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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 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 ______
______________________________
COMMISSION FILE NUMBER 0 - 19300
NORTHERN STATES FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-3449727
(State of incorporation) (I.R.S. Employer
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)
______________________________
Securities registered pursuant to Section 12(g) of the Act
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
---------------------------- ------------------------
<S> <C>
Common Stock $2.00 par value NASDAQ Small-Cap Market
</TABLE>
Cover Page 1 of 2
Page 1 of 88 Pages
Exhibit Index Appears on Page 29
1
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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. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting shares held by nonaffiliates of
the Registrant is $98,967,520, as of March 20, 1998. Solely for the purpose
of this computation, it has been assumed that executive officers and
directors of the Registrant are "affiliates" and that the last price known to
management was a sale on March 17, 1998, of $160.00 per share.
889,373 shares of common stock were outstanding as of March 20, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Parts II and IV are incorporated by reference from the
Registrant's 1997 Annual Report to Stockholders; and a portion of Part III is
incorporated by reference from the Registrant's Proxy Statement dated March
23, 1998, for the Annual Meeting of Stockholders to be held April 23, 1998.
Except for those portions of the 1997 Annual Report incorporated by
reference, the Annual Report is not deemed filed as part of this Report.
Cover Page 2 of 2
2
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INDEX
<TABLE>
<CAPTION>
PART I PAGE NO.
- ------ --------
<S> <C> <C>
Item 1 Business 4
Item 2 Properties 14
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote
of Security Holders 14
PART II
- -------
Item 5 Market for the Registrant's Common Stock
and Related Stockholder Matters 15
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis
of Financial Condition and
Results of Operations 15
Item 7A Quantitative and Qualitative Disclosures
about Market Risk 15
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes in and Disagreements with
Accountants on Accounting
and Financial Disclosure 16
PART III
- --------
Item 10 Directors and Executive Officers of the
Registrant 17
Item 11 Executive Compensation 17
Item 12 Security Ownership of Certain Beneficial
Owners and Management 17
Item 13 Certain Relationships and Related
Transactions 17
PART IV
- -------
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 18
Signatures 19
</TABLE>
3
<PAGE>
PART I
ITEM 1. BUSINESS
THE COMPANY
OVERVIEW
Northern States Financial Corporation (the "Registrant" or the
"Company") is a bank holding company organized in 1984 under the laws of
Delaware, for the purpose of becoming the parent bank holding company of the
Bank of Waukegan (the "Bank"). In 1984, the Company acquired Northern States
Trust Company (the "Trust Company"). On January 1, 1992, the Trust Company's
accounts and operations were assumed by the Bank. By combining the
operations of the Trust Company and the Bank's Trust Department, the Company
provides more efficient and effective service to its trust customers. During
1994, the Trust Company charter was surrendered and the Trust Company was
liquidated. In 1991, the Registrant acquired First Federal Bank, fsb ("First
Federal" or the "Thrift").
The Registrant is registered under the Bank Holding Company Act of 1956,
as amended, and owns all the outstanding stock of the Bank and First Federal.
At December 31, 1997, the Company had 438 registered stockholders of record,
889,373 shares of Common Stock outstanding, and total consolidated assets of
approximately $459 million. Aside from the stock of the Bank, First Federal
and cash, the Registrant has no other substantial assets.
As a large, community-oriented, independent banking organization in the
Waukegan-Gurnee area in the State of Illinois, the Company is well positioned
to take advantage of the growth in Waukegan-Gurnee and its surrounding
communities. The Company has continuously served the community since 1919
when First Federal was chartered; complemented by the Bank when it was
chartered in 1962. The Company's local management, coupled with its long
record of service, has allowed it to compete successfully in the banking
market. The Company operates traditional community and savings banks with
conveniently located facilities and a professional staff.
The Registrant, Bank and First Federal have no material patents,
trademarks, licenses or franchises except the corporate franchises which
permit them to engage in banking and trust practices pursuant to law.
The following table shows loans and deposits of the Bank and First
Federal as of December 31, 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
Loans Deposits
-------- ---------
<S> <C> <C>
Bank of Waukegan $177,537 $260,429
First Federal Bank, fsb 63,349 88,395
</TABLE>
4
<PAGE>
The principal business of the Registrant, operating through the Bank and
First Federal, consists of attracting deposits and securities sold under
repurchase agreements from the general public, making commercial loans, loans
secured by residential and commercial real estate and consumer loans, and
operating a trust business.
SUBSIDIARY OPERATIONS
THE BANK OF WAUKEGAN
The Bank of Waukegan was chartered as a state bank in 1962 and is
located in Waukegan, Illinois. Waukegan is located approximately 37 miles
north of Chicago, Illinois and has a population of approximately 70,000. At
December 31, 1997 the Bank of Waukegan had total assets of approximately
$349.1 million, deposits of approximately $260.4 million and stockholder's
equity of approximately $45.5 million. The Bank has two banking offices
located in Waukegan and one office located in Antioch, Illinois.
The Bank provides services to individuals, businesses and local
governmental units in northeastern Illinois and southeastern Wisconsin.
The Bank's full service banking business includes the customary consumer
and commercial products and services which banks provide, including the
following: demand, savings, time, securities sold under repurchase
agreements, individual retirement accounts; commercial, consumer and real
estate lending, including installment loans, student loans, lines of credit
and overdraft checking; safe deposit operations; trust services; and a
variety of additional services tailored to the needs of individual customers,
such as the acquisition of U.S. Treasury notes and bonds, the sale of
traveler's checks, money orders, cashier's checks and foreign currency,
direct deposit, and other special services.
Commercial and consumer loans are made to corporations, partnerships and
individuals, primarily on a secured basis. Commercial lending focuses on
business, capital, construction, inventory and real estate. The installment
loan department of the Bank makes direct and indirect loans to consumers and
commercial customers. The mortgage division originates and services
commercial and residential mortgages.
The Bank's trust department acts as executor, administrator, trustee,
conservator, guardian, custodian and agent.
At December 31, 1997, the Trust Department had assets under management
or custodial arrangements of approximately $197 million. Its office is
located in Waukegan, Illinois.
5
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FIRST FEDERAL BANK
First Federal, headquartered in Waukegan, Illinois was incorporated in
Illinois in 1919 as Waukegan Building and Loan Association, a state chartered
mutual savings and loan association. It converted to a federally chartered
mutual savings and loan association in 1934 and changed its name to First
Federal Savings & Loan Association of Waukegan.
In 1990, First Federal converted to a federal mutual savings bank and
changed its name to First Federal Bank, fsb. First Federal is a member of
the Federal Home Loan Bank System and its deposit accounts are insured by the
Federal Deposit Insurance Corporation ("FDIC").
First Federal had total assets of approximately $109.7 million, deposits
of approximately $88.4 million, and stockholder's equity of approximately
$14.1 million at December 31, 1997. First Federal's market area is comprised
of sections of northeastern Illinois, including Waukegan and Gurnee, and is
situated in the center of the Chicago-Milwaukee corridor.
First Federal operates as a traditional savings institution. Its
business consists primarily of acquiring retail savings and checking
deposits, originating residential and nonresidential real estate mortgage
loans for both its portfolio and sale into the secondary market, and
investing in government and other debt securities. First Federal has two
offices located in Waukegan, Illinois and one office located in Gurnee,
Illinois.
On December 16, 1997 the Company's Board of Directors announced that it
had approved the merger of its two wholly owned subsidiaries, Bank of
Waukegan and First Federal Bank, fsb. The Bank of Waukegan will be the
surviving entity in the merger. The proposed merger is subject to the
receipt of various bank regulatory approvals. Subject to regulatory
approval, the merger will become effective during the second quarter of 1998.
COMPANY OPERATING STRATEGY
Corporate policy, strategy and goals are established by the Board of
Directors of the Company. Pursuant to the Company's philosophy, operational
and administrative policies for the Bank and Thrift are also established by
the Company. Within this framework, both subsidiaries focus on providing
personalized services and quality products to customers to meet the needs of
the communities in which they operate.
As part of its community banking approach, the Company encourages the
officers of both institutions to actively participate in community
organizations. In addition, within credit and rate of return parameters, the
Company attempts to ensure that each institution meets the credit needs of
the community. In addition, the Bank (and the Thrift to a lesser extent)
invests in local municipal securities.
6
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LENDING ACTIVITIES
GENERAL - Both banks provide a range of commercial and retail lending
services to corporations, partnerships and individuals, including, but not
limited to, commercial business loans, commercial and residential real estate
construction and mortgage loans, consumer loans, revolving lines of credit
and letters of credit. The installment loan departments of each bank make
direct and indirect loans to consumers and commercial customers. The
mortgage departments originate and service commercial and residential
mortgages. The majority of commercial mortgages are originated by the Bank,
while the Thrift originates most of the residential mortgages.
Each bank aggressively markets its services to qualified lending
customers in both the commercial and consumer sectors. The Bank's commercial
lending officers actively solicit the business of new companies entering the
surrounding market as well as long-standing members of the business
community. Through personalized professional service and competitive
pricing, the Bank has been successful in attracting new commercial lending
customers. At the same time, the Bank actively advertises its consumer loan
products and continually attempts to make its lending officers more
accessible.
COMMERCIAL LOANS - The Bank seeks new commercial loans in its market area
and much of the increase in these loans in recent years can be attributed to
the successful solicitation of new business. The Bank's areas of emphasis
include, but are not limited to, loans to manufacturers, building
contractors, developers, business services companies and retailers. The Bank
provides a wide range of commercial business loans, including lines of credit
for working capital purposes and term loans for the acquisition of equipment
and other purposes. Collateral for these loans generally includes accounts
receivable, inventory, equipment and real estate. Loans may be made on an
unsecured basis where warranted by the overall financial condition of the
borrower. Terms of commercial business loans generally range from one to
five years. The majority of the Bank's commercial business loans have
floating interest rates or reprice within one year. The primary repayment
risk for commercial loans is the failure of the business due to economic or
financial factors. In most cases, the Bank has collateralized these loans
and/or taken personal guarantees to help assure repayment.
Both the Bank and the Thrift regularly provide financing to developers
who have demonstrated a favorable record of performance for the construction
of homes. Sales of these homes have remained very strong in Lake County due
to the growth in population.
MORTGAGE BANKING - The Thrift conducts a mortgage origination operation
through its mortgage division. Since 1991, the Thrift began to fund
conforming long-term residential mortgage loans and selling them in the
secondary market with servicing retained. The Bank will also originate
residential mortgages. As a result of such actions, the Thrift has built its
mortgage servicing portfolio to approximately $64.9 million at December 31,
1997. Management believes that the retention of mortgage servicing provides
First Federal with a relatively steady source of fee income as compared to
fees generated solely from mortgage origination operations, while maintaining
the customer relationship.
7
<PAGE>
CONSUMER LENDING - The Company's consumer lending departments provide all
types of consumer loans including motor vehicle, home improvement, home
equity, student loans, unsecured loans and small personal credit lines.
TRUST DEPARTMENT - The Bank's trust department has been providing trust
services to the community for over 10 years. Currently, the Bank has over
$197 million of trust assets and provides a full complement of trust services
for individuals and corporations including land trust services.
To build on the trust department's mainstay of personal trust
administration, the trust department's focus is in two major areas: (i)
investment management for individuals and (ii) administration and investment
services for employee benefit plans.
COMPETITION
The Registrant and its subsidiaries encounter significant competition in
all of their activities. The Chicago metropolitan area and suburban Lake
County have a high density of financial institutions, many of which are
significantly larger and have substantially greater financial resources than
the Company and its subsidiaries, and all of which are competitors of the
Company and its subsidiaries to varying degrees. The Registrant and its
subsidiaries are subject to competition from various financial institutions,
including state and national banks, state and federal savings associations,
credit unions, certain non-banking consumer lenders, and other companies or
firms, including brokerage houses and mortgage brokers, that provide similar
services in northeastern Illinois. In total, there are 22 financial
institutions located in the Waukegan-Gurnee area, including the Company's two
subsidiaries. These financial institutions consist of 9 banks, 6 savings
associations and 7 credit unions. The Company also competes with money funds
and with insurance companies with respect to its individual retirement
accounts.
Competition may increase as a result of the continuing reduction in the
effective restrictions on the interstate operations of financial
institutions. The Registrant and its subsidiaries face additional
competition for deposits from short-term money market mutual funds and other
corporate and government securities funds. Since the elimination of federal
interest rate controls on deposits, the competition from other financial
institutions for deposits has increased.
The primary factors influencing competition for deposits are interest
rates, service, and convenience of office locations. The Company competes
for loans principally through the range and quality of the services it
provides, interest rate and loan fee terms. The Company believes that its
long-standing presence in the community and personal service philosophy
enhances its ability to compete favorably in attracting and retaining
individual and business customers. The Company actively solicits
deposit-related clients and competes for deposits by offering customers
personal attention, professional service and competitive interest rates.
8
<PAGE>
EMPLOYEES
The Registrant and its subsidiaries employed 111 full-time and 30
part-time employees as of December 31, 1997. None of the Registrant's
employees is represented by any collective bargaining group. The Company
offers a variety of employee benefits and management considers its employee
relations to be good.
GOVERNMENTAL MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings and growth of the Company are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the
federal government and its agencies. In particular, the Federal Reserve Board
regulates monetary and credit conditions and interest rates in order to
influence general economic conditions, primarily through open-market
operations in U.S. Government securities, varying the discount rate on bank
borrowings, and setting reserve requirements against bank deposits.
These policies have a significant influence on overall growth and
distribution of the Company's loans, investments and deposits, and affect
interest rates charged on loans and earned on investments or paid for
deposits.
The monetary policies of the Federal Reserve Board are expected to
continue their substantial influence on the operating results of banks.
The general effect, if any, of such policies upon the future business
and earnings of the Company and its subsidiaries cannot accurately be
predicted.
SUPERVISION AND REGULATION
Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, the business, financial
condition and prospects of the Company, the Bank and First Federal can be
materially affected not only by management decisions and general economic
conditions, but also by applicable statutes and regulations and other
regulatory pronouncements and policies promulgated by regulatory agencies
with jurisdiction over the Company, the Bank and First Federal, such as the
Board of Governors of the Federal Reserve System ("FRB"), the Office of
Thrift Supervision (the "OTS"), the Federal Deposit Insurance Corporation
("FDIC") and the Illinois Office of Banks and Real Estate (the "Office").
Such statutes, regulations and other pronouncements and policies are intended
to protect depositors and the FDIC's deposit insurance funds, not to protect
stockholders.
9
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The Company and its subsidiaries are "affiliates" within the meaning of
the Federal Reserve Act so that the Bank and First Federal are subject to
certain restrictions with respect to loans to the Company and certain other
transactions with the Company or involving its securities.
The Company is a bank holding company subject to the Bank Holding
Company Act of 1956, as amended (the "Act"), and to regulation by the FRB.
The Act limits the activities which may be engaged in by bank holding
companies and their nonbank subsidiaries, with certain exceptions, to those
so closely related to banking or managing or controlling banks as to be a
proper incident thereto. Also, under the Act and the FRB's regulations, a
bank holding company, as well as certain of its subsidiaries, are prohibited
from engaging in certain tie-in arrangements in connection with any extension
of credit or provision of any property or services.
The Act also prohibits bank holding companies from acquiring
substantially all the assets of or owning more than 5% of the voting shares
of any bank or nonbanking company, which is not already majority owned,
without the prior approval of the FRB. Beginning September 29, 1995 the
Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Act") permits an adequately capitalized and adequately managed
bank holding company to acquire, with FRB approval, a bank located in a state
other than the bank holding company's home state, without regard to whether
the transaction is permitted under any state law, except that a host state
may establish by statute the minimum age of its banks (up to a maximum of 5
years) subject to acquisition by out-of-state bank holding companies. The
FRB may not approve the acquisition if the applicant bank holding company,
upon consummation, would control more that 10% of total U.S. insured
depository institution deposits or more than 30% of the host state's total
insured depository institution deposits. Effective as of September 29, 1994,
the Interstate Act permits a bank, with the approval of the appropriate
Federal bank regulatory agency, to establish a de novo branch in a state,
other than the bank's home state, in which the bank does not presently
maintain a branch if the host state has enacted a law that applies equally to
all banks and expressly permits all out-of-state banks to branch de novo into
the host state. Commencing June 1, 1997, banks having different home states
may, with approval of the appropriate Federal bank regulatory agency, merge
across state lines, unless the home state of a participating bank has
opted-out. The Interstate Act permits, as of September 29, 1995, any bank
subsidiary of a bank holding company to receive deposits, renew time
deposits, close loans, service loans and receive payments on loans and other
obligations as agent for a bank or thrift affiliate, whether such affiliate
is located in a different state or in the same state. Illinois law allows
the Bank to establish branches anywhere in the state.
The Illinois Bank Holding Company Act permits Illinois bank holding
companies to acquire control of banks in any state and permits bank holding
companies whose principal place of business is in another state to acquire
control of Illinois banks or bank holding companies upon satisfactory
application to the Office. In reviewing any such application, the Office
will review, among other things, compliance by the applicant with the
requirements of the Community Reinvestment Act (the "CRA") and other
information designed to determine such banks' abilities to meet community
credit needs.
10
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The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") amended the Act to authorize the FRB to allow bank holding
companies to acquire any savings association (whether healthy, failed or
failing) and removed "tandem operations" restrictions, which previously
prohibited savings associations from being operated in tandem with a bank
holding company's other subsidiaries. As a result, bank holding companies
now have expanded opportunities to acquire savings associations.
Under FIRREA, an insured depository institution which is commonly
controlled with another insured depository institution shall generally be
liable for any loss incurred, or reasonably anticipated to be incurred, by
the FDIC in connection with the default of such commonly controlled
institution, or for any assistance provided by the FDIC to such commonly
controlled institution, which is in danger of default. The term "default" is
defined to mean the appointment of a conservator or receiver for such
institution. Such liability is subordinated in right of payment to deposit
liabilities, secured obligations, any other general or senior liability and
any obligation subordinated to depositors and or other general creditors,
other than obligations owed to any affiliate of the depository institution
(with certain exceptions) and any obligations to stockholders in such
capacity.
The Bank is subject to regulation the FDIC, as well as by the Office.
First Federal is primarily regulated by the OTS.
Under the Illinois Banking Act (the "IBA"), the Bank is permitted to
declare and pay dividends in amounts up to the amount of its accumulated net
profits provided that it shall retain in its surplus at least one-tenth of
its net profits since the date of the declaration of its most recent previous
dividend until such additions to surplus, in the aggregate, equal at least
the paid-in capital of the Bank. In no event may the Bank, while it continues
its banking business, pay dividends in excess of its net profits then on hand
(after deductions for losses and bad debts).
Under the FDIC's risk-based insurance assessment system, each insured
depository institution is placed in one of nine risk categories based on its
level of capital and other relevant information. Each insured depository
institution's insurance assessment rate is then determined by the risk
category in which it has been classified by the FDIC. Under the assessment
schedule applicable for the second semi-annual assessment period of 1997 to
BIF-insured institutions (such as the Bank) and to SAIF-insured institutions
(such as First Federal), assessment rates ranged from 0% to 0.27% of
deposits. In addition, the Bank and First Federal are subject to "FICO
assessments" to repay obligations issued by a federally chartered corporation
to provide financing for resolving the thrift crises of the 1980s. The FICO
assessment rate applicable to BIF-assessable deposits is limited by law to
20% of the rate applicable to SAIF-assessable deposits. Currently, the FICO
assessment rate applicable to BIF-assessable deposits is 1.26 basis points,
and the rate applicable to SAIF-assessable deposits is 6.30 basis points.
11
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The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") substantially revised the bank regulatory and funding provisions
of the Federal Deposit Insurance Act and made revisions to several other
federal banking statutes. In general, FDICIA subjects depository
institutions to significantly increased regulation and supervision. Among
other things, FDICIA requires federal bank regulatory authorities to take
"prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements, and imposes certain restrictions upon
depository institutions which meet minimum capital requirements but are not
"well capitalized" for purposes of FDICIA. FDICIA and the regulations
adopted under it establish five capital categories as follows, with the
category for any institution determined by the lowest of any of these ratios:
<TABLE>
<CAPTION>
Tier 1 Total
Leverage Ratio Risked-Based Ratio Risked-Based Ratio
<S> <C> <C> <C>
Well Capitalized 5% or above 6% or above 10% or above
Adequately
Capitalized 4% or above* 4% of above 8% or above
Undercapitalized Less than 4% Less than 4% Less than 8%
Significantly
Undercapitalized Less than 3% Less than 3% Less than 6%
</TABLE>
<TABLE>
<CAPTION>
Ratio of
Tangible Equity
to Total Assets
<S> <C>
Critically Undercapitalized 2% or below
</TABLE>
*3% for banks with the highest CAMEL (supervisory) rating.
An insured depository institution may be deemed to be in a capital
category that is lower than is indicated by its capital ratios if it receives
an unsatisfactory rating by its examiners with respect to its assets,
management, earnings or liquidity.
12
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Under FDICIA, a bank that is not well capitalized is generally
prohibited from accepting or renewing brokered deposits and offering interest
rates on deposits significantly higher than the prevailing rate in its normal
market area or nationally (depending upon where the deposits are solicited);
in addition, "pass through" insurance coverage may not be available for
certain employee benefit accounts.
FDICIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any
management fee to its holding company if the depository institution would
thereafter be undercapitalized. Undercapitalized depository institutions are
subject to limitations on growth and are required to submit a capital
restoration plan, which must be guaranteed by the institution's parent
company. Institutions that fail to submit an acceptable plan, or that are
significantly undercapitalized, are subject to a host of more drastic
regulatory restrictions and measures.
The Bank and First Federal are considered "well capitalized" according
to FDICIA guidelines.
FDICIA directs that each federal banking agency prescribe standards for
depository institutions or depository institutions' holding companies
relating to internal controls, information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset
growth, compensation, a maximum ratio of classified assets to capital,
minimum earnings sufficient to absorb losses and other standards as they deem
appropriate. Many regulations implementing these directives have been
adopted by the agencies
BUSINESS-STATISTICAL DISCLOSURE
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and the Results of Operations" on Pages 11
through 26 of the 1997 Annual Report to Stockholders (filed as Exhibit 13,
pages 23 through 38 of this report) is incorporated herein by reference.
13
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ITEM 2. PROPERTIES
The Bank conducts its operations through its main office and two
branches. The Company's office is located in the main office of the Bank.
All of such offices are owned by the Bank and are located in Lake County,
Illinois. The Bank believes that its current facilities are adequate for the
conduct of its business.
First Federal conducts its business through its main office and two
branch offices. All offices are located in Lake County and have drive-up
facilities. First Federal believes that its facilities are adequate to meet
its present and immediately foreseeable needs.
The following table sets forth information relating to each of such
offices:
Bank of Waukegan:
Main Office: Trust Department:
1601 North Lewis Avenue 1601 North Lewis Avenue
Waukegan, Illinois 60085 Waukegan, Illinois 60085
Branches:
3233 Grand Avenue 40220 N. Route 59
Waukegan, Illinois 60085 Antioch, Illinois 60002
First Federal Bank, fsb:
Main Office:
216 Madison Street
Waukegan, Illinois 60085
Branches:
1428 N. Lewis Avenue 5384 Grand Avenue
Waukegan, Illinois 60085 Gurnee, Illinois 60031
ITEM 3. LEGAL PROCEEDINGS
Due to the nature of their business, the Registrant and its subsidiaries
are often subject to various legal actions. These legal actions, whether
pending or threatened, arise through the normal course of business and are
not considered unusual or material.
Currently, no material legal procedures are pending which involve the
Registrant, the Bank, or First Federal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
14
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The information set forth under the captions "Stock Market Information";
"Price Summary"; and "Cash Dividends" on Page 46 of the 1997 Annual Report to
Stockholders (filed as Exhibit 13, page 58 of this report) is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated
Financial Data" on Page 10 of the 1997 Annual Report to Stockholders (filed
as Exhibit 13, page 22 of this report) is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on Pages 11
through 26 of the 1997 Annual Report to Stockholders (filed as Exhibit 13,
pages 23 through 38 of this report) is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information set forth under the caption "Qunatitative and
Qualitative Disclosures about Market Risk" on Pages 26 and 27 of the 1997
Annual Report to Stockholders (filed as Exhibit 13, pages 38 and 39 of this
report) is incorporated herein by reference.
15
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant and the
Independent Auditors' Report as set forth on the following pages of the 1997
Annual Report to Stockholders (filed as Exhibit 13, to this report) are
incorporated herein by reference:
<TABLE>
<CAPTION>
Annual Report
to Stockholders
Page
---------------
<S> <C>
Independent Auditors' Report 28
Consolidated Balance Sheets as of
December 31, 1997 and 1996 29
Consolidated Statements of Income for the
Years ended December 31, 1997, 1996 and 1995 30
Consolidated Statements of Cash Flows for the
Years ended December 31, 1997, 1996 and 1995 31
Consolidated Statements of Stockholders'
Equity for the Years ended
December 31, 1997, 1996 and 1995 32
Notes to the Consolidated Financial Statements 33
Parent Company only financial statements 45
</TABLE>
The portions of the 1997 Annual Report to Stockholders which are not
specifically incorporated by reference as a part of this Form 10-K are not
deemed to be a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS - The information with respect to Directors of the Registrant set
forth under the caption "Directors and Executive Management" on page 2 of the
Registrant's Proxy Statement, dated March 23, 1998, relating to the April 23,
1998 Annual Meeting of Stockholders is incorporated herein by reference.
EXECUTIVE OFFICERS - The Company's only executive officers are Mr. Fred
Abdula, the President of the Company, and Mr. Kenneth W. Balza, the Vice
President and Treasurer of the Company. The information with respect to Mr.
Abdula and Mr. Balza is set forth under the caption "Directors and Executive
Management" on page 2 of the Registrant's Proxy Statement, dated March 23,
1998, relating to the April 23, 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" and
"Summary Compensation Table" on page 5 of the Registrant's Proxy Statement,
dated March 23, 1998, relating to the April 23, 1998 Annual Meeting of Stock
holders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" on page 4 of the Registrant's Proxy
Statement, dated March 23, 1998, relating to the April 23, 1998 Annual
Meeting of Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Compensation Committee
Interlocks and Insider Participation" on pages 8 and 9 of the Registrant's
Proxy Statement, dated March 23, 1998, relating to the April 23, 1998 Annual
Meeting of Stockholders is incorporated herein by reference.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
All financial statements of the Registrant are incorporated herein by
reference as set forth under Item 8, Part II of this report on Form
10-K.
2. FINANCIAL STATEMENT SCHEDULES Not applicable
3. EXHIBITS (Numbered in accordance with Item 601 of Regulation S-K)
The following exhibits are filed as part of this report:
3-A Articles of Incorporation of the Company, as amended
to date. (Filed with Registrant's annual report on Form 10-K
for the year ended December 31, 1994 Commission
File 0-19300 and incorporated here by reference.)
3-B Bylaws of the Company, as amended to date. (Filed with
Registrant's annual report on Form 10-K for the year ended
December 31, 1994 Commission File 0-19300 and incorporated here
by reference.)
10 1992 Northern States Omnibus Incentive Plan. (Filed with
Registrant's annual report on Form 10-K for the year ended
December 31, 1994 Commission File 0-19300 and incorporated here
by reference.)
11 Statement of Computation of per share earnings. Contained in
Notes 1 and 14 to the consolidated financial statements, pages
34 and 44, 1997 Annual Report to Stockholders (filed as Exhibit
13 to this report) is incorporated by reference.
13 Copy of the Company's Annual Report to Stockholders for the year
ended December 31, 1997. This exhibit, except for portions
thereof that have been specifically incorporated by reference
into this report, is furnished for the information of the
Commission and shall not be deemed "filed" as part hereof.
21 List of Subsidiaries.
27 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1997.
(c) Exhibit List and Index
18
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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 20th day
of March 1998.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Fred Abdula,
Chairman of the Board
and President
/s/ Fred Abdula (Principal Executive Officer)
- -------------------------------------
Thomas M. Nemeth,
Assistant Vice President
(Principal Financial Officer and
/s/ Thomas M. Nemeth Principal Accounting Officer)
- -------------------------------------
19
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each director
of the Registrant, whose signature appears below, hereby appoints Fred Abdula
and Thomas M. Nemeth and each of them severally, as his attorney-in-fact, to
sign in his name and on his behalf, as a director of the Registrant, and to
file with the Commission any and all Amendments to this Report on Form 10-K,
on this 20th day of March 1998.
Fred Abdula, Director /s/ Fred Abdula
--------------------------
Kenneth W. Balza, Director /s/ Kenneth W. Balza
--------------------------
Jack H. Blumberg, Director /s/ Jack H. Blumberg
--------------------------
Frank Furlan, Director /s/ Frank Furlan
--------------------------
Harry S. Gaples, Director /s/ Harry S. Gaples
--------------------------
Laurance A. Guthrie, Director /s/ Laurance A. Guthrie
--------------------------
James A. Hollensteiner, Director /s/ James A. Hollensteiner
--------------------------
Raymond M. Mota, Director /s/ Raymond M. Mota
--------------------------
Helen Rumsa, Director /s/ Helen Rumsa
--------------------------
Frank Ryskiewicz, Director /s/ Frank Ryskiewicz
--------------------------
Henry G. Tewes, Director /s/ Henry G. Tewes
--------------------------
Arthur J. Wagner, Director /s/ Arthur J. Wagner
--------------------------
20
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Page(s)
- -------- ---------
<S> <C> <C>
3-A Articles of Incorporation of the Company,
as amended to date.
(Filed with Registrant's annual report on
Form 10-K for the year ended December 31, 1994
Commission File 0-19300 and incorporated here
by reference.)
3-B Bylaws of the Company, as amended to date.
(Filed with Registrant's annual report on
Form 10-K for the year ended December 31, 1994
Commission File 0-19300 and incorporated here by
reference.)
10 1992 Northern States Omnibus Incentive Plan.
(Filed with Registrant's annual report on
Form 10-K for the year ended December 31, 1994
Commission File 0-19300 and incorporated here by
reference.)
11 Statement of Computation of per share earnings.
Contained in Notes 1 and 14 to the consolidated
financial statements, pages 34 and 44, 1997 Annual
Report to Stockholders (filed as Exhibit 13 to
this report) is incorporated by reference. 46 and 56
13 Copy of the Company's Annual Report to
Stockholders for the year ended December 31,
1997. This exhibit, except for portions thereof
that have been specifically incorporated by
reference into this Report, is furnished for the
information of the Commission and shall not be
deemed "filed" as part hereof. 22
21 List of Subsidiaries. 59
27 Financial Data Schedule.
</TABLE>
21
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
($ 000's, except per share data)
- ---------------------------------------------------------------------------------------------------------------------------------
At or for the Year Ended December 31, 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income $ 32,759 $ 31,671 $ 30,893 $ 27,375 $ 26,836
Interest expense 15,615 14,808 14,705 11,429 11,708
-------------------------------------------------------------------------
Net interest income 17,144 16,863 16,188 15,946 15,128
Provision for loan losses 480 1,190 1,480 1,440 1,481
-------------------------------------------------------------------------
Net interest income after provision for loan losses 16,664 15,673 14,708 14,506 13,647
Noninterest income 2,687 3,239 2,702 2,764 3,540
Noninterest expenses 9,132 10,372 10,433 11,010 11,387
-------------------------------------------------------------------------
Income before income taxes 10,219 8,540 6,977 6,260 5,800
Provision for income taxes 3,209 2,529 2,040 1,785 1,366
-------------------------------------------------------------------------
NET INCOME $ 7,010 $ 6,011 $ 4,937 $ 4,475 $ 4,434
-------------------------------------------------------------------------
-------------------------------------------------------------------------
BALANCE SHEET DATA:
Cash, non-interest bearing $ 14,200 $ 15,247 $ 18,119 $ 16,539 $ 19,133
Investments (2) 192,078 166,585 171,125 164,254 164,542
Loans, net 236,794 227,814 220,865 212,823 216,163
Direct lease financing 1,274 999 622 373 993
All other assets 14,640 15,919 17,160 17,646 15,298
-------------------------------------------------------------------------
TOTAL ASSETS $458,986 $426,564 $427,891 $411,635 $416,129
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Deposits $347,950 $328,795 $327,555 $329,363 $349,360
Other borrowings 43,504 36,758 43,278 30,654 18,113
All other liabilities 7,337 6,176 6,053 5,918 4,858
Stockholders' equity 60,195 54,835 51,005 45,700 43,798
-------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $458,986 $426,564 $427,891 $411,635 $416,129
-------------------------------------------------------------------------
-------------------------------------------------------------------------
PER SHARE DATA:
Basic earnings per share $ 7.88 $ 6.76 $ 5.57 $ 5.05 $ 5.01
Diluted earnings per share 7.87 6.75 5.56 5.04 5.00
Cash dividends declared 2.40 2.00 1.65 1.45 1.30
Book value (at end of year) 67.68 61.66 57.47 51.57 49.43
SELECTED FINANCIAL AND OTHER RATIOS:
Return on average assets (1) 1.61% 1.43% 1.21% 1.08% 1.09%
Return on average equity (1) 12.28 11.47 10.15 9.89 10.35
Average stockholders' equity to average assets (1) 13.13 12.47 11.93 10.96 10.53
Tax equivalent interest rate spread 3.39 3.64 3.62 3.78 3.73
Tax equivalent net interest income
to average earning assets (1) 4.33 4.50 4.46 4.34 4.23
Non-performing loans and other real
estate owned to total assets 0.78 0.94 2.25 2.39 2.72
Dividend payout ratio (3) 30.44 29.60 29.63 28.72 25.98
</TABLE>
(1) Does not reflect impact of securities available for sale on average
balances.
(2) Includes interest-bearing deposits in other financial institutions, federal
funds sold, securities available for sale and securities held to maturity.
(3) Total cash dividends divided by net income.
10 NSFC ANNUAL REPORT 1997
22
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion and analysis of Northern States Financial
Corporation's (Company) financial position and results of operations and
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this report. The Company has two
wholly-owned subsidiaries: The Bank of Waukegan (Bank), a commercial banking
company providing traditional banking services, including trust services, to
corporate, retail and civic entities in the market; and First Federal Bank,
fsb, (Thrift), a savings institution providing traditional thrift services
primarily to individuals and small businesses in the local market area.
The Company and its subsidiaries are subject to regulation by numerous
agencies including the Federal Reserve Board, the Federal Deposit Insurance
Corporation, the Illinois Office of Banks and Real Estate and the Office of
Thrift Supervision. Among other things, these agencies limit the activities
in which the Company and its subsidiaries may engage, limit the investments
and loans which the Bank and/or Thrift funds, and determine the reserves
against deposits which the Bank and Thrift must maintain.
The reader should recognize that the financial results vary significantly
between a commercial bank and a traditional savings and loan entity. A
savings and loan institution normally has a higher percentage of fixed rate
loans to total earning assets, a much lower volume of non-interest bearing
transaction accounts, and a relatively low allowance for loan losses to total
loans. Approximately 24% of the Company's assets are invested in the Thrift.
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.
Forward-looking statements, which are based on certain assumptions and
describe future plans, strategies and expectations of the Company, are
identifiable by the use of the words "believe", "expect", "intend",
"estimate" or similar expressions. The Company cautions readers of this
Annual Report that a number of important factors such as changes in interest
rates, general economic conditions, regulatory policies, loan demand, and
competition could cause the Company's actual results in 1998 and beyond to
differ materially from those expressed in any such forward-looking
statements.
TABLE 1 ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES
<TABLE>
<CAPTION>
($ 000's)
- ------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (1) (2) (3) $241,019 $22,343 9.27% $233,167 $22,296 9.56% $223,806 $21,788 9.74%
Taxable securities (5) 132,128 8,411 6.34 124,271 7,663 6.12 122,401 7,313 5.95
Securities exempt from
federal income taxes (2) (5) 21,301 1,741 8.38 22,058 1,799 8.36 20,838 1,751 8.43
Interest bearing deposits
in financial institutions 617 35 5.67 504 28 5.56 1,572 117 7.44
Federal funds sold 17,437 965 5.53 13,844 742 5.36 12,541 740 5.90
---------------------------------------------------------------------------------------
Interest earning assets 412,502 33,495 8.12 393,844 32,528 8.25 381,158 31,709 8.31
Noninterest earning assets 22,344 25,818 26,018
---------------------------------------------------------------------------------------
Average assets (4) $434,846 $419,662 $407,176
-------- -------- --------
-------- -------- --------
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW deposits $ 37,672 1,120 2.97 $ 39,474 1,177 2.98 $ 39,361 1,149 2.92
Money market deposits 41,945 1,672 3.99 44,272 1,792 4.05 39,980 1,866 4.67
Savings deposits 44,458 1,322 2.97 46,828 1,395 2.98 48,796 1,436 2.94
Time deposits 171,149 9,714 5.68 155,378 8,720 5.61 150,994 8,381 5.55
Other borrowings 35,082 1,787 5.09 35,006 1,724 4.92 34,633 1,873 5.41
---------------------------------------------------------------------------------------
Interest bearing liabilities 330,306 15,615 4.73 320,958 14,808 4.61 313,764 14,705 4.69
Demand deposits and
other noninterest
bearing liabilities 47,453 46,580 45,125
Stockholders' equity 57,087 52,124 48,287
---------------------------------------------------------------------------------------
Average liabilities and
stockholders' equity $434,846 $419,662 $407,176
-------- -------- --------
-------- -------- --------
Net interest income (2) $17,880 $17,720 $17,004
------- ------- -------
------- ------- -------
Net yield on interest
earning assets 4.33% 4.50% 4.46%
----- ----- -----
----- ----- -----
Interest-bearing liabilities
to earning assets ratio 80.07% 81.40% 82.22%
------ ------ ------
------ ------ ------
</TABLE>
(1) - Interest income on loans includes loan origination and other fees of
$492 for 1997, $443 for 1996 and $540 for 1995. Average loans include
direct lease financing.
(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.
(4) - Average balances are derived from the average daily balances.
(5) - Rate information was calculated based on the average amortized cost for
securities. The 1997, 1996 and 1995 average balance information includes
an average valuation allowance for taxable securities of $(526), $(985)
and $(521). The 1997, 1996 and 1995 average balance information includes
an average valuation allowance of $530, $540 and $58 for tax-exempt
securities.
NSFC ANNUAL REPORT 1997 11
23
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NET INTEREST INCOME
Table 1 shows a comparison of net interest income and average volumes,
together with effective yields earned and rates paid on such funds. The
results shown reflect the excess of interest earned on assets over the
interest paid for funds.
Interest income is the primary source of revenue for the Company. It
comprised 92.4% of the Company's total revenues in 1997, 90.7% in 1996 and
92.0% in 1995.
Net interest income is the difference between interest income earned on
average interest earning assets, such as loans and securities, and interest
expense on average interest bearing liabilities, such as deposits and other
borrowings. In Table 1, interest income on non-taxable securities and loans
has been adjusted to be fully taxable equivalent so as to be comparable with
rates earned and paid elsewhere. In addition, rates earned on securities are
calculated based upon the average amortized cost of the related securities.
Several factors affect net interest income of which one factor is changes
in interest rates which are usually indicated by the changes in the prime
lending rate. The weighted average prime lending rate in 1997 was 8.44%, an
increase of 17 basis points from 8.27% in 1996, and was 8.83% in 1995. During
1997 the prime lending rate began the year at 8.25% and increased to 8.50% on
March 26, 1997, where it remained for the balance of the year. The rises in
rates in 1997 caused corresponding increases in rates earned on taxable
securities. Average rates earned on taxable securities increased to 6.34%, up
22 basis points from 1996 levels, after increasing only 17 basis points in
1996 from 1995 levels. Rates on federal funds sold increased 17 basis points
in 1997 after declining 54 basis points in 1996.
Another major factor affecting the net interest margin is rates earned on
loans. Table 1 shows that rates earned on average loans in 1997 decreased to
9.27% in 1997 from 9.56% in 1996 after declining in 1996 from 9.74% in 1995.
The yields on loans decreased 29 basis points from 1996 even though the
weighted average prime lending rate in 1997 increased 17 basis points from
1996. Competitive pressures have caused our loan rates to decline and
increased the Company's portfolio of fixed rate loans. It is expected that
competitive pressures will continue to affect loan pricing in 1998. Loan
rates in 1996 declined 18 basis points from 1995 which resulted from the
general decrease in loan rates during 1996 as evidenced by the reduction in
the prime rate during 1996.
The average earning asset ratio is another important factor affecting net
interest income. The average earning asset ratio is the percentage of average
assets that earn interest income to total average assets. This ratio has
increased for the Company during 1997 to 94.86% compared to 93.85% in 1996
and 93.61% in 1995.
As indicated in Table 1, the Company's net interest income rose in 1997
to $17,880,000. Net interest income increased $160,000 in 1997 from 1996.
During 1996 net interest income increased $716,000 from 1995. A significant
reason for the 1997 increase was that interest earning assets increased $18.7
million in 1996 while interest bearing liabilities only increased by $9.3
million. This is further evidenced in Table 2 which shows that the 1997
increase in net interest income is attributable to changes due to volume,
which was partially offset by a decrease in the net interest spread.
The interest rate spread is the difference between the yield earned on
assets less the rates paid on liabilities. The interest rate spread
decreased to 3.39% in 1997 as compared to 3.64% in 1996 and 3.62% in 1995.
The Company's average deposit and other borrowing rates were 4.73% in
1997, an increase from 4.61% in 1996, which had declined slightly from 4.69%
in 1995. The rates earned on average earning assets during 1997 decreased
slightly to 8.12% from 8.25% in 1996, which had declined from 8.31% in 1995.
The rates on average earning assets decreased due to competitive pressures on
loan rates during 1997. In 1997 the Company had more interest bearing
liabilities repricing than assets. On a forward looking basis, the Company is
"liability sensitive" out to at least one year. This means that in an
increasing rate environment as experienced in 1997, interest bearing deposits
and other liabilities will reprice upward faster than our interest earning
assets. This is evidenced in 1997 when rates increased and stabilized which
caused yields on interest bearing liabilities to increase by 12 basis points.
Another factor influencing net interest income is the "interest bearing
liabilities to earning assets ratio", as shown in Table 1. This ratio
indicates how many cents of each dollar of earning assets are funded by an
interest bearing liability. As Table 1 indicates, this relationship has
declined to 80.07% in 1997 from 81.40% in 1996, which was lower than 1995's
ratio of 82.22%. The decline in this ratio has a positive impact on interest
income.
The mix of assets and liabilities also affects net interest income.
Average assets increased by 3.62% in 1997, as compared with an increase of
3.07% in 1996. Local economic conditions continued to improve in 1997 as
evidenced by the increase in average loans. Average loan volume increased
3.37% in 1997 after an increase of 4.18% in 1996. Average total securities
increased 4.85% in 1997 after increasing 2.16% in 1996.
In 1997, total average interest bearing deposits increased $9.3 million
from 1996 levels while average other borrowings, which consists primarily of
repurchase agreement products and a term advance from the Federal Home Loan
Bank, increased only $76 thousand from 1996. The 1997 increase in average
interest bearing deposits was in time deposits which increased $15.8 million
while lower cost savings and NOW deposits declined $4.2 million and money
market deposits declined $2.3 million.
Interest rates paid on deposits and charged for loans during 1997
remained comparable with other local financial institutions during the year.
In spite of the many non-bank investment products available to our customers
today, as well as from other financial institutions, the Company is pleased
with its ability to maintain the level of interest bearing liabilities.
As Table 1 indicates, the average balances of other borrowings increased
only slightly in 1997 and 1996. Most of the other borrowings are in the form
of securities sold under repurchase agreements (repurchase agreements) which
the Company continues to offer as an alternative to certificates of deposit.
A repurchase agreement is not subject to FDIC insurance and is not subject to
reserve requirements, and therefore is less costly to the Company. The
repurchase agreement also gives the customer added security for the borrowing
in the form of a security pledged by the Company. Management expects to
continue to offer repurchase agreements as an alternative to certificates of
deposit in the future.
Many other factors beyond Management's control can have a
12 NSFC ANNUAL REPORT 1997
24
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NET INTEREST INCOME CONTINUED
significant impact on changes in net interest income from one period to
another. Examples of such factors are: (1) credit demands by customers;
(2) fiscal and debt management policy of federal and state governments;
(3) monetary policy of the Federal Reserve Board; and (4) changes in
regulations.
The components of the changes in net interest income are shown in
Table 2. This table allocates changes in net interest income between amounts
attributable to changes in volume and changes in rate for the various
categories of interest earning assets and interest bearing liabilities.
TABLE 2 ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
<TABLE>
<CAPTION>
($ 000's)
- ---------------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31 1997 Compared to 1996 1996 Compared to 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
Change Change Change Change
Total Due To Due To Total Due To Due To
Change Volume Rate Change Volume Rate
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 47 $ 737 $(690) $ 508 $ 902 $(394)
Taxable securities 748 463 285 350 140 210
Securities exempt from
federal income taxes (58) (63) 5 48 62 (14)
Interest-bearing deposits
in financial institutions 7 6 1 (89) (65) (24)
Federal funds sold 223 198 25 2 73 (71)
-------------------------------------------------------------------------------------
Total interest income 967 1,341 (374) 819 1,112 (293)
-------------------------------------------------------------------------------------
INTEREST EXPENSE
NOW deposits (57) (54) (3) 28 3 25
Money market deposits (120) (93) (27) (74) 188 (262)
Savings deposits (73) (70) (3) (41) (58) 17
Time deposits 994 894 100 339 245 94
Other borrowings 63 4 59 (149) 20 (169)
-------------------------------------------------------------------------------------
Total interest expense 807 681 126 103 398 (295)
-------------------------------------------------------------------------------------
NET INTEREST INCOME $ 160 $ 660 $(500) $ 716 $ 714 $ 2
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
Volume/rate variances are allocated to the volume variance and the rate
variance on an absolute basis. Tax-exempt income is reflected on a fully tax
equivalent basis utilizing a 34% rate.
NSFC ANNUAL REPORT 1997 13
25
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
TABLE 3 SECURITIES
<TABLE>
<CAPTION>
($ 000's)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
% of Total % of Total % of Total
Securities available for sale Amount Portfolio Amount Portfolio Amount Portfolio
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 14,031 7.77% $ 16,114 10.76% $ 37,248 24.01%
U.S. Government agencies and corporations 128,872 71.33 89,604 59.84 71,581 46.13
States and political subdivisions 22,408 12.40 25,482 17.02 22,065 14.22
Mortgage-backed securities 13,123 7.26 16,430 10.97 20,472 13.19
Equity securities 2,238 1.24 2,120 1.41 3,804 2.45
-----------------------------------------------------------------------------------
Total securities available for sale $180,672 100.00% $149,750 100.00% $155,170 100.00%
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, the Company held no securities of a single
issuer, other than the U.S. Treasury and U.S. Government agencies and
corporations, including the Federal Home Loan Bank (FHLB), the Federal Home
Loan Mortgage Corporation (FHLMC), the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA), the
Federal Farm Credit Bank (FFCB), and the Student Loan Marketing Association
(SLMA), that exceeded 10% of stockholders' equity. Although the Company holds
securities issued by municipalities within the state of Illinois which in the
aggregate exceed 10% of consolidated stockholders equity, none of the
holdings from individual municipal issuers exceed this threshold.
The Company also holds local municipal bonds which, although not rated,
are considered low risk investments.
The carrying value of interest bearing balances with banks and federal
funds sold consisted of the following at December 31, 1997:
<TABLE>
<S> <C>
First USA Bank, Dallas $ 5,500
LaSalle National Bank, Chicago 4,000
Harris Bank, Chicago 1,736
Bank of America, Illinois 100
Federal Home Loan Bank, Chicago 70
-------
Total carrying value $11,406
-------
-------
</TABLE>
14 NSFC ANNUAL REPORT 1997
26
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
SECURITIES
All securities of the Company at December 31, 1997 are classified as
available for sale. The Company classifies its securities as available for
sale to provide flexibility in the event that it may be necessary to sell
securities to raise cash for liquidity purposes, to adjust the portfolio for
interest rate risk purposes or to adjust for income tax purposes. In previous
years, until late in 1995, securities that were subject to repricing or had
an original maturity of two years or less were classified as available for
sale while all other securities were classified as held to maturity.
Late in 1995, the Company, as permitted by the Statement of Financial
Accounting Standards ("SFAS") No. 115 implementation guide released in 1995,
exercised a one time opportunity to reassess the appropriateness of the
classification of all securities held. Based on this review, the Company
reclassified securities, having an amortized cost of $96,547,000 and a net
unrealized gain of $772,000 during 1995, from held to maturity to available
for sale. This reclassification transferred all held to maturity securities
to the available for sale classification and provided the Company with an
improved ability to manage its securities portfolio.
The securities portfolio increased $30.9 million at year end 1997 from
1996, after a decline of $5.4 million at year end 1996 from 1995. However,
average securities as shown in Table 1, increased in 1997 from 1996 by $7.1
million. The increase was the result of increased average interest bearing
liabilities, of which the excess, after being used to increase our loans, was
invested in securities. Holdings of U.S. Treasury securities declined $2.1
million at December 31, 1997 compared to December 31, 1996. U.S. Government
agency issues increased by $39.3 million to $128.9 million at December 31,
1997, from $89.6 million at December 31, 1996. The increase in U.S.
Government agency issues is the result of the Company investing in higher
yielding agency issues that have call provisions in order to maximize yields
on the Company's securities portfolio while helping to minimize state income
taxes.
The Company attempts to keep at least half its portfolio in U.S.
Treasury and U.S. Government agency issues which was the case for all periods
reported in Table 3. This allows the Company to better manage its exposure to
changing interest rates, while minimizing credit risk within the portfolio.
U.S. Treasury and U.S. Government agency issues comprised over 79% of the
total portfolio at December 31, 1997.
Holdings of securities issued by states and public subdivisions, of
which 90% are tax-exempt, declined by $3.1 million to $22.4 million at
December 31, 1997. Reflecting the change applicable to commercial banks in
the federal tax law, a bank is not allowed an interest deduction for the cost
of deposits or borrowings used to fund most tax-exempt issues acquired after
August 7, 1986. However, the Company has been able to purchase "bank
qualified" tax-exempt issues from local taxing bodies to offset some of the
runoff in this portfolio. The Company will continue to buy bonds of local
tax-exempt entities, in an effort to support the local community, consistent
with the investment standards contained in the investment policy.
In as much as the Thrift is required, by regulation, to have 65% of its
assets invested in mortgage related products, the Thrift invests in pools of
mortgage-backed securities as an alternative to keeping mortgage loans
originated at long-term fixed-rates in their portfolio. As a result,
mortgage-backed securities balances at December 31, 1997 were $13.1 million,
a decrease of $3.3 million from the previous year. The majority of the
mortgage-backed securities portfolio is at the Thrift and the decrease is
consistent with the Thrift's decrease in total assets during 1997.
The Company's equity securities consist of Student Loan Marketing
Association (SLMA) and Federal Home Loan Bank (FHLB) stock which totaled $2.2
million at December 31, 1997.
Efforts by the Company to maintain appropriate liquidity includes
periodic adjustments to the securities portfolio as management considers
necessary, typically accomplished through the maturity schedule of
investments purchased.
The maturity distribution and average yields, on a fully tax equivalent
basis, of the securities portfolio at December 31, 1997 is shown in Table 4.
TABLE 4 SECURITIES MATURITY SCHEDULE & YIELDS
<TABLE>
<CAPTION>
Greater than 1 yr. Greater than 5 yrs.
Securities available for sale Less than or and less than or and less than or Greater
($ 000's) equal to 1 yr. equal to 5 yrs. equal to 10 yrs. than 10 yrs. Totals
- -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997 Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $10,022 5.75% $ 4,009 5.76% $ 0 0.00% $ 0 0.00% $ 14,031 5.75%
U.S. Government agencies
and corporations 9,723 5.51 110,574 6.31 8,575 6.87 0 0.00 128,872 6.29
States and political
subdivisions (1) 3,140 7.90 13,737 8.09 5,531 8.53 0 0.00 22,408 8.17
Mortgage-backed securities (2) 0 0.00 573 6.53 3,211 6.53 9,339 6.89 13,123 6.79
Equity securities 1,561 7.00 677 4.91 0 0.00 0 0.00 2,238 6.37
---------------------------------------------------------------------------------------------------
Total $24,446 6.01% $129,570 6.48% $17,317 7.34% $9,339 6.89% $180,672 6.52%
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
(1) - The yield is reflected on a fully tax equivalent basis utilizing a 34%
tax rate.
(2) - Mortgage-backed securities reflect the contractual maturity of the
related instrument.
NSFC ANNUAL REPORT 1997 15
27
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
TABLE 5 LOAN PORTFOLIO
<TABLE>
<CAPTION>
($ 000's)
- --------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial $ 54,701 $ 50,762 $ 53,886 $ 50,495 $ 54,902
Real estate-construction 26,768 26,905 23,720 21,815 19,719
Real estate-mortgage 152,856 146,552 137,941 132,830 135,224
Installment 8,544 9,203 10,903 13,069 11,761
--------------------------------------------------------------
Total loans 242,869 233,422 226,450 218,209 221,606
Unearned income (154) (240) (370) (592) (755)
Deferred loan fees (491) (529) (701) (829) (924)
--------------------------------------------------------------
Loans, net of unearned income
and deferred loan fees 242,224 232,653 225,379 216,788 219,927
Allowance for loan losses (5,430) (4,839) (4,514) (3,965) (3,764)
--------------------------------------------------------------
Loans, net $236,794 $227,814 $220,865 $212,823 $216,163
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
The Company has one foreign loan outstanding in the amount of $188 at
December 31, 1997.
LOAN PORTFOLIO
Loans for the Company continued to grow in 1997 due to a strong local
economy. As shown in Table 5, gross loans increased $9,447,000 or 4.0% at
year end 1997, following an increase of $6,972,000 or 3.1% in 1996. Table 1
shows that average loans in 1997 were $241,019,000, an increase of $7,852,000
over the average loans in 1996.
The Company's commercial loans at year end increased $3.9 million to
$54.7 million as of December 31, 1997 after declining $3.1 million in 1996.
The growth in commercial loans reflects the strong local economy in 1997.
The Company's real estate construction lending portfolio stabilized
during 1997 with balances at December 31, 1997 of $26.8 million, a slight
decrease from 1996 year end balances of $26.9 million. The Company has
developed an expertise in construction lending and has developed a portfolio
of construction and construction-related loans. This portfolio has averaged
approximately $23 million over the last five years. The construction
portfolio consists of loans to residential builders, housing developers, and
for commercial building projects. The Company recognizes that successful
construction lending is dependent upon the successful completion of
construction contracts and efficient management of the construction company.
Construction loans are generally made on properties which are under sold
contracts. Loans are secured by first lien positions on the real estate and
have loan to value ratios between 50% - 75% of appraised value. These loans
are usually processed through a title company construction escrow. Terms
generally range from six months to five years. The Company attempts to
minimize the risk of construction lending by granting credit to established
customers and restricting these loans to our market area.
The mortgage loan portfolio of the Company increased by $6,304,000 at
December 31, 1997 as compared to December 31, 1996 as shown in Table 5. A
large percentage of the mortgages booked were commercial related mortgages
that had initially been short term commercial loans or construction loans in
which the related projects were completed and transferred to mortgage loans.
These commercial mortgages were primarily made at fixed rates with call
features after five years.
The home equity loan program, classified as real estate-mortgage in
Table 5, is a product that allows consumers to use the equity in their homes
to finance purchases and to get an interest deduction on their tax return.
This product is new since the 1986 Reform Act phased out interest deductions
on consumer loans. The interest deduction has made this product an attractive
alternative to traditional consumer financing and is a product that the
Company expects to grow in the future. The home equity portfolio continued to
grow during 1997 with balances of approximately $14.7 million at December 31,
1997, an increase of 13.1% over last year.
At First Federal, mortgage loans originated for sale increased to $11.2
million in 1997 from $9.2 million in 1996. First Federal's loans originated
for sale are normally sold through the Federal Home Loan Mortgage Corporation
(FHLMC) gold or Federal National Mortgage Association (FNMA) live pricing
programs.
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost, net of loan fees collected, or estimated market
value in the aggregate. These loans are Company financed mortgage loans
awaiting sale to FHLMC or FNMA. The sale generally occurs approximately three
days after funding. Loans held for sale on December 31, 1997 and 1996 were
approximately $1,338,000 and $893,000 and are classified as real estate
mortgage loans.
16 NSFC ANNUAL REPORT 1997
28
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
LOAN PORTFOLIO CONTINUED
The Company services the mortgages sold on the secondary market, which
generates additional fee income. The unpaid principal balances of these loans
at December 31, 1997 and 1996 were $64.9 million and $65.3 million.
Installment lending decreased by $.7 million during 1997, a decline of
7.2%, as consumers were provided with lower cost loan incentives to purchase
consumer goods. Prior to 1995, half of the consumer loan portfolio was made
up of indirect automobile paper. At December 31, 1997 this percentage had
decreased to less than 10%. There are three primary factors for the decline
in indirect paper that has negatively impacted consumer loan volume. Dealer
incentives have driven the interest rate spread lower, the customer has lost
the interest deduction for taxes, and other institutions have securitized
these portfolios for sale in the bond market, thereby making loan rates
unattractive. It is expected that the consumer loan portfolio will decline in
1998, but at a smaller rate.
The Company has a small direct lease financing portfolio, which
increased in 1997 to $1,274,000. While the Company does not presently solicit
leasing business, the Company does occasionally make leases to provide
customers with financial alternatives.
Table 5 shows the year end balance of loans outstanding by loan purpose
for each of the last five years.
MATURITY OF LOANS
Table 6 highlights the maturity distribution of the Company's loan
portfolio, excluding mortgage and installment loans.
The short-term sensitivity of the portfolio to interest rate changes is
reflected in the fact that approximately 49.2% of the loans are scheduled to
mature within one year. Of the remaining loans maturing beyond one year,
69.9% of that total are loans subject to immediate repricing.
TABLE 6 LOAN MATURITY SCHEDULE
<TABLE>
<CAPTION>
Greater than
($ 000's) Less than or 1 yr. and less than Greater than
- ----------------------------------------------------------------------------------------------------------
As of December 31, 1997 equal to 1 yr. or equal to 5 yrs. 5 yrs. Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $22,424 $25,579 $6,698 $54,701
Real estate-construction 17,685 7,963 1,120 26,768
---------------------------------------------------------------------------
Total $40,109 $33,542 $7,818 $81,469
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Percent of total 49.23% 41.17% 9.60% 100.00%
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Commercial and construction loans maturing after one year:
Fixed rate $12,436
Variable rate 28,924
-------------
Total $41,360
-------------
-------------
</TABLE>
Real estate-construction loans reflect the contractual maturity of the
related note. Due to anticipated roll-overs of real estate-construction
notes, management estimates that the loans will actually mature between one
and five years based upon the related types of construction. Loans that
mature within one year are considered to be variable rate loans as they can
be repriced upon maturity.
NSFC ANNUAL REPORT 1997 17
29
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NON-PERFORMING ASSETS
Non-performing assets consist of non-performing loans and other real
estate owned. Non-performing loans, which include impaired loans, are: (1)
loans accounted for on a non-interest accrual basis; (2) accruing loans
contractually past due ninety days or more as to interest or principal
payment; and (3) loans with terms that have been renegotiated to provide a
reduction or deferral of interest or principal because of a deterioration in
the financial condition of the borrower, of which there were none for any
year in Table 7. Total non-performing loans at December 31, 1997, were
$1,006,000.
Impaired loans, as defined by Statement of Financial Accounting
Standards (SFAS) No. 114 and No. 118, are included in non-performing loans
and totaled $754,000 and $828,000 at December 31, 1997 and 1996. SFAS No. 114
and No. 118 consider a loan impaired if full principal or interest payments
are not anticipated. Impaired loans are carried at the present value of
expected cash flows discounted at the loan's effective interest rate or at
the fair value of the collateral, if the loan is collateral dependent. At
December 31, 1997, approximately 2.3% of the allowance for loan losses is
specifically allocated for impaired loans. Interest income recognized on
impaired loans in 1997 was $36,000 which was all cash basis income, down from
$587,000 and $113,000 of income recognized on impaired loans in 1996 and 1995.
Other real estate owned includes assets acquired through loan
foreclosure and repossession. The carrying value of other real estate owned
is reviewed by management at least quarterly to assure the reasonableness of
its carrying value, which is lower of cost (fair value at date of
foreclosure) or fair value less estimated selling costs. Other real estate
owned declined slightly to $2,555,000 at December 31, 1997 from $2,846,000 at
December 31, 1996.
Loans are placed in nonaccrual status when they are 90 days past due,
unless they are fully secured and in the process of collection. At December
31, 1997 the Company had $3,000 in loans that were 90 days past due, still
accruing interest.
As illustrated in Table 7, total non-performing assets during 1997
decreased slightly from the 1996 levels in the amount of $451,000. The loans
on nonaccrual status decreased by $105,000 in 1997 from $1,108,000 in 1996.
Loans 90 days or more past due, still accruing, were reduced by $55,000 in
1997.
Loans in the amount of $174,000 were foreclosed upon and transferred to
other real estate owned during 1997. In addition, other real estate owned
decreased $291,000 during 1997. The Company was able to liquidate a portion
of its other real estate, realizing sales proceeds of $586,000 with gains of
$142,000.
Management continues to be conservative by quickly placing loans on
nonaccrual status. This approach is used to eliminate any unearned interest
income which would inflate the Company's earnings. Management will continue
its emphasis on the collection of all non-performing loans, including the
collection of unpaid interest.
On December 31, 1997, one piece of property accounted for approximately
69.8% of the total of other real estate owned. The property was acquired by
the Bank through the receipt of a deed in lieu of foreclosure in 1987. The
parcel consists of approximately 525,000 square feet of land situated on Lake
Michigan in Waukegan.
During 1994, a purchase agreement for the property, along with some
neighboring parcels, was negotiated for an amount that satisfies the current
carrying value. The agreement provides for the sale of the property and
provides for a fee to be paid to the Bank for the agreement and any 6 month
extensions of the agreement. During 1997 all option and extension fees have
been received by the Bank at the appropriate time and the agreement remains
in force. Conditions necessary to finalize the purchase include approvals
from the City of Waukegan and favorable legislative action by the State of
Illinois Senate and House of Representatives. It is still uncertain as to
when the state legislature will consider such approval of the required
legislation.
Management continues to emphasize the early identification of loan
related problems. Management is not currently aware of any other significant
loan, group of loans, or segment of the loan portfolio not included in the
discussion above as to which there are serious doubts as to the ability of
the borrower(s) to comply with the present loan payment terms.
There were no other interest-bearing assets at December 31, 1997, that
would be required to be disclosed as non-performing if such assets were
loans.
TABLE 7 NON-PERFORMING ASSETS
<TABLE>
<CAPTION>
($ 000's)
- --------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Loans
Non-accrual status $1,003 $1,108 $5,692 $4,912 $ 7,873
90 days or more past due, still accruing 3 58 1,653 2,179 557
----------------------------------------------------------
Total non-performing loans 1,006 1,166 7,345 7,091 8,430
Other real estate owned 2,555 2,846 2,311 2,728 2,891
----------------------------------------------------------
Total non-performing assets $3,561 $4,012 $9,656 $9,819 $11,321
----------------------------------------------------------
----------------------------------------------------------
Non-performing loans as a percentage
of total loans, net of unearned
income and deferred loan fees 0.42% 0.50% 3.24% 3.27% 3.83%
Non-performing assets as a
percentage of total assets 0.78 0.94 2.25 2.39 2.72
Non-performing loans as a percentage
of the allowance for loan losses 18.53 24.10 161.74 178.84 223.96
</TABLE>
Loans are placed in non-accrual status when they are 90 days past due, unless
they are fully secured and in the process of collection.
Impaired Loans - At December 31, 1997, 1996 and 1995 impaired loans totaled
$754, $828 and $5,161 and are included in non-accrual loans.
Potential Problem Loans - At December 31, 1997 there were no other loans
classified as problem loans that are not included above.
Other Problem Assets - At December 31, 1997, there were no other classified
assets, including direct lease financing, other than the loans and other real
estate owned shown above.
18 NSFC ANNUAL REPORT 1997
30
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
PROVISION FOR LOAN LOSSES
A provision is credited to an allowance for loan losses, which is
maintained at a level considered by management to be adequate to absorb
future loan losses. The adequacy of the loan loss allowance is analyzed at
least quarterly. Factors considered in assessing the adequacy of the
allowance include: changes in the type and volume of the loan portfolio;
review of the larger credits within each subsidiary; historical loss
experience; current economic trends and conditions; review of the present
value of expected cash flows and fair value of collateral on impaired loans;
loan growth; and other factors management deems appropriate.
As mentioned previously, SFAS No. 114 and SFAS No. 118 require that
management discount impaired loans based on expected cash flows or collateral
values. A portion of the allowance for loan losses is then allocated to each
impaired loan.
Throughout the year, management determines the level of provision
necessary to maintain an adequate allowance based upon current conditions and
outstanding loan volumes.
The level of non-performing loans at December 31, 1997, was lower than
the Company's historical average between 1993 and 1995. Therefore, management
during 1997 lowered the loan loss provision to $480,000 from $1,190,000 in
1996 which was decreased from $1,480,000 in 1995. If the level of
non-performing assets remains low in 1998 it is expected that there will be
further reductions to the loan loss provision.
As shown in Table 8, during 1997 the loan loss provision of $480,000
plus net recoveries of $111,000 increased the allowance for loan losses to
$5,430,000. As a result, the allowance for loan losses increased to 2.2% of
total loans outstanding at December 31, 1997.
Table 8 also indicates the types of loans charged-off and recovered for
the five years from 1993 through 1997 as well as each year's provision.
Because management is not certain as to the full collectibility of the
non-performing loans, potential loss exposure has been provided in the
Company's allocation of the allowance for loan losses. As illustrated in
Table 9, the unallocated portion of the allowance, the portion of the
allowance that is not specifically reserved for any particular problem
credit, was 49.76% of the total allowance at December 31, 1997, which is a
decrease from 58.98% of the total allowance at December 31, 1996.
Based upon management's analysis, the allowance for loan losses at
December 31, 1997, is adequate to cover future possible loan losses.
TABLE 8 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
($ 000's)
- ------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at the beginning of year $4,839 $4,514 $3,965 $3,764 $2,809
-------------------------------------------------------
Charge-offs:
Commercial 86 288 145 687 488
Real estate-construction 0 523 334 22 8
Real estate-mortgage 38 145 473 496 0
Installment 85 185 57 110 147
-------------------------------------------------------
Total charge-offs 209 1,141 1,009 1,315 643
-------------------------------------------------------
Recoveries:
Commercial 33 183 18 9 14
Real estate-construction 0 50 0 0 0
Real estate-mortgage 206 0 0 0 0
Installment 81 43 60 67 103
-------------------------------------------------------
Total recoveries 320 276 78 76 117
-------------------------------------------------------
Net charge-offs (recoveries) (111) 865 931 1,239 526
-------------------------------------------------------
Additions charged to operations 480 1,190 1,480 1,440 1,481
-------------------------------------------------------
Balance at end of year $5,430 $4,839 $4,514 $3,965 $3,764
-------------------------------------------------------
-------------------------------------------------------
Allowance as a % of total loans, net of
unearned income and deferred loan fees 2.24% 2.08% 2.00% 1.83% 1.71%
-------------------------------------------------------
-------------------------------------------------------
Net charge-offs (recoveries) during the year to
average loans outstanding during the year -0.05% 0.37% 0.42% 0.58% 0.23%
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
In addition to management's assessment, loans are examined periodically by
federal and state banking authorities.
NSFC ANNUAL REPORT 1997 19
31
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
TABLE 9 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
($ 000's)
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
Percent of Percent of Percent of Percent of Percent of
loans in each loans in each loans in each loans in each loans in each
category to category to category to category to category to
Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $1,335 22.52% $ 947 21.75% $1,741 23.80% $1,468 23.14% $1,553 24.77%
Real estate-construction 389 11.02 184 11.53 727 10.47 168 10.00 95 8.90
Real estate-mortgage 946 62.94 809 62.78 644 60.92 813 60.87 609 61.02
Installment 58 3.52 45 3.94 87 4.81 116 5.99 138 5.31
Unallocated 2,702 NA 2,854 NA 1,315 NA 1,400 NA 1,369 NA
--------------------------------------------------------------------------------------------------------
Total $5,430 100.00% $4,839 100.00% $4,514 100.00% $3,965 100.00% $3,764 100.00%
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</TABLE>
NONINTEREST INCOME
Noninterest income declined by $552,000 or 17.0% during 1997 following
an increase of $537,000 or 19.9% during 1996.
Service fees on deposits declined by $93,000 in 1997. The major portion
of this decline was the result of decreased overdraft fee income which fell
$31,000 from 1996 as average customer demand deposit balances increased in
1997. Service charges on retail deposits declined $21,000 in 1997 as average
account balances increased from 1996. Service charge income from automated
teller machines (ATMs) decreased $37,000 due to a change in the accounting
treatment for credits received when noncustomers use our ATMs. These credits
in 1997 were applied against data processing expense relating to ATM
transactions.
Trust income increased $102,000 or 19.5% from the same period in 1996
due to increased fees and additional trust business.
There were no security sales during 1997 and there were no corresponding
security gains. During 1996 there was a sale of equity securities classified
as available for sale for liquidity purposes which realized proceeds of
$2,675,000 and a resulting gain of $5,000.
Gains on sales of loans declined $38,000 during 1997 as compared to
1996. Volume of loan sales during 1997 remained stable with $10.7 million in
loans sold in 1997 as compared to $10.8 million sold in 1996. The decline in
gains was the result of competitive pressures which caused the Company to
narrow its profit margin on sales of loans in order to maintain sales volume.
Other operating income declined $518,000 or 45.3% in 1997. The decrease
is attributable to the Company booking $163,000 more in gains from the sale
of other real estate owned during 1996 than in 1997. Other operating income
also declined during 1997 due to the one-time collection during 1996 of back
interest and fees on a loan in excess of the amount charged off of $131,000.
Competitive pressures for the origination of loans for sale on the secondary
market reduced other loan fee income by $37,000 during 1997.
Comparing 1996 to 1995, noninterest income increased by $537,000 or
19.9%. The majority of this increase is attributable to increases in other
operating income which rose $461,000 or 67.5% during 1996. The Company booked
gains from the sale of other real estate owned of $305,000 during 1996. Other
income also increased during 1996 due to the one-time collection of back
interest and fees on a loan in excess of the amount charged off of $131,000.
Service fees on deposits declined $76,000 in 1996 as compared to 1995 as
average customer demand deposit balances increased.
Income from trust activities increased $62,000 during 1996 as fiduciary
activities rose in 1996 as compared to 1995.
Gains on sales of loans rose $85,000 in 1996 from 1995 as a result of
adopting SFAS 122, "Accounting for Mortgage Servicing Rights" during 1996
which allowed additional gains pertaining to servicing rights to be booked.
NONINTEREST EXPENSES
In 1997, total noninterest expenses declined by $1,240,000 to
$9,132,000, a decrease of 11.96%. Over the last three years total noninterest
expenses averaged $9,979,000 as the Company emphasized its ability to control
operating expenses. As a percent of average assets, noninterest expense was
2.1% in 1997 compared to 2.5% in 1996 and 2.6% in 1995.
The efficiency ratio, noninterest expenses divided by the sum of net
interest income and noninterest income, is frequently used as an indicator as
to how well a financial institution manages its noninterest expenses. A
decreasing ratio is an indication of improving performance. The Company's
efficiency ratio was 46.1% in 1997, 51.6% in 1996 and 55.2% in 1995. Compared
to its bank holding company peers, the Company's ability to control overhead
expenses is one of its operating strengths.
Salaries and other employee expenses decreased $70,000 in 1997 which was
a smaller decrease than in 1996. The Company continued to experience staff
reductions during 1997 due to increased efficiencies. The Company hired one
senior lender during the third quarter of 1997 because of increases to the
loan portfolio.
Occupancy expenses declined $117,000 or 9% during 1997 as compared to
the same period in 1996. A majority of this reduction is a result of
decreases in the accrual for property taxes which declined $81,000 during
1997. Management was able to successfully protest and significantly decrease
the assessed valuation of the Company's real property.
20 NSFC ANNUAL REPORT 1997
32
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NONINTEREST EXPENSES CONTINUED
Data processing expense decreased $31,000 or 5.7% during 1997 as
compared to the same period in 1996. The Company changed its accounting
treatment for credits received for noncustomers' use of Company owned ATMs.
These credits in 1997 amounted to $37,000 and were applied against data
processing expense relating to ATM transactions.
FDIC deposit insurance expense fell significantly in 1997 by $745,000 or
91.2% as compared to 1996. During 1996 the Thrift subsidiary booked a
$603,000 one-time FDIC expense due to legislation requiring recapitalization
of the FDIC Savings Association Insurance Fund (SAIF). With both FDIC SAIF
and Bank Insurance Fund (BIF) being fully funded the Company's 1997 FDIC
expense declined.
Other real estate owned expenses decreased $83,000 or 37.2% during 1997
compared to the previous year due to the decline in transfers made from loans
to the other real estate owned during 1997 compared to 1996. Only $174,000 in
loans were transfered to other real estate owned in 1997 compared to
$2,432,000 in 1996.
Other operating expenses for 1997 declined by $194,000 or 9.6% as
compared to last year. Auditing expenses declined $35,000 from last year as
the internal audit staff took on some of the audit functions that previously
were performed by the outside auditors. Loan and collection expenses declined
$32,000 in 1997 resulting from the decrease in non-performing loans. Printing
expenses declined $32,000 as the Company's loan and customer service areas
continued to automate so that forms are printed internally by laser printers
as needed, reducing inventories of forms. Business development expenses
declined $34,000 during 1997 as greater use of joint advertisement of Bank
and Thrift products occurred. Expenses relating to correspondent bank
accounts were $18,000 less in 1997 as higher balances were maintained and
earnings credit allowances were greater, thus reducing this expense.
In 1996, total noninterest expenses declined slightly by $61,000 to
$10,372,000 from 1995 levels.
Salaries and other employee expenses decreased $222,000 or 3.9% in 1996.
Staff reductions occurred during 1996 due to increased efficiencies.
Occupancy expenses declined slightly by $32,000 or 2.4% during 1996 as
compared to the same period in 1995. This is the result of a reduction of
depreciation expense of $41,000 from building and equipment items becoming
fully depreciated.
Data processing expense increased $15,000 or 2.8% during 1996 as
compared to the same period in 1995. This is due to a small increase in our
data processing service bureau charges.
FDIC deposit insurance expense increased significantly in 1996 by
$334,000 or 69.2% as compared to 1995. This increase is a result of the
Thrift booking a $603,000 one-time FDIC expense due to legislation requiring
recapitalization of the FDIC Savings Association Insurance Fund (SAIF) during
1996.
Other real estate owned expenses increased $51,000 or 29.7% during 1996
compared to 1995 due to the increase in transfers of loans to other real
estate owned which occurred in 1996. During 1996 loans totaling $2,432,000
were transferred to other real estate owned compared to only $981,000 during
1995.
Other operating expenses for 1996 declined by $207,000 or 9.3% as
compared to 1995. Much of this decrease is attributable to one-time expenses
during the early part of 1995 related to the conversion to a new data
processing service bureau and the installation of new data processing
equipment that went along with the conversion. Printing and supplies declined
$31,000 in 1996 as during 1995 new forms had to be ordered for the new data
processing system. Professional fees declined $110,000 as consultants were
used in 1995 during the conversion to assist and train Company personnel on
the new system and equipment. Other expenses related to the employment of new
employees decreased $21,000 in 1996 and other expenses pertaining to goodwill
decreased $24,000 as goodwill associated with the purchase of a branch office
were fully amortized in 1995.
On December 17, 1997 the Company's Board of Directors announced that it
had approved the merger of its two wholly owned subsidiaries, Bank of
Waukegan and First Federal Bank, fsb. The Bank of Waukegan will be the
surviving entity in the merger. The proposed merger is subject to the receipt
of various bank regulatory approvals. Subject to regulatory approval, the
merger will become effective during the second quarter of 1998.
Management believes that the merger will increase efficiencies and lower
noninterest expenses in future years. The Company expects increases to other
operating expenses as a result of the merger during 1998. Legal and other
professional expenses related to the merger are estimated to be $60,000
during 1998. Merger expenses relating to data processing are estimated at
$33,000. It is expected that marketing expenses for signs and notices to our
customers will be approximately $35,000. Printing expenses may increase
during 1998 as a result of the merger.
The Company has established a "Year 2000 Team" made up of management in
order to deal with risks associated with the new millennium especially in the
area of data processing. This "Year 2000 Team" regularly updates the
Company's Board of Directors as to the Company's ability to deal with year
2000 issues.
An inventory of all computer hardware and software utilized by the
Company has been conducted and the hardware and software vendors have been
contacted requesting the status of the vendors' compliance with year 2000
issues. The Company contracts with an outside data processing service bureau
for most of its data processing needs. The data processing service bureau has
been testing for year 2000 compliance and expects to be prepared for all year
2000 issues.
The Company's item processing system has been found not to be year 2000
compliant and new hardware and software will be installed during 1998 at an
expected cost of $50,000. The teller platform system used by the Company has
been determined as not compliant for the year 2000. Updating the teller
platform will entail an expenditure for hardware and software of
approximately $100,000.
FEDERAL AND STATE INCOME TAXES
For the years ended December 31, 1997, 1996 and 1995, the Company's
provision for federal and state taxes as a percentage of pretax earnings were
31.4%, 29.6% and 29.2%.
The actual tax rates differ from the statutory rates because the pretax
earnings include significant amounts of interest on United States Government
securities, which are nontaxable for state income tax purposes, qualified
interest on loans to local political subdivisions, which are nontaxable for
federal income tax purposes, and interest on qualified state and local political
subdivision securities, which are nontaxable for federal income tax purposes.
NSFC ANNUAL REPORT 1997 21
33
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
TABLE 10 MATURITY OR REPRICING OF ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
-------------------SUBJECT TO REPRICING WITHIN -------------------------------
($ 000)s IMMEDIATE 91 DAYS 181 DAYS 1 - 3 3 - 5 5 - 10
- --------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997 BALANCES TO 90 DAYS TO 180 DAYS TO 365 DAYS YEARS YEARS YEARS
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest bearing deposits
in financial institutions $ 206 $ 106 $ 0 $ 0 $ 100 $ 0 $ 0
Federal funds sold 11,200 11,200 0 0 0 0 0
SECURITIES:
U.S. Treasury 14,031 3,002 2,013 5,007 4,009 0 0
U.S. Government agencies and corporations 128,872 3,000 1,745 4,978 50,220 60,354 8,575
States & political subdivisions 22,408 701 322 2,117 7,147 6,590 5,531
Equity securities 2,238 1,561 0 0 0 677 0
Mortgage-backed securities (1) 13,123 3,781 70 2,921 551 22 5,778
LOANS:
Commercial 54,701 41,400 1,171 683 3,697 6,749 1,001
Real estate - construction 26,768 24,653 594 423 69 82 947
Real estate - mortgage 152,856 55,728 3,918 10,818 28,866 35,095 18,431
Installment, net of unearned income 8,390 3,056 834 1,343 1,684 1,377 96
Direct lease financing 1,274 571 45 133 269 256 0
------------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS $436,067 $ 148,759 $ 10,712 $ 28,423 $96,612 $111,202 $40,359
------------------------------------------------------------------------------
------------------------------------------------------------------------------
LIABILITIES:
NOW accounts $ 36,455 $ 36,455 $ 0 $ 0 $ 0 $ 0 $ 0
Money market accounts 38,790 38,790 0 0 0 0 0
Savings 43,923 43,923 0 0 0 0 0
Time deposits, $100,000 and over 93,469 39,775 19,509 28,106 6,079 0 0
Time deposits, under $100,000 93,925 34,950 19,124 20,335 19,453 25 38
Other interest bearing liabilities 43,504 23,618 8,784 5,102 6,000 0 0
------------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES $350,066 $ 217,511 $ 47,417 $ 53,543 $31,532 $ 25 $ 38
------------------------------------------------------------------------------
------------------------------------------------------------------------------
EXCESS INTEREST EARNING ASSETS (LIABILITIES) $ (68,752) $ (36,705) $ (25,120) $65,080 $111,177 $40,321
CUMULATIVE EXCESS INTEREST EARNING
ASSETS (LIABILITIES) (68,752) (105,457) (130,577) (65,497) 45,680 86,001
CUMULATIVE INTEREST RATE SENSITIVITY RATIO (2) 0.68 0.60 0.59 0.81 1.13 1.25
</TABLE>
(1) Mortgage-backed securities reflect the time horizon when these financial
instruments are subject to rate change or repricing.
(2) Interest earning assets divided by interest bearing liabilities.
This table does not necessarily indicate the impact of general interest rate
movements on the Company's net interest income because the repricing of
certain assets and liabilities is discretionary and is subject to
competitive and other pressures. As a result, assets and liabilities
indicated as repricing within the same period may in fact reprice at
different times and at different rate levels.
22 NSFC ANNUAL REPORT 1997
34
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
LIQUIDITY AND INTEREST RATE SENSITIVITY ANALYSIS
The primary functions of asset/liability management are to assure
adequate liquidity and maintain an appropriate balance between interest
sensitive earning assets and interest bearing liabilities.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and
by monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period
if it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest
earning assets maturing or repricing within a specific time period and the
amount of interest bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate
sensitive assets exceeds the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely
affect net interest income while a positive gap would tend to result in an
increase in net interest income. During a period of falling interest rates, a
negative gap would tend to result in an increase in net interest income while
a positive gap would tend to adversely affect net interest income. The
Company's gap position is illustrated in Table 10.
Liquidity management involves the ability to meet the cash flow
requirements of customers who may be either depositors wanting to withdraw
funds or borrowers knowing that sufficient funds will be available to meet
their credit needs.
In addition to federal funds sold and interest bearing deposits in
banks, marketable securities, particularly those of shorter maturities, are a
principal source of asset liquidity. The Company classifies all of its
securities as available for sale which increases the Company's flexibility in
that the Company can sell any of its unpledged securities to meet liquidity
requirements. Securities available for sale amounted to $180,672,000 at
December 31, 1997. Securities at December 31, 1997 in the amount of
$122,418,000 were pledged to secure public deposits and repurchase agreements.
During 1997, the Company received a term advance from the Federal Home
Loan Bank in the amount of $5,000,000. These funds were used to purchase a
U.S. Government agency security that has a call provision on the same date as
the advance is due to be repaid.
Rate sensitivity varies with different types of interest earning assets
and interest bearing liabilities. Federal funds sold on which the rate varies
daily and loans tied to the prime rate differ considerably from long-term
securities and fixed rate loans. Time deposits over $100,000 are more rate
sensitive than savings accounts, Management has portrayed savings accounts as
immediately repricable, because of management's ability to change the savings
interest rate.
Table 11 illustrates the maturity schedule as of December 31, 1997 of
the time deposits $100,000 and over portfolio. At December 31, 1997 6.5% of
the time deposits $100,000 and over mature after a year. At December 31, 1996
only 5.5% of time deposits matured after a year showing a slight shift by
large time deposit customers to long term certificates of deposit. This
lengthening of maturity lengths on time deposits of $100,000 assists in
lowering the Company's negative gap position.
The Company historically has a high level of time deposits over $100,000
and securities sold under repurchase agreements and other short-term
borrowings. As of December 31, 1997, time deposits over $100,000 and
repurchase agreements were 33.7% of total deposits and other borrowings, an
increase from 28.9% in 1996. The increase in time deposits over $100,000 was
from existing local public depositors. Being located in the county seat, the
Company accepts time deposits over $100,000 from various government agencies.
With approximately 51.4% of the Company's loan and lease portfolio
floating with the prime rate or repricable within 90 days, the effect on
interest income when rates rise or fall is felt quickly.
As Table 10 shows, the Company is liability sensitive through the three
year time horizon by $65.5 million. This is a change from last year, where
the Company was liability sensitive through the three year time horizon by
$61.5 million. Although management has attempted during the past year to
reduce its liability sensitive gap position, its efforts continued to be
restricted by competitive pressures in the area of commercial and commercial
real estate loans which have increased the level of fixed rate loans with
intermediate term balloon maturities. The Company has increased the maturity
time horizon on its securities by purchasing intermediate term U.S.
Government agency securities that have call provisions in order to maximize
yields on its securities portfolio. Securities carried at $77,088,000 have
call options allowing the issuers to redeem the securities prior to the
contractual maturity date. Management has continued its efforts to reduced
its liability sensitive position by continuing to sell fixed rate mortgage
loans originated on the secondary market. Management has made efforts to
reduce its liability sensitive position by lengthening the maturities of its
time deposit. Time deposits maturing after one year as a percentage of total
time deposits increased to 13.7% at December 31, 1997 from 12.6% last year.
It is management's desire to reduce the liability gap position during the
upcoming year.
TABLE 11 TIME DEPOSITS, $100,00 AND OVER MATURITY SCHEDULE
<TABLE>
<CAPTION>
Greater than Greater than
($ 000's) Less than or 3 mos. & less than 3 mos. & less than Greater than
- ---------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997 equal to 3 mos. or equal to 6 mos. or equal to 12 mos. 12 mos. Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Time deposits, $100,000 and over:
Retail deposits $10,399 $ 6,041 $ 8,188 $4,632 $29,260
Corporate deposits 6,712 2,739 950 909 11,310
Public fund deposits 22,664 10,729 18,968 538 52,899
------------------------------------------------------------------------------------
Total time deposits,
$100,000 and over $39,775 $19,509 $28,106 $6,079 $93,469
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
The Company has no foreign banking offices or deposits.
NSFC ANNUAL REPORT 1997 23
35
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS
Securities sold under repurchase agreements (repurchase agreements) and
other short-term borrowings during 1997 have continued to be an alternative
to certificates of deposit as a source of funds. At December 31, 1997 the
Company had $38,504,000 of repurchase agreements. Most municipalities, other
public entities and some other organizations, require that their funds are
insured or collateralized as a matter of their policies. Commercial
depositors also find the collateralization of repurchase agreements
attractive as an alternative to certificates of deposits. Repurchase
agreements provide a source of funds and do not increase the Company's
reserve requirements with the Federal Reserve Bank or create an expense
relating to FDIC insurance. Repurchase agreements consequently are less
costly to the Company. Management expects to continue to offer repurchase
agreements as an alternative to certificates of deposit in the future.
Although the Company experienced a $1.7 million increase in its
repurchase agreements and short term borrowing at year end 1997, average
repurchase agreements during 1997 declined slightly by $830,000 from 1996.
Average repurchase agreements increased during 1996 from 1995 levels by
$373,000. These slight changes in average balances indicate that repurchase
agreements are a stable source of funds to the Company.
Table 12 provides information as to balances and interest rates
pertaining to securities sold under repurchase agreements and other
short-term borrowings.
TABLE 12 SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER
SHORT-TERM BORROWINGS
<TABLE>
<CAPTION>
($ 000's)
- ----------------------------------------------------------------------------------
At or for the Year Ended December 31, 1997 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at end of year $38,504 $36,758 $43,278
Weighted average interest rate at end of year 5.29% 4.93% 5.28%
Maximum amount outstanding $39,995 $44,135 $78,116
Average amount outstanding 34,176 35,006 34,633
Weighted average interest rate 5.07% 4.92% 5.41%
</TABLE>
CAPITAL RESOURCES
Capital provides the foundation for future growth. Regulatory agencies
have developed minimum guidelines by which the adequacy of a financial
institution's capital may be evaluated.
Northern States' capital ratios exceed these minimum guidelines, both in
terms of Tier I capital (stockholders' equity of the Company less intangible
assets), and in terms of Tier II capital (Tier I capital plus qualifying
long-term debt and the allowance for loan losses). The portion of the
allowance for loan losses qualifying as Tier II capital is limited to 1.25%
of risk weighted assets. The effect of the unrealized gains (losses) on
securities available for sale is excluded from the capital ratio calculations.
Regulatory capital guidelines require that the amount of capital
increase with the amount of risk inherent in a company's balance sheet and
off-balance sheet exposure. Capital requirements in order for the Company to
be considered well capitalized are that Tier I capital to average assets must
be at least 5.00% and Tier I capital to risk weighted assets must be at least
6.00%. The requirements are that Tier II capital must be 10.00% of risk
adjusted assets in order for the Company to be considered well capitalized.
All of the Company's capital ratios exceed the level required under
regulatory guidelines as shown in Table 13.
24 NSFC ANNUAL REPORT 1997
36
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
<TABLE>
<CAPTION>
($ 000's) As of December 31, 1997
- ----------------------------------------------------------
QUALIFYING FOR TIER I CAPITAL:
- ----------------------------------------------------------
<S> <C>
Common stock $ 1,779
Surplus 11,222
Retained earnings 46,725
Less - Intangible assets (129)
--------
TOTAL QUALIFYING TIER I CAPITAL $59,597
--------
--------
</TABLE>
<TABLE>
<CAPTION>
($ 000's) As of December 31, 1997
- -----------------------------------------------------------
QUALIFYING FOR TIER II CAPITAL:
- -----------------------------------------------------------
<S> <C>
Total Qualifying Tier I Capital $ 59,597
Allowance for loan losses 3,652
--------
TOTAL QUALIFYING TIER II CAPITAL $ 63,249
--------
TOTAL ASSETS $458,222
--------
--------
</TABLE>
<TABLE>
<CAPTION>
($ 000's) As of December 31, 1997
- ---------------------------------------------------------------------------
RISK-BASED ASSETS TOTAL RISK-BASED
- ---------------------------------------------------------------------------
<S> <C> <C>
Zero percent risk $ 20,111 $ 0
Twenty percent risk 183,275 36,655
Fifty percent risk 101,019 50,510
One hundred percent risk (1) 205,034 205,034
-------------------------
TOTAL RISK-WEIGHTED ASSETS $509,439 $292,199
-------------------------
-------------------------
</TABLE>
(1) Includes off-balance-sheet items
<TABLE>
<CAPTION>
($ 000's) As of December 31, 1997
- ----------------------------------------------------------------
CAPITAL REQUIREMENTS $ %
- ----------------------------------------------------------------
<S> <C> <C>
(Tier I Capital to Average Assets)
REQUIRED $21,742 5.00%
ACTUAL 59,597 13.71
RISK-BASED CAPITAL:
Tier I:
REQUIRED $17,532 6.00%
ACTUAL 59,597 20.40
Tier II:
REQUIRED $29,220 10.00%
ACTUAL 63,249 21.65
</TABLE>
CASH FLOWS
Cash flows from operating activities were above accrual basis net income
by $1.8 million in 1997. In 1996 cash flows from operating income exceeded
net income by $6.2 million and in 1995 cash flows from operating income were
below net income by $.2 million. Management expects ongoing operating
activities to continue to be a primary source of cash flow for the Company.
Interest bearing deposits increased $21.0 million or 7.35% in 1997. The
Company has experienced growth in its time deposits over $100,000 from
existing local public depositors. Interest bearing deposits help the Company
to maintain an adequate level of cash for the Company's activities. While
competition for deposits is expected to remain keen and future deposit growth
cannot be predicted with any certainty, the Company plans to continue to
actively seek profitable new deposit business.
The increase in loans during 1997 provided greater interest income
revenues for the Company. These increases to loans were funded through cash
flows from operating activities and increases to deposits.
Securities available for sale increased $30.9 million during 1997 and
also provided increased interest income revenues to the Company. The increase
in securities available for sale came from proceeds from maturing securities
available for sale, operating activities, a term advance of $5.0 million from
the Federal Home Loan Bank and increases to deposits.
To insure the ability to meet its funding needs, including any
unexpected strain on liquidity, the Company has a $23 million in federal
funds lines of credit from two independent banks. In addition, the Company
has the ability to borrow funds, if necessary, directly from the Federal
Reserve Bank and the Federal Home Loan Bank.
The Company has a term advance of $5.0 million from the Federal Home
Loan Bank which has been used to purchase a U.S. Government agency security
that has a call provision on the same date as the advance is due to be
repaid. Interest earned on the U.S. Government agency security is used to
service the debt to the Federal Home Loan Bank. The Company has no other
notes payable or similar debt on its balance sheet. The lack of a debt
service requirement allows the Company to use its funds for other operating
purposes.
Equity capital is in excess of regulatory requirements, as determined on
both risk-based and leverage ratio criteria. Cash dividends have been a
relatively modest percentage of net income for the past three years, ranging
to 30.4% in 1997 from 29.6% in both 1996 and 1995.
During 1997 the Company made a $64,000 outlay for expansion of its new
telephone system to all its offices. Expenditures of $76,000 were made in
1997 to remodel and add offices at two of the Company's locations and
addtional $77,000 was expended to update data processing equipment and
printers. During 1996 a $61,000 outlay was made for new telephone equipment
and $49,000 was used to purchase 2 new ATMs. There are planned expenditures
during 1998 of $50,000 to purchase hardware and software to update the
Company's item processing system in order to meet the year 2000 issues. It is
possible that another $100,000 to update the Company's teller platform system
to be compliant for the year 2000 may be expended during 1998.
NSFC ANNUAL REPORT 1997 25
37
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
RECENT ACCOUNTING PRONOUNCEMENTS
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.
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.
QUANTITIVE AND QUALITIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to
a lesser extent, liquidity risk. Interest-rate risk ("IRR") is the exposure
of a banking organization's financial condition to adverse movements in
interest rates. Accepting this risk can be an important source of
profitability and stockholder value, however excessive levels of IRR can pose
a significant threat to the Company's earnings and capital base. Accordingly,
effective risk management that maintains IRR at prudent levels is essential
to the Company's safety and soundness.
Evaluating a financial institution's exposure to changes in interest
rates includes assessing both the adequacy of the management process used to
control IRR and the organization's quantitative level of exposure. When
assessing the IRR management process, the Company seeks to ensure that
appropriate policies, procedures, management information systems and internal
controls are in place to maintain IRR at prudent levels with consistency and
continuity. Evaluating the quantitative level of IRR exposure requires the
Company to assess the existing and potential future effects of changes in
interest rates on its consolidated financial condition, including capital
adequacy, earnings, liquidity, and, where appropriate, asset quality.
The Federal Reserve Board, together with the Office of the Comptroller
of the Currency and the Federal Deposit Insurance Corporation, adopted a
Joint Agency Policy Statement on Interest-Rate Risk, effective June 26, 1996.
The policy statement provides guidance to examiners and bankers on sound
practices for managing interest rate risk, which will form the basis for
ongoing evaluation of the adequacy of interest-rate risk management at
supervised institutions. The policy statement also outlines fundamental
elements of sound management that have been identified in prior Federal
Reserve guidance and discusses the importance of these elements in the
context of managing interest-rate risk. Specifically, the guidance emphasizes
the need for active board of director and senior management oversight and a
comprehensive risk-management process that effectively identifies, measures,
and controls interest-rate risk. Several techniques might be used by an
institution to minimize interest-rate risk. Such activities fall under the
broad definition of asset/liability management. The Company's primary
asset/liability management technique is the measurement of the Company's
asset/liability gap, that is, the difference between the cash flow amounts of
interest-sensitive assets and liabilities that will be repriced during a
given period.
Several ways an institution can manage interest-rate risk include:
selling existing assets or repaying certain liabilities; matching repricing
periods for new assets and liabilities, for example, and by shortening terms
of new loans or investments. Financial institutions are also subject to
prepayment risk in falling rate environments. For example, mortgage loans and
other financial assets may be prepaid by a debtor so that the debtor may
refund its obligations at new, lower rates. Prepayments of assets carrying
higher rates reduce the Company's interest income and overall asset yields. A
large portion of an institution's liabilities may be short term or due on
demand, while most of its assets may be invested in long-term loans or
investments. Accordingly, the Company seeks to have in place sources of cash
to meet short-term demands. These funds can be obtained by increasing
deposits, borrowing, or selling assets.
Table 14 provides information about the Company's financial instruments
that are sensitive to changes in interest rates as of December 31, 1997 based
on the information and assumptions set forth in the notes. The Company
believes that the assumptions utilized are reasonable. The Company had no
derivative financial instruments, or trading portfolio, as of December 31,
1997. The expected maturity date values for loans receivable, mortgage-backed
securities, and investment securities were calculated by adjusting the
instrument's contractual maturity date for expectations of prepayments, as
set forth in the notes. Expected maturity for interest bearing core deposits
such as NOW, money market and savings accounts are assumed to be 5% each
year. With respect to the Company's adjustable rate instruments, expected
maturity date values were measured by adjusting the instrument's contractual
maturity date for expectations of prepayments, as set forth in the notes.
From a risk management perspective, however, the Company believes that
repricing dates, as opposed to expected maturity dates, may be more relevant
in analyzing the value of such instruments. Similarly, 42.7% of the Company's
securities portfolio is comprised of callable securities. Company borrowings
consist of securities sold under repurchase agreements and a Federal Home
Loan Bank term advance and were tabulated by contractual maturity dates and
without regard to any conversion or repricing dates.
26 NSFC ANNUAL REPORT 1997
38
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
TABLE 14 EXPECTED MATURITY DATES OF ON BALANCE SHEET ITEMS
<TABLE>
<CAPTION>
($ 000's) ---------------------------------------- Maturing In --------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
As of December 31, 1997 1998 1999 2000 2001 2002 Thereafter Totals Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) (2)
Fixed rate $ 17,753 $10,862 $15,771 $24,867 $16,685 $20,776 $106,714 $107,151
Average interest rate 8.88% 8.93% 8.98% 9.03% 8.98% 7.86% 8.75%
Adjustable rate 55,486 12,365 13,052 9,012 13,816 32,424 136,155 136,155
Average interest rate 9.17 9.27 9.21 8.98 9.29 9.27 9.21
Securities
Fixed rate 24,446 19,081 43,344 33,821 33,324 19,625 173,641 173,641
Average interest rate 6.01 6.30 6.50 6.47 6.55 7.33 6.51
Adjustable rate 0 0 0 0 0 7,031 7,031 7,031
Average interest rate 0.00 0.00 0.00 0.00 0.00 6.76 6.76
Interest bearing deposits
and federal funds sold
Fixed rate 0 0 100 0 0 0 100 100
Average interest rate 0.00 0.00 7.30 0.00 0.00 0.00 7.30
Adjustable rate 11,306 0 0 0 0 0 11,306 11,306
Average interest rate 5.57 0.00 0.00 0.00 0.00 0.00 5.57
Direct lease financing
Fixed rate 749 202 67 149 107 0 1,274 1,274
Average interest rate 7.74 7.80 8.74 7.30 7.14 0.00 7.70
-------------------------------------------------------------------------------------------
Total $109,740 $42,510 $72,334 $67,849 $63,932 $79,856 $436,221 $436,658
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Interest bearing liabilities:
Interest bearing deposits (3)
Balances $167,753 $25,613 $10,958 $ 5,128 $ 4,859 $92,251 $306,562 $306,958
Average interest rate 5.60% 5.46% 4.80% 3.35% 3.34% 3.34% 4.80%
Borrowings
Balances 37,504 6,000 0 0 0 0 43,504 43,519
Average interest rate 5.27 5.92 0.00 0.00 0.00 0.00 5.36
-------------------------------------------------------------------------------------------
Total $205,257 $31,613 $10,958 $ 5,128 $ 4,859 $92,251 $350,066 $350,477
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include net deferred loan fees, unearned income or the allowance
for loan losses.
(2) For fixed rate loans, amortization is based on aggregate payments due.
(3) NOW, money market and savings deposits assume 5% maturity each year.
NSFC ANNUAL REPORT 1997 27
39
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 & 1995
STATEMENT OF MANAGEMENT RESPONSIBILITY
Northern States Financial Corporation's management is responsible for
the accompanying consolidated financial statements which have been prepared
in conformity with generally accepted accounting principles. They are based
on our best estimates and judgments. Financial information elsewhere in this
annual report is consistent with the data presented in these statements.
We acknowledge the integrity and objectivity of published financial
data. To this end, we maintain an accounting system and related internal
controls which we believe sufficient in all material respects to provide
reasonable assurance that financial records are reliable for preparing
financial statements and that assets are safeguarded from loss or
unauthorized use.
Our independent auditing firm, Crowe, Chizek and Company LLP, provides
an objective review as to management's discharge of its responsibilities
insofar as they relate to the fairness of reported operating results and the
financial condition of the Company. This firm obtains and maintains an
understanding of our accounting and financial controls and employs such
testing and verification procedures as it deems necessary to arrive at an
opinion on the fairness of the consolidated financial statements.
The Board of Directors pursues its responsibilities for the accompanying
consolidated financial statements through its Audit Committee. The Committee
meets periodically with Northern States Financial Corporation's internal
auditor and/or independent auditors to review and approve the scope and
timing of the internal and external audits and the findings therefrom. The
Committee recommends to the Board of Directors the engagement of the
independent auditors and the auditors have direct access to the Audit
Committee.
/s/ Fred Abdula /s/ Thomas M. Nemeth
- ------------------------ -------------------------
FRED ABDULA THOMAS M. NEMETH
Chairman of the Board & Assistant Vice President
Chief Executive Officer
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Northern States Financial Corporation
Waukegan, Illinois
We have audited the accompanying consolidated balance sheets of NORTHERN
STATES FINANCIAL CORPORATION as of December 31, 1997 and 1996 and the related
consolidated statements of income, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NORTHERN
STATES FINANCIAL CORPORATION as of December 31, 1997 and 1996, and the
results of its operations and its cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Crowe, Chizek and Company LLP
- ----------------------------------
Crowe, Chizek and Company LLP
Oak Brook, Illinois
February 12, 1998, except for Note 14,
as to which the date is February 17, 1998
28 NSFC ANNUAL REPORT 1997
40
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
($ 000's, except per share data)
- ------------------------------------------------------------------------------------------------------------
December 31, 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks ............................................................ $ 14,200 $ 15,247
Interest bearing deposits in financial institutions - maturities less than 90 days.. 106 1,235
Federal funds sold ................................................................. 11,200 15,500
----------------------
Total cash and cash equivalents ................................................ 25,506 31,982
Interest bearing deposits in financial institutions - maturities over 90 days ...... 100 100
Securities available for sale ...................................................... 180,672 149,750
Loans .............................................................................. 242,224 232,653
Less: Allowance for loan losses .................................................... (5,430) (4,839)
----------------------
Loans, net ..................................................................... 236,794 227,814
Direct lease financing ............................................................. 1,274 999
Office buildings and equipment, net ................................................ 5,899 6,250
Other real estate owned, net of allowance for losses of $544 and $532 .............. 2,555 2,846
Accrued interest receivable ........................................................ 4,308 3,955
Other assets ....................................................................... 1,878 2,868
----------------------
Total assets ............................................................... $458,986 $426,564
----------------------
----------------------
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest bearing ................................................... $ 41,388 $ 43,223
NOW accounts ................................................................... 36,455 38,159
Money market accounts .......................................................... 38,790 44,426
Savings ........................................................................ 43,923 44,843
Time, $100,000 and over ........................................................ 93,469 69,052
Time, under $100,000 ........................................................... 93,925 89,092
----------------------
Total deposits ............................................................. 347,950 328,795
Securities sold under repurchase agreements and other short-term borrowings ........ 38,504 36,758
Federal Home Loan Bank term advance ................................................ 5,000 0
Advances from borrowers for taxes and insurance .................................... 1,166 1,021
Accrued interest payable and other liabilities ..................................... 6,171 5,155
----------------------
Total liabilities .......................................................... 398,791 371,729
----------------------
Stockholders' Equity
Common stock - $2 par value: 1,750,000 shares authorized;
889,373 and 889,273 shares issued and outstanding .............................. 1,779 1,779
Additional paid-in capital ......................................................... 11,222 11,216
Retained earnings .................................................................. 46,725 41,849
Unrealized gain (loss) on securities available for sale, net ....................... 469 (9)
----------------------
Total stockholders' equity ..................................................... 60,195 54,835
----------------------
Total liabilities and stockholders' equity ..................................... $458,986 $426,564
----------------------
----------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NSFC ANNUAL REPORT 1997 29
41
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
($ 000's, except per share data)
- -------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans (including fee income)............................. $22,199 $22,050 $21,567
Securities
Taxable.............................................. 8,411 7,663 7,313
Exempt from federal income tax....................... 1,149 1,188 1,156
Interest bearing deposits in financial institutions...... 35 28 117
Federal funds sold....................................... 965 742 740
---------------------------
Total interest income................................ 32,759 31,671 30,893
---------------------------
Interest expense
Time deposits............................................ 9,714 8,720 8,381
Other deposits........................................... 4,114 4,364 4,451
Other borrowings......................................... 1,787 1,724 1,873
---------------------------
Total interest expense............................... 15,615 14,808 14,705
---------------------------
Net interest income.......................................... 17,144 16,863 16,188
Provision for loan losses.................................... 480 1,190 1,480
---------------------------
Net interest income after provision for loan losses.......... 16,664 15,673 14,708
---------------------------
Noninterest income
Service fees on deposits................................. 1,264 1,357 1,433
Trust income............................................. 625 523 461
Net security gains....................................... 0 5 0
Net gains on sales of loans.............................. 172 210 125
Other operating income................................... 626 1,144 683
---------------------------
Total noninterest income............................. 2,687 3,239 2,702
---------------------------
Noninterest expenses
Salaries and employee benefits........................... 5,407 5,477 5,699
Occupancy and equipment expenses, net.................... 1,184 1,301 1,333
Data processing expense.................................. 511 542 527
FDIC deposit insurance expense........................... 72 817 483
Other real estate owned expenses......................... 140 223 172
Other operating expenses................................. 1,818 2,012 2,219
---------------------------
Total noninterest expenses........................... 9,132 10,372 10,433
---------------------------
Income before income taxes................................... 10,219 8,540 6,977
Provision for income taxes................................... 3,209 2,529 2,040
---------------------------
Net income................................................... $ 7,010 $ 6,011 $ 4,937
---------------------------
---------------------------
Basic earnings per common share.............................. $ 7.88 $ 6.76 $ 5.57
Diluted earnings per share................................... $ 7.87 $ 6.75 $ 5.56
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30 NSFC ANNUAL REPORT 1997
42
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
($ 000's)
- --------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income...................................................... $ 7,010 $ 6,011 $ 4,937
Adjustments to reconcile net income to cash from
operating activities:
Depreciation................................................ 568 546 621
Provision for loan losses................................... 480 1,190 1,480
Provision for losses on other real estate owned............. 21 22 23
Deferred loan fees.......................................... (38) (172) (128)
Net gains on sales of securities............................ 0 (5) 0
Net change in loans held for sale........................... (349) 2,863 (1,029)
Net gains on sales of loans................................. (172) (210) (125)
Net gains on sales of other real estate owned............... (142) (305) 0
Amortization of mortgage servicing rights................... 36 15 0
Net change in interest receivable........................... (353) 411 (579)
Net change in interest payable.............................. 1,192 342 428
Net change in other assets.................................. 742 1,218 (656)
Net change in other liabilities............................. (205) 290 (269)
--------------------------------
Net cash from operating activities...................... 8,790 12,216 4,703
--------------------------------
Cash flows from investing activities
Net change in interest bearing deposits in financial
institutions - maturities over 90 days...................... 0 0 4,100
Proceeds from sales of securities available for sale........ 0 2,675 0
Proceeds from maturities of securities available for sale... 90,148 90,571 66,116
Proceeds from maturities of securities held to maturity..... 0 0 27,584
Purchases of securities available for sale.................. (120,273) (83,959) (49,799)
Purchases of securities held to maturity.................... 0 0 (45,642)
Change in loans made to customers........................... (9,151) (17,847) (9,221)
Property and equipment expenditures......................... (217) (209) (97)
Net change in direct lease financing........................ (275) (377) (249)
Proceeds from sales of other real estate owned.............. 586 2,180 1,375
--------------------------------
Net cash from investing activities...................... (39,182) (6,966) (5,833)
--------------------------------
Cash flows from financing activities
Net increase (decrease) in:
Deposits................................................. 19,155 1,240 (1,808)
Securities sold under repurchase agreements and
other short-term borrowings.......................... 1,746 (6,520) 12,624
Advances from borrowers for taxes and insurance.......... 145 (260) (255)
Federal Home Loan Bank term advance......................... 5,000 0 0
Net proceeds from exercise of stock options................. 4 77 54
Dividends paid.............................................. (2,134) (1,779) (1,463)
--------------------------------
Net cash from financing activities...................... 23,916 (7,242) 9,152
--------------------------------
Net change in cash and cash equivalents............................. (6,476) (1,992) 8,022
Cash and cash equivalents at beginning of year...................... 31,982 33,974 25,952
--------------------------------
Cash and cash equivalents at end of year............................ $ 25,506 $ 31,982 $ 33,974
--------------------------------
--------------------------------
Supplemental disclosures
Cash paid during the year for
Interest.................................................... $ 14,423 $ 14,466 $ 14,277
Income taxes................................................ 3,089 2,335 1,833
Noncash investing activities
Transfers made from loans to other real estate owned........ 174 2,432 981
Transfers made from securities held to maturity to
securities available for sale, at fair value............ 0 0 97,319
Transfers made from tax-exempt loans to securities
available for sale, at fair value....................... 0 4,700 0
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NSFC ANNUAL REPORT 1997 31
43
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on Securities Total
($ 000's, except per share data) Common Additional Retained Available for Sale Stockholders'
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1997, 1996 and 1995 Stock Paid-In Capital Earnings Net Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995............................. $1,772 $11,054 $34,143 $(1,269) $45,700
Net income........................................... 4,937 4,937
Cash dividends ($1.65 per share)..................... (1,463) (1,463)
Exercise of stock options on 1,300 shares of
common stock..................................... 3 51 54
Tax benefit from the increase in the fair value of
restricted stock issued.......................... 7 7
Tax benefit from the exercise of stock options....... 11 11
Transfer of securities from held to maturity to
available for sale............................... 473 473
Unrealized net gain on securities available
for sale......................................... 1,286 1,286
----------------------------------------------------------------------
Balance, December 31, 1995........................... 1,775 11,123 37,617 490 51,005
Net income........................................... 6,011 6,011
Cash dividends ($2.00 per share)..................... (1,779) (1,779)
Exercise of stock options on 1,842 shares of
common stock..................................... 4 73 77
Tax benefit from the exercise of stock options....... 20 20
Unrealized net loss on securities available
for sale......................................... (499) (499)
----------------------------------------------------------------------
Balance, December 31, 1996........................... 1,779 11,216 41,849 (9) 54,835
Net income........................................... 7,010 7,010
Cash dividends ($2.40 per share)..................... (2,134) (2,134)
Exercise of stock options on 100 shares of
common stock..................................... 4 4
Tax benefit from the exercise of stock options....... 2 2
Unrealized net gain on securities
available for sale............................... 478 478
----------------------------------------------------------------------
Balance, December 31, 1997........................... $1,779 $11,222 $46,725 $ 469 $60,195
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32 NSFC ANNUAL REPORT 1997
44
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 & 1995
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of Northern States Financial Corporation (Company) and
its wholly owned subsidiaries, Bank of Waukegan (Bank) and First Federal
Bank, fsb (Thrift). The Bank and the Thrift are referred to collectively as
"the Subsidiaries". All significant intercompany transactions and balances
have been eliminated in consolidation.
NATURE OF OPERATIONS: The Company's and the Subsidiaries' revenues,
operating income, and assets are primarily from the banking industry. Loan
customers are mainly located in Lake County, Illinois and surrounding areas,
and include a wide range of individuals, businesses, and other organizations.
A major portion of loans are secured by various forms of collateral including
real estate, business assets, consumer property, and other items. The Thrift
also engages in mortgage banking operations.
USE OF ESTIMATES: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The collectibility of loans, fair
values of financial instruments, and status of contingencies are particularly
subject to change.
CASH FLOW REPORTING: Cash and cash equivalents are defined as cash and
due from banks, federal funds sold, and interest-bearing deposits in
financial institutions with original maturities under 90 days. Net cash flows
are reported for customer loan and deposit transactions, securities sold
under agreements to repurchase and other short-term borrowings, and interest
bearing deposits in financial institutions with maturities over 90 days.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold
them to maturity. Securities are classified as available for sale when they
might be sold before maturity. Securities available for sale are carried at
fair value, with unrealized holding gains and losses reported separately in
stockholders' equity, net of tax. Other securities, such as Federal Home Loan
Bank stock and Federal Reserve Bank stock, are carried at cost. Securities
are written down to fair value when a decline in fair value is not temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
A transfer of securities to available for sale was made in 1995 under new
interpretive guidance.
LOANS HELD FOR SALE: Loans held for sale are reported at the lower of
cost or market value in the aggregate.
LOANS: Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs and the allowance for loan losses. Interest
income is reported on the interest method and includes amortization of net
deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Payments received on such
loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full,
an allowance for loan losses is recorded. Increases to the allowance are
recorded by a provision for loan losses charged to expense. Estimating the
risk of loss and the amount of loss on any loan is necessarily subjective.
Accordingly, the allowance is maintained by management at a level considered
adequate to cover possible losses that are currently anticipated based on
past loss experience, general economic conditions, information about specific
borrower situations including their financial position and collateral values,
and other factors and estimates which are subject to change over time. While
management may periodically allocate portions of the allowance for specific
problem loan situations, the whole allowance is available for any loan
charge-offs that occur. A loan is charged-off by management as a loss when
deemed uncollectible, although collection efforts continue and future
recoveries may occur.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an integral
part of their examination process, periodically review the Bank's and the
Thrift's allowances for loan losses. Such agencies may require the Bank and
the Thrift to provide additions to the allowance based on their judgements at
the time of their examinations.
Loans are considered impaired if full principal or interest payments are
not anticipated. Impaired loans are carried at the present value of expected
cash flows discounted at the loan's effective interest rate or at the fair
value of the collateral if the loan is collateral dependent. A portion of the
allowance for loan losses is allocated to impaired loans.
Smaller-balance homogeneous loans are evaluated for impairment in total.
Such loans include residential first mortgage loans secured by one-to-four
family residences, residential construction loans, and automobile, home
equity and second mortgage loans. Commercial loans and mortgage loans secured
by other properties are evaluated individually for impairment. All loans in
nonaccrual status and other selected watch list loans are considered
impaired. Impaired loans or portions thereof are charged off when deemed
uncollectible.
Increases or decreases in the carrying value of impaired loans are
reported as reductions or increases to the provision for loan losses.
OFFICE BUILDINGS AND EQUIPMENT: Asset cost is reported net of
accumulated depreciation. Depreciation expense is calculated on the
straight-line method over asset useful lives.
OTHER REAL ESTATE: Real estate acquired in settlement of loans is
initially reported at estimated fair value at acquisition. After acquisition,
a valuation allowance reduces the reported amount to the lower of the initial
amount or fair value less costs to sell. Expenses, gains and losses on
disposition, and changes in the valuation allowance are reported in net loss
on other real estate.
SERVICING RIGHTS: The Company has not purchased rights to service loans
for others. Subsequent to adopting Financial Accounting Standard (SFAS) No.
122, as amended by SFAS No. 125, at the start of 1996, servicing rights
represent the allocated value of servicing rights retained on loans sold.
Servicing rights are expensed in proportion to, and over the period of,
estimated net servicing revenues. Impairment is evaluated based on the fair
value of the rights, using groupings of the underlying loans as to interest
rates. Any impairment of a grouping is reported as a valuation allowance.
The effect of adopting SFAS No. 122 and SFAS No. 125 was not material to the
Company's consolidated net income.
NSFC ANNUAL REPORT 1997 33
45
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 & 1995
NOTE 1 (CONTINUED)
GOODWILL: Goodwill is the excess of purchase price over identified net
assets in business acquisitions. Goodwill is expensed on the straight-line
method over 25 years. Goodwill is assessed for impairment based on estimated
undiscounted cash flows, and written down if necessary.
EMPLOYEE BENEFITS: A profit sharing plan covers substantially all
employees. Contributions are expensed annually and are made at the discretion
of the Board of Directors. Contributions totaled $260,000, $255,000, and
$224,000 in 1997, 1996, and 1995. The plan allows employees to make voluntary
contributions, although such contributions are not matched by the Company.
STOCK COMPENSATION: Expense for employee compensation under stock option
plans is based on Opinion 25, with expense reported only if options are
granted below market price at grant date. Pro forma disclosures of net income
and earnings per share are provided as if the fair value method of SFAS No.
123 was used for stock based compensation awarded after January 1, 1995.
INCOME TAXES: Income tax expense is the sum of the current year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences
of temporary differences between the carrying amounts and tax bases of assets
and liabilities, computed using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial
instruments are estimated using relevant market information and other
assumptions, as more fully disclosed separately. Fair value estimates involve
uncertainties and matters of significant judgment regarding interest rates,
credit risk, prepayments, and other factors, especially in the absence of
broad markets for particular items. Changes in assumptions or in market
conditions could significantly affect the estimates. The fair value estimates
of existing on and off balance sheet financial instruments does not include
the value of anticipated future business or the values of assets and
liabilities not considered financial instruments.
EARNINGS PER SHARE: Basic earnings per share is based on weighted-average
common shares outstanding. Diluted earnings per share further assumes issue
of any dilutive potential common shares. The accounting standard for
computing earnings per share was revised for 1997, and all earnings per share
previously reported are restated to follow the new standard.
FUTURE ACCOUNTING CHANGES: New accounting standards have been issued
which will require future reporting of comprehensive income (net income plus
changes in holding gains and losses on available for sale securities) and may
require redetermination of industry segment financial information.
34 NSFC ANNUAL REPORT 1997
46
<PAGE>
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS) NORTHERN STATES FINANCIAL CORPORATION
NOTE 2 SECURITIES
Year end securities available for sale were as follows:
<TABLE>
<CAPTION>
Amortized Gross Unrealized
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1997 Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury $ 14,017 $ 15 $ (1) 14,031
U.S. Government agencies and corporations 129,077 45 (250) 128,872
States and political subdivisions 21,712 720 (24) 22,408
Mortgage-backed securities 13,033 137 (47) 13,123
Equity securities 2,069 196 (27) 2,238
------------------------------------------------------------
Total $179,908 $1,113 $ (349) 180,672
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Amortized Gross Unrealized
- --------------------------------------------------------------------------------------------------------------------------
December 31, 1996 Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 and mutual fund investment in debt securities 2,091 128 (99) 2,120
------------------------------------------------------------
Total $149,783 $1,015 $(1,048) $149,750
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
Contractual maturities of debt securities available for sale at year-end
1997 were as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities, are shown separately.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Amortized Cost Fair Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 22,883 $ 22,885
Due after one year through five years 127,639 127,821
Due after five years through ten years 14,284 14,605
-------------------------------
164,806 165,311
Mortgage-backed securities 13,033 13,123
Equity securities 2,069 2,238
-------------------------------
Total $179,908 $180,672
-------------------------------
-------------------------------
</TABLE>
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 Government National
Mortgage Association (GNMA) or the Federal National Mortgage Association
(FNMA).
Agency securities with call options totaled $77,088,000 at December 31,
1997. As of December 31, 1997, the Company held structured notes with an
amortized cost of $2,000,000 and fair value of $1,995,000. These securities
were issued by the Federal Home Loan Bank (FHLB) and the FHLMC. The
structured notes are comprised primarily of securities which have coupon
interest rates which "step up" periodically during the term to maturity.
There were no sales of debt securities during 1997, 1996, and 1995.
Proceeds from sales of equity securities in 1996 totaled $2,675,000 with a
resulting gain of $5,000. During 1997 and 1996, the Federal Home Loan Bank of
Chicago redeemed 220 and 250 shares of its stock from the Thrift, with
proceeds of $22,000 and $25,000 and with no resulting gain or loss.
Securities carried at $122,418,000 and $97,052,000 at year-end 1997 and
1996, were pledged to secure public deposits, repurchase agreements and for
other purposes as required or permitted by law.
As of December 31, 1997, the Company had no securities of a single
issuer, other than the U.S. Treasury and U.S. Government agencies and
corporations, including the FHLB, FHLMC, FNMA, GNMA, the Federal Farm Credit
Bank (FFCB), and the Student Loan Marketing Association (SLMA) that exceeded
10% of stockholders' equity. Although the Company holds securities issued by
municipalities within the state of Illinois which in aggregate exceed 10% of
stockholders' equity, none of the holdings from individual municipal issuers
exceeded this threshold.
Interest-bearing balances with banks and federal funds sold consisted of
the following at December 31, 1997:
<TABLE>
<S> <C>
First USA Bank, Dallas $ 5,500
LaSalle National Bank, Chicago 4,000
Harris Bank, Chicago 1,736
Bank of America, Illinois 100
Federal Home Loan Bank, Chicago 70
-------
Total $11,406
-------
-------
</TABLE>
NSFC ANNUAL REPORT 1997 35
47
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 & 1995
NOTE 3 LOANS
Year end loans were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Commercial $ 54,701 $ 50,762
Real estate - construction 26,768 26,905
Real estate - mortgage 152,856 146,552
Installment 8,544 9,203
--------------------------
Total loans 242,869 233,422
Less:
Unearned income (154) (240)
Deferred loan fees (491) (529)
--------------------------
Loans, net of unearned income
and deferred loan fees 242,224 232,653
Allowance for loan losses (5,430) (4,839)
--------------------------
Total loans, net $236,794 $227,814
--------------------------
--------------------------
</TABLE>
Related party loans were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
1997
- -------------------------------------------------------------------
<S> <C>
Total loans at beginning of year $ 991
New Loans 218
Repayments (685)
Other changes (15)
------
Total loans at end of year $ 509
------
------
</TABLE>
Real estate loans with a carrying value of $24,807,000 and $15,454,000
were pledged to secure public deposits at December 31, 1997 and 1996.
Loans held for sale at year-end were approximately $1,338,000 and
$893,000 and are classified as real estate mortgage loans.
Impaired loans were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year-end loans with no allowance for loan losses allocated $ 0 $ 0 $ 0
Year-end loans with allowance for loan losses allocated 754 828 5,161
Amount of allowance allocated 125 146 975
Average of impaired loans during the year 776 2,620 5,111
Interest income recognized during impairment 36 587 113
Cash-basis interest income recognized 36 218 111
</TABLE>
36 NSFC ANNUAL REPORT 1997
48
<PAGE>
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS) NORTHERN STATES FINANCIAL CORPORATION
NOTE 4 ALLOWANCES FOR LOAN AND OTHER REAL ESTATE OWNED LOSSES
Activity in the allowance for loan losses for the year ended December
31, follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $4,839 $ 4,514 $ 3,965
Provision charged to
operating expense 480 1,190 1,480
Loans charged off (209) (1,141) (1,009)
Recoveries on loans
previously charged-off 320 276 78
---------------------------------
Balance at end of year $5,430 $ 4,839 $ 4,514
---------------------------------
---------------------------------
</TABLE>
Activity in the allowance for other real estate owned losses for the
year ended December 31, follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $532 $510 $526
Provision charged to
operating expense 21 22 23
Losses on other real
estate owned (9) 0 (39)
---------------------------
Balance at end of year $544 $532 $510
---------------------------
---------------------------
</TABLE>
NOTE 5 OFFICE BUILDINGS AND EQUIPMENT
Office buildings and equipment consisted of the following at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
1997 1996
- -----------------------------------------------------------
<S> <C> <C>
Land $ 1,489 $ 1,489
Office buildings and improvements 7,239 7,203
Furniture and equipment 3,622 3,802
---------------------
Total cost 12,350 12,494
Accumulated depreciation (6,451) (6,244)
---------------------
Net book value $ 5,899 $ 6,250
---------------------
---------------------
</TABLE>
Depreciation expense amounted to $568,000 in 1997, $546,000 in 1996 and
$621,000 in 1995.
NOTE 6 LOAN SERVICING
Mortgage loans serviced for others are not reported as assets. These
loans totaled $64,924,000 and $65,321,000 at year-end 1997 and 1996. Related
escrow deposit balances were $639,000 and $612,000 at year-end 1997 and 1996.
Activity for capitalized mortgage servicing rights was as follows for
1997 and 1996:
<TABLE>
<CAPTION>
- ---------------------------------------------
1997 1996
- ---------------------------------------------
<S> <C> <C>
Beginning of year $ 80 $ 0
Additions 76 95
Amortized to expense (36) (15)
----- -----
End of year $120 $ 80
----- -----
----- -----
</TABLE>
NSFC ANNUAL REPORT 1997 37
49
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 & 1995
NOTE 7 DEPOSITS
At year-end 1997, stated maturities of time deposits were:
<TABLE>
<S> <C>
1998 .............................. $161,799
1999 .............................. 19,952
2000 .............................. 5,580
2001 and thereafter ............... 63
--------
$187,394
--------
--------
</TABLE>
Related party deposits at year-end 1997 totaled $10,229,000.
NOTE 8 BORROWINGS
Securities sold under repurchase agreements and other short-term
borrowings are financing arrangements. Physical control is maintained for all
securities sold under repurchase agreements. Information concerning
securities sold under repurchase agreements is summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------
<S> <C> <C>
Average daily balance during the year $34,176 $35,006
Average interest rate during the year 5.07% 4.92%
Maximum month end balance during the year $38,504 $37,804
</TABLE>
Securities sold under repurchase agreements to directors of the Company
and related interests totaled $22,088,000 at December 31, 1997, and have a
weighted remaining maturity of 4 months.
The Company had a fixed rate advance from the Federal Home Loan Bank of
Chicago (the "FHLB") at December 31, 1997, as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------
Maturity Date Interest Rate Balance
--------------------------------------------------------------
<C> <C> <C>
April 30, 1999 5.90% $5,000,000
</TABLE>
The Thrift maintains a collateral pledge agreement with the FHLB
covering secured advances whereby the Thrift agrees to retain first mortgage
loans with an unpaid principal balances aggregating no less than 167% of the
outstanding secured advance from the FHLB.
38 NSFC ANNUAL REPORT 1997
50
<PAGE>
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS) NORTHERN STATES FINANCIAL CORPORATION
NOTE 9 INCOME TAXES
A summary of federal and state income taxes on operations follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Current payable
Federal $2,940 $2,184 $1,877
State 262 151 316
Deferred income tax (benefit) 7 194 (153)
-----------------------------
Provision for income taxes $3,209 $2,529 $2,040
-----------------------------
-----------------------------
</TABLE>
The components of deferred tax assets and liabilities at December 31,
1997 and 1996 follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Allowances for loan and other real estate owned losses $ 1,922 $1,791
Deferred loan fees 25 134
Deferred compensation and directors' fees 182 148
Unrealized net loss on securities available for sale 0 25
Taxable income on nonperforming loans not
recorded for book purposes 5 7
------- -------
Gross deferred tax assets 2,134 2,105
------- -------
Deferred tax liabilities:
Depreciation (586) (575)
Federal Home Loan Bank stock dividend (37) (37)
Unrealized net gain on securities available for sale (296) 0
Other items (111) (61)
------- -------
Gross deferred tax liabilities (1,030) (673)
------- -------
Net deferred tax asset $ 1,104 $1,432
------- -------
------- -------
</TABLE>
No valuation allowance is required for deferred tax assets.
The provision for income taxes differs from that computed at the
statutory federal corporate tax rate as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax calculated at statutory rate (34%) $3,474 $2,904 $2,372
Add (subtract) tax effect of:
Tax-exempt income, net of disallowed interest expense (431) (503) (483)
State income tax, net of federal tax benefit 156 120 186
Other items, net 10 8 (35)
-----------------------------
Provision for income taxes $3,209 $2,529 $2,040
-----------------------------
-----------------------------
</TABLE>
The Thrift has qualified under provisions of the Internal Revenue Code
which permit it to deduct from taxable income a provision for bad debts which
differs from the provision charged to income in the financial statements. Tax
legislation passed in 1996 now requires all thrift institutions to deduct a
provision for bad debts for tax purposes based on actual loss experience and
recapture of the excess bad reserve accumulated in tax years after 1987. The
related amount of deferred tax liability which must be recaptured is not
material. Retained earnings at December 31, 1997 includes approximately
$3,269,000 for which no provision for federal income taxes has been made. If,
in the future, this portion of retained earnings is used for any purpose
other than to absorb bad debt losses, federal income taxes would be imposed
at the then prevailing rates, resulting in approximately $1,266,000 of
deferred tax liability.
NSFC ANNUAL REPORT 1997 39
51
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 & 1995
NOTE 10 OMNIBUS INCENTIVE PLANS
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.
Financial Accounting Standard 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 has not
granted any stock options since January 1, 1995.
Stock options are used to reward directors and employees and provide
them with an additional equity interest. Options are issued for 10 year
periods and are fully vested when granted. Information about option grants
follow:
<TABLE>
<CAPTION>
Number of Weighted-average
- -----------------------------------------------------------------------
options exercise price
- -----------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of 1995 8,320 $41.64
Exercised 1995 (1,300) 41.69
-------
Outstanding, end of 1995 7,020 41.63
Exercised 1996 (1,842) 41.64
-------
Outstanding, end of 1996 5,178 41.62
Exercised 1997 (100) 42.00
-------
Outstanding, end of 1997 5,078 41.62
-------
-------
</TABLE>
At year-end 1997, options outstanding ranged in exercise price from
$41.60 to $42.00 and had a weighted average remaining option life of 4 years.
The Committee of the Board of Directors 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 grant price. As of December 31, 1997 and 1996,
3,248 and 3,904 stock appreciation rights were outstanding, granted at
$41.60. The Company's expense was $114,000, $70,000 and $21,000 for the years
ended December 31, 1997, 1996 and 1995. The stock appreciation rights will
expire during 2002.
40 NSFC ANNUAL REPORT 1997
52
<PAGE>
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS) NORTHERN STATES FINANCIAL CORPORATION
NOTE 11 COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in the
ordinary course of business. In the opinion of management, after consultation
with legal counsel, the ultimate disposition of these matters is not expected
to have a material effect on financial condition or results of operations.
At year-end 1997 and 1996, reserves of $2,735,000 and $2,756,000 were
required as deposits with the Federal Reserve or as cash on hand. These
reserves do not earn interest.
Some financial instruments are used in the normal course of business to
meet the financing needs of customers and to reduce exposure to interest rate
changes. These financial instruments include commitments to extend credit,
standby letters of credit, and financial guarantees. These involve, to
varying degrees, credit and interest-rate risk in excess of the amount
reported in the financial statements.
Exposure to credit loss if the other party does not perform is
represented by the contractual amount for commitments to extend credit,
standby letters of credit, and financial guarantees written. The same credit
policies are used for commitments and conditional obligations as are used for
loans. Collateral or other security is normally required to support financial
instruments with credit risk.
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments are
expected to expire without being used, the commitment does not necessarily
represent future cash requirements. Standby letters of credit and financial
guarantees written are conditional commitments to guarantee a customer's
performance to a third party.
A summary of the notional or contractual amounts of financial
instruments with off-balance-sheet risk at year-end follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
1997 1996
- -------------------------------------------------------------
<S> <C> <C>
Unused lines of credit and
commitments to make loans:
Fixed rate $20,388 $17,696
Variable rate 54,339 57,979
--------------------
Total $74,727 $75,675
--------------------
--------------------
Standby letters of credit $ 6,891 $ 6,250
</TABLE>
Commitments to make loans at a fixed rate have interest rates ranging
primarily from 6.00% to 9.00%.
NOTE 12 FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair values
for financial instruments. The carrying amount is considered to estimate fair
value for cash and cash equivalents, interest-bearing deposits in financial
institutions, demand deposits, and advances from borrowers for taxes and
insurance. Securities fair values are based on quoted market prices or, if no
quotes are available, on the rate and term of the security and or information
about the issuer. For fixed rate loans or deposits, securities sold under
repurchase agreements, and Federal Home Loan Bank term advances, the fair
value is estimated by discounted cash flow analysis using current market
rates for the estimated life and credit risk. Fair values for impaired loans
are estimated using discounted cash flow analysis or underlying collateral
values where applicable. Fair value of loans held for sale is based on market
estimates. The fair value of off-balance-sheet items is based on the fees or
cost that would currently be charged to enter or terminate such arrangements,
and the fair value is not materal.
The estimated year-end fair values of financial instruments were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1997 Carrying Value Estimated Fair Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 25,506 $ 25,506
Interest bearing deposits in financial institutions - maturities over 90 days 100 100
Securities available for sale 180,672 180,672
Loans, net 236,794 237,231
Direct lease financing 1,274 1,274
Accrued interest receivable 4,308 4,308
Financial liabilities:
Deposits $(347,950) $(348,346)
Securities sold under repurchase agreements and other short-term borrowings (38,504) (38,519)
Federal Home Loan Bank term advances (5,000) (5,000)
Advances from borrowers for taxes and insurance (1,166) (1,166)
Accrued interest payable (3,691) (3,691)
</TABLE>
NSFC ANNUAL REPORT 1997 41
53
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 & 1995
NOTE 12 CONTINUED
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1996 Carrying Value Estimated Fair Value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 31,982 $ 31,982
Interest bearing deposits in financial institutions - maturities over 90 days 100 100
Securities available for sale 149,750 149,750
Loans, net 227,814 228,178
Direct lease financing 999 999
Accrued interest receivable 3,955 3,955
Financial liabilities:
Deposits $(328,795) $(328,909)
Securities sold under repurchase agreements and other short-term borrowings (36,758) (36,770)
Advances from borrowers for taxes and insurance (1,021) (1,021)
Accrued interest payable (2,498) (2,498)
</TABLE>
NOTE 13 REGULATORY MATTERS
The Company and Subsidiaries are subject to regulatory capital
requirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities, and certain off-balance sheet items
calculated under regulatory accounting practices. Capital amounts and
classifications are also subject to qualitative judgements by regulators
about components, risk weightings, and other factors, and the regulators can
lower classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action that could have a direct material
effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although
these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is asset
growth and expansion, and plans for capital restoration are required. The
minimum requirements are:
<TABLE>
<CAPTION>
Capital to risk-weighted assets Tier 1 capital to
- -------------------------------------------------------------------------------
Total Tier I average assets
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Well capitalized 10.00% 6.00% 5.00%
Adequately capitalized 8.00% 4.00% 4.00%
Undercapitalized 8.00% 3.00% 3.00%
</TABLE>
42 NSFC ANNUAL REPORT 1997
54
<PAGE>
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS) NORTHERN STATES FINANCIAL CORPORATION
NOTE 13 CONTINUED
At year end, actual capital levels and minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required For
Minimum Required For Well Capitalized Under Prompt
Actual Capital Adequacy Purposes Corrective Action Regulations
- --------------------------------------------------------------------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
Total Capital
(to risk weighted assets)
Consolidated $63,249 21.65% $23,376 8.00% $29,220 10.00%
Bank 47,947 20.72 18,513 8.00 23,142 10.00
Tier I Capital
(to risk weighted assets)
Consolidated 59,597 20.40 11,688 4.00 17,532 6.00
Bank 45,054 19.47 9,257 4.00 13,885 6.00
Tier I Capital
(to average assets)
Consolidated 59,597 13.71 17,394 4.00 21,742 5.00
Bank 45,054 13.67 13,186 4.00 16,483 5.00
1996
Total Capital
(to risk weighted assets)
Consolidated $58,136 21.18% $21,963 8.00% $27,454 10.00%
Bank 43,335 20.18 17,182 8.00 21,478 10.00
Tier I Capital
(to risk weighted assets)
Consolidated 54,704 19.93 10,982 4.00 16,473 6.00
Bank 40,650 18.93 8,591 4.00 12,887 6.00
Tier I Capital
(to average assets)
Consolidated 54,704 13.02 16,804 4.00 21,005 5.00
Bank 40,650 12.98 12,523 4.00 15,654 5.00
</TABLE>
The Company and the Subsidiaries at year end 1997 were categorized as
well capitalized. Management knows of no circumstances or events which would
change the categorizations.
The Company's primary source of funds to pay dividends to stockholders
is the dividends it receives from the Subsidiaries. The Subsidiaries are
subject to certain restrictions on the amount of dividends that may be
declared without regulatory approval. At December 31, 1997, $30,648,000 of
the Subsidiaries' retained earnings were available for dividend declaration
without prior regulatory approval.
NSFC ANNUAL REPORT 1997 43
55
<PAGE>
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 & 1995
NOTE 14 EARNINGS PER SHARE AND SUBSEQUENT EVENT
Net income was utilized to calculate both basic and diluted earnings per
share for all years presented. Information regarding weighted average shares
utilized in computing basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Average outstanding common shares 889,290 888,913 887,081
Effect of stock options 1,811 1,464 1,570
------------------------------------
Average outstanding shares for diluted earnings per share 891,101 890,377 888,651
------------------------------------
------------------------------------
</TABLE>
On February 17, 1998, the Company's Board of Directors approved a
proposal to amend the Company's certificate of incorporation to increase the
authorized common shares from 1,750,000 to 6,500,000 and to effect a 5-for-1
stock split. The split is contingent upon stockholder approval at the April
23, 1998, annual meeting of stockholders. If ultimate approval is received,
it is expected that the stock split will be effective to stockholders of
record approximately ten days after the annual meeting. Because ultimate
approval is pending until April 23, 1998, financial information contained in
this report has not been adjusted to reflect the impact of the proposed stock
split.
Earnings per common share amounts, after giving retroactive effect to
the 5-for-1 stock split, are presented below for all of the earnings per
share amounts disclosed in the financial statements and the notes to the
financial statements:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic earnings per share $ 1.58 $ 1.35 $ 1.11
Diluted earnings per share $ 1.57 $ 1.35 $ 1.11
Average outstanding common shares 4,446,450 4,444,565 4,435,405
Effect of stock options 9,055 7,320 7,850
---------------------------------------
Average outstanding shares for diluted earnings per share 4,455,505 4,451,885 4,443,255
---------------------------------------
---------------------------------------
</TABLE>
44 NSFC ANNUAL REPORT 1997
56
<PAGE>
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS) NORTHERN STATES FINANCIAL CORPORATION
NOTE 15 PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
Following are condensed parent company financial statements:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
December 31, 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Assets
Cash on deposit at subsidiary
bank - noninterest-bearing $ 874 $ 807
Interest-bearing deposits in
unaffiliated bank 36 35
--------------------
Total cash and cash equivalents 910 842
Investment in wholly-owned subsidiaries
Equity in underlying book value:
Bank of Waukegan 45,472 40,645
First Federal Bank, fsb 14,119 13,445
Goodwill, net 129 140
--------------------
Total investment in subsidiaries 59,720 54,230
Other assets 108 419
--------------------
Total assets $60,738 $55,491
--------------------
--------------------
Liabilities and Stockholders' Equity
Accounts payable and other liabilities $ 543 $ 656
Stockholders' equity 60,195 54,835
--------------------
Total liabilities and
stockholders' equity $60,738 $55,491
--------------------
--------------------
</TABLE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- -------------------------------------------------------------------
<S> <C> <C> <C>
Operating Income
Dividends from subsidiaries $2,124 $1,745 $ 758
Interest income 1 1 1
------------------------
Total operating income 2,125 1,746 759
Operating expenses 218 214 293
------------------------
Income before income taxes
and equity in undistributed
earnings of subsidiaries 1,907 1,532 466
Income tax benefit 80 78 130
------------------------
Income before equity in undistributed
earnings of subsidiaries 1,987 1,610 596
Equity in undistributed
earnings of subsidiaries 5,023 4,401 4,341
------------------------
Net income $7,010 $6,011 $4,937
------------------------
------------------------
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
Years ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 7,010 $ 6,011 $ 4,937
Adjustments to reconcile net
income to net cash from
operating activities:
Equity in undistributed
earnings of subsidiaries (5,023) (4,401) (4,341)
Goodwill amortization 11 10 11
(Increase) decrease in
other assets 311 (149) 321
Increase (decrease) in
other liabilities (111) 208 110
----------------------------
Net cash from operating activities 2,198 1,679 1,038
----------------------------
Cash flows from financing activities
Exercise of stock options 4 77 54
Dividends paid (2,134) (1,779) (1,463)
----------------------------
Net cash from financing activities (2,130) (1,702) (1,409)
Increase (decrease) in cash
and cash equivalents 68 (23) (371)
Cash and cash equivalents at
beginning of year 842 865 1,236
----------------------------
Cash and cash equivalents at
end of year $ 910 $ 842 $ 865
----------------------------
----------------------------
</TABLE>
NSFC ANNUAL REPORT 1997 45
57
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
STOCKHOLDER INFORMATION
ANNUAL MEETING: All stockholders are invited to attend our annual meeting,
which will be held at 4:30 P.M., on Thursday, April 23, 1998 in the lobby of
the Bank of Waukegan, 1601 N. Lewis Avenue, Waukegan, Illinois 60085.
We look forward to meeting all stockholders and welcome your questions
at the annual meeting. Any shareholder unable to attend this year's meeting
is invited to send questions and comments in writing to Fred Abdula, Chairman
of the Board and Chief Executive Officer, at Northern States Financial
Corporation.
FORM 10-K: Stockholders who wish to obtain a copy at no charge of Northern
States Financial Corporation's Form 10-K for the fiscal year ended December
31, 1997, as filed with the Securities and Exchange Commission, may do so by
writing Thomas M. Nemeth, Assistant Vice President, at Northern States
Financial Corporation.
FOR FURTHER INFORMATION: Stockholders and prospective investors are welcome
to call or write Northern States Financial Corporation with questions or
requests for additional information. Please direct inquiries to:
Thomas M. Nemeth
Assistant Vice President
Northern States Financial Corporation
1601 N. Lewis Avenue
Waukegan, Illinois 60085
(847) 244-6000 ext. 269
TRANSFER AGENT, REGISTRAR & DIVIDEND DISBURSEMENTS: Stockholders with a
change of address or related inquiries should contact:
Firstar Trust Company
Investors Services Unit
1555 N. Rivercenter Dr., Suite 301
Milwaukee, Wisconsin 53212
(800) 637-7549
QUARTERLY CALENDAR: The Company operates on a fiscal year ending December 31.
Quarterly results are announced within 45 days after the end of each
quarter, and audited results are announced within 90 days after year end.
SEMI-ANNUAL DIVIDEND DATES: Dividends are expected to be announced and paid
on the following schedule during 1998:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Half Record Date Payment Date
- -------------------------------------------------------------------------
<S> <C> <C>
First May 15 June 1
Second November 16 December 1
</TABLE>
STOCK MARKET INFORMATION: The common stock of Northern States Financial
Corporation is traded on the National Association of Securities Dealers
Automated Quotation System (NASDAQ Small-Cap Market) under the ticker symbol
NSFC. Stock price quotations are published daily in the Chicago Tribune and
Chicago Sun-Times newspapers and, when traded, in The Wall Street Journal.
The stock is commonly listed as NthStat.
As of December 31, 1997, there were 1,750,000 common shares authorized;
889,373 common shares were outstanding, held by approximately 438 registered
stockholders.
As of February 28, 1998, the following securities firms indicated they
were maintaining an inventory of Northern States Financial Corporation common
stock and acting as market makers:
Herzog, Heine, Geduld, Inc. Howe Barnes Investments, Inc.
Miami, Florida Chicago, Illinois
(800) 966-7022 (800) 800-4693
(305) 932-5880 (312) 655-2946
PRICE SUMMARY: The following schedule details our stock's quarter ending bid
and ask price.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1997 1996
- ------------------------------------------------------------------------
BID ASK BID ASK
--- --- --- ---
<S> <C> <C> <C> <C>
Quarter Ended:
March 31 $ 88 $ 93 $ 69 $ 74
June 30 87 92 71 76
September 30 95 100 74 79
December 31 117 130 3/4 83 87
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------
BID ASK
--- ---
<S> <C> <C>
For the First Quarter (through March 6, 1998) $ 161 $ 166
</TABLE>
CASH DIVIDENDS: Northern States Financial Corporation pays semi-annual cash
dividends in June and December. Uninterrupted cash dividends have been paid
since the Company's formation in 1984 and have been increased each year since
then. The table below shows semi-annual cash dividends per share for the past
seven years. Dividends have been restated to reflect the five-for-one stock
split which occurred in June of 1991.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
June 1 December 1 Total
- -------------------------------------------------------------------
<S> <C> <C> <C>
1991 $ .47 $ .53 $1.00
1992 .55 .60 1.15
1993 .63 .67 1.30
1994 .70 .75 1.45
1995 .80 .85 1.65
1996 .95 1.05 2.00
1997 1.15 1.25 2.40
</TABLE>
INDEPENDENT AUDITORS
Crowe, Chizek and Company LLP
Oak Brook, Illinois
46 NSFC ANNUAL REPORT 1997
58
<PAGE>
EXHIBIT 21.
SUBSIDIARIES OF NORTHERN STATES FINANCIAL CORPORATION
Bank of Waukegan
1601 N. Lewis Avenue
Waukegan, Illinois 60085
State of Incorporation - Illinois
A Wholly-Owned Subsidiary of
Northern States Financial Corporation
First Federal Bank, fsb
216 Madison Street
Waukegan, Illinois 60085
State of Incorporation - Illinois
A Wholly-Owned Subsidiary of
Northern States Financial Corporation
59
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 14,200
<INT-BEARING-DEPOSITS> 206
<FED-FUNDS-SOLD> 11,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 180,672
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 243,498
<ALLOWANCE> 5,430
<TOTAL-ASSETS> 458,986
<DEPOSITS> 347,950
<SHORT-TERM> 38,504
<LIABILITIES-OTHER> 7,337
<LONG-TERM> 5,000
0
0
<COMMON> 1,779
<OTHER-SE> 58,416
<TOTAL-LIABILITIES-AND-EQUITY> 458,986
<INTEREST-LOAN> 22,199
<INTEREST-INVEST> 9,560
<INTEREST-OTHER> 1,000
<INTEREST-TOTAL> 32,759
<INTEREST-DEPOSIT> 13,828
<INTEREST-EXPENSE> 15,615
<INTEREST-INCOME-NET> 17,144
<LOAN-LOSSES> 480
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,132
<INCOME-PRETAX> 10,219
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,010
<EPS-PRIMARY> 7.88
<EPS-DILUTED> 7.87
<YIELD-ACTUAL> 4.33
<LOANS-NON> 1,033
<LOANS-PAST> 3
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 4,839
<CHARGE-OFFS> 209
<RECOVERIES> 320
<ALLOWANCE-CLOSE> 5,430
<ALLOWANCE-DOMESTIC> 2,728
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,702
</TABLE>
