<PAGE> 1
================================================================================
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 June 30, 1999
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:
------- -------
4,458,345 shares of common stock were outstanding
as of June 30, 1999
<PAGE> 2
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
Condensed consolidated balance sheets as of June 30,
1999, December 31, 1998, and June 30, 1998............................. 2
Condensed consolidated statements of income for the three and
six months ended June 30, 1999 and 1998................................ 3
Condensed consolidated statements of comprehenesive income
the three and six months ended June 30, 1999 and 1998.................. 4
Condensed consolidated statements of cash flows for
the six months ended June 30, 1999 and 1998............................ 5
Notes to condensed consolidated financial statements............... 6 - 16
Item 2. Management's discussion and analysis of financial
condition and results of operations..................... 17 - 27
Item 7A. Quantitative and qualitative disclosures
about market risk.................................... 27 - 31
PART II. OTHER INFORMATION
Signatures.............................................................. 32
1
<PAGE> 3
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1999, December 31, 1998 and June 30, 1998
(In thousands of dollars)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
Assets 1999 1998 1998
-------- ----------- --------
<S> <C> <C> <C>
Cash and due from banks................................................... $ 14,113 $ 15,176 $ 13,767
Interest bearing deposits in financial institutions -
maturities less than 90 days.......................................... 196 183 230
Federal funds sold........................................................ 0 12,600 31,000
-------- -------- --------
Total cash and cash equivalents........................................ 14,309 27,959 44,997
Interest bearing deposits in financial institutions -
maturities over 90 days............................................... 100 100 100
Securities available for sale............................................. 199,865 200,861 180,051
Loans..................................................................... 242,466 246,209 236,876
Less: Allowance for loan losses........................................... (4,799) (5,433) (5,466)
-------- -------- --------
Loans, net............................................................. 237,667 240,776 231,410
Direct lease financing.................................................... 927 987 1,176
Office buildings and equipment, net....................................... 6,334 6,647 5,668
Other real estate owned, net of allowance for losses
of $552, $552 and $552................................................. 5,007 2,497 2,547
Accrued interest receivable............................................... 4,135 4,408 4,615
Other assets.............................................................. 3,154 1,686 1,698
-------- -------- --------
Total assets........................................................... $471,498 $485,921 $472,262
======== ======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest bearing........................................... $ 43,668 $ 44,075 $ 39,663
NOW accounts........................................................... 49,040 39,180 49,295
Money market accounts.................................................. 39,917 41,003 40,446
Savings................................................................ 46,210 45,333 44,208
Time, $100,000 and over................................................ 79,633 98,338 91,855
Time, under $100,000................................................... 86,641 87,827 94,685
-------- -------- --------
Total deposits...................................................... 345,109 355,756 360,152
Securities sold under repurchase agreements
and other short-term borrowings........................................ 51,083 47,990 31,512
Federal Home Loan Bank term advance....................................... 5,000 10,000 10,000
Advances from borrowers for taxes and insurance........................... 662 992 901
Accrued interest payable and other liabilities............................ 5,116 6,070 7,093
-------- -------- --------
Total liabilities................................................... 406,970 420,808 409,658
Stockholders' Equity
Common stock.............................................................. 1,783 1,781 1,780
Additional paid-in capital................................................ 11,376 11,336 11,254
Retained earnings......................................................... 53,417 51,358 49,001
Accumulated other comprehensive income (loss), net........................ (2,048) 638 569
-------- -------- --------
Total stockholders' equity............................................. 64,528 65,113 62,604
-------- -------- --------
Total liabilities and stockholders' equity............................. $471,498 $485,921 $472,262
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 4
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months and six months ended June 30, 1999 and 1998
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans (including fee income).................................. $5,078 $5,553 $10,214 $11,102
Securities
Taxable..................................................... 2,551 2,535 5,057 5,039
Exempt from federal income tax............................. 262 248 527 505
Interest bearing deposits in financial institutions........... 6 10 9 19
Federal funds sold............................................ 93 235 253 453
------ ------ ------- -------
Total interest income...................................... 7,990 8,581 16,060 17,118
------ ------ ------- -------
Interest expense
Time deposits................................................. 2,069 2,545 4,269 5,154
Other deposits................................................ 983 1,024 1,961 2,045
Other borrowings.............................................. 591 583 1,220 1,143
------ ------ ------- -------
Total interest expense..................................... 3,643 4,152 7,450 8,342
------ ------ ------- -------
Net interest income.............................................. 4,347 4,429 8,610 8,776
Provision for loan losses........................................ 0 0 0 10
------ ------ ------- -------
Net interest income after provision for
loan losses................................................... 4,347 4,429 8,610 8,766
------ ------ ------- -------
Noninterest income
Service fees on deposits...................................... 277 284 539 551
Trust income.................................................. 184 171 381 342
Mortgage banking income...................................... 35 2 217 23
Net gains on sales of loans................................... 69 96 155 160
Other operating income........................................ 148 110 333 212
------ ------ ------- -------
Total noninterest income................................... 713 663 1,625 1,288
------ ------ ------- -------
Noninterest expenses
Salaries and employee benefits................................ 1,489 1,471 3,056 3,009
Occupancy and equipment expenses, net......................... 330 322 684 612
Data processing............................................... 122 145 252 261
FDIC deposit insurance........................................ 22 22 43 43
Other real estate owned....................................... 17 37 38 61
Other operating expenses...................................... 427 478 926 959
------ ------ ------- -------
Total noninterest expenses................................. 2,407 2,475 4,999 4,945
------ ------ ------- -------
Income before income taxes....................................... 2,653 2,617 5,236 5,109
Provision for income taxes....................................... 821 821 1,616 1,587
------ ------ ------- -------
Net income....................................................... $1,832 $1,796 $ 3,620 $ 3,522
====== ====== ======= =======
Basic earnings per share......................................... $ 0.41 $ 0.40 $ 0.81 $ 0.79
Diluted earnings per share....................................... $ 0.41 $ 0.40 $ 0.81 $ 0.79
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and six months ended June 30, 1999 and 1998
(In thousands of dollars)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income.......................................................... $1,832 $1,796 $3,620 $3,522
Other comprehensive income:
Unrealized gains (losses) arising during period
on securities available for sale, net of tax
of ($1,227), ($10), ($1,698) and $64........................ (1,941) (13) (2,686) 100
------- ------ ------ ------
Comprehensive income................................................ ($109) $1,783 $ 934 $3,622
======= ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1999 and 1998
(In thousands of dollars)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities
Net income........................................................................... $3,620 $3,522
Adjustments to reconcile net income to cash from
operating activities:
Depreciation...................................................................... 333 276
Provision for loan losses......................................................... 0 10
Provision for losses on other real estate owned................................... 0 8
Deferred loan fees................................................................ (16) (50)
Gain on sales of property and equipment........................................... (74) 0
Net change in loans held for sale................................................. 3,434 (1,349)
Net gains on sales of loans....................................................... (155) (160)
Amortization of mortgage servicing rights......................................... 36 28
Net change in interest receivable................................................. 273 (307)
Net change in interest payable.................................................... (575) (77)
Net change in other assets........................................................ 194 57
Net change in other liabilities................................................... (379) 1,030
------- -------
Net cash from operating activities............................................. 6,691 2,988
------- -------
Cash flows from investing activities
Proceeds from maturities and calls of securities available for sale.............. 59,282 78,931
Purchases of securities available for sale........................................ (62,670) (78,146)
Change in loans made to customers................................................. (2,664) 6,933
Proceeds from sales of property and equipment..................................... 257 0
Property and equipment expenditures............................................... (203) (45)
Net change in direct lease financing.............................................. 60 98
------- -------
Net cash from investing activities............................................. (5,938) 7,771
------- -------
Cash flows from financing activities
Net change in:
Deposits........................................................................ (10,647) 12,202
Securities sold under repurchase agreements
and other short-term borrowings............................................... 3,093 (6,992)
Advances from borrowers for taxes and insurance................................. (330) (265)
Net change in Federal Home Loan Bank term advance................................. (5,000) 5,000
Net proceeds from exercise of stock options....................................... 42 33
Dividends paid.................................................................... (1,561) (1,246)
------- -------
Net cash from financing activities............................................. (14,403) 8,732
------- -------
Net change in cash and cash equivalents..................................................... (13,650) 19,491
Cash and cash equivalents at beginning of period............................................ 27,959 25,506
------- -------
Cash and cash equivalents at end of period.................................................. $14,309 $44,997
======= =======
Supplemental disclosures
Cash paid during the period for
Interest....................................................................... $8,025 $8,419
Income taxes................................................................... 1,605 1,654
Noncash investing activities
Transfers made from loans to other real estate owned........................... 2,510 0
Transfers made from loans held for sale to portfolio........................... 2,520 0
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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 June 30, 1999, December
31, 1998 and June 30, 1998. The condensed consolidated statements of income and
the condensed consolidated statements of comprehensive income are for the three
months and six months ended June 30, 1999 and 1998. The condensed consolidated
statements of cash flows are for the six months ended June 30, 1999 and 1998.
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, 1998, 1997 and 1996.
The results of operations for the three and six month periods ended June
30, 1999, 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
effect a 5-for-1 stock split. The split became effective to stockholders of
record on May 5, 1998 and an additional 4 shares for each share were mailed on
May 15, 1998. Basic earnings per share, diluted earnings per share and all
omnibus incentive plan information have been restated for all periods to reflect
the effect of the 5-for-1 stock split. Common stock information is summarized as
follows:
June 30, December 31, June 30,
1999 1998 1998
------------------------------------
Common shares authorized......... 6,500,000 6,500,000 6,500,000
Common shares outstanding........ 4,458,345 4,453,400 4,450,865
Par value per share.............. $0.40 $0.40 $0.40
6
<PAGE> 8
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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 June 30, 1999, December 31, 1998 and June
30, 1998 are as follows:
<TABLE>
<CAPTION>
June 30, 1999 Amortized Gross Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury........................................ $ 10,000 $ 19 $0 $ 10,019
U.S. Government agencies and corporations............ 160,923 6 (3,770) 157,159
States and political subdivisions.................... 22,209 328 (105) 22,432
Mortgage-backed securities........................... 8,110 32 (70) 8,072
Equity securities.................................... 1,966 231 (14) 2,183
------------------------------------------------------
Total............................................. $203,208 $616 ($3,959) $199,865
======================================================
<CAPTION>
December 31, 1998 Amortized Gross Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury........................................ $ 13,022 $ 87 $0 $ 13,109
U.S. Government agencies and corporations............ 152,558 208 (326) 152,440
States and political subdivisions.................... 22,693 737 (2) 23,428
Mortgage-backed securities........................... 9,622 106 0 9,728
Equity securities.................................... 1,925 242 (11) 2,156
------------------------------------------------------
Total............................................. $199,820 $1,380 ($339) $200,861
======================================================
<CAPTION>
June 30, 1998 Amortized Gross Unrealized Fair
Cost Gains Losses Value
------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury........................................ $ 18,043 $ 21 ($1) $ 18,063
U.S. Government agencies and corporations............ 126,857 70 (173) 126,754
States and political subdivisions.................... 20,862 649 (4) 21,507
Mortgage-backed securities........................... 11,366 123 (6) 11,483
Equity securities.................................... 1,995 249 0 2,244
------------------------------------------------------
Total............................................. $179,123 $1,112 ($184) $180,051
======================================================
</TABLE>
7
<PAGE> 9
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Dollar amounts in thousands, except per share data)
(Unaudited)
Contractual maturities of debt securities at June 30, 1999 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities and equity securities are shown separately.
Amortized Fair
Cost Value
-----------------------
Due in one year of less....................... $ 15,370 $ 15,407
Due after one year through five years......... 127,192 124,939
Due after five years through ten years........ 50,570 49,265
-----------------------
193,132 189,611
Mortgage-backed securities.................... 8,110 8,072
Equity securities............................. 1,966 2,182
-----------------------
Total................................ $203,208 $199,865
=======================
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).
The fair value of agency securities with call options totaled $153,652 at
June 30, 1999. As of June 30, 1999, the Company held no structured notes.
There were no sales of securities during the three and six months ended
June 30, 1999 and 1998.
Securities carried at $127,040 and $111,237 at June 30, 1999 and 1998 were
pledged to secure public deposits, repurchase agreements and for other purposes
as required or permitted by law.
8
<PAGE> 10
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 3 - Loans
The Company makes loans to, and obtains deposits from, customers primarily
in Lake County, Illinois and surrounding areas. Most loans are secured by
specific items of collateral, including commercial and residential real estate
and other business and consumer assets.
Loans at June 30, 1999, December 31, 1998 and June 30, 1998 were as
follows:
June 30, December 31, June 30,
1999 1998 1998
---------------------------------
Commercial.............................. $ 57,037 $ 64,043 $ 56,519
Real estate - construction.............. 20,923 17,328 25,515
Real estate - mortgage.................. 141,044 141,241 131,995
Home equity............................. 15,984 15,579 14,725
Installment............................. 7,982 8,530 8,684
---------------------------------
Total loans.......................... 242,970 246,721 237,438
Unearned income......................... (107) (99) (121)
Deferred loan fees...................... (397) (413) (441)
---------------------------------
Loans, net of unearned income
and deferred loan fees............... 242,466 246,209 236,876
Allowance for loan losses............... (4,799) (5,433) (5,466)
---------------------------------
Loans, net........................... $237,667 $240,776 $231,410
=================================
The were no loans held for sale on June 30, 1999. During the first six
months of 1999 the Company transferred loans held for sale with a book value and
fair value of $2,520 to portfolio loans. Loans held held for sale on December
31, 1998 and June 30, 1998 were approximately $5,799 and $2,847 and are
classified as real estate loans.
Real estate - mortgage loans with a carrying value of $21,244, $20,596 and
$22,315 were pledged to secure public deposits at June 30, 1999, December 31,
1998 and June 30, 1998. The Company has pledged real estate - mortgage loans on
residential property in an amount equal to at least 167% of the outstanding
Federal Home Loan Bank advances.
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 $352 at June 30, 1999, $4,117 at December 31, 1998 and $856 at June
30, 1998.
9
<PAGE> 11
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Dollar amounts in thousands, except per share data)
(Unaudited)
Impaired loans were as follows for June 30, 1999, December 31, 1998 and
June 30, 1998:
June 30, December 31, June 30,
1999 1998 1998
-----------------------------------
Loans with no allowance
for losses allocated......... $0 $0 $0
Loans with allowance
for losses allocated......... 491 3,515 620
Amount of the allowance
allocated.................... 74 544 94
The average balance and income recognized on impaired loans were as follows
for the three and six months ended June 30, 1999 and June 30, 1998:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------------------------------------------------
<S> <C> <C> <C> <C>
Average of impaired
loans during the period................... $367 $621 $1,191 $666
Interest income recognized
during the impairment period.............. 4 0 18 8
Cash-basis interest income recognized
during the impairment period.............. 4 0 18 8
</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> 12
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Dollar amounts in thousands, except per share data)
(Unaudited)
At June 30, 1999, December 31, 1998 and June 30, 1998, the contract amount
of the Company's off-balance sheet commitments was as follows:
June 30, December 31, June 30,
1999 1998 1998
---------------------------------
Unused lines of credit and
commitments to make loans:
Fixed rate............................... $20,950 $19,999 $25,907
Variable rate............................ 69,329 60,009 65,909
---------------------------------
Total................................. $90,279 $80,008 $91,816
=================================
Standby letters of credit................... $ 4,791 $ 6,598 $ 7,204
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> 13
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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 six months ended June 30,
1999, twelve months ended December 31, 1998 and six months ended June 30, 1998
is as follows:
June 30, December 31, June 30,
1999 1998 1998
--------------------------------
Balance at beginning of year.............. $5,433 $5,430 $5,430
Provision charged to operating expense.... 0 10 10
Loans charged off......................... (660) (73) (6)
Recoveries on loans
previously charged off.................. 26 66 32
-------------------------------
Balance at end of period............... $4,799 $5,433 $5,466
===============================
Activity in the allowance for other realize estate owned losses for the six
months ended June 30 1999, twelve months ended December 31, 1998 and six months
ended June 30, 1998 is as follows:
June 30, December 31, June 30,
1999 1998 1998
-------------------------------
Balance at beginning of year............... $552 $544 $544
Provision charged to operating expense..... 0 10 8
Losses on other real estate owned.......... 0 (2) 0
-------------------------------
Balance at end of period................ $552 $552 $552
===============================
12
<PAGE> 14
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(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 six months ended June 30, 1999 total stockholders' equity decreased
$585. The decline is a result of net income of $3,620, less the change in the
valuation allowance from December 31, 1998 for the fair value of securities
available for sale, net of tax, of $2,686, plus $42 due to the exercise of 4,945
stock options pursuant to the Omnibus Incentive Plan, less cash dividends of
$1,561.
For the six months ended June 30, 1998 total stockholders' equity increased
$2,409 due to net income of $3,522, plus the change in the valuation allowance
from December 31, 1997 for the fair value of securities available for sale, net
of tax, of $100, plus $33 due to the exercise of 4,000 stock options pursuant to
the Omnibus Incentive Plan, less cash dividends of $1,246.
Note 7 - Omnibus Incentive Plan Instruments
The 1992 Omnibus Incentive Plan (the "Plan") authorizes the issuance of up
to 375,000 shares of the Company's common stock, including the granting of
non-qualified stock options, restricted stock and stock appreciation rights.
Statement of Financial Accounting Standards No. 123 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 six months ended June 30, 1999 or during the entire year 1998. 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.
13
<PAGE> 15
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Dollar amounts in thousands, except per share data)
(Unaudited)
Information about option grants follow:
Number of Weighted-Avg.
Options Exercise Price
--------------------------
Outstanding at January 1, 1998............ 25,390 $8.32
Exercised during period ended
June 30, 1998......................... (4,000) 8.34
--------------------------
Outstanding at June 30, 1998.............. 21,390 $8.32
==========
Outstanding at January 1, 1999............ 18,855 $8.32
Exercised during period ended
June 30, 1999......................... (4,945) 8.32
--------------------------
Outstanding at June 30, 1999.............. 13,910 $8.32
=========
At June 30, 1999, all remaining options had an exercise price of $8.32. The
options outstanding had a remaining life of 2.5 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 six months ended June 30, 1999, 2,710 stock appreciation
rights were exercised and payment was made to the holders. As of June 30, 1999
and 1998, 12,280 and 16,240 stock appreciation rights were outstanding at the
grant price of $8.32 per share. The Company's expense was ($4) and $40 for the
three months ended June 30, 1999 and 1998 and ($18) and $180 for the six months
ended June 30, 1999 and 1998. The stock appreciation rights will expire during
2002.
14
<PAGE> 16
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 8 - Other Comprehensive Income
Other comprehensive income components and related taxes for the three
months six months ended June 30, 1999 and 1998 follows:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
---------------------------------------
<S> <C> <C> <C> <C>
Unrealized holding gains (losses) on
on securities available for sale..... ($3,168) ($23) ($4,384) $164
Tax effect.............................. (1,227) (10) (1,698) 64
---------------------------------------
Other comprehensive income (loss).... ($1,941) ($13) ($2,686) $100
=======================================
</TABLE>
Note 9 - Segment Information
The operating segments are determined by the products and services offered,
primarily distinguished between banking, mortgage banking and trust operations.
Loans, securities and deposits provide the revenues in the banking operation,
servicing fees and loan sales provide the revenues in mortgage banking, and
trust fees provide the revenues in trust operations. All operations are
domestic.
Management began evaluating mortgage banking as a separate segment in
August, 1998. Mortgage banking and trust segment performance is evaluated using
fee income net of direct expenses. Income taxes are not allocated to these
segments and selected indirect expenses are allocated. There are no transactions
among segments. Substantially all assets are related to the banking segment.
Neither mortgage banking nor trust pre-tax revenues exceeded 10% of total
pre-tax income for the three months or six months ended June 30, 1999 or 1998.
Information reported internally for performance assessment of operating
segments for the three months and six months ended June 30, 1999 and 1998
follows:
Three months ended June 30, 1999
--------------------------------
Other Total
Banking Segments Segments
--------------------------------
Net interest income................... $4,347 $0 $4,347
Provision for loan losses............. 0 0 0
Other revenue......................... 426 287 713
Other expenses........................ 2,090 317 2,407
--------------------------------
Segment profit..................... $2,683 ($30) $2,653
================================
15
<PAGE> 17
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999
(Dollar amounts in thousands, except per share data)
(Unaudited)
Three months ended June 30, 1998
---------------------------------
Other Total
Banking Segments Segments
---------------------------------
Net interest income................. $4,429 $ 0 $4,429
Provision for loan losses........... 0 0 0
Other revenue....................... 492 171 663
Other expenses...................... 2,348 127 2,475
---------------------------------
Segment profit................... $2,573 $ 44 $2,617
=================================
Six months ended June 30, 1999
---------------------------------
Other Total
Banking Segments Segments
---------------------------------
Net interest income................. $8,610 $ 0 $8,610
Provision for loan losses........... 0 0 0
Other revenue....................... 874 751 1,625
Other expenses...................... 4,209 790 4,999
---------------------------------
Segment profit................... $5,275 ($ 39) $5,236
=================================
Six months ended June 30, 1998
---------------------------------
Other Total
Banking Segments Segments
---------------------------------
Net interest income................. $8,776 $ 0 $8,776
Provision for loan losses........... 10 0 10
Other revenue....................... 946 342 1,288
Other expenses...................... 4,692 253 4,945
---------------------------------
Segment profit................... $5,020 $ 89 $5,109
=================================
16
<PAGE> 18
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion focuses on the consolidated financial conditions
of the Northern States Financial Corporation (the "Company") at June 30, 1999
and the consolidated results of operations for the three and six month periods
ending June 30, 1999, compared to the same periods of 1998. The purpose of this
discussion is to provide a better understanding of the condensed consolidated
financial statements and the operations of its subsidiary, the Bank of Waukegan
(the "Bank"). 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 June 30, 1999 to differ
materially from those expressed in any such forward-looking statements.
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 merger became effective April 21, 1998 with the
Bank of Waukegan as the surviving entity in the merger.
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. The
stockholders approved the 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
were mailed on May 15, 1998. Book value per share, basic earnings per share,
diluted earnings per share and all omnibus incentive plan information have been
restated for all periods to reflect the effect of the 5-for-1 stock split.
FINANCIAL CONDITION
The consolidated total assets for the Company were $471.5 million at June
30, 1999, decreasing $14.4 million from the Company's year-end, December 31,
1998.
The Company had no federal fund sold at June 30, 1999, a decline of $12.6
million from December 31, 1998. The Company's federal funds sold position
declined, as there was some seasonal deposit runoff during the second quarter of
1999.
The fair value of securities at June 30, 1999 was $199.9 million decreasing
slightly by $1.0 million from the previous year-end. Actual amortized cost
increases to the securities portfolio totaled $3.4 million from year-end. The
net unrealized losses of the portfolio, however, were $4.4 million for the six
months ended June 30, 1999. The securities portfolio went to a net unrealized
loss at June 30, 1999 of $3.4 million from a net unrealized gain at December 31,
1998 of $1.0 million. This shift is attributable to bond market rate increases.
The amortized cost of the securities portfolio showed decreases to U.S. Treasury
securities of $3.0 million, to mortgage-backed securities of $1.5 million and to
securities issued by state and political subdivisions of $.5 million. These
declined were offset by increases to the amortized cost of U.S. Government
agency issues of $8.4 million.
17
<PAGE> 19
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company's loans decreased $3.7 million or 1.52% from December 31, 1998.
Competitive pressures and uncertainty about the economy and interest rates have
contributed to the decline in loans. The decrease in loans occurred primarily in
the commercial loan portfolio, which decreased $7.0 million. A portion of the
decrease in the commercial loan portfolio was the result of the reclassification
of a $2.5 credit from a commercial loan to a real estate - mortgage loan due to
the use of commercial property to secure the loan. Real estate - construction
loans increased $3.6 million with construction business increasing from the
winter months. Real estate - mortgages decreased slightly by $.2 million. During
the first quarter of 1999 a real estate - mortgage loan that was nonperforming
at year-end of $3.0 million was transferred to other real estate owned in the
amount of $2.5 million after being reduced $.5 million that was charged to the
allowance for loan losses. The resulting decrease to real estate - mortgage
loans was offset by the reclassification of the $2.5 commercial loan to the real
estate - mortgage portfolio. During the first half of 1999 the Company
transferred loans held for sale, classified as real estate - mortgages, with a
book value and fair value of $2.5 million to portfolio loans. The consumer
installment loan portfolio declined $.5 million from year-end while home equity
loans increased $.4 million.
At June 30, 1998 deposits at the Company declined $10.6 million from
December 31, 1998. Most of the decline was in the area of deposits from public
entities, which declined $7.6 million from year-end. The Company is located in
the county seat and accepts deposits from local municipalities and various
government agencies. Due to the nature of county property tax collections there
is a cyclical nature to public deposits. As public deposit balances decline,
remaining public deposit balances are transferred from certificates of deposit
to more liquid deposits such as NOW accounts.
NOW accounts increased from year-end by $9.9 million as the result of
public depositors shifting funds from time deposits. During the third quarter of
1999 the NOW balance is expected to decrease as public depositors receive
payment of county property taxes and make investment decisions. Savings deposits
also increased slightly by $.9 million. Demand accounts declined slightly by $.4
million while money market accounts decreased $1.1 million. Total time deposits
declined $19.9 million, which is attributable to decreases in public time
deposits of $100,000 and over.
Securities sold under repurchase agreements and other short-term borrowings
at the Company increased $3.1 million from December 31, 1998 to $51.1 million at
June 30, 1999. 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.
On June 30, 1999 the Company had term advances from the Federal Home Loan
Bank in the amount of $5.0 million, a decrease of $5.0 million from December 31,
1998. The funds provided by the term advances has been used to purchase U.S.
Government agency securities with call provisions on the same date that the
advances are due to be repaid. During the second quarter a term advance of $5.0
million came due and the underlying U.S. Government agency securities were
called and used to retire the term advance.
Total stockholders' equity decreased $585,000 during the six months ended
June 30, 1999. The decline is the result of net income of $3,620,000, less the
adjustment in the valuation allowance for the market value of securities
available-for-sale, net of tax, of $2,686,000, plus $42,000 due to the exercise
of 4,945 stock options pursuant to the Omnibus Incentive Plan, less cash
dividends paid of $1,561,000.
18
<PAGE> 20
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The tier 1 capital to average asset ratio at June 30, 1999 was 15.28% and
the total capital to asset ratio, on a risk adjusted basis, amounted to 22.68%,
exceeding the minimum required to be capitalized under prompt corrective action
regulations, which minimums are 5.00% and 10.00%. Book value per share, was
$14.47 at June 30, 1999 as compared to $14.63 at December 31, 1998. On June 30,
1999, the Company and its subsidiary were in compliance with all applicable
regulatory capital requirements.
RESULTS OF OPERATIONS
NET INCOME
The consolidated net income for the quarter ended June 30, 1999 was
$1,832,000, an increase of $36,000 or 2.00%, as compared to net income of
$1,796,000 for the same period the previous year. The annualized return on
average assets was 1.57% for the quarter, which was slightly higher than the
return on average assets for the quarter the previous year of 1.55%. The
consolidated net income for the six months ended June 30, 1999 was $3,620,000,
an increase of $98,000, over the first half of 1998. The annualized return on
average assets for the first six months of 1999 was 1.54%, which was slightly
higher than the return on average assets for the same period the previous year,
which was 1.53%.
NET INTEREST INCOME
Net interest income, the difference between interest income earned on
average interest earning assets and interest expense on average interest bearing
liabilities, decreased $82,000 or 1.85% during the three months ended June 30,
1999, compared to the same three months in 1998. The decrease in net interest
income for the second quarter of 1999 resulted from the decline in the net yield
on interest earning assets. This is shown in Table 1, "Analysis of Average
Balance and Tax Equivalent Rates for the Three Months ended June 30, 1999 and
1998", where the net yield on interest earning assets during the second quarter
of 1999 was 4.09% as compared to 4.16% during the same quarter last year. Table
1 shows the yield on interest earning assets declined to 7.38% during the second
quarter of 1999 as compared to 7.92% last year. Table 1 also indicates that
rates paid on interest bearing liabilities declined to 4.13% during the three
months ended June 30, 1999 as compared to 4.72% for the same period last year.
Competitive pressures are responsible for the compression of the net yield on
interest earning assets. During the second quarter of 1999 management decreased
the rates offered on savings and NOW deposits by 25 basis points in order to
increase the net yield on interest earning assets.
During the first six months of 1999, net interest income decreased $166,000
or 1.89% over the same period of 1998. Table 2, "Analysis of Average Balance and
Tax Equivalent Rates for the Six Months ended June 30, 1999 and 1998" shows that
the Company's net yield on interest earning assets was 4.02% for the first six
months of 1999 as compared to 4.15% in 1998. The decline of the net yield on
interest earning assets is attributable to competitive pressures. Management's
lowering of savings and NOW deposit rates by 25 basis points is expected to have
a positive impact on the net yield on earning assets by reducing interest
expense.
19
<PAGE> 21
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended June 30, 1999 and 1998
($ 000s)
<TABLE>
<CAPTION>
1999 1998
--------------------------------------- ----------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3) $241,777 $5,112 8.46% $242,050 $5,582 9.22%
Taxable securities 170,233 2,551 5.96% 163,768 2,535 6.20%
Securities exempt from
Taxes (2) 21,150 398 7.69% 18,797 376 8.28%
Interest bearing deposits in banks 386 6 6.22% 438 10 9.13%
Federal funds sold 7,847 93 4.74% 17,212 235 5.46%
---------------------------- ----------------------------
Interest earning assets 441,393 8,160 7.38% 442,265 8,738 7.92%
-------------- --------------
Noninterest earning assets 26,826 21,160
-------------- --------------
Average assets $468,219 $463,425
============== ==============
Liabilities and stockholders' equity
NOW deposits $ 46,017 302 2.63% $ 40,052 285 2.85%
Money market deposits 41,185 359 3.49% 40,953 406 3.97%
Savings deposits 46,111 322 2.79% 44,799 333 2.97%
Time deposits 168,053 2,069 4.92% 181,478 2,545 5.61%
Other borrowings 51,110 591 4.63% 44,463 583 5.24%
---------------------------- ----------------------------
Interest bearing
liabilities 352,476 3,643 4.13% 351,745 4,152 4.72%
-------------- --------------
Demand deposits 42,823 40,553
Other noninterest bearing liabilities 6,969 9,452
Stockholders' equity 65,951 61,675
-------------- --------------
Average liabilities and
stockholders' equity $468,219 $463,425
============== ==============
Net interest income $4,517 $4,586
============== ==============
Net yield on interest
earning assets 4.09% 4.16%
=========== ============
Interest bearing liabilities to
earning assets Ratio 79.74% 79.68%
=========== ============
</TABLE>
(1)-Interest income on loans includes loan origination fees of $83 and $160 for
the three months ended June 30, 1999 and 1998.
(2)-Tax-exempt income is reflected on a fully tax equivalent basis utilizing a
34% rate.
(3)-Non-accrual loans are included in average loans.
20
<PAGE> 22
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Six Months Ended June 30, 1999 and 1998
($ 000s)
<TABLE>
<CAPTION>
1999 1998
--------------------------------------- -------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3) $243,227 $10,284 8.46% $242,036 $11,166 9.23%
Taxable securities 169,343 5,057 5.95% 161,692 5,039 6.24%
Securities exempt from
Federal income taxes (2) 21,338 799 7.69% 19,209 765 8.26%
Interest bearing deposits in banks 311 9 5.79% 569 19 6.68%
Federal funds sold 10,742 253 4.71% 16,534 453 5.48%
---------------------------- -------------------------------
Interest earning assets 444,961 16,402 7.37% 440,040 17,442 7.94%
-------------- ---------------
Noninterest earning assets 25,385 21,072
-------------- ----------------
Average assets $470,346 $461,112
============== ================
Liabilities and stockholders' equity
NOW deposits $ 43,634 583 2.67% $ 38,717 576 2.98%
Money market deposits 41,823 725 3.47% 41,120 813 3.95%
Savings deposits 45,649 653 2.86% 44,494 656 2.95%
Time deposits 172,257 4,269 4.96% 183,303 5,154 5.62%
Other borrowings 51,642 1,220 4.72% 43,590 1,143 5.24%
---------------------------- -------------------------------
Interest bearing liabilities 355,005 7,450 4.20% 351,224 8,342 4.75%
-------------- ---------------
Demand deposits 42,569 39,538
Other noninterest bearing liabilities 7,009 9,014
Stockholders' equity 65,763 61,336
-------------- ----------------
Average liabilities and
stockholders' equity $470,346 $461,112
============== ================
Net interest income $8,952 $9,100
============== ===============
Net yield on interest
earning assets 4.02% 4.15%
=========== ============
Interest bearing
liabilities to
earning assets ratio 79.79% 79.99%
=========== ============
</TABLE>
(1)-Interest income on loans includes loan origination fees of $175 and $290
for the six months ended June 30, 1999 and 1998.
(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.
21
<PAGE> 23
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROVISION FOR LOAN LOSSES
There was no provision for loan losses during the three months ended June
30, 1999 and June 30, 1998. For the six months ended June 30, 1999, there was no
provision for loan losses compared to $10,000 for the six months ended June 30,
1998. Management, with the concurrence of the Board of Directors, lowered the
provision for loan losses during 1999 after a careful review of the adequacy of
the allowance for loan losses and the levels of nonperforming and impaired
loans.
At June 30, 1999, the allowance for loan losses was $4,799,000 or 1.98% of
loans as compared to 2.21% of loans at December 31, 1998. Nonperforming loans,
at June 30, 1999, were $352,000, down from $4,117,000 at December 31, 1998.
Impaired loans were only $491,000 or .20 % of loans at June 30, 1999 as compared
to impaired loans of $3,515,000 at December 31, 1998 or 1.43% of loans. The
amount of the allowance for loan losses allocated for impaired loans at June 30,
1999 declined to $74,000 from $544,000 at December 31, 1998. Loan charge offs to
the allowance for loan losses have during the first six months of 1999 were
$660,000 as compared to $6,000 during the same period of 1998. During the first
six months of 1999 recoveries of loans previously charged off were $26,000 as
compared to $32,000 during the same period in 1998.
Management, during the first quarter of 1999, charged off $500,000 of a
nonperforming credit of $3,010,000 secured by a 57,000 square foot office
building located in Northbrook, Illinois. The balance of this credit,
$2,510,000, was transferred to other real estate owned. At June 30, 1999 there
was a sales contract on this property. After June 30, 1999 the sale subsequently
closed with other real estate owned reduced by $2,150,000 and with $500,000 of
the proceeds credited to the allowance for loan losses as a recovery.
Management and the Board of Directors analyze the adequacy of the allowance
for loan losses 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 June 30, 1999 is adequate to cover
future possible loan losses. If the level of impaired and nonperforming loans
remains low during the remainder of 1999, no additional loan loss provision is
budgeted for the remainder of 1999.
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 1999 was $713,000 as
compared to $663,000 for the three months ended June 30, 1998, an increase of
$50,000. Service fees on deposits decreased slightly by $7,000 as compared to
the same quarter last year. Trust fee income increased $13,000 during the three
months ended June 30, 1999 due to increased trust business. Income from mortgage
banking activities was $35,000 during the first quarter of 1999; an increase of
$33,000 from last year as management expanded this operating segment beginning
in August 1998. The $35,000 in mortgage banking income consist of fees earned by
the Bank on "table funded" loans as well as fees for appraisals and credit
bureau costs from borrowers of both "table funded" loans and loans originated
and funded by the Bank and sold on the secondary market. Other income from gains
on sales on loans declined $27,000 during the second quarter of 1999, as there
were less loan sales as compared to the previous year as
22
<PAGE> 24
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
mortgage rates had significantly increased during the second quarter of 1999.
Other operating income during the second quarter of 1999 was $38,000 more than
the same period last year resulting from instituting charges for noncustomer use
of Company owned automated teller machines.
For the first six months of 1999 noninterest income was $1,625,000 as
compared to $1,288,000 for the same period of 1998, an increase of $337,000.
Service fees on deposits were $12,000 less during the first half of 1998 as
compared to the same period last year because of decreased service charge income
on checking and NOW accounts of $10,000. Trust income for the six months ended
June 30, 1999 increased $39,000 as a result of increased fiduciary activities.
Mortgage banking income was $217,000 during the first half of 1999, increasing
$194,000 from last year as management expanded this operating segment beginning
in August 1998. Gains on sales of loans decreased $5,000 during the first half
of 1999 compared to the same period of 1998 as mortgage interest rates increased
during the second quarter of 1999. The higher mortgage rates lowered the volume
of mortgage loans originated for sale on the secondary market. Other operating
income increased $121,000 during the six months ended June 30, 1999 as the
Company realized a $74,000 gain on the sale of a branch office. With the merging
of First Federal Bank, fsb with the Bank of Waukegan in April 1998 the Bank had
two branches within two city blocks of one another. The Bank closed the smaller
of the two branches during 1998 and entered into a sales contract with a party
who wished to purchase the branch for a purpose other than banking. The sale was
completed during January 1999 with proceeds from the sale of $257,000. Other
operating income also increased by $39,000 as the Company began charging
noncustomers for use of Company owned automated teller machines.
NONINTEREST EXPENSES
Noninterest expenses were $2,407,000 during the three months ended June 30,
1999 a decline of $68,000 from the same quarter last year. The Company's
efficiency ratio, noninterest expenses divided by the sum of net interest income
and noninterest income, was 47.57% for the second quarter of 1999 as compared to
48.61% for the same quarter of 1998. 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.
Increases in salary and employee benefits expenses of $18,000 occurred
during the second quarter of 1999 compared to the same period last year, an
increase of 1.22%. Expenses relating to salaries for the mortgage banking
segment were $46,000 greater during the second quarter of 1999 as management
expanded this operating segment beginning in August 1998. Group insurance rates
increased $28,000 during the second quarter of 1999 compared to the same period
last year as coverage provided by a three year policy expired at December 31,
1998 and new coverage was obtained but at a much higher rate for 1999. Salary
expense relating to stock appreciation rights issued under the Omnibus Incentive
Plan was $44,000 less during the three months ended June 30, 1999 than in the
same three months last year. Unemployment insurance premiums were also $7,000
less for the quarter compared to last year.
23
<PAGE> 25
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Occupancy expenses for the second quarter of 1999 were $330,000, $8,000
higher when compared to the second quarter of 1998. During the fourth quarter of
1998 the Bank purchased a branch office in the neighboring community of Winthrop
Harbor, Illinois, from another financial institution for $1,000,000 and opened
the branch in November 1998. The Bank did not purchase any assets or liabilities
other than the branch building. The Bank sold another of its branch buildings
located two blocks from the Bank's main office during the first quarter of 1999
that had a book value of only $183,000. The result of these developments was
that the Bank operates six branch offices, has expanded its geographic presence,
and has increased its building and equipment depreciation expenses during 1999.
Data processing expense declined $23,000 during the three months ended June
30, 1999 to $122,000. During the second quarter of 1998 the Company experienced
increased data processing expenses related to the merger between the Bank of
Waukegan and First Federal Bank, fsb that became effective April 21, 1998.
FDIC insurance was $22,000 during the three months ended June 30, 1999
which remained unchanged from the same period last year.
Other real estate owned expenses declined during the second quarter of 1999
by $20,000 even though the other real estate loan portfolio increased during
1999 to $5,007,000 at June 30, 1999 from $2,547,000 at June 30, 1998. Rents
received on the properties helped to keep expensed low and real estate taxes on
these properties declined due to a decreased assessed valuation to one of the
properties.
Miscellaneous other operating expenses decreased $51,000 during the three
months ended June 30, 1999 compared to the same three months last year. Legal
expenses were $53,000 less during the second quarter of 1999. During second
quarter of 1998 there were additional legal expenses relating to the merger
between the Bank of Waukegan and First Federal Bank, fsb and the five-for-one
stock split which both occurred during the second quarter of 1998.
During the six months ended June 30, 1999, total noninterest expenses were
$4,999,000 or $54,000 greater than during the same period last year, an increase
of 1.09%. The Company's efficiency ratio for the first half of 1999 was 48.84%
as compared to 49.14% for the first half of 1998.
Salaries and employee benefit expenses increased 1.56% or $47,000 during
the six months ending June 30, 1999 as compared to the same period last year.
Annual salary increases and the payment of increased commissions due to
expansion of the mortgage banking department were $140,000 higher during the
half year ended June 30, 1999 compared to the same period last year. Group
insurance expense increased $95,000 during the first two quarters of 1999
compared to the same period last year due to premium rate increases. Decreases
to the Company's stock price lowered salary expenses relating to stock
appreciation rights by $198,000 from last year.
Occupancy expenses were $72,000 greater during the first six months of 1999
when compared to the same period of 1998. Depreciation expenses for building and
equipment were $57,000 higher than for the same period of 1998. The purchase and
opening of a new branch office in the neighboring community of Winthrop Harbor,
Illinois accounts for much of the increases in depreciation expenses. Building
and equipment maintenance costs, many related to the new branch office, also
increased $21,000 during the first six months of 1999 compared to 1998.
24
<PAGE> 26
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Data processing expense was $9,000 lower during the first six months of 1999
when compared to the same period of 1998. Data processing expense was greater
during the first half of 1998 because of the merger of the Bank of Waukegan and
First Federal Bank, fsb.
FDIC deposit insurance expense was $43,000 for the first two quarters of
1999, remaining unchanged from the same period last year.
Other real estate owned expenses declined $23,000 during the six months
ending June 30, 1999 as compared to the same period last year as rents from
other real estate increased with the addition of another building to the other
real estate owned portfolio. Lower property taxes on the other real estate owned
portfolio also contributed to the decreases in other real estate owned expenses.
Miscellaneous other operating expenses were $33,000 less for the six months
ending June 30, 1998 than they were the same period last year. Legal expenses
declined $97,000 during the first half 1999 because there had been increased
legal expenses in 1998 resulting from the merger between the two subsidiaries
and the five-for-one stock split that both occurred during 1998. Due to the
expansion the mortgage banking area there were increases during the first half
of 1999 to loan expenses of $63,000.
YEAR 2000
The Company, in compliance with the Federal Financial Institutions
Examination Council (FFIEC) 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 the
awareness, assessment and renovation phases of its action plan, and the testing
phase is well under way. During 1998 the Company purchased and installed new
hardware and software for its item processing and teller platform systems in
order to bring them up to Year 2000 standards. The combined cost of these
projects was $216,000. It is anticipated that the Company will incur $50,000 in
additional Year 2000 costs in 1999.
The major risk to the Company is that its data systems will inaccurately
calculate date-related accrual of interest on loans and deposits because of the
Year 2000. This would impact customer confidence and Company earnings. Another
risk to the Company is that its loan customers' businesses will be impaired by
the Year 2000 in such a way that payments will not be made in a timely fashion.
The Company has completed a risk assessment of its entire loan portfolio rating
each loan customer as to how susceptible the customer's business may be to Year
2000 risks. Those loan customers which were assessed as having medium to high
Year 2000 risks have been contacted to make them aware of possible problems
caused by the Year 2000 and to request information as to the borrower's state of
preparedness to Year 2000 issues. Information provided by our customers will
allow the Company to better determine possible external risks caused by the Year
2000. The Company continues to monitor and work with these borrowers.
25
<PAGE> 27
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The Company has instituted a customer awareness program in which information
has been mailed to customers which discusses the Year 2000 problem in general
and discloses the Bank's state of preparedness for the Year 2000. Efforts to
communicate the Bank's preparedness to customers are expected to continue during
1999 in order to steady customer fears regarding this issue.
A majority of the Company's data processing is performed by an outside bank
data processing service bureau which has assured the Company that their core
products are fully Year 2000 compliant. Despite these assurances, the Company
did participate in an in depth proxy testing program, which was conducted by the
service bureau's User's Group. The results of this testing were reviewed by an
independent auditing firm and have confirm the service bureau's initial
statements of Year 2000 compliance.
The Company has developed both Remediation and Business Resumption
contingency plans to deal with possible Year 2000 problems, both prior to and
immediately following the century date change. Some strategies of these plans
include: 1) printing, prior to December 31, 1999, trial balances and other
internal reports, 2) printing account histories prior to December 31, 1999, 3)
modification of the Bank's liquidity policy to take into consideration the Year
2000 as it relates to the Bank's liquidity, and 4) testing and training of staff
on contingency plan procedures. These plans and strategies serve as a way of
dealing with Year 2000 problems if they should result despite our best efforts
to anticipate and avoid them.
Although management is confident that the Company has identified all
necessary upgrades to it's equipment, and budgeted accordingly, no assurance can
be made that Year 2000 compliance can be achieved without additional
unanticipated expenditures. It is not possible at this time to quantify the
estimated costs due to business disruption caused by vendors, suppliers,
customers or even the loss of electric power or telephone service; however, such
costs could be substantial. As a result of the Year 2000 project, the Company
has not had any material delay regarding its information systems projects.
FEDERAL AND STATE INCOME TAXES
For the three months ended June 30, 1999 and 1998, the Company's provision
for federal and state income taxes was $821,000 for both periods, which as a
percentage of pretax earnings was 30.95% and 31.37%. For the six months ended
June 30, 1999, the Company's provision for federal and state taxes was
$1,616,000 or 30.86% of pretax earnings as compared to $1,587,000 or 31.06% of
pretax earnings for the six months ending June 30, 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued by the Financial
Accounting Standards Board (FASB) in 1998 and is effective for the Company on
January 1, 2000. It requires that all derivatives be recorded at fair value in
the balance sheet, with changes to fair value charged or credited to income. If
derivatives are documented and effective as hedges, the change in derivative
fair value will be offset by an equal change in the fair value of the hedged
item. Since the Company has no derivative or hedging activities, adoption of
Statement 133 will have no material impact on the Company's financial
statements.
26
<PAGE> 28
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise", became effective for the Company as of January 1, 1999. The
statement allows securitized mortgage loans to be classified as trading,
available for sale, or in certain circumstances, held to maturity. Previously,
these had to be classified as trading. Since the Company has not securitized
mortgage loans, Statement 134 has not affected the Company.
American Institute of Certified Public Accountants Statement of Position
(SOP) 98-1, which became effective in 1999, sets the accounting requirements to
capitalize costs incurred to develop or obtain software that is to be used
solely to meet internal needs. Costs to capitalize are those direct costs
incurred after the preliminary project stage, up to the date when all testing
has been completed, and the software is substantially ready for use. All
training costs, research and development costs, costs incurred to convert data,
and all other general and administrative costs are expensed as incurred. The
capitalized cost of internal use software is to be amortized over its useful
life and reviewed for impairment using the criteria in Statement No. 121. SOP
98-1 has not had an impact on the Company.
SOP 98-5, which became effective in 1999, requires all start up, preopening
and organization costs to be expensed as incurred. Any such costs previously
capitalized for financial reporting purposes must be written off to income at
the start of the year. SOP 98-5 has not had an impact on the Company.
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 IRR, which will form the basis for ongoing evaluation of the
adequacy of IRR 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
27
<PAGE> 29
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
these elements in the context of managing IRR. Specifically, the guidance
emphasizes the need for active board of director and management oversight and a
comprehensive risk-management process that effectively identifies, measures, and
controls IRR. One approach used by management is to minimize IRR is to
periodically shock the balance sheet by decreasing rates 2% and increasing rates
2% using computer simulation to show the effect of rate changes on the fair
value of the Company. Another 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.
Both approaches fall under the broad definition of asset/liability management.
The Company's primary asset/liability management techniques are the interest
rate shock and 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 IRR 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, a debtor may prepay other financial assets so that
the debtor may refinance their 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. Increasing deposits, borrowing, or selling assets can
obtain these funds.
The following Table 3 shows information as of March 31, 1999 and December
31, 1998 about how interest rate shocks of decreasing rates 2% and increasing
rates 2% effect the fair value of the Company's balance sheet. Table 3 shows,
because of the Company's gap position, that the fair value of the Company would
increase $20.8 million if rates immediately drop 2% or decrease $19.3 million if
rates immediately rise 2% at March 31, 1999. Table 3 also shows that the effect
of interest rate shocks at December 31, 1998 would also increase the fair value
of the Company if rates drop and decrease the fair value if rates rise. Tables 4
and 5 provide information about the Company's financial instruments that are
sensitive to changes in interest rates as of December 31, 1998 and 1997. The
Company believes that the assumptions utilized by the tables are reasonable. The
expected maturity date values for loan receivable, 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 estimated to be 5%
each year although these may be withdrawn over 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
may be a more relevant in analyzing such instruments. Similarly, 52.17% of the
Company's investment securities portfolio at December 31, 1998 is comprised of
callable securities.
28
<PAGE> 30
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
TABLE 3
NORTHERN STATES FINANCIAL CORPORATION
EFFECT OF INTEREST SHOCKS ON FINANCIAL INSTRUMENTS
as of March 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
Fair Value at March 31, 1999
--------------------------------------------------
Down 2% Current Up 2%
--------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 36,084 $ 36,083 $ 36,082
Interest bearing deposits in financial
institutions - maturities over 90 days 101 100 99
Securities available for sale 193,595 181,408 170,275
Loans 250,062 241,467 233,294
Direct lease financing 979 964 951
Other assets 17,840 17,840 17,840
--------------------------------------------------
Total assets $498,661 $477,862 $458,541
==================================================
Financial liabilities:
Deposits $348,816 $343,687 $335,902
Securities sold under repurchase agreements
and other short-term 45,819 45,815 45,811
borrowings
Federal Home Loan Bank term advances 8,845 8,315 7,861
Other liabilities 10,331 6,130 2,388
--------------------------------------------------
Total liabilities 413,811 403,947 391,962
--------------------------------------------------
Total equity 84,850 73,915 66,579
--------------------------------------------------
Total liabilities and equity $498,661 $477,862 $458,541
==================================================
<CAPTION>
Fair Value at December 31, 1998
--------------------------------------------------
Down 2% Current Up 2%
--------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 27,960 $ 27,959 $ 27,958
Interest bearing deposits in financial
institutions - maturities over 90 days 101 100 99
Securities available for sale 213,608 200,861 189,199
Loans 259,503 250,721 242,283
Direct lease financing 1,017 1,001 987
Other assets 15,238 15,238 15,238
--------------------------------------------------
Total assets $517,427 $495,880 $475,764
==================================================
Financial liabilities:
Deposits $363,356 $356,971 $350,093
Securities sold under repurchase agreements
and other short-term 47,994 47,990 47,986
borrowings
Federal Home Loan Bank term advances 9,039 8,482 8,005
Other liabilities 7,062 7,062 7,062
--------------------------------------------------
Total liabilities 427,451 420,505 413,146
--------------------------------------------------
Total equity 89,976 75,375 62,618
--------------------------------------------------
Total liabilities and equity $517,427 $495,880 $475,764
==================================================
</TABLE>
29
<PAGE> 31
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
TABLE 4
NORTHERN STATES FINANCIAL CORPORATION
EXPECTED MATURITY DATES OF ON BALANCE SHEET
FINANCIAL INSTRUMENTS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
____________________ Maturing In___________________
($ 000s) 1999 2000 2001 2002 2003 Thereafter Totals Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (1)(2)
Fixed rate $23,539 $12,282 $18,001 $24,140 $21,407 $30,352 $129,721 135,604
Average interest rate 8.48% 8.62% 8.82% 8.44% 8.50% 7.11% 8.22%
Adjustable rate 38,072 15,448 10,279 13,027 6,446 33,728 117,000 121,062
Average interest rate 8.41% 8.44% 8.25% 8.15% 8.42% 8.20% 8.31%
Securities
Fixed rate 20,677 12,225 24,787 36,620 53,155 47,027 194,491 194,491
Average interest rate 5.95% 6.64% 6.33% 6.14% 5.92% 6.23% 6.14%
Adjustable rate 1,000 0 0 0 0 5,370 6,370 6,370
Average interest rate 6.15% 0.00% 0.00% 0.00% 0.00% 6.52% 6.46%
Interest-bearing deposits
and federal funds sold
Fixed rate 0 100 0 0 0 0 100 100
Average interest rate 0.00% 7.41% 0.00% 0.00% 0.00% 0.00% 7.41%
Adjustable rate 12,783 0 0 0 0 0 12,783 12,783
Average interest rate 4.59% 0.00% 0.00% 0.00% 0.00% 0.00% 4.59%
Direct lease financing
Fixed rate 665 99 100 123 0 0 987 1,001
Average interest rate 8.13% 8.02% 6.58% 7.44% 0.00% 0.00% 7.87%
-------------------------------------------------------------------------------------------
Total $96,736 $40,154 $53,167 $73,910 $81,008 $116,477 $461,452 $471,411
===========================================================================================
Interest-bearing Liabilities:
Interest-bearing deposits (3)
Balances $171,816 $20,469 $11,729 $5,428 $5,112 $97,127 $311,681 $312,896
Average interest rate 5.00% 5.03% 4.46% 3.08% 3.06% 3.06% 4.31%
Borrowings
Balances 46,990 6,000 0 0 0 5,000 57,990 56,472
Average interest rate 5.00% 4.99% 0.00% 0.00% 0.00% 4.75% 4.98%
-------------------------------------------------------------------------------------------
Total $218,806 $26,469 $11,729 $5,428 $5,112 $102,127 $369,671 $369,368
===========================================================================================
</TABLE>
(1) Does not include net deferred loan fees, unearned income or the allowance
for loan losses.
(2) For fixed rate loans maturities are based on aggregate payments due.
(3) For NOW, money market and savings deposits all balances assumed 5% maturity
each yr.
30
<PAGE> 32
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
TABLE 5
NORTHERN STATES FINANCIAL CORPORATION
EXPECTED MATURITY DATES OF ON BALANCE SHEET
FINANCIAL INSTRUMENTS AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
____________________ Maturing In___________________
($ 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 $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) For NOW, money market and savings deposits all balances assumed 5% maturity
each yr.
31
<PAGE> 33
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 13th day of August 1999.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Date: August 13, 1999 By: /s/ Fred Abdula
-------------------------- --------------------------------------
Fred Abdula
Chairman of the Board of
Directors and President
Date: August 13, 1999 By: /s/ Thomas M. Nemeth
--------------------------- --------------------------------------
Thomas M. Nemeth
Vice President and Treasurer
32
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 14,133
<INT-BEARING-DEPOSITS> 296
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 199,865
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 243,393
<ALLOWANCE> 4,799
<TOTAL-ASSETS> 471,498
<DEPOSITS> 345,109
<SHORT-TERM> 51,083
<LIABILITIES-OTHER> 5,778
<LONG-TERM> 5,000
0
0
<COMMON> 1,783
<OTHER-SE> 62,745
<TOTAL-LIABILITIES-AND-EQUITY> 471,498
<INTEREST-LOAN> 10,214
<INTEREST-INVEST> 5,584
<INTEREST-OTHER> 262
<INTEREST-TOTAL> 16,060
<INTEREST-DEPOSIT> 6,230
<INTEREST-EXPENSE> 7,450
<INTEREST-INCOME-NET> 8,610
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,999
<INCOME-PRETAX> 5,236
<INCOME-PRE-EXTRAORDINARY> 5,236
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,620
<EPS-BASIC> .81
<EPS-DILUTED> .81
<YIELD-ACTUAL> 4.02
<LOANS-NON> 304
<LOANS-PAST> 48
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,433
<CHARGE-OFFS> 660
<RECOVERIES> 26
<ALLOWANCE-CLOSE> 4,799
<ALLOWANCE-DOMESTIC> 2,877
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,922
</TABLE>
