Weighted average common shares outstanding. . . . . . . . . . 889,273 889,273 889,273 888,793
======== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1997 and 1996
(In thousands of dollars)
Sept. 30, Sept. 30,
1997 1996
--------- ---------
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . $4,983 $4,061
Adjustments to reconcile net income to cash
from operating activities:
Depreciation . . . . . . . . . . . . . . . . 416 407
Provision for loan losses. . . . . . . . . . 480 1,080
Provision for losses on other real estate
owned . . . . . . . . . . . . . . . . . . 17 16
Deferred loan fees . . . . . . . . . . . . . (53) (118)
Net gains on sales of securities . . . . . . 0 (5)
Proceeds from sales of loans . . . . . . . . 6,990 8,749
Loans originated for sale. . . . . . . . . . (6,965) (6,535)
Net gains on sales of loans. . . . . . . . . (57) (98)
Net gains on sales of other real estate
owned . . . . . . . . . . . . . . . . . . (142) (99)
Amortization of mortgage servicing
rights. . . . . . . . . . . . . . . . . . 25 0
Net change in interest receivable. . . . . . (124) 328
Net change in interest payable . . . . . . . 436 48
Net change in other assets . . . . . . . . . 724 919
Net change in other liabilities. . . . . . . 55 833
--------- ---------
Net cash from operating activities . . . . . 6,785 9,586
--------- ---------
Cash flows from investing activities
Proceeds from sales of securities
available-for-sale . . . . . . . . . . . . 0 2,675
Proceeds from maturities of securities
available-for-sale . . . . . . . . . . . . 49,434 78,089
Purchases of securities available-for-sale. . (54,693) (68,371)
Change in loans made to customers . . . . . . (10,426) (7,692)
Property and equipment expenditures . . . . . (168) (159)
Net change in direct lease financing. . . . . (133) (297)
Proceeds from sales of other real
estate owned . . . . . . . . . . . . . . . 587 520
--------- ---------
Net cash from investing activities . . . . . (15,399) 4,765
--------- ---------
Cash flows from financing activities
Net change in:
Deposits . . . . . . . . . . . . . . . . . 24,691 1,852
Securities sold under repurchase agreements
and other short-term borrowings. . . . . (1,068) (11,915)
Advances from borrowers for taxes and
insurance. . . . . . . . . . . . . . . . . (595) (719)
Net proceeds from exercise of stock
options. . . . . . . . . . . . . . . . . . 0 77
Dividends paid . . . . . . . . . . . . . . . . (1,023) (845)
--------- ---------
Net cash from financing activities . . . . . 22,005 (11,550)
--------- ---------
Net change in cash and cash equivalents . . . . . . . 13,391 2,801
Cash and cash equivalents at beginning of period. . . 31,982 33,974
--------- ---------
Cash and cash equivalents at end of period. . . . . . $45,373 $36,775
========= =========
Supplemental disclosures
Cash paid during the period for
Interest . . . . . . . . . . . . . . . . . . $10,893 $11,042
Income taxes . . . . . . . . . . . . . . . . 2,159 1,665
Noncash investing activities
Transfers made from loans to other real estate
owned. . . . . . . . . . . . . . . . . . . 176 1,709
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
September 30, 1997
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim condensed 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 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, 1997,
December 31, 1996 and September 30, 1996. The condensed consolidated
statements of income are for the three months and nine months ended September
30, 1997 and 1996. The condensed consolidated statements of cash flows are
for the nine months ended September 30, 1997 and 1996.
The interim condensed financial statements should be read in conjuction
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 nine month period ended September 30,
1997 are not necessarily indicative of the results to be expected for the
full year.
Earnings per share are computed by dividing net income by the
weighted-average shares during the period. The effect of stock options was
not material to earnings per share for any periods presented.
5
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
NOTE 2 - SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of
securities available-for-sale as of September 30, 1997, December 31, 1996 and
September 30, 1996 are as follows:
SEPTEMBER 30, 1997
- ------------------
Amortized Gross Unrealized Fair
Cost Gains Losses Value
----------------------------------------------
U.S. Treasury . . . . . . . . . $14,031 $16 $0 $14,047
U.S. Government agencies
and corporations . . . . . . . 101,848 117 (134) 101,831
States and political
subdivisions . . . . . . . . . 23,115 697 (29) 23,783
Mortgage-backed securities. . . 13,979 166 (75) 14,070
Equity securities and mutual fund
investment in debt securities. 2,069 222 (41) 2,250
-------- ------ ------ ---------
Total. . . . . . . . . . . . $155,042 $1,218 $(279) $155,981
======== ====== ====== =========
December 31, 1996
- -----------------
Amortized Gross Unrealized Fair
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. . . 16,408 131 (109) 16,430
Equity securities and mutual fund
investment in debt securities. 2,091 128 (99) 2,120
-------- ------ ------ ---------
Total. . . . . . . . . . . . . $149,783 $1,015 $(1,048) $149,750
======== ====== ======= =======
6
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
September 30, 1996
- ------------------
Amortized Gross Unrealized Fair
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 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
======== === ======== ========
Contractual maturities of debt securities at September 30, 1997 were as
follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
Amortized Fair
Cost Value
------------------------
Securities available-for-sale
Due in one year of less . . . . . . . . . . . . $22,969 $22,982
Due after one year through five years . . . . . 100,064 100,381
Due after five years through
ten years . . . . . . . . . . . . . . . . . . 15,961 16,298
------- -------
138,994 139,661
Mortgage-backed securities. . . . . . . . . . . 13,979 14,070
Mutual fund investment in mortgage-backed
securities . . . . . . . . . . . . . . . . . 2,069 2,250
------- -------
Total. . . . . . . . . . . . . . . . . . . . $155,042 $155,981
======= =======
7
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Mortgage-backed securities are composed of investments in pools of
residential mortgages. The mortgage pools are issued and guaranteed by the
Federal Home Loan Mortgage Corporation (FHLMC) or the Federal National Mortgage
Association (FNMA) and the Government National Mortgage Association (GNMA).
As of September 30, 1997, the Company held structured notes with an
amortized cost of $2,0000 and fair value of $1,994. These securities were
issued by the Federal Home Loan Bank (FHLB). The structured notes consist of
securities that have coupon rates that "step up" periodically during the term to
maturity.
There were no security sales during the three and nine months ended
September 30, 1997.
There were no sales of securities during the three months ended September
30, 1996. There were two sales of securities during the nine months ended
September 30, 1996 of equity securities that resulted in proceeds of $2,675 and
a gain of $5.
Securities carried at fair values of $100,062 and $89,311 at September 30,
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
September 30, 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 at September 30, 1997, December 31, 1996 and September 30, 1996
were as follows:
Sept. 30, December 31, Sept. 30,
1997 1996 1996
---------------------------------------
Commercial. . . . . . . . . . . . $56,449 $50,762 $47,286
Real estate - construction. . . . 26,515 26,905 25,796
Real estate - mortgage. . . . . . 151,675 146,552 147,083
Installment . . . . . . . . . . . 9,088 9,203 9,482
---------------------------------------
Total loans. . . . . . . . . . 243,727 233,422 229,647
Unearned income . . . . . . . . . (161) (240) (278)
Deferred loan fees. . . . . . . . (476) (529) (582)
---------------------------------------
Loans, net of unearned income 243,090 232,653 228,787
and deferred loan fees . . .
Allowance for loan losses . . . . (5,421) (4,839) (5,017)
---------------------------------------
Loans, net . . . . . . . . . . $237,669 $227,814 $223,770
=======================================
Loans held for sale on September 30, 1997, December 31, 1996 and September
30, 1996 were approximately $925, $893 and $345, and are classified as real
estate loans.
Non-performing loans, which includes 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 $2,270 at September 30, 1997, $1,166 at December 31, 1996 and $2,174
at September 30, 1996.
9
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
Impaired loans were as follows for September 30, 1997, December 31, 1996
and September 30, 1996:
Sept. 30, December 31, Sept. 30,
1997 1996 1996
---------------------------------------
Loans with no allowance
for losses allocated . . . . . . $ 0 $ 0 $ 0
Loans with allowance
for losses allocated . . . . . . 647 828 1,083
Amount of the allowance
allocated . . . . . . . . . . . . 109 146 385
Average balance and income recognized on impaired loans were as follows
for the three and nine months ended September 30, 1997 and 1996:
Three months ended Nine months ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Average of impaired
loans during the period . . $627 $1,793 $810 $3,111
Interest income recognized
during the impairment
period . . . . . . . . . . . 18 3 34 7
Cash-basis interest income
recognized during the
impairment period . . . . . 18 3 34 7
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 nonperformance by other parties to these
financial statements 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
September 30, 1997
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
At September 30, 1997, December 31, 1996 and September 30, 1996 the
contract amount of the Company's off-balance sheet commitments was as follows:
Sept. 30, December 31, Sept. 30,
1997 1996 1996
-------------------------------------------
Unused lines of credit
and commitments to make loans:
Fixed rate . . . . . . . . . $17,302 $17,696 $10,473
Variable rate . . . . . . . . 52,698 57,979 53,334
-------------------------------------------
Total . . . . . . . . . . . $70,000 $75,675 $63,807
===========================================
Standby letters of credit . . . $5,979 $6,250 $5,287
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 commitment 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, 1997
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES AND OTHER REAL ESTATE OWNED LOSSES
Activity in the allowance for loan losses for the nine months ended
September 30, 1997, twelve months ended December 31, 1996 and nine months
ended September 30, 1996 is as follows:
Sept. 30, December 31, Sept. 30,
1997 1996 1996
--------------------------------------------
Balance at beginning of year $4,839 $4,514 $4,514
Provision charged to
operating expense . . . . 480 1,190 1,080
Loans charged off. . . . . . (190) (1,141) (793)
Recoveries on loans
previously charged off . . 292 276 216
--------------------------------------------
Balance at end of period . $5,421 $4,839 $5,017
============================================
Activity in the allowance for other real estate owned losses for the
nine months ended September 30, 1997, twelve months ended December 31, 1996
and nine months ended September 30, 1996 is as follows:
Sept. 30, December 31, Sept. 30,
1997 1996 1996
--------------------------------------
Balance at beginning of year . $532 $510 $510
Provision charged to operating
expense . . . . . . . . . . 17 22 16
Losses on other real estate
owned . . . . . . . . . . . (8) 0 0
---------------------------------------
Balance at end of period . . . $541 $532 $526
=======================================
12
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 nine months ended September 30, 1997 total stockholders' equity
increased $4,544. The increase is a result of net income of $4,983, plus the
change in the valuation allowance from December 31, 1996 for the fair value
of securities available-for-sale, net of tax, of $584, less cash dividends
paid of $1,023.
For the nine months ended September 30, 1996 total stockholders' equity
increased $1,965 due to 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.
NOTE 7 - OMNIBUS INCENTIVE PLAN INSTRUMENTS
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 that became
effective for 1996, requires pro forma disclosures for companies that do not
adopt its fair value accounting method for stockbased employee compensation.
The Company did not grant any stock options during the nine months ended
September 30, 1997 or during the entire year, 1996.
13
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(Dollar Amounts in Thousands, Except Per Share Data)
(Unaudited)
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 follows:
Number of Weighted-Avg.
Options Exercise Price
--------------------------------
Outstanding at January 1, 1996. . . 7,020 $41.63
Exercised during period ended
September 30, 1996 . . . . . . . 1,842 41.64
--------------------------------
Outstanding at September 30, 1996 . 5,178 $41.62
======== =======
Outstanding at January 1, 1997. . . 5,178 $41.62
Exercised during period ended
September 30, 1997 . . . . . . . 0 0
--------------------------------
Outstanding at September 30, 1997 . 5,178 $41.62
At September 30, 1997, options outstanding ranged in exercise price from
$41.60 to $42.00 and had a remaining option life of 4.4 years.
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 a grant over
the grant price. During the nine months ended September 30, 1997 and 1996,
656 and 2,908 stock appreciation rights were exercised and payment made to
the holders. As of September 30, 1997 and 1996, 3,248 and 3,904 stock
appreciation rights were outstanding that had been awarded at $41.60. The
Company's expense was $26 and $12 for the three months ended September 30,
1997 and 1996 and was $42 and $35 for the nine months ended September 30,
1997 and 1996. The stock appreciation rights will expire in April 30, 2002.
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
conditions of the Northern States Financial Corporation at September 30, 1997
and the consolidated results of operations for the three and nine month
periods ending September 30, 1997, compared to the same periods of 1996. The
purpose of this discussion is to provide a better understanding of the
condensed consolidated financial statements and the operations of its
subsidiaries, the Bank of Waukegan ("The Bank") and First Federal Bank, fsb
("First Federal" or "The Thrift"). This discussion should be read in
conjunction with the interim condensed consolidated financial statements and
notes thereto included herein.
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 subsequent to September 30,
1997 to differ materially from those expressed in any such forward-looking
statements.
FINANCIAL CONDITION
The consolidated total assets for the Company were $454.7 million at
September 30, 1997, increasing $28.1 million from the Company's year-end,
December 31, 1996.
Securities in total increased $6.2 million or 4.16% from the previous
year-end. The statement of cashflows shows that $5.3 million more in
securities were purchased than matured. The fair value of securities
increased $.9 million as well due to changes in market conditions. Most of
the new securities purchased were U.S. Government agency issues.
Strong loan demand caused the Company's loans to increase $10.4 million
or 4.49% from December 31, 1997. Loan growth occurred primarily at the Bank
where total loans increased $10.8 million. The Bank experienced $4.8 million
in growth to its commercial loan portfolio and $8.2 million in growth to its
real estate mortgage loan portfolio. A large percentage of the mortgage
loans booked by the Bank are commercial related mortgages that initially were
short-term commercial loans or construction loans. The Bank experienced
declines to its real estate construction and installment loans from year-end
of $1.5 million and $.7 million. At the Thrift, total loans decreased
slightly by $.4 million. While commercial, real estate construction and
installment loans posted increases at the Thrift of $.9 million, $1.2 million
and $.6 million, mortgage loans at the Thrift declined $3.1 million.
Increased competition for mortgages on 1 - 4 family residences accounts for
the decline of mortgage loans at the Thrift.
During the first nine months of 1997 deposits at the Company grew $24.7
million. Total time deposits increased $21.9 million while money market and
NOW accounts grew $8.1 million and $.7 million from December 31, 1996.
Noninterest-bearing demand deposits and savings accounts declined $4.7
million and $1.3 million.
At the Bank of Waukegan, total deposits increased $32.1 million or
13.53%. The Bank experienced increases to its NOW accounts of $2.0 million,
money market accounts of $9.1 million, time deposits of $100,000 and over of
$22.1 million and time deposits of under $100,000 of $3.3 million.
15
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Much of the growth in money market accounts and time deposits of $100,000 and
over was from increases in public deposits. The increases in time deposits
of under $100,000 were made by retail depositors. The Bank had declines of
$3.6 million and $.8 million to noninterest-bearing demand deposits and
savings accounts. The decline in noninterest-bearing demand deposits at the
Bank is attributable to decreased commercial deposits as business customers
made capital expenditures due to the healthy local economy.
Deposit totals at First Federal declined $7.4 from December 31, 1996.
Noninterest-bearing demand balances decreased $1.0 million, NOW accounts
declined $1.3 million, and money market accounts were $1.0 million lower.
Savings and time deposit of all types also decreased $.5 million and $3.6
million. Time deposits of $100,000 and over declined at the Thrift as
brokered deposits of $3.5 million left the Thrift. The other decreases are
attributable to customers shifting funds to other savings and loan
institutions that traditionally have offered higher interest rates and lower
deposit service fees. First Federal offers rates and terms on its deposits
that are the same as the Bank of Waukegan and as a result some clients have
withdrawn their funds and transferred them to competitors.
Securities sold under repurchase agreements and other short-term
borrowings at the Company declined $1.1 million from December 31, 1996 to
$35.7 million at September 30, 1997. These funds mainly consist of
securities sold under repurchase agreement 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 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 has been the result of commercial customers drawing down
their balances to make capital expenditures that is indicative of the
expansion of the local economy.
Total stockholders' equity increased $4,544,000 during the nine months
ended September 30, 1997. The increase is the result of net income of
$4,983,000, plus the adjustment in the valuation allowance for the market
value of securities available-for-sale, net of tax, of $584,000, less cash
dividends paid of $1,023,000.
The tier 1 capital-to-asset ratio at September 30, 1997 was 12.93% and
the total capital-to-asset ratio, on a risk adjusted basis, amounted to
21.56%, exceeding the minimum required to be capitalized under prompt
corrective action regulations, which minimums are 5.00% and 10.00%. Book
value per share was $66.77 at September 30, 1997 as compared to $61.66 at
December 31, 1996. On September 30, 1997, the Company and its subsidiaries
were in compliance with all applicable regulatory capital requirements.
RESULTS OF OPERATIONS
NET INCOME
The consolidated net income for the quarter ended September 30, 1997 was
$1,771,000, an increase of $323,000 or 22.31%, as compared to net income of
$1,448,000 for the same period the previous year. The annualized return on
average assets was 1.61% for the quarter as compared to 1.39%
16
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for the quarter the previous year. The consolidated net income for the nine
months ended September 30, 1997 was $4,983,000, an increase of $922,000, over
the first nine months of 1996. The annualized return on average assets for
the first nine months of 1997 was 1.55% as compared to 1.29% 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, decreased $142,000 or 3.18% during the three
months ended September 30, 1997, compared to the same three months in 1996.
The decrease in net interest income for the third quarter of 1997 can be
explained in that during the third quarter of 1996 the Thrift received
payment to bring an impaired credit up to date and received a one-time
$400,000 in interest and fees which increased net interest income in 1996.
This is evidenced in Table 1, "Analysis of Average Balance and Tax Equivalent
Rates for the Three Months ended September 30, 1997 and 1996" where the yield
on loans for the third quarter of 1997 was only 9.36% as compared to 9.93%
last year. Adjusting out the $400,000 in interest and fees collected on the
impaired loan lowers the yield on loans for the third quarter of 1996 to
9.24%. This same adjustment lowers the yield on interest-earning assets for
the third quarter of 1996 to 8.10% that compares to the yield on interest
earning assets of 8.16% during the third quarter of 1997. Table 1 also
points out that time deposit rates for the third quarter of 1997 increased
over the same period last year as the Company offered higher interest rates
during 1997 to maintain and attract time deposit customers.
During the first nine months of 1997, net interest income increased
$171,000 or 1.36% over the same period of 1996. During the first nine months
of 1996 $480,000 in interest and fees were collected on impaired loans that
were brought up to date or paid off. Table 2, "Analysis of Average Balance
and Tax Equivalent Rates for the Nine Months ended September 30, 1997" shows
that the Company's net yield on interest earning assets was 4.39% for the
first nine months of 1997 as compared to 4.49% in 1996. Factoring out the
$480,000 in one-time interest and fees lowers the Company's net yield on
interest earning assets from 4.49% to 4.33% for the nine months ended
September 30, 1996.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $120,000 for the quarter ended
September 30, 1997 compared to $360,000 for the same period the previous
year. For the nine months ended September 30, 1997, the provision for loan
losses was $480,000 compared to $1,080,000 for the nine months ended
September 30, 1996. Management, with the concurrence of the Board of
Directors, lowered the provision for loan losses during 1997 after a careful
review of the adequacy of the allowance for loan losses and the levels of
non-performing and impaired loans.
17
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended September 30, 1997 and 1996
($ 000s)
<TABLE>
<CAPTION>
1997 1996
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3) $241,606 $ 5,655 9.36% $233,048 $ 5,785 9.93%
Taxable securities 129,324 2,048 6.33% 117,793 1,837 6.14%
Securities exempt from
taxes (2) 21,183 434 8.39% 24,106 498 8.41%
Interest bearing deposits in banks 473 7 5.92% 372 5 5.38%
Federal funds sold 23,015 324 5.63% 13,051 172 5.27%
---------------------- -------------------
Interest earning assets 415,601 8,468 8.16% 388,370 8,297 8.51%
------- -------
Noninterest earning assets 22,441 26,552
-------- --------
Average assets $438,042 $414,922
======== ========
Liabilities and stockholders' equity
NOW deposits $ 38,565 287 2.98% $ 37,605 274 2.91%
Money market deposits 44,846 451 4.02% 43,208 434 4.02%
Savings deposits 44,450 333 3.00% 47,326 355 3.00%
Time deposits 170,988 2,453 5.74% 154,864 2,151 5.56%
Other borrowings 34,302 439 5.12% 34,233 416 4.86%
----------------------- -------------------
Interest bearing liabilities 333,151 3,963 4.76% 317,236 3,630 4.58%
------- -------
Demand deposits 40,298 39,585
Other noninterest bearing liabilities 6,658 6,056
Stockholders' equity 57,935 52,045
-------- --------
Average liabilities and stockholders'
equity $438,042 $414,922
======== ========
Net interest income $ 4,505 $ 4,667
======= =======
Net yield on interest earning assets 4.34% 4.79%
===== =====
Liabilities to earning assets ratio 80.16% 81.68%
===== =====
</TABLE>
(1) - Interest income on loans includes loan origination fees of $116
and $76 for the three months ended September 30, 1997
and 1996.
(2) - Tax-exempt income is reflected on a fully tax equivalent basis
utilizing a 34% rate.
(3) - Non-accrual loans are included in average loans.
18
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Nine Months Ended September 30, 1997 and 1996
($ 000s)
<TABLE>
<CAPTION>
1997 1996
AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3)
$239,226 $16,559 9.23% $233,542 $16,778 9.58%
Taxable securities 126,300 6,043 6.34% 125,591 5,763 6.07%
Securities exempt from
federal income taxes (2) 21,535 1,322 8.37% 21,546 1,317 8.36%
Interest bearing deposits in banks 537 23 5.71% 454 19 5.58%
Federal funds sold 16,453 679 5.50% 11,247 442 5.24%
---------------------- -------------------
Interest earning assets 404,051 24,626 8.12% 392,380 24,319 8.25%
------- -------
Noninterest earning assets 22,603 25,840
-------- --------
Average assets $426,654 $418,220
======== ========
Liabilities and stockholders' equity
NOW deposits $37,683 836 2.96% $40,241 906 3.00%
Money market deposits 42,700 1,274 3.98% 42,410 1,291 4.06%
Savings deposits 44,672 993 2.96% 47,246 1,054 2.97%
Time deposits 164,598 6,969 5.65% 155,350 6,542 5.61%
Other borrowings 33,458 1,257 5.01% 35,103 1,297 4.93%
----------------------- -------------------
Interest bearing liabilities 323,111 11,329 4.67% 320,350 11,090 4.62%
------- -------
Demand deposits 40,090 39,577
Other noninterest bearing liabilities 7,078 6,674
Stockholders' equity 56,375 51,619
-------- --------
Average liabilities and stockholders'
equity $426,654 $418,220
======== ========
Net interest income $13,297 $13,229
======= =======
Net yield on interest earning assets 4.39% 4.49%
===== =====
Interest-bearing liabilities to
earning assets ratio 79.97% 81.64%
===== =====
</TABLE>
(1) - Interest income on loans includes loan origination fees of $319
and $293 for the nine months ended September 30, 1997
and 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.
19
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
At September 30, 1997, the allowance for loan losses was $5,421,000 or
2.23% of loans as compared to 2.19% of loans at September 30, 1996.
Nonperforming loans, at September 30, 1997, were $2,270,000, up slightly from
$2,174,000 at September 30, 1996. At September 30, 1997, the Bank had two
credits totaling $1,048,000 classified as nonperforming because the credits
were ninety days past due. The Bank is waiting for needed documentation
before renewing the loans and expects that the documentation will be
forthcoming and the loans will be reclassified as performing. Impaired loans
were only $647,000 or .26 % of loans at September 30, 1997 as compared to
impaired loans of $1,083,000 at September 30, 1997 or .47% of loans. The
amount of the allowance for loan losses allocated for impaired loans at
September 30, 1997 declined to $109,000 from $385,000 at September 30, 1996.
Loan charge offs to the allowance for loan losses have decreased in 1997.
During the first nine months of 1997 only $190,000 in loans were charged off
to the allowance for loan losses as compared to $793,000 during the same
period of 1996. Recoveries of charged off loans have increased in 1997
increasing the allowance for loan losses. During the first nine months of
1997 recoveries of loans previously charged off were $292,000 as compared to
only $216,000 during the same period in 1996.
The adequacy of the allowance for loan losses is analyzed by management
and the Board of Directors at both the Bank and the Thrift 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 allowance for loan losses.
Based on management's and the Board of Directors' analysis, the allowance
for loan losses at September 30, 1997 is adequate to cover future possible
loan losses.
NONINTEREST INCOME
Noninterest income for the three months ended September 30, 1997 was
$660,000 as compared to $948,000 for the three months ended September 30,
1996, a decrease of $288,000. Service fees on deposits decreased slightly by
$3,000 as compared to the same quarter last year because of a slowdown in
overdraft activities. Trust fee increased $19,000 during the three months
ended September 30, 1997 due to increased trust business. Other income from
gains on sales on loans declined $45,000 during the third quarter of 1997 in
that during the third quarter of 1996 the Thrift booked an additional
one-time $77,000 as gains on loan sales to comply with Statement of Financial
Accounting Standards (SFAS) Number 122 "Accounting for Mortgage Servicing
Rights". Other operating income during the third quarter of 1997 was
$259,000 less than the same period last year as the Bank during the third
quarter of 1996 had a gain of $99,000 on the sale of two properties
classified as other real estate owned and a one-time collection of back
interest and fees totaling $131,000 on a loan that had been previously
charged off.
For the first nine months of 1997 noninterest income was $2,036,000 as
compared to $2,201,000 for the same period of 1996. Service fees on deposits
were $8,000 less during the first three quarters of 1997 because of decreased
overdraft fee income as compared to the same period last year. Trust income
for the nine months ended September 30, 1997 increased $72,000 as a result of
increased fiduciary activities. Gains on sales of loans declined $57,000
during the first three quarters of 1997 as during the same period of 1996 as
the Thrift recognized one-time gains on sales of loans of $77,000 in 1996 to
comply with SFAS Number 122. Other operating income declined $167,000 during
the nine months ended September 30, 1997 as there was a $131,000 one-time
collection of back interest and fees during the third quarter of 1996 on a
charged off loan.
20
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NONINTEREST EXPENSES
Noninterest expenses declined $715,000 or 23.91% during the three
months ended September 30, 1997. There was a slight increase in salary and
employee benefit expenses of $28,000 during the third quarter of 1997
compared to the same period last year. A new employee policy was implemented
at the Bank during 1997 and accruals for vacation pay were instituted which
increased salary expense during the third quarter of 1997. A new senior
lender was hired at the Bank during the third quarter of 1997 that also
increased salaries and employee benefits compared to last year.
Occupancy expenses for the third quarter of 1997 were $289,000 which
was a decline of $6,000 from the third quarter of 1996. This decline in
occupancy expenses is attributable to decreased property taxes at the Bank
where the assessed valuation of one location was lowered.
Data processing expense increased $1,000 during the third quarter of
1997 to $135,000.
FDIC insurance decreased $636,000 to $20,000 during the three months
ended September 30, 1997. During the third quarter of 1996 First Federal
expensed a one-time $603,000 special assessment that was required as First
Federal's portion to fully capitalize the FDIC Savings Association Insurance
Fund (SAIF). Because of this special assessment the Thrift's FDIC premiums
have been minimized during 1997.
Other real estate owned expenses declined during the third quarter of
1997 by $30,000 reflecting the smaller real estate owned portfolio that
amounted to $2,560,000 at September 30, 1997 as compared to $3,583,000 at
September 30, 1996.
Miscellaneous other operating expenses decreased $72,000 compared to the
same quarter last year. Professional fees were $15,000 lower during the
third quarter of 1997 as compared to the same period last year as the level
of professional services needed declined. Printing expenses declined $20,000
as the loan and customer service areas continued to automate so that forms
are printed by laser printers when needed, reducing inventories of forms.
Expenses relating to charged off checking accounts and bad checks were
$18,000 less during the third quarter of 1997 as compared to last year.
During the nine months ended September 30, 1997, total noninterest
expenses were $7,063,000 or $978,000 less than during the same period last
year, a reduction of 12.16%. Salaries and employee benefit expense was
$166,000 less during the nine months ending September 30, 1997 as compared to
the same period last year. During the first part of 1997, as employees left
or retired, management closely examined and delegated their responsibilities
to others whenever possible. During the third quarter of 1997, a senior
lender was added to staff and employee policy changes increased accruals for
vacation pay. Management expects that fourth quarter 1997 salary expense will
increase slightly when compared to the fourth quarter of 1996.
Occupancy expenses were $6,000 less during the nine months of 1997 when
compared to the same period of 1996. Decreased property taxes at the Bank
explain this decrease.
21
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Data processing expenses were $6,000 lower during the first nine months
of 1997 when compared to the same period of 1996. It is expected that fourth
quarter 1997 data processing expenses will increase slightly as the Company
has been notified of contractual increases in charges from its data
processing service bureau.
FDIC deposit insurance expense was $64,000 for the first three quarters
of 1997, a decrease of $700,000 from the same period last year. In
September, 1996 the Thrift expensed a one-time special assessment of $603,000
to recapitalize the FDIC Savings Association Insurance Fund (SAIF). Because
of this special assessment the Thrift's regular quarterly FDIC insurance
premiums have been minimized which account for the additional decrease in
FDIC expense during 1997.
Other real estate owned expenses declined $16,000 during the nine months
ending September 30, 1997 as compared to the same period last year as other
real estate owned on the Company's books was over $1,000,000 lower at
September 30, 1997 than at September 30, 1996.
Miscellaneous other operating expenses were $84,000 lower for the nine
months ending September 30, 1997 as compared to the same period last year.
Professional fees declined $28,000 during the first three quarters of 1997
as compared to the same period last year as the level of professional
services needed declined. Printing expenses were $40,000 lower as automation
of the loan and customer service areas allowed forms to be printed by laser
printers as needed, reducing inventories of forms. Expenses relating to
correspondent bank accounts were $20,000 less during the nine months ended
September 30, 1997 as compared to last year as correspondent bank balances
were larger and earning allowances were greater, thus reducing this expense.
FEDERAL AND STATE INCOME TAXES
For the three months ended September 30, 1997 and 1996, the Company's
provision for federal and state income taxes was $813,000 and $611,000 which
as a percentage of pretax earnings was 31.46% and 29.67%. For the nine months
ended September 30, 1997, the Company's provision for federal and state taxes
was $2,250,000 or 31.10% of pretax earnings as compared to $1,588,000 or
28.11% of pretax earnings for the nine months ending September 30, 1996. The
increase in tax rates during 1997 is attributable to increased earnings in
1997 that were not sheltered for federal or state income tax purposes.
ACCOUNTING CHANGES, RECENT PRONOUNCEMENTS AND REGULATORY ISSUES
SFAS 125
Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" revised 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 will be effected by this
statement in 1998. The effect on this statement on the September 30, 1997
financial statements was not material.
22
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SFAS 128
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" becomes effective for the Company's December 31, 1997 financial
statements. This statement simplifies the calculations of earnings per share
by replacing primary earnings per share with basic earnings per share.
SFAS 130
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No, 130, "Reporting Comprehensive Income" which will be
effective for fiscal years beginning after December 15, 1997. The statement
establishes standards for the reporting and display of comprehensive income
and its components in a full set of general purpose financial statements.
The statement does not address when transactions are recorded, how they are
measured in the financial statements or whether they should be included in
net income or other comprehensive income. The effect of this statement on
future financial statements is not expected to be material.
SFAS 131
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and
Related Information" which will become effective for fiscal years beginning
after December 15, 1997. The statement establishes standards for the way
public companies report information about operating segments in annual
financial statements and requires that those enterprises report selected
financial information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major
customers. Management does not expect that the effect of this statement on
its financial reporting will be material.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to sign on its behalf by the
undersigned hereunto duly authorized, on this 7th day of November, 1997.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Date: November 11, 1997 By: /s/ Fred Abdula
----------------------------- ----------------------------------
Fred Abdula
Chairman if the Board of
Directors and President
Date: November 11, 1997 By: /s/ Thomas M. Nemeth
----------------------------- ----------------------------------
Thomas M. Nemeth
Assistant Vice President
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 15,037
<INT-BEARING-DEPOSITS> 136
<FED-FUNDS-SOLD> 30,300
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 155,981
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 244,222
<ALLOWANCE> 5,421
<TOTAL-ASSETS> 454,673
<DEPOSITS> 353,486
<SHORT-TERM> 35,690
<LIABILITIES-OTHER> 6,118
<LONG-TERM> 0
0
0
<COMMON> 1,779
<OTHER-SE> 57,600
<TOTAL-LIABILITIES-AND-EQUITY> 454,673
<INTEREST-LOAN> 16,452
<INTEREST-INVEST> 6,915
<INTEREST-OTHER> 702
<INTEREST-TOTAL> 24,069
<INTEREST-DEPOSIT> 10,072
<INTEREST-EXPENSE> 11,329
<INTEREST-INCOME-NET> 12,470
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 7,063
<INCOME-PRETAX> 7,233
<INCOME-PRE-EXTRAORDINARY> 4,983
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,983
<EPS-PRIMARY> 5.60
<EPS-DILUTED> 5.60
<YIELD-ACTUAL> 4.39
<LOANS-NON> 1,201
<LOANS-PAST> 1,069
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,839
<CHARGE-OFFS> 190
<RECOVERIES> 292
<ALLOWANCE-CLOSE> 5,421
<ALLOWANCE-DOMESTIC> 2,268
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,153
</TABLE>
