<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
------------------------
NORTHERN STATES FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 0-19300 36-3449727
(State of Incorporation) (Commission (I.R.S. Employer
File Number) Identification No.)
1601 North Lewis Avenue
Waukegan, Illinois 60085
(847) 244-6000
(Address, including zip code, and telephone number, including
area code, of principal executive office)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
YES: XXX NO:
----- -----
4,446,865 shares of common stock were outstanding
as of May 5, 1998
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at March 31,
1998, December 31, 1997, and March 31, 1997 2
Condensed consolidated statements of income for the three
months ended March 31, 1998 and 1997 3
Condensed consolidated statements of comprehenesive income
the three months ended March 31, 1998 and 1997 4
Condensed consolidated statements of cash flows for
the three months ended March 31, 1998 and 1997 5
Notes to condensed consolidated financial statements 6 - 14
Item 2. Management's discussion and analysis of financial
condition and results of operations 15 - 20
Item 7A. Quantitative and qualitative disclosures about
market risk 21 - 23
PART II. OTHER INFORMATION
Signatures 24
</TABLE>
1
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998, December 31, 1997 and March 31, 1997
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
Assets 1998 1997 1997
--------- ------------ ---------
<S> <C> <C> <C>
Cash and due from banks. . . . . . . . . . . . . . . . . . . . . $ 13,108 $ 14,200 $ 12,257
Interest bearing deposits in financial institutions. . . . . . . 212 106 655
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . 19,500 11,200 15,100
-------- -------- --------
Total cash and cash equivalents . . . . . . . . . . . . . . . 32,820 25,506 28,012
Interest bearing deposits in financial institutions -
maturities over 90 days. . . . . . . . . . . . . . . . . . . 100 100 100
Securities available for sale. . . . . . . . . . . . . . . . . . 177,626 180,672 146,443
Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,607 242,224 238,174
Less: Allowance for loan losses. . . . . . . . . . . . . . . . . (5,458) (5,430) (5,014)
-------- -------- --------
Loans, net. . . . . . . . . . . . . . . . . . . . . . . . . . 239,149 236,794 233,160
Direct lease financing . . . . . . . . . . . . . . . . . . . . . 1,264 1,274 952
Office buildings and equipment, net. . . . . . . . . . . . . . . 5,801 5,899 9,181
Other real estate owned, net of allowance for losses
of $550, $544 and $537. . . . . . . . . . . . . . . . . . . . 2,549 2,555 2,765
Accrued interest receivable. . . . . . . . . . . . . . . . . . . 4,155 4,308 4,130
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,743 1,878 2,687
-------- -------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $465,207 $458,986 $427,430
-------- -------- --------
-------- -------- --------
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest-bearing. . . . . . . . . . . . . . . . . $ 40,866 $ 41,388 $ 41,234
NOW accounts. . . . . . . . . . . . . . . . . . . . . . . . . 36,738 36,455 36,207
Money market accounts . . . . . . . . . . . . . . . . . . . . 41,891 38,790 42,716
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,304 43,923 44,969
Time, $100,000 and over . . . . . . . . . . . . . . . . . . . 88,849 93,469 70,134
Time, under $100,000. . . . . . . . . . . . . . . . . . . . . 94,301 93,925 92,407
-------- -------- --------
Total deposits . . . . . . . . . . . . . . . . . . . . . . 347,949 347,950 327,667
Securities sold under repurchase agreements
and other short-term borrowings . . . . . . . . . . . . . . . 35,798 38,504 33,381
Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . 10,000 5,000 0
Advances from borrowers for taxes and insurance. . . . . . . . . 1,596 1,166 1,371
Accrued interest payable and other liabilities . . . . . . . . . 7,830 6,171 6,097
-------- -------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . . 403,173 398,791 368,516
Stockholders' Equity
Common stock - $2 par value: 1,750,000 shares authorized;
889,373, 889,373 and 889,273 shares issued and outstanding. . 1,779 1,779 1,779
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 11,222 11,222 11,216
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . 48,451 46,725 43,431
Unrealized gain (loss) on securities available for sale, net . . 582 469 (512)
-------- -------- --------
Total stockholders' equity. . . . . . . . . . . . . . . . . . 62,034 60,195 55,914
-------- -------- --------
Total liabilities and stockholders' equity. . . . . . . . . . $465,207 $458,986 $424,430
-------- -------- --------
-------- -------- --------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 1998 and 1997
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Interest income
Loans (including fee income) . . . . . . . . . . . . . . . . . $5,549 $5,282
Securities
Taxable. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,504 1,968
Exempt from federal income tax . . . . . . . . . . . . . . . 257 296
Interest bearing deposits in financial
institutions . . . . . . . . . . . . . . . . . . . . . . . . 9 8
Federal funds sold . . . . . . . . . . . . . . . . . . . . . . 218 229
------ ------
Total interest income. . . . . . . . . . . . . . . . . . . 8,537 7,783
------ ------
Interest expense
Time deposits. . . . . . . . . . . . . . . . . . . . . . . . . 2,609 2,232
Other deposits . . . . . . . . . . . . . . . . . . . . . . . . 1,021 1,022
Other borrowings . . . . . . . . . . . . . . . . . . . . . . . 560 404
------ ------
Total interest expense . . . . . . . . . . . . . . . . . . . 4,190 3,658
------ ------
Net interest income. . . . . . . . . . . . . . . . . . . . . . . 4,347 4,125
Provision for loan losses. . . . . . . . . . . . . . . . . . . . 10 180
------ ------
Net interest income after provision for
loan losses. . . . . . . . . . . . . . . . . . . . . . . . . . 4,337 3,945
------ ------
Other income
Service fees on deposits . . . . . . . . . . . . . . . . . . . 267 334
Trust income . . . . . . . . . . . . . . . . . . . . . . . . . 171 144
Net gains on sales of loans. . . . . . . . . . . . . . . . . . 64 35
Other operating income . . . . . . . . . . . . . . . . . . . . 123 235
------ ------
Total other income . . . . . . . . . . . . . . . . . . . . . 625 748
------ ------
Other expenses
Salaries and employee benefits . . . . . . . . . . . . . . . . 1,538 1,322
Occupancy and equipment expenses, net. . . . . . . . . . . . . 290 333
Data processing expense. . . . . . . . . . . . . . . . . . . . 116 140
FDIC deposit insurance expense . . . . . . . . . . . . . . . . 21 22
Other real estate owned expenses . . . . . . . . . . . . . . . 24 68
Other operating expenses . . . . . . . . . . . . . . . . . . . 481 524
------ ------
Total other expenses . . . . . . . . . . . . . . . . . . . . 2,470 2,409
------ ------
Income before income taxes . . . . . . . . . . . . . . . . . . . 2,492 2,284
Provision for income taxes . . . . . . . . . . . . . . . . . . . 766 702
------ ------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,726 $1,582
------ ------
------ ------
Basic earnings per common share, as adjusted for 5-for-1
stock split. . . . . . . . . . . . . . . . . . . . . . . . . . $0.39 $0.36
Diluted earnings per common share, as adjusted for 5-for-1
stock split. . . . . . . . . . . . . . . . . . . . . . . . . . $0.39 $0.36
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 1998 and 1997
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,726 $1,582
Other comprehensive income:
Unrealized gains (losses) arising during period
on securities available for sale, net of tax
of $73 and ($299). . . . . . . . . . . . . . . . . . . . . . 113 (503)
------ ------
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . 1,839 1,079
------ ------
------ ------
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 1998 and 1997
(In thousands of dollars)
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 1,726 $ 1,582
Adjustments to reconcile net income to cash from
operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . 137 132
Provision for loan losses. . . . . . . . . . . . . . . 10 180
Provision for losses on other real estate owned. . . . 6 5
Deferred loan fees . . . . . . . . . . . . . . . . . . 18 (3)
Proceeds from sales of loans . . . . . . . . . . . . . 4,082 1,897
Loans originated for sale. . . . . . . . . . . . . . . (3,886) (2,128)
Net gains on sales of loans. . . . . . . . . . . . . . (64) (29)
Net gains on sales of other real estate owned. . . . . 0 (134)
Amortization of mortgage servicing rights. . . . . . . 12 0
Net change in interest receivable. . . . . . . . . . . 153 (175)
Net change in interest payable . . . . . . . . . . . . 25 18
Net change in other assets . . . . . . . . . . . . . . 93 480
Net change in other liabilities. . . . . . . . . . . . 1,591 924
------ ------
Net cash from operating activities. . . . . . . . . 3,903 2,749
------ ------
Cash flows from investing activities
Proceeds from maturities of securities available
for sale . . . . . . . . . . . . . . . . . . . . . . 48,002 16,696
Purchases of securities available for sale . . . . . . (44,770) (14,191)
Change in loans made to customers. . . . . . . . . . . (2,515) (5,263)
Property and equipment expenditures. . . . . . . . . . (39) (63)
Net change in direct lease financing . . . . . . . . . 10 47
Proceeds from sales of other real estate owned . . . . 0 210
------ ------
Net cash from investing activities. . . . . . . . . 688 (2,564)
------ ------
Cash flows from financing activities
Net change in:
Deposits (1) . . . . . . . . . . . . . . . . . . . . (1,128)
Securities sold under repurchase agreements
and other short-term borrowings. . . . . . . . . . 2,294 (3,377)
Advances from borrowers for taxes and insurance. . . 430 350
------ ------
Net cash from financing activities. . . . . . . . . 2,723 (4,155)
------ ------
Net change in cash and cash equivalents. . . . . . . . . . . . . 7,314 (3,970)
Cash and cash equivalents at beginning of period . . . . . . . . 25,506 31,982
------ ------
Cash and cash equivalents at end of period . . . . . . . . . . . $32,820 $28,012
------ ------
------ ------
Supplemental disclosures
Cash paid during the period for
Interest. . . . . . . . . . . . . . . . . . . . . . $ 4,165 $3,640
Income taxes. . . . . . . . . . . . . . . . . . . . 75 0
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements are
prepared without audit and reflect all adjustments which are of a normal and
recurring nature and, in the opinion of management, are necessary to present
interim financial statements of Northern States Financial Corporation (the
Company) in accordance with generally accepted accounting principles. The
interim financial statements do not purport to contain all the necessary
financial disclosures covered by generally accepted accounting principles
that might otherwise be necessary for complete financial statements.
The condensed consolidated balance sheets are as of March 31, 1998,
December 31, 1997 and March 31, 1997. The condensed consolidated statements
of income and the condensed consolidated statements of comprehensive income
are for the three months ended March 31, 1998 and 1997. The condensed
consolidated statements of cash flows are for the three months ended March
31, 1998 and 1997.
The interim condensed financial statements should be read in conjunction
with the audited financial statements and accompanying notes (or notes
thereto) of the Company for the years ended December 31, 1997, 1996 and 1995.
The results of operations for the three month period ended March 31, 1998,
are not necessarily indicative of the results to be expected for the full year.
Basic earnings per share is based on weighted-average shares
outstanding. Diluted earnings per share further assumes issue of any dilutive
potential common shares. On April 23, 1998 the stockholders approved an
amendment to increase the authorized common shares from 1,750,000 to
6,500,000 and effect a 5-for-1 stock split. The split became effective to
stockholders of record on May 5, 1998 and an additional 4 shares of common
stock for each share will be mailed on or about May 15, 1998. Basic earnings
per share and diluted earnings per share have been restated for all periods
to reflect the effect of the 5-for-1 stock split.
6
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
NOTE 2 - SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of
securities available for sale as of March 31, 1998, December 31, 1997 and March
31, 1997 are as follows:
<TABLE>
<CAPTION>
March 31, 1998
- --------------
Amortized Gross Unrealized Fair
Securities available for sale Cost Gains Losses Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury. . . . . . . . . . . . . . . . . . . $ 20,057 $ 22 ($4) $ 20,075
U.S. Government agencies and corporations. . . . . 121,099 100 (196) 121,003
States and political subdivisions. . . . . . . . . 21,153 698 (7) 21,844
Mortgage-backed securities . . . . . . . . . . . . 12,297 143 (6) 12,434
Equity securities. . . . . . . . . . . . . . . . . 2,069 219 (18) 2,270
---------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . $176,675 $1,182 ($231) $ 177,626
---------------------------------------------------------------------
---------------------------------------------------------------------
<CAPTION>
December 31, 1997
- ----------------- Amortized Gross Unrealized Fair
Securities available for sale Cost Gains Losses 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
---------------------------------------------------------------------
---------------------------------------------------------------------
<CAPTION>
March 31, 1997
- -------------- Amortized Gross Unrealized Fair
Securities available for sale Cost Gains Losses Value
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury. . . . . . . . . . . . . . . . . . . $ 12,063 $ 7 ($12) $ 12,058
U.S. Government agencies and corporations. . . . . 93,855 7 (1,260) 92,602
States and political subdivisions. . . . . . . . . 23,782 495 (76) 24,201
Mortgage-backed securities . . . . . . . . . . . . 15,487 118 (163) 15,442
Equity securities and mutual fund
investment in debt securities . . . . . . . . . 2,091 141 (92) 2,140
---------------------------------------------------------------------
Total . . . . . . . . . . . . . . . . . . . . . $147,278 $768 ($1,603) $146,443
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
7
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
Contractual maturities of debt securities at March 31, 1998 were as
follows. Securities not due at a single maturity date, primarily mortgage-backed
securities, are shown separately.
<TABLE>
<CAPTION>
Amortized Fair
Securities available for sale Cost Value
---------------------------
<S> <C> <C>
Due in one year of less . . . . . . $ 16,682 $ 16,695
Due after one year through
five years . . . . . . . . . . 130,791 131,152
Due after five years through
ten years. . . . . . . . . . . 14,836 15,075
----------------------------
162,309 162,922
Mortgage-backed securities. . . . . 12,297 12,434
Equity securities . . . . . . . . . 2,069 2,270
----------------------------
Total. . . . . . . . . . . . . $176,675 $177,626
---------------------------
---------------------------
</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
Corporation (GNMA) or the Federal National Mortgage Association (FNMA).
Agency securities with call options totalled $118,493 at March 31, 1998. As
of March 31, 1998, the Company held structured notes with an amortized cost of
$2,000 and fair value of $1,998. These securities were issued by the Federal
Home Loan Bank (FHLB) and the FHLMC. The structured notes are comprised of
securities which have coupon interest rates which step up periodically during
the term to maturity.
There were no sales of securities during the three months ended March 31,
1998 and 1997.
Securities carried at $110,368 and $100,495 at March 31, 1998 and 1997 were
pledged to secure public deposits, repurchase agreements and for other purposes
as required or permitted by law.
8
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
NOTE 3 - LOANS
The Company makes loan to, and obtains deposits from, customers primarily
in Lake County, Illinois and surrounding areas. Most loans are secured by
specific items of collateral, including commercial and residential real estate
and other business and consumer assets.
Loans at March 31, 1998, December 31, 1997 and March 31, 1997 were as
follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
-------------------------------------------------
<S> <C> <C> <C>
Commercial . . . . . . . . . . . . . . . $ 56,835 $ 54,701 $ 53,162
Real estate - construction . . . . . . . 25,084 26,768 26,735
Real estate - mortgage . . . . . . . . . 154,185 152,856 149,821
Installment. . . . . . . . . . . . . . . 9,154 8,544 9,182
-------------------------------------------------
Total loans. . . . . . . . . . . . . . 245,258 242,869 238,900
Unearned income. . . . . . . . . . . . . (142) (154) (200)
Deferred loan fees . . . . . . . . . . . (509) (491) (526)
-------------------------------------------------
Loans, net of unearned income
and deferred loan fees . . . . . . . . 244,607 242,224 238,174
Allowance for loan losses. . . . . . . . (5,458) (5,430) (5,014)
-------------------------------------------------
Loans, net . . . . . . . . . . . . . . $239,149 $236,794 $233,160
-------------------------------------------------
-------------------------------------------------
</TABLE>
Loans held for sale on March 31, 1998, December 31, 1997 and March 31, 1997
were approximately $1,206, $1,338 and $1,153 and are classified as real estate
loans.
Non-performing loans, which includes loans contractually past due ninety
days or more, loans accounted for on a nonaccrual basis, and loans whose terms
have been renegotiated to provide a reduction or deferral of interest or
principal because of deterioration in the financial position of the borrower,
amounted to $1,021 at March 31, 1998, $1,006 at December 31, 1997 and $1,480 at
March 31, 1997.
9
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
Impaired loans were as follows for March 31, 1998, December 31, 1997 and
March 31, 1997:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
-------------------------------------------------
<S> <C> <C> <C>
Loans with no allowance
for losses allocated . . . . . . . . . . $ 0 $ 0 $ 0
Loans with allowance
for losses allocated . . . . . . . . . . 625 754 1,212
Amount of the allowance
allocated. . . . . . . . . . . . . . . . 97 125 121
</TABLE>
Average balance and income recognized on impaired loans were as follows for
the three months ended March 31, 1998 and March 31, 1997:
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
1998 1997
-----------------------------
<S> <C> <C>
Average of impaired
loans during the period. . . . . . . . . . . . . . . . . . . $710 $1,056
Interest income recognized
during the impairment period . . . . . . . . . . . . . . . . 10 3
Cash-basis interest income recognized
during the impairment period . . . . . . . . . . . . . . . . 10 3
</TABLE>
The Company is a party to financial instruments with off-balance sheet
risk in the normal course of business to meet financing needs of its
customers. These financial instruments include commitments to make loans,
standby letters of credit, and unused lines of credit. The Company's
exposure to credit loss in the event of nonperformance by the other parties
to these financial instruments is represented by the contractual amount of
the instruments. The Company uses the same credit policy to make such
commitments as it uses for on-balance-sheet items.
10
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
At March 31, 1998, December 31, 1997 and March 31, 1997, the contract
amount of the Company's off-balance sheet commitments was as follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
-----------------------------------------------
<S> <C> <C> <C>
Unused lines of credit and
commitments to make loans:
Fixed rate . . . . . . . . . . . . . . . . . $29,240 $20,388 $19,205
Variable rate. . . . . . . . . . . . . . . . 56,996 54,339 48,562
-----------------------------------------------
Total . . . . . . . . . . . . . . . . . . $86,236 $74,727 $67,767
-----------------------------------------------
-----------------------------------------------
Standby letters of credit . . . . . . . . . . . $ 7,165 $ 6,891 $ 6,140
</TABLE>
Since many commitments to make loans expire without being used, the amounts
above do not necessarily represent future cash commitments. Collateral obtained
upon exercise of the commitments is determined using management's credit
evaluation of the borrower, and may include commercial and residential real
estate and other business and consumer assets.
11
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
NOTE 4 - ALLOWANCE FOR LOAN LOSSES AND OTHER REAL ESTATE OWNED LOSSES
Activity in the allowance for loan losses for the three months ended
March 31, 1998, twelve months ended December 31, 1997 and three months ended
March 31, 1997 is as follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
1998 1997 1997
-----------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year . . . . . . . $5,430 $4,839 $4,839
Provision charged to operating expense . . 10 480 180
Loans charged off. . . . . . . . . . . . . (1) (209) (56)
Recoveries on loans
previously charged off . . . . . . . . . 19 320 51
-----------------------------------------------
Balance at end of period. . . . . . . . $5,458 $5,430 $5,014
-----------------------------------------------
-----------------------------------------------
</TABLE>
Activity in the allowance for other reals estate owned losses for the three
months ended March 31, 1998, twelve months ended December 31, 1997 and three
months ended March 31, 1997 is as follows:
<TABLE>
<CAPTION>
Sept. 30, December 31, Sept. 30,
1997 1996 1996
-----------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year . . . . . . . $544 $532 $532
Provision charged to operating expense . . 6 21 5
Losses on other real estate owned. . . . . 0 (9) 0
-----------------------------------------------
Balance at end of period. . . . . . . . $550 $544 $537
-----------------------------------------------
-----------------------------------------------
</TABLE>
12
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
NOTE 5 - PROVISION FOR INCOME TAX
The provision for income taxes represents federal and state income tax
expense calculated using annualized rates on taxable income generated during the
respective periods.
NOTE 6 - STOCKHOLDERS' EQUITY
For the three months ended March 31, 1998 total stockholders' equity
increased $1,839. The increase is a result of net income of $1,726, plus the
change in the valuation allowance from December 31, 1997 for the fair value of
securities available for sale, net of tax, of $113.
For the three months ended March 31, 1997 total stockholders' equity
increased $1,079 due to net income of $1,582, less the change in the valuation
allowance from December 31, 1996 for the fair value of securities available for
sale, net of tax, of $503.
NOTE 7 - OMNIBUS INCENTIVE PLAN INSTRUMENTS
The 1992 Omnibus Incentive Plan (the Plan) authorizes the issuance of up
to 75,000 shares of the Company's common stock, including the granting of
non-qualified stock options, restricted stock and stock appreciation rights.
Effective May 5, 1998, as a result of the 5-for-1 stock split, the Shares
authorized under the Plan increased to 375,000 shares.
Statement of Financial Accounting Standards No. 123 which became effective
for 1996, requires pro forma disclosures for companies that do not adopt its
fair value accounting method for stockbased employee compensation. The Company
did not grant any stock options during the three months ended March 31, 1998 or
during the entire year, 1997.
13
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(Dollar amounts in thousands, except per share data)
(Unaudited)
Stock options may be used to reward directors and employees and provide
them with an additional equity interest in the Company. Options have been
issued for 10 year periods and are fully vested when granted. The following
information about option grants does not reflect the 5-for-1 stock split
effective May 5, 1998:
<TABLE>
<CAPTION>
Number of Weighted-Avg.
Options Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1997 . . . . . . . . . . . . 5,178 $41.62
Exercised during period ended
March 31, 1997 . . . . . . . . . . . . . . . . . . . 0 0
----------------------------
Outstanding at March 31, 1997. . . . . . . . . . . . . 5,178 $41.62
---------
---------
Outstanding at January 1, 1998 . . . . . . . . . . . . 5,078 $41.62
Exercised during period ended
March 31, 1998 . . . . . . . . . . . . . . . . . . . 0 0
----------------------------
Outstanding at March 31, 1998. . . . . . . . . . . . . 5,078 $41.62
---------
---------
</TABLE>
At March 31, 1998, options outstanding ranged in exercise price from $41.60
to $42.00 which does not reflect the 5-for-1 stock split effective May 5,
1998 and had a remaining option life of 3.75 years.
The Company at its discretion may grant stock appreciation rights under
the Plan. A stock appreciation right entitles the holder to receive from the
Company an amount equal to the excess, if any, of the aggregate fair market
value of the Company's common stock which is the subject of such a grant over
the grant price. During the three months ended March 31, 1998 and 1997 no
stock appreciation rights were exercised. As of March 31, 1998 and 1997,
3,248 and 3,904 stock appreciation rights were outstanding that had been
awarded at $41.60 which does not reflect the 5-for-1 stock split effective
May 5, 1998. The Company's expense was $140 and $20 for the three months
ended March 31, 1998 and 1997. The stock appreciation rights will expire
during 2002.
14
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion focuses on the consolidated financial
condition of the Northern States Financial Corporation at March 31, 1998 and
the consolidated results of operations for the three month period ending
March 31, 1998, compared to the same period of 1997. The purpose of this
discussion is to provide a better understanding of the condensed consolidated
financial statements and the operations of its subsidiaries, the Bank of
Waukegan ("The Bank") and First Federal Bank, fsb ("First Federal" or "The
Thrift"). This discussion should be read in conjunction with the interim
condensed consolidated financial statements and notes thereto included herein.
The statements contained in this management's discussion and analysis
that are not historical facts are forward-looking statements subject to the
safe harbor created by the Private Securities Litigation Reform Act of 1995.
The Company cautions readers of this report that a number of important
factors could cause the Company's actual results subsequent to March 31, 1998
to differ materially from those expressed in any such forward-looking
statements.
FINANCIAL CONDITION
The consolidated total assets for the Company were $465.2 million at
March 31, 1998, increasing $6.2 million or 1.36% from the Company's year-end,
December 31, 1997.
Securities in total declined $3.0 million or 1.69% from the previous
year-end. The statement of cashflows shows that $3.2 million more in
securities matured than were purchased during the first quarter of 1998. The
fair value of securities increased $.2 million over the same period due to
changes in market conditions. The cashflows from the maturing securities was
used to fund loan growth.
Loan demand caused the Company's loans to increase $2.4 million or .98%
from December 31, 1997. Commercial loans grew $2.1 million and real estate
mortgages increased $1.3 million. A large percentage of the real estate
mortgage loans booked were commercial related mortgages that initially were
short-term commercial loans or construction loans. Real estate construction
loans declined $1.7 million from year-end due to the cyclical nature of the
construction business and the decline in construction during the winter
months. The Company experienced an increase of $.6 million to its
installment loan portfolio from year-end.
During the three months of 1998 deposits at the Company remained
constant at $347.9 million. Total time deposits declined $4.2 million
primarily in time deposits, $100,000 and over. Money market, NOW and savings
accounts grew $3.1 million, $.3 and $1.4 million from December 31, 1997
indicating a shift by depositors to shorter term and more liquid deposits.
Noninterest-bearing demand deposits declined slightly by $.5 million.
Securities sold under repurchase agreements and other short-term
borrowings at the Company declined $2.7 million from December 31, 1997 to
$35.8 million at March 31, 1998. These funds mainly consist of securities
sold under repurchase agreement that are offered through an overnight
repurchase agreement product and a term product with maturities from 7 days
to one year. Repurchase agreements provide a source of funds to the Company
that do not increase reserve requirements with the Federal Reserve Bank or
create an expense relating to FDIC insurance and, therefore, are less costly
to the Company. The decrease in repurchase agreement funds has been the
result of commercial customers drawing down their balances to make capital
expenditures which is indicative of the expansion of the local economy.
15
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company has received term advances from the Federal Home Loan
Bank in the amount of $10,000,000. These funds were used to purchase U.S.
Government agency securities that have call provisions on the same date that
the advances are due to be repaid.
Total stockholders' equity increased $1,839,000 during the three months
ended March 31, 1998. The increase is the result of net income of
$1,726,000, plus the adjustment in the valuation allowance for the market
value of securities available for sale, net of tax, of $113,000.
The tier 1 capital to average assets ratio at March 31, 1998 was 14.10%
and the total capital to asset ratio, on a risk adjusted basis, amounted to
22.06%, exceeding the minimum required to be capitalized under prompt
corrective action regulations, which minimums are 5.00% and 10.00%. Book
value per share, which is stated to reflect the 5-for-1 stock split approved
on April 23, 1998, was $13.95 at March 31, 1998 as compared to $13.54 at
December 31, 1997. On March 31, 1998, the Company and its subsidiaries were
in compliance with all applicable regulatory capital requirements.
RESULTS OF OPERATIONS
NET INCOME
The consolidated net income for the quarter ended March 31, 1998 was
$1,726,000, an increase of $144,000 or 9.10%, as compared to net income of
$1,582,000 for the same period the previous year. The annualized return on
average assets was 1.50% for the quarter which equaled the return on average
assets for the quarter the previous year.
NET INTEREST INCOME
Net interest income, the difference between interest income earned on
average interest earning assets and interest expense on average interest
bearing liabilities, increased $222,000 or 5.38% during the three months
ended March 31, 1998, compared to the same three months in 1997. The
increase in net interest income for the first quarter of 1998 is from
increases in average interest earning assets during the first quarter of 1998
as compared to the same period last year. As evidenced in Table 1, "Analysis
of Average Balance and Tax Equivalent Rates for the Three Months ended March
31, 1998 and 1997", average interest earning assets during the first quarter
of 1998 were $437.8 million as compared to $397.5 million last year. Table 1
shows the yield on interest earning assets declined slightly to 7.97% during
the first quarter of 1998 as compared to 8.01% last year. The Table also
indicates that rates paid on interest bearing liabilities increased to 4.78%
during the three months ended March 31, 1998 as compared to 4.58% for the
same period last year as increased rates were paid on time deposits and other
borrowings. The net yield on interest earning assets declined 20 basis
points to 4.13% during the first quarter of 1998 as compared to 4.33% last
year. Even though the net yield declined the increased volume of interest
earning assets increased overall net interest income during the quarter.
During the first quarter of 1998 management has decreased the rates offered
on time deposits by 30 basis points in order to increase the net yield on
interest earning assets. As time deposits mature and renew the impact of
this reduction in time deposit rates will begin to be observed.
16
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended March 31, 1998 and 1997
($000s)
<TABLE>
<CAPTION>
1998 1997
------------------------ -------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3) $242,022 $5,584 9.23% $233,496 $5,313 9.10%
Taxable securities 159,616 2,504 6.29% 123,703 1,968 6.32%
Securities exempt from
taxes (2) 19,621 389 8.24% 22,007 449 8.39%
Interest bearing deposits in banks 700 9 5.14% 670 8 4.78%
Federal funds sold 15,856 218 5.50% 17,613 229 5.20%
-------- ------ -------- ------
Interest earning assets 437,815 8,704 7.97% 397,489 7,967 8.01%
------ ------
Noninterest earning assets 20,984 23,275
-------- --------
Average assets $458,799 $420,764
-------- --------
-------- --------
Liabilities and stockholders' equity
NOW deposits $37,382 291 3.11% $37,179 270 2.90%
Money market deposits 41,287 407 3.94% 43,371 427 3.94%
Savings deposits 44,189 323 2.92% 44,234 325 2.94%
Time deposits 185,128 2,609 5.64% 161,128 2,232 5.54%
Other borrowings 42,717 560 5.24% 33,524 404 4.82%
-------- ----- -------- -----
Interest bearing
liabilities 350,703 4,190 4.78% 319,436 3,658 4.58%
----- -----
Demand deposits 38,523 39,371
Other noninterest bearing liabilities 8,576 6,585
Stockholders' equity 60,997 55,372
-------- --------
Average liabilities and
stockholders' equity $458,799 $420,764
-------- --------
-------- --------
Net interest income $4,514 $4,309
------ ------
------ ------
Net yield on interest
earning assets 4.13% 4.33%
----- -----
----- -----
Liabilities to earning
assets ratio 80.31% 80.33%
------ ------
------ ------
</TABLE>
(1) - Interest income on loans includes loan origination fees of $130 and
$90 for the three months ended March 31, 1998
and 1997.
(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.
17
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES
The provision for loan losses was $10,000 for the quarter ended March 31,
1998 compared to $180,000 for the same period the previous year. Management,
with the concurrence of the Board of Directors, lowered the provision for
loan losses during the first quarter of 1998 after a careful review of the
adequacy of the allowance for loan losses and the levels of non-performing
and impaired loans.
At March 31, 1998, the allowance for loan losses was $5,458,000 or 2.23%
of loans as compared to $5,014,000 or 2.11% of loans at March 31, 1997.
Nonperforming loans, at March 31, 1998, were $1,021,000, down from
$1,480,000 at March 31, 1997. Impaired loans were $625,000 or .26 % of
loans at March 31, 1998 as compared to impaired loans of $1,212,000 or .51%
of loans at March 31, 1997. The amount of the allowance for loan losses
allocated for impaired loans at March 31, 1998 was $97,000 compared to
$121,000 at March 31, 1997. During the first three months of 1998 only
$1,000 in loans were charged off to the allowance for loan losses as compared
to $56,000 during the same period of 1997. During the first three months of
1998 recoveries of loans previously charged off were $19,000 as compared to
$51,000 during the same period in 1997.
The adequacy of the allowance for loan losses is analyzed by management and
the Board of Directors at least quarterly. Loans judged to be impaired,
loans with potential loss exposure, loans that are no longer accruing
interest, and historical net loan loss percentages are reviewed in the
analysis of the allowance for loan losses. Based on management's and the
Board of Directors' analysis, the allowance for loan losses at March 31, 1998
is adequate to cover future possible loan losses. If the level of impaired
and non-performing loans remains low during the balance of 1998 there will be
further reductions to the loan loss provision in 1998 as compared to 1997.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 1998 was $625,000
as compared to $748,000 for the three months ended March 31, 1997, a decrease
of $123,000. Service fees on deposits decreased by $67,000 as compared to
the same quarter last year because of decreased overdraft fee income of
$38,000 and service charge income on checking accounts of $15,000. The
decreased overdraft fee income and service charge income can be in part be
explained by the decrease in the number of checking accounts at the Company
which declined 231 accounts or 2.54% from March 31, 1997. Most of the
decreased accounts belonged to customers with lower balances who were
assessed higher service charges and became overdrawn more often. Many of
these customers were lost to local credit unions which have lower balance
requirements and fees. Trust fee income increased $27,000 during the three
months ended March 31, 1998 due to increased trust business. Other income
from gains on sales on loans increased $29,000 during the first quarter of
1998 in that loans sold on the secondary market increased to $4.1 million
during the first quarter if 1998 as compared to $1.9 million during the same
period last year. Other operating income during the first quarter of 1998
was $112,000 less than the same period last year as the Company during the
first quarter of 1997 had a gain of $134,000 on the sale of a property
classified as other real estate owned.
18
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NONINTEREST EXPENSES
Noninterest expenses increased $61,000 or 2.53% during the three months
ended March 31, 1998. The Company's efficiency ratio, noninterest expenses
divided by the sum of net interest income and noninterest income was 49.68%
for the first quarter of 1998 as compared to 49.44% for the first quarter of
1997. The efficiency ratio is frequently used as an indicator as to how well
a financial institution manages its noninterest expenses with a decreasing
ratio indicating improved performance. Compared to its peers, the Company's
ability to control overhead is one of its operating strengths.
Expenses relating to salaries and employee benefits increased of $216,000
during the first quarter of 1998 compared to the same period last year.
Expenses relating to stock appreciation rights increased $120,000 during the
first three months of 1998 compared to last year as the result of increases
in the market price of the Company's stock. Annual salary increases took
effect during the first quarter of 1998 and a new senior lender was hired at
the Bank during the third quarter of 1997 which also increased salaries and
employee benefits compared to last year.
Occupancy expenses for the first quarter of 1998 were $290,000 which was a
decline of $43,000 from the first quarter of 1997. This decline in occupancy
expenses is attributable to decreased property taxes of $12,000 where the
assessed valuation of one location was lowered. Utilities expense was $19,000
less during the first quarter of 1998 due to the mild winter. Maintenance
expenses declined $13,000 partially as a result of the mild winter.
Data processing expense declined $24,000 during the first quarter of 1998
to $116,000 as the Company reviewed its data processing service bureau
contract and dropped some programming that was not being utilized.
FDIC insurance expense was $21,000 during the three months ended March 31,
1998, a slight decrease of $1,000 as compared to last year.
Other real estate owned expenses declined during the first quarter of 1998
by $44,000. Real estate taxes on other real estate owned declined due to
lower assessed valuation to one of the properties. During the first quarter
of 1997 there were some expenses relating to the sale of the other real
estate owned that occurred at that time. The decrease in other real estate
owned partially reflects the smaller real estate owned portfolio that
amounted to $2,549,000 at March 31, 1998 as compared to $2,765,000 at March
31, 1997.
Miscellaneous other operating expenses decreased $43,000 compared to the
same quarter last year. Postage expense decreased $7,000 due in part to the
reduction in the number of checking accounts. Expenses relating to the
Company's correspondent bank accounts were $16,000 less during the three
months ended March 31, 1998 as compared to last year as correspondent bank
balances were larger and earning allowances were greater, thus reducing this
expense. Audit expense declined $18,000 and marketing expenses declined
$25,000 during the first quarter of 1998. Other operating losses and expenses
relating to closing checking accounts declined $38,000 during the quarter.
Legal expenses were $51,000 higher during the first quarter of 1998 relating
to the upcoming merger between the two subsidiaries of the Company.
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
19
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
of Waukegan will be the surviving entity in the merger. Subsequent to March
31, 1998 the Company received the necessary various bank regulatory approvals
and the merger became effective April 21, 1998.
Management believes that the merger will increase efficiencies and lower
noninterest expenses in future years. The Company expects increases to
noninterest expenses related to the merger during 1998. Legal and
professional expenses related to the merger are expected to be $60,000 during
1998. Merger expenses related 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 and printing expenses during 1998 may increase
as well.
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 effect a 5-for-1
stock split. Subsequent to March 31, 1998 the stockholders approved the
proposed amendment at the annual meeting of stockholders that was held on
April 23, 1998. The split became effective to stockholders of record on May
5, 1998 and an additional 4 shares of common stock for each share held will
be mailed on or about May 15, 1998. Legal and professional costs relating to
the 5-for-1 split are estimated at $15,000 during 1998.
The Company, in compliance with the FFIEC's (Federal Financial Institutions
Examination Council) guidelines, has established a "Year 2000 Action Plan" in
order to deal with risks associated with the new millennium especially in the
area of data processing. As part of the "Year 2000 Action Plan" the
Company's Board of Directors is regularly updated as to the Company's ability
to deal with the year 2000 risks.
The "Year 2000 Policy and Action Plan" includes the five basic steps or
phases recommended by the FFIEC: awareness, assessment, renovation,
validation (testing) and implementation. At this time, the Company has
completed both the awareness and assessment phases of its action plan, and
the renovation and testing phases are well under way. It has been determined
that both the Company's item processing system and its teller platform system
are not year 2000 compliant. The Company has contracted for the purchase of
new hardware and software for both systems. The combined cost of these
projects approximate $200,000.
The Company expects to complete its "Year 2000 Action Plan" during the
first quarter of 1999. A majority of the Company's data processing system is
performed by an outside bank data processing service bureau which expects to
be fully year 2000 compliant by December 31, 1998. After the service bureau
completes its year 2000 compliance the Company will complete its "Year 2000
Action Plan" by doing additional testing of the service bureau for year 2000
compliance.
RECENT ACCOUNTING PRONOUNCEMENTS
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.
20
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FEDERAL AND STATE INCOME TAXES
For the three months ended March 31, 1998 and 1997, the Company's
provision for federal and state income taxes was $766,000 and $702,000 which
as a percentage of pretax earnings was 30.74% for both periods.
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE 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. One approach
used by the Company is to periodically analyze its assets and liabilities and
make future financing and investment decisions based on payment streams,
interest rates, contractual maturities, and estimated sensitivity to actual
or potential changes in market interest rates. 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.
21
<PAGE>
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, 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.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December
31, 1997. The table uses December 31, 1997 as there has been no material
changes to the Company's balance sheets and to market interest rate levels
from December 31, 1997. 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. Expected maturity for
interest-bearing core deposits such as NOW, money market and savings accounts
are assumed to be 1998 as these may be withdrawn in a very short time period
even though it may be unlikely. 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.
From a risk management perspective, however, the Company believes that
repricing dates, as opposed to expected maturity dates, may be a more
relevant in analyzing the value of such instruments. Similarly, 42.7% of the
Company's investment securities portfolio at December 31, 1997 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.
22
<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
TABLE 2
NORTHERN STATES FINANCIAL CORPORATION
EXPECTED MATURITY DATES OF ON BALANCE SHEET
FINANCIAL INSTRUMENTS AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Maturing In
----------------------------------------------------------------------------
($000s) 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 $280,967 $19,952 $5,580 $19 $6 $38 $306,562 $306,958
Average interest rate 4.69% 6.06% 6.22% 5.48% 6.80% 6.01% 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 $318,471 $25,952 $5,580 $19 $6 $38 $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 maturities are based on projected scheduled payments.
(3) For NOW, money market and savings deposits all balances assumed mature in
1998.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to sign on its behalf by the
undersigned hereunto duly authorized, on this 14th day of May, 1998.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Date: May 14, 1998 By: /s/ Fred Abdula
--------------------- ---------------------
Fred Abdula
Chairman of the Board of
Directors and President
Date: May 14, 1998 By: /s/ Thomas M. Nemeth
--------------------- ---------------------
Thomas M. Nemeth
Assistant Vice President
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 13,108
<INT-BEARING-DEPOSITS> 312
<FED-FUNDS-SOLD> 19,500
<TRADING-ASSETS> 0
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<LOANS> 245,871
<ALLOWANCE> 5,458
<TOTAL-ASSETS> 465,207
<DEPOSITS> 347,949
<SHORT-TERM> 35,798
<LIABILITIES-OTHER> 9,426
<LONG-TERM> 10,000
0
0
<COMMON> 1,779
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<TOTAL-LIABILITIES-AND-EQUITY> 465,207
<INTEREST-LOAN> 5,549
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<INTEREST-DEPOSIT> 3,630
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<INCOME-PRETAX> 2,492
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</TABLE>
