<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 September 30, 2000
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:
------ ------
4,460,845 shares of common stock were outstanding
as of September 30, 2000
<PAGE> 2
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements Page Number
<S> <C>
Independent Accountants' Report....................................................................2
Condensed consolidated balance sheets as of September 30,
2000, December 31, 1999 and September 30, 1999................................................... 3
Condensed consolidated statements of income for the three and
nine months ended September 30, 2000 and 1999.....................................................4
Condensed consolidated statements of comprehensive income
the three and nine months ended September 30, 2000 and 1999.......................................5
Condensed consolidated statements of cash flows for
the nine months ended September 30, 2000 and 1999.................................................6
Notes to condensed consolidated financial statements.......................................... 7- 17
Item 2. Management's discussion and analysis of financial condition and
results of operations.................................................................. 18 - 26
Item 7A. Quantitative and qualitative disclosures about market risk............................. 27 - 28
PART II. OTHER INFORMATION
Signatures........................................................................................29
</TABLE>
<PAGE> 3
NORTHERN STATES FINANCIAL CORPORATION
FORM 10-Q
SEPTEMBER 30, 2000
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Northern States Financial Corporation
Waukegan, Illinois
We have reviewed the condensed consolidated balance sheet of NORTHERN
STATES FINANCIAL CORPORATION as of September 30, 2000 and the related condensed
consolidated statements of income and comprehensive income for the three-month
and nine-month periods ended September 30, 2000 and 1999 and the condensed
consolidated statements of cash flows for the nine-month period ended September
30, 2000 and 1999. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
---------------------------------------
Oak Brook, Illinois
October 26, 2000
2
<PAGE> 4
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000, December 31, 1999 and September 30, 1999
(In thousands of dollars) (Unaudited)
<TABLE>
<CAPTION>
September 30, December 31, September 30,
Assets 2000 1999 1999
------------- ------------ -------------
<S> <C> <C> <C>
Cash and due from banks........................................... $ 14,153 $ 16,740 $ 18,224
Interest bearing deposits in financial institutions -
maturities less than 90 days.................................. 189 160 185
Federal funds sold................................................ 15,000 0 0
-------- -------- --------
Total cash and cash equivalents................................ 29,342 16,900 18,409
Interest bearing deposits in financial institutions -
maturities over 90 days....................................... 0 100 100
Securities available for sale..................................... 189,039 196,684 201,247
Loans............................................................. 282,248 248,162 242,409
Less: Allowance for loan losses................................... (5,313) (5,368) (5,335)
-------- -------- --------
Loans, net..................................................... 276,935 242,794 237,074
Direct lease financing............................................ 2,366 2,138 1,449
Office buildings and equipment, net............................... 5,901 6,176 6,259
Other real estate owned, net of allowance for losses
of $552 at September 30, 1999.................................. 2,622 2,622 2,497
Accrued interest receivable....................................... 5,263 4,361 4,862
Other assets...................................................... 4,098 4,906 3,547
-------- -------- --------
Total assets................................................... $515,566 $476,681 $475,444
======== ======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest bearing................................... $ 44,065 $ 41,261 $ 41,666
NOW accounts................................................... 40,823 41,787 56,103
Money market accounts.......................................... 33,866 37,636 38,909
Savings........................................................ 42,978 44,207 45,888
Time, $100,000 and over........................................ 97,586 83,266 85,162
Time, under $100,000........................................... 102,823 86,094 85,361
-------- -------- --------
Total deposits.............................................. 362,141 334,251 353,089
Securities sold under repurchase agreements
and other short-term borrowings................................ 65,658 70,436 45,608
Federal Home Loan Bank advance.................................... 10,000 0 5,000
Advances from borrowers for taxes and insurance................... 359 645 436
Accrued interest payable and other liabilities.................... 6,929 5,815 5,261
-------- -------- --------
Total liabilities........................................... 445,087 411,147 409,394
Stockholders' Equity
Common stock...................................................... 1,784 1,783 1,783
Additional paid-in capital........................................ 11,424 11,405 11,376
Retained earnings................................................. 59,880 55,898 55,449
Accumulated other comprehensive loss, net......................... (2,609) (3,552) (2,558)
-------- -------- --------
Total stockholders' equity..................................... 70,479 65,534 66,050
-------- -------- --------
Total liabilities and stockholders' equity..................... $515,566 $476,681 $475,444
======== ======== ========
</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 INCOME
Three months and nine months ended September 30, 2000 and 1999
(In thousands of dollars, except per share data) (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30 September 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income
Loans (including fee income)..................................... $6,642 $5,213 $18,158 $15,427
Securities
Taxable........................................................ 2,694 2,790 8,136 7,847
Exempt from federal income tax................................. 224 257 694 784
Interest bearing deposits in financial institutions.............. 5 4 12 13
Federal funds sold............................................... 61 26 182 279
------ ------ ------ ------
Total interest income......................................... 9,626 8,290 27,182 24,350
------ ------ ------ ------
Interest expense
Time deposits.................................................... 2,827 2,088 7,666 6,357
Other deposits................................................... 939 959 2,788 2,920
Other borrowings................................................. 1,303 654 3,104 1,874
------ ------ ------ ------
Total interest expense........................................ 5,069 3,701 13,558 11,151
------ ------ ------ ------
Net interest income................................................. 4,557 4,589 13,624 13,199
Provision for loan losses........................................... 0 0 0 0
------ ------ ------ ------
Net interest income after provision for
loan losses...................................................... 4,557 4,589 13,624 13,199
------ ------ ------ ------
Noninterest income
Service fees on deposits......................................... 363 306 1,061 845
Trust income..................................................... 180 174 559 555
Mortgage banking income.......................................... 20 22 63 239
Net gains on sales of loans...................................... 0 7 0 162
Net gains on sales of other real estate owned.................... 0 157 3 157
Other operating income........................................... 155 137 501 470
------ ------ ------ ------
Total noninterest income...................................... 718 803 2,187 2,428
------ ------ ------ ------
Noninterest expense
Salaries and employee benefits................................... 1,552 1,464 4,510 4,520
Occupancy and equipment, net..................................... 300 335 921 1,019
Data processing.................................................. 117 120 358 372
FDIC deposit insurance........................................... 18 20 53 63
Other real estate owned.......................................... 45 15 77 53
Other operating expenses......................................... 476 474 1,476 1,400
------ ------ ------ ------
Total noninterest expense..................................... 2,508 2,428 7,395 7,427
------ ------ ------ ------
Income before income taxes.......................................... 2,767 2,964 8,416 8,200
Provision for income taxes.......................................... 880 932 2,516 2,548
------ ------ ------ ------
Net income.......................................................... $1,887 $2,032 $5,900 $5,652
====== ====== ====== ======
Basic earnings per share............................................ $ 0.42 $ 0.46 $ 1.32 $ 1.27
Diluted earnings per share.......................................... $ 0.42 $ 0.46 $ 1.32 $ 1.27
</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 COMPREHENSIVE INCOME
Three months and nine months ended September 30, 2000 and 1999
(In thousands of dollars) (Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income.................................................... $1,887 $2,032 $5,900 $5,652
Other comprehensive income (loss):
Unrealized gains (losses) arising during period
on securities available for sale, net of tax
of $1,324, ($323), $597 and ($2,021).................... 2,093 (510) 943 (3,196)
------ ------ ------ ------
Comprehensive income.......................................... $3,980 $1,522 $6,843 $2,456
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2000 and 1999
(In thousands of dollars) (Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities
Net income........................................................................ $ 5,900 $ 5,652
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation................................................................... 356 478
Deferred loan fees............................................................. 138 (8)
Net change in loans held for sale.............................................. 0 3,441
Net gains on sales of loans.................................................... 0 (162)
Net gain on sale of building................................................... 0 (74)
Net gain on sale of other real estate owned.................................... (3) (157)
Amortization of mortgage servicing rights...................................... 40 52
Net change in interest receivable.............................................. (902) (454)
Net change in interest payable................................................. 1,281 911
Net change in other assets..................................................... 171 108
Net change in other liabilities................................................ (167) (1,720)
------- -------
Net cash from operating activities.......................................... 6,814 8,067
------- -------
Cash flows from investing activities
Proceeds from maturities of interest-bearing deposits in financial
institutions - maturities over 90 days...................................... 100 0
Proceeds from maturities and calls of securities available for sale............ 10,559 70,677
Purchases of securities available for sale..................................... (1,374) (76,280)
Change in loans made to customers.............................................. (34,359) (2,079)
Property and equipment expenditures............................................ (81) (273)
Proceeds from sales of property and equipment..... ............................ 0 257
Proceeds from sale of other real estate owned..... ............................ 83 2,667
Net change in direct lease financing........................................... (228) (462)
------- -------
Net cash from investing activities.......................................... (25,300) (5,493)
------- -------
Cash flows from financing activities
Net increase (decrease) in:
Deposits..................................................................... 27,890 (2,667)
Securities sold under repurchase agreements
and other short-term borrowings............................................ (4,778) (2,382)
Advances from borrowers for taxes and insurance.............................. (286) (556)
Federal Home Loan Bank advance................................................. 10,000 (5,000)
Net proceeds from exercise of stock options.................................... 20 42
Dividends paid................................................................. (1,918) (1,561)
------- -------
Net cash from financing activities.......................................... 30,928 (12,124)
------- -------
Net change in cash and cash equivalents.................................................. 12,442 (9,550)
Cash and cash equivalents at beginning of period......................................... 16,900 27,959
------- -------
Cash and cash equivalents at end of period............................................... $29,342 $18,409
======= =======
Supplemental disclosures
Cash paid during the period for
Interest.................................................................... $12,277 $10,240
Income taxes................................................................ 2,446 2,498
Noncash investing activities
Transfers made from loans to other real estate owned........................ 80 2,510
Transfers made from loans held for sale to portfolio........................ 0 2,520
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 8
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(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 September 30, 2000,
December 31, 1999 and September 30, 1999. The condensed consolidated statements
of income and the condensed consolidated statements of comprehensive income are
for the three and nine months ended September 30, 2000 and 1999. The condensed
consolidated statements of cash flows are for the nine months ended September
30, 2000 and 1999.
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, 1999, 1998 and 1997.
The results of operations for the three and nine month periods ended
September 30, 2000, 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 of
4,460,845 and 4,458,345 for the three months ended September 30, 2000 and 1999
and 4,460,289 and 4,457,149 for the nine months ended September 30, 2000 and
1999. Diluted earnings per share further assumes issue of any dilutive potential
shares. Common stock information is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
---------------------------------------------
<S> <C> <C> <C>
Common shares authorized ..... 6,500,000 6,500,000 6,500,000
Common shares outstanding .... 4,460,845 4,458,345 4,458,345
Par value per share .......... $0.40 $0.40 $0.40
</TABLE>
7
<PAGE> 9
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 2 - Securities
-------------------
The amortized cost, gross unrealized gains and losses, and fair value of
securities available for sale as of September 30, 2000, December 31, 1999 and
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
September 30, 2000 Amortized Gross Unrealized Fair
------------------ Cost Gains Losses Value
----------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury .............................. $ 999 $ 0 ($1) $ 998
U.S. Government agencies and corporations .. 166,018 10 (4,383) 161,645
States and political subdivisions .......... 18,546 80 (134) 18,492
Mortgage-backed securities ................. 5,717 13 (68) 5,662
Equity securities .......................... 2,018 241 (17) 2,242
----------------------------------------
Total ................................... $193,298 $344 ($4,603) $189,039
========================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 Amortized Gross Unrealized Fair
----------------- Cost Gains Losses Value
----------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury .............................. $ 4,999 $ 0 ($1) $ 4,998
U.S. Government agencies and corporations .. 168,024 0 (5,933) 162,091
States and political subdivisions .......... 20,719 172 (181) 20,710
Mortgage-backed securities ................. 6,775 10 (73) 6,712
Equity securities .......................... 1,966 211 (4) 2,173
----------------------------------------
Total ................................... $202,483 $393 ($6,192) $196,684
========================================
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999 Amortized Gross Unrealized Fair
------------------ Cost Gains Losses Value
----------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury .............................. $ 4,997 $ 7 $ 0 $ 5,004
U.S. Government agencies and corporations .. 170,028 1 (4,456) 165,573
States and political subdivisions .......... 21,108 253 (127) 21,234
Mortgage-backed securities ................. 7,324 19 (72) 7,271
Equity securities .......................... 1,966 216 (17) 2,165
----------------------------------------
Total ................................... $205,423 $496 ($4,672) $201,247
========================================
</TABLE>
8
<PAGE> 10
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Contractual maturities of securities available for sale at September 30,
2000 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 .................... $ 9,306 $ 9,289
Due after one year through five years ...... 159,472 155,659
Due after five years through ten years ..... 16,785 16,187
---------------------
185,563 181,135
Mortgage-backed securities ................. 5,717 5,662
Equity securities .......................... 2,018 2,242
---------------------
Total ........................ $193,298 $189,039
=====================
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 $152,687 at
September 30, 2000. As of September 30, 2000, the Company held no structured
notes.
There were no sales of securities during the nine months ended September
30, 2000 and 1999.
Securities carried at $147,979 and $133,612 at September 30, 2000 and 1999
were pledged to secure public deposits, repurchase agreements and for other
purposes as required or permitted by law.
9
<PAGE> 11
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 3 - Loans
--------------
The Company makes loans to, and obtains deposits from, customers primarily
in Lake County, Illinois and surrounding areas. Most loans are secured by
specific items of collateral, including commercial and residential real estate
and other business and consumer assets.
Loans at September 30, 2000, December 31, 1999 and September 30, 1999 were
as follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
-------------------------------------------
<S> <C> <C> <C>
Commercial ........................ $ 82,369 $ 60,570 $ 54,817
Real estate - construction ........ 23,640 21,813 19,335
Real estate - mortgage ............ 148,245 142,016 145,723
Home equity ....................... 19,510 17,259 16,223
Installment ....................... 9,030 6,957 6,803
-------------------------------------------
Total loans .................... 282,794 248,615 242,901
Unearned income ................... (24) (69) (87)
Deferred loan fees ................ (522) (384) (405)
-------------------------------------------
Loans, net of unearned income
and deferred loan fees ......... 282,248 248,162 242,409
Allowance for loan losses ......... (5,313) (5,368) (5,335)
-------------------------------------------
Loans, net ..................... $ 276,935 $ 242,794 $ 237,074
===========================================
</TABLE>
There were no loans held for sale on September 30, 2000, December 31, 1999,
or September 30, 1999. During the first nine months of 1999 the Company
transferred loans held for sale with a book value and fair value of $2,520 to
portfolio loans.
Real estate - mortgage loans with a carrying value of $17,571, $18,276 and
$20,303 were pledged to secure public deposits at September 30, 2000, December
31, 1999 and September 30, 1999. The Company has also 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 $3,951 at September 30, 2000, $815 at December 31, 1999 and $449 at
September 30, 1999.
10
<PAGE> 12
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Impaired loans were as follows for September 30, 2000, December 31, 1999
and September 30, 1999:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
--------------------------------------------
<S> <C> <C> <C>
Loans with no allowance
for losses allocated ......... $ 0 $ 0 $ 0
Loans with allowance
for losses allocated ......... 621 394 265
Amount of the allowance
allocated .................... 93 59 40
</TABLE>
The average balance and income recognized on impaired loans were as follows
for the three and nine months ended September 30, 2000 and September 30, 1999:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Average of impaired loans
during the period ....................... $621 $415 $557 $933
Interest income recognized during
the impairment period ................... 0 12 0 30
Cash-basis interest income recognized
during the impairment period ............ 0 12 0 30
</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.
11
<PAGE> 13
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
At September 30, 2000, December 31, 1999 and September 30, 1999, the
contract amount of the Company's off-balance sheet commitments was as follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
---------------------------------------------
<S> <C> <C> <C>
Unused lines of credit and
commitments to make loans:
Fixed rate ....................... $ 21,314 $ 19,776 $ 17,540
Variable rate .................... 98,458 67,664 67,571
---------------------------------------------
Total ......................... $119,772 $ 87,440 $ 85,111
=============================================
Standby letters of credit ........... $ 5,222 $ 5,318 $ 5,742
</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.
12
<PAGE> 14
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 4 - Allowance for Loan Losses and Other Real Estate Owned Losses
---------------------------------------------------------------------
Activity in the allowance for loan losses for the nine months ended
September 30, 2000, twelve months ended December 31, 1999 and nine months ended
September 30, 1999 is as follows:
<TABLE>
<CAPTION>
September 30, December 31, September 30,
2000 1999 1999
---------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year ................ $ 5,368 $ 5,433 $ 5,433
Provision charged to operating expense ...... 0 0 0
Loans charged off ........................... (166) (683) (670)
Recoveries on loans
previously charged off .................... 111 618 572
---------------------------------------------
Balance at end of period ................. $ 5,313 $ 5,368 $ 5,335
=============================================
</TABLE>
There was no activity or balance in the allowance for other real estate
owned losses during the nine months ended September 30, 2000. Activity in the
allowance for other real estate owned losses for the twelve months ended
December 31, 1999 and nine months ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
----------------------------
<S> <C> <C>
Balance at beginning of year ................... $ 552 $ 552
Provision charged to operating expense ......... 0 0
Charge-off to the allowance for other
real estate owned losses .................... (176) 0
Recovery of allowance upon sale of
other real estate owned ..................... (376) 0
Losses on other real estate owned .............. 0 0
----------------------------
Balance at end of period .................... $ 0 $ 552
============================
</TABLE>
13
<PAGE> 15
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(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. During the first quarter of 2000, the Company received
additional information to support a charitable contribution for real estate
owned sold during 1999 to a municipal entity. Accordingly, the Company recorded
a $153 tax benefit related to this sale in the first quarter of 2000.
Note 6 - Stockholders' Equity
-----------------------------
For the nine months ended September 30, 2000 total stockholders' equity
increased $4,945. The increase is a result of net income of $5,900, plus the
change in the valuation allowance from December 31, 1999 for the fair value of
securities available for sale, net of tax, of $943, plus $20 due to the exercise
of 2,500 stock options pursuant to the Omnibus Incentive Plan, less cash
dividends paid of $1,918.
For the nine months ended September 30, 1999 total stockholders' equity
grew by $937. The increase was the result of net income of $5,652, less the
change in the valuation allowance from December 31, 1998 for the fair value of
securities available for sale, net of tax, of $3,196, plus $42 due to the
exercise of 4,945 stock options options pursuant to the Omnibus Incentive Plan,
less cash dividends paid of $1,561.
In October 2000, the Company adopted a Dividend Reinvestment and Stock
Purchase Plan (the "Plan"). The Plan provides holders of the Company's common
stock the opportunity to purchase additional shares of the Company's common
stock by reinvesting cash dividends, to purchase additional shares of common
stock, or do both. Stockholders who participate in the Plan will have the cash
dividends paid on their shares of common stock automatically reinvested in
shares of common stock. Participants may also make optional cash purchases of
not less than $50 per payment and not more than $3,000 per calendar quarter.
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.
14
<PAGE> 16
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Statement of Financial Accounting Standards No. 123 requires pro forma
disclosures for companies that do not adopt its fair value accounting method for
stock-based employee compensation. The Company did not grant any stock options
during the nine months ended September 30, 2000 or during the entire year 1999.
Stock options may be used to reward directors and employees and provide them
with an additional equity interest in the Company. Options have been issued for
10 year periods and are fully vested when granted.
Information about option grants follow:
<TABLE>
<CAPTION>
Number of Weighted-Avg.
Options Exercise Price
---------------------------------
<S> <C> <C>
Outstanding at January 1, 1999 ............ 18,855 $ 8.32
Exercised during period ended
September 30, 1999 .................... (4,945) 8.32
---------------------------------
Outstanding at September 30, 1999 ......... 13,910 $ 8.32
==============
Outstanding at January 1, 2000 ............ 13,910 $ 8.32
Exercised during period ended
September 30, 2000 .................... (2,500) 8.32
---------------------------------
Outstanding at September 30, 2000 ......... 11,410 $ 8.32
==============
</TABLE>
At September 30, 2000, all remaining options had an exercise price of
$8.32. The options outstanding had a remaining life of 1.25 years.
The Company at its discretion may grant stock appreciation rights under the
Plan. A stock appreciation right entitles the holder to receive from the Company
an amount equal to the excess, if any, of the aggregate fair market value of the
Company's common stock which is the subject of such a grant over the grant
price. During the nine months ended September 30, 2000, no stock appreciation
rights were exercised. At both September 30, 2000 and 1999, 12,280 stock
appreciation rights were outstanding at the grant price $8.32 per share. The
Company's expense/(benefit) was $18 and ($6) for the three months ended
September 30, 2000 and 1999 and ($25) and ($24) for the nine months ended
September 30, 2000 and 1999. The stock appreciation rights will expire during
2002.
15
<PAGE> 17
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 8 - Other Comprehensive Income
-----------------------------------
Other comprehensive income components and related taxes for the three and
nine months ended September 30, 2000 and 1999 follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------------------------------
<S> <C> <C> <C> <C>
Unrealized holding gains (losses)
on securities available for sale ......... $3,417 ($833) $ 1,540 ($5,217)
Tax effect .................................. 1,324 (323) 597 (2,021)
------------------------------------------------------------
Other comprehensive gains (losses) ....... $2,093 ($510) $ 943 ($3,196)
============================================================
</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 or nine months ended September 30, 2000 or 1999.
16
<PAGE> 18
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
September 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Information reported internally for performance assessment of operating
segments for the three and nine months ended September 30, 2000 and 1999
follows:
<TABLE>
<CAPTION>
Three months ended September 30, 2000
Banking Other Segments Total
--------------------------------------------
<S> <C> <C> <C>
Net interest income ............... $ 4,557 $ 0 $ 4,557
Other revenue ..................... 490 228 718
Other expenses .................... 2,275 233 2,508
-----------------------------------------
Segment profit (loss) .......... $ 2,772 ($5) $ 2,767
=========================================
</TABLE>
<TABLE>
<CAPTION>
Three months ended September 30, 1999
Banking Other Segments Total
--------------------------------------------
<S> <C> <C> <C>
Net interest income ............... $ 4,589 $ 0 $ 4,589
Other revenue ..................... 600 203 803
Other expenses .................... 2,210 218 2,428
-----------------------------------------
Segment profit (loss) .......... $ 2,979 ($15) $ 2,964
=========================================
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 2000
Banking Other Segments Total
--------------------------------------------
<S> <C> <C> <C>
Net interest income ............... $13,624 $ 0 $13,624
Other revenue ..................... 1,477 710 2,187
Other expenses .................... 6,687 708 7,395
-----------------------------------------
Segment profit (loss) .......... $ 8,414 $ 2 $ 8,416
=========================================
</TABLE>
<TABLE>
<CAPTION>
Nine months ended September 30, 1999
Banking Other Segments Total
--------------------------------------------
<S> <C> <C> <C>
Net interest income ............... $13,199 $ 0 $13,199
Other revenue ..................... 1,474 954 2,428
Other expenses .................... 6,419 1,008 7,427
-----------------------------------------
Segment profit (loss) .......... $ 8,254 ($54) $ 8,200
=========================================
</TABLE>
17
<PAGE> 19
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 (the "Company") at September 30, 2000
and the consolidated results of operations for the three and nine month periods
ended September 30, 2000, compared to the same periods of 1999. 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 September 30, 2000 to differ
materially from those expressed in any such forward-looking statements.
FINANCIAL CONDITION
The consolidated total assets for the Company were $515.6 million at
September 30, 2000, increasing $38.9 million from the Company's year-end,
December 31, 1999.
The Company had federal funds sold amounting to $15 million at September
30, 2000 compared to none at December 31, 1999. The Company's federal funds sold
position has increased for purposes of liquidity.
The fair value of securities available for sale was $189.0 million at
September 30, 2000 decreased by $7.6 million from the previous year-end. The
amortized cost of the securities portfolio declined $9.2 million from year-end.
The net unrealized loss to the securities portfolio at September 30, 2000 was
$4.3 million compared to a net unrealized loss at December 31, 1999 of $5.8
million and reflects lower bond interest rates at September 30, 2000 from the
previous year-end. The statement of cash flows reflects that the Company had
$10.6 million in maturities of securities during the nine months ended September
30, 2000 with only $1.4 million in purchases. As securities matured the proceeds
were mainly used to fund increases to the Company's loan portfolio. The
amortized cost of the securities portfolio showed decreases from the previous
year-end to U.S. Treasury securities of $4.0 million, to U.S. Government agency
issues of $2.0 million, to securities issued by state and political subdivisions
of $2.2 million and to mortgage-backed securities of $1.0 million.
The Company's loans increased $34.1 million to $282.2 million at September
30, 2000 or 13.74% from December 31, 1999. The local economy continued to thrive
during the first nine months of 2000 and loan demand has been good with all loan
product types showing increases. The commercial loan portfolio increased $21.8
million from year-end while real estate loans grew by $6.2 million. Home equity,
installment and construction loans also posted increases of $2.2 million, $2.1
million and $1.8 million.
18
<PAGE> 20
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
During the first nine months of 2000 deposits at the Company increased
$27.9 million from December 31, 1999. Deposit rates increased during the first
nine months of 2000 and with the uncertainties of the stock market, time
deposits became an attractive option to investors. Time deposits increased $31.0
million that was mostly deposited into longer-term time deposits. Another factor
in the growth of time deposits is that some depositors at December 31, 1999 kept
their funds in liquid deposit products because of Y2K concerns and have since
transferred their deposits back into longer term time deposits. This is
evidenced by money market, savings and NOW account balances that declined $3.8
million, $1.2 million and $.9 million from the previous year-end.
Demand-noninterest bearing deposits increased $2.8 million mostly in commercial
deposits.
During the third quarter of 2000 the Company began to offer Internet
banking to its customers. Management expects this product to increase and retain
core deposits while increasing service fee income from depositors.
Securities sold under repurchase agreements and other short-term borrowings
at the Company declined $4.8 million from December 31, 1999 to $65.7 million at
September 30, 2000. 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 for operating purposes and transferring their funds to more
liquid deposits.
At September 30, 2000 the Company had term advances from the Federal Home
Loan Bank in the amount of $10.0 million from having none at December 31, 1999.
The funds provided by the term advances have been used to fund loan growth and
for liquidity purposes.
Total stockholders' equity increased $4,945,000 during the nine months
ended September 30, 2000. The increase is the result of net income of
$5,900,000, plus the adjustment in the valuation allowance for the market value
of securities available for sale, net of tax, of $943,000, plus $20,000 due to
the exercise of 2,500 stock options pursuant to the Omnibus Incentive Plan, less
cash dividends paid of $1,918,000.
The tier 1 capital to average asset ratio at September 30, 2000 was 14.73%
and the total tier 2 capital to asset ratio, on a risk adjusted basis, amounted
to 21.07%, 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 $15.80 at September 30, 2000 as compared to $14.70 at December 31,
1999. On September 30, 2000, the Company and its subsidiary were in compliance
with all applicable regulatory capital requirements.
19
<PAGE> 21
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
NET INCOME
The consolidated net income for the quarter ended September 30, 2000 was
$1,887,000, a decrease of $145,000 or 7.14%, as compared to net income of
$2,032,000 for the same period the previous year. The annualized return on
average assets was 1.49% for the quarter, down from 1.71%, the return on average
assets for the quarter the previous year. The consolidated net income for the
nine months ended September 30, 2000 was $5,900,000, an increase of $248,000 or
4.39%, over the first nine months of 1999. The annualized return on average
assets for the first nine months of 2000 was 1.61% increasing slightly from
1.60%, the return on average assets for the same period the previous year.
NET INTEREST INCOME
Net interest income, the difference between interest income earned on
average interest earning assets and interest expense on average interest bearing
liabilities, decreased $32,000 during the three months ended September 30, 2000,
compared to the same three months in 1999. Interest rates during the third
quarter of 2000 were generally higher than during the same period of 1999. This
is evidenced by the prime lending rate that was 9.50% at September 30, 2000
compared to 8.25% at September 30, 1999, an increase of 125 basis points. Yields
earned on interest earning assets were 55 basis points higher during the third
quarter 2000 compared to the third quarter 1999. But, net interest income
decreased because rates paid on interest bearing liabilities increased to a
greater extent causing interest expense to rise more than interest income. Table
1, "Analysis of Average Balance and Tax Equivalent Rates for the Three Months
ended September 30, 2000 and 1999", shows the rates paid on interest bearing
liabilities increased to 5.24% during the third quarter of 2000 as compared to
4.14% last year, an increase of 110 basis points. Rates paid on money market
deposits increased 54 basis points from the same quarter last year as rates were
increased on money market deposits to meet local competition. Due to the
increase in loan demand the Company offered higher time deposit rates compared
to last year. Rates on time deposits and other borrowings were 116 and 167 basis
points greater than the same quarter last year. As a result of these changes the
net yield on interest earning assets for the third quarter of 2000 was 3.87%
compared to 4.22% last year.
During the first nine months of 2000, net interest income increased
$425,000 or 3.22% over the same period of 1999. Table 2, "Analysis of Average
Balance and Tax Equivalent Rates for the Nine Months ended September 30, 2000
and 1999" shows that the Company's net yield on interest earning assets was
4.00% for the first nine months of 2000 as compared to 4.09% in 1999. The yield
on interest earning assets was 43 basis points higher for the nine months ended
September 30, 1999 as compared to the same nine-month period last year. Rates
paid on interest bearing liabilities increased 68 basis points from the previous
year as the Company raised its time deposit and money market rates to meet
competition and to increase deposits to fund loan growth. Despite the smaller
net yield on interest earning assets, net interest income increased $425,000 due
to the larger volume in interest earning assets that averaged $461.6 million for
the nine months ended September 30, 2000 compared to $445.8 million for the same
period last year
20
<PAGE> 22
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended September 30, 2000 and 1999
($ 000s)
<TABLE>
<CAPTION>
2000 1999
------------------------------------ -------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
------------------------------------ -------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3) $286,287 $6,660 9.31% $243,500 $5,244 8.61%
Taxable securities (4) 170,143 2,694 6.11% 181,358 2,790 6.03%
Tax-advantaged securities (2) (4) 17,965 339 7.52% 20,522 389 7.66%
Interest bearing deposits in banks 240 5 8.33% 296 4 5.41%
Federal funds sold 3,716 61 6.57% 1,868 26 5.57%
----------------------------------- ------------------------------------
Interest earning assets (4) 478,351 9,759 8.05% 447,544 8,453 7.50%
Noninterest earning assets 26,820 26,474
----------- ------------
Average assets $505,171 $474,018
=========== ============
Liabilities and stockholders' equity
NOW deposits $ 41,675 $286 2.75% $ 48,038 $297 2.47%
Money market deposits 34,796 353 4.06% 39,567 348 3.52%
Savings deposits 43,649 300 2.75% 45,901 314 2.74%
Time deposits 183,736 2,827 6.15% 167,352 2,088 4.99%
Other borrowings 83,238 1,303 6.26% 56,937 654 4.59%
----------------------------------- ------------------------------------
Total interest bearing liabilities 387,094 5,069 5.24% 357,795 3,701 4.14%
----------------------- -----------------------
Demand deposits 42,695 44,882
Other noninterest earning liabilities 7,311 6,100
Stockholders' equity 68,071 65,241
----------- ------------
Average liabilities and
Stockholders' equity $505,171 $474,018
=========== ============
Net interest income $4,690 $4,752
============ ============
Net yield on interest earning assets (4) 3.87% 4.22%
========== ==========
Interest bearing liabilities
to earning assets ratio 79.87% 79.34%
========== ==========
</TABLE>
(1) - Interest income on loans includes loan origination and other fees
of $85 and $81 for the three months ended September 30, 2000 and
1999.
(2) - Tax-exempt income is reflected on a fully tax equivalent basis
utilizing a 34% rate.
(3) - Non-accrual loans are included in average loans.
(4) - Rate information was calculated on the average amortized cost for
securities. The three months ending September 30, 2000 and 1999
average balance information includes an average unrealized gain
(loss) for taxable securities of ($6,230) and ($3,609) and for
tax-advantaged securities ($74) and $209.
21
<PAGE> 23
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Nine Months Ended September 30, 2000 and 1999
($ 000s)
<TABLE>
<CAPTION>
2000 1999
----------------------------------- ------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
----------------------------------- ------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3) $268,177 $18,219 9.06% $243,318 $15,528 8.51%
Taxable securities (4) 170,811 8,136 6.10% 173,348 7,847 5.98%
Tax-advantaged securities (2) (4) 18,469 1,052 7.55% 21,066 1,188 7.68%
Interest bearing deposits in banks 250 12 6.40% 306 13 5.66%
Federal funds sold 3,918 182 6.19% 7,784 279 4.78%
----------------------------------- ------------------------------------
Interest earning assets 461,625 27,601 7.85% 445,822 24,855 7.42%
Noninterest earning assets 26,918 25,748
----------- ------------
Average assets $488,543 $471,570
=========== ============
Liabilities and stockholders' equity
NOW deposits $ 42,791 $859 2.68% $ 45,102 $880 2.60%
Money market deposits 36,122 1,014 3.74% 41,071 1,073 3.48%
Savings deposits 44,649 915 2.73% 45,733 967 2.82%
Time deposits 176,772 7,666 5.78% 170,622 6,357 4.97%
Other borrowings 71,678 3,104 5.77% 53,407 1,874 4.68%
----------------------------------- ------------------------------------
Total interest bearing liabilities 372,012 13,558 4.86% 355,935 11,151 4.18%
----------------------- -----------------------
Demand deposits 42,759 43,340
Other noninterest earning liabilities 7,429 6,706
Stockholders' equity 66,343 65,589
----------- ------------
Average liabilities and
Stockholders' equity $488,543 $471,570
=========== ============
Net interest income $14,043 $13,704
============ =============
Net yield on interest earning assets 4.00% 4.09%
========== ==========
Interest bearing liabilities
to earning assets ratio 79.38% 79.64%
========== ==========
</TABLE>
(1) - Interest income on loans includes loan origination and other fees
of $256 and $256 for the nine months ended September 30, 2000 and
1999.
(2) - Tax-exempt income is reflected on a fully tax equivalent basis
utilizing a 34% rate.
(3) - Non-accrual loans are included in average loans.
(4) - Rate information was calculated on the average amortized cost for
securities. The nine month ending September 30, 2000 and 1999 average
balance information includes an average unrealized gain (loss) for
taxable securities of ($6,900) and ($1,547) and for tax-advantaged
securities ($114) and $443.
22
<PAGE> 24
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 and nine months
ended September 30, 2000 or September 30, 1999. Management, with the concurrence
of the Board of Directors, after carefully reviewing the adequacy of the
allowance for loan losses and the levels of nonperforming and impaired loans,
found that no provision for loan losses was necessary during these periods.
At September 30, 2000, the allowance for loan losses was $5,313,000 or
1.88% of loans as compared to 2.16% of loans at December 31, 1999. Nonperforming
loans at September 30, 2000 were $3,951,000 or 1.40% of loans, up from $815,000
at December 31, 1999. Impaired loans at September 30, 2000 were $621,000 up from
$394,000 at December 31, 1999. The amount of the allowance for loan losses
allocated for impaired loans was $93,000 at September 30, 2000 increasing from
$59,000 from the previous year-end.
Other real estate owned, a non-performing asset, at September 30, 2000 was
$2,622,000. During the first nine months of 2000 one property used to secure a
loan was foreclosed upon and $80,000 was transferred from loans to other real
estate owned. This property was consequently sold netting proceeds of $83,000
that resulted in a gain from the sale of $3,000.
During the first nine months of 2000 $166,000 in loans were charged off to
the allowance compared to $670,000 during the same period last year. Recoveries
of loans previously charged off were $111,000 during the first nine months of
2000 compared to $572,000 during the same period in 1999.
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 and the Board of Directors'
analysis, the allowance for loan losses at September 30, 2000 is adequate to
cover future possible loan losses. If the level of impaired and nonperforming
loans remains stable during the remainder of 2000, no additional loan loss
provision is anticipated during 2000.
NONINTEREST INCOME
Noninterest income for the three months ended September 30, 2000 was
$718,000 as compared to $803,000 for the three months ended September 30, 1999,
a decrease of $85,000. The most significant factor affecting the decline in
noninterest income is that the Company experienced a one-time gain on the sale
of a foreclosed property during the three months ended September 30, 1999 in the
amount of $157,000. As there were no sales of other real estate owned in the
third quarter of 2000, gains from sales of these properties declined by
$157,000. Service fees on deposits increased by $57,000 as compared to the same
quarter last year because of increased overdraft fee income and service charges
from the new retail checking account product that was introduced during the
third quarter of 1999. The new checking
23
<PAGE> 25
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
product packages bank services and offers common carrier and accidental death
insurance for a monthly membership fee. Trust fee income increased slightly by
$6,000 during the quarter ended September 30, 2000 as compared to the same
quarter last year. Mortgage banking income and gains from the sales of loans
declined $9,000 in aggregate during the third quarter of 2000 as compared to
last year as increased home mortgage rates caused the levels of mortgage
activity to decrease. Miscellaneous operating income during the third quarter of
2000 was $18,000 greater than the same period last year because of increased
miscellaneous fees collected by tellers and operations staff for services done
for customers.
For the first nine months of 2000 noninterest income was $2,187,000 as
compared to $2,428,000 for the same period of 1999, a decrease of $241,000.
Service fees on deposits were $216,000 more during the first nine months of 2000
as compared to the same period last year because of increased overdraft fee
income of $126,000 resulting from greater overdraft activity from commercial
checking account customers. Deposit service fees also increased because of fee
income generated from the checking account product introduced during the third
quarter of 1999 that was $111,000 greater during the first three-quarters of
2000 as compared to last year. Trust income for the nine months ended September
30, 2000 rose only slightly by $4,000. Other income from mortgage banking and
gains on sales of loans declined $176,000 and $162,000 during the first nine
months of 2000 as higher home mortgage rates in 2000 caused sharp declines in
the volumes of these activities. Gains from the sale of other real estate owned
were only $3,000 during the nine months ended September 30, 2000 compared to
$157,000 during the same period last year. During the second quarter of 2000 one
property securing a loan was foreclosed upon and $80,000 was transferred to
other real estate owned. This property was consequently sold during the second
quarter of 2000 resulting in a gain of $3,000. During the third quarter of 1999
the Company sold a foreclosed upon property at a gain of $157,000. Other
operating income increased $31,000 during the nine months ended September 30,
1999 compared to last year. During the first three quarters of 2000 fees from
charging customers for miscellaneous services, fees from noncustomer use of
Company ATMs, loan fee income and income earned on security deposits increased
$27,000, $22,000, $29,000 and $37,000 from last year. Offsetting these increases
in other income during 2000 was a one-time $74,000 gain on the sale of a branch
office during the first quarter of 1999.
NONINTEREST EXPENSES
Noninterest expenses for the quarter ended September 30, 2000 were
$2,508,000 increasing $80,000 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 47.55% for the third quarter of 2000 as compared to
45.03% for the same quarter of 1999. 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 benefit expenses of $88,000 occurred
during the third quarter of 2000 compared to the same period last year. Regular
salary expense was 4.37% or $49,000 greater during the third quarter of 2000 as
a result of yearly merit increases. Compensation expense relating to stock
appreciation rights were $24,000 more during the three months ended September
30, 2000 than in the same three months last year as the share price of the
Company's stock rose. Group insurance expense increased $12,000 during the third
quarter of 2000 compared to last year due to premium rate increases.
24
<PAGE> 26
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Occupancy expenses for the third quarter of 2000 were $300,000, which was a
decrease of $35,000 from the third quarter of 1999. This decrease in occupancy
expenses is attributable to $30,000 in decreased maintenance expenses during the
three months ended September 30, 2000. During the third quarter of 1999 there
had been increased maintenance expenses incurred to prepare the Company's
equipment for Y2K.
Data processing expense declined slightly by $3,000 during the three months
ended September 30, 2000 to $117,000.
FDIC insurance expense was $18,000 during the three months ended September
30, 2000 decreasing slightly from $20,000 during the same period last year.
Other real estate owned expenses increased during the third quarter of 2000
by $30,000 to $45,000. To prepare one of the foreclosed upon properties for
market, repairs were to it made during the third quarter of 2000 raising this
expense compared to last year.
Miscellaneous other operating expenses for the third quarter of 2000
increased slightly by $2,000 to $476,000 compared to the same quarter last year.
Product development costs related to the checking account that the Company began
offering during the third quarter of 1999 were $30,000 greater during the third
quarter of 2000 compared to last year. Loan expenses related to the making of
loans for sale on the secondary market from the mortgage banking area were
$15,000 less during the third quarter of 2000 compared to last year as higher
mortgage rates slowed volumes in 2000. Other miscellaneous other operating
expenses declined $13,000 in aggregate during the third quarter of 2000 compared
to the same quarter last year.
During the nine months ended September 30, 2000, total noninterest expenses
were $7,395,000 or $32,000 less than during the same period last year. The
Company's efficiency ratio was 46.77% for the first nine months of 2000 as
compared to 47.53% for the first nine months of 1999.
Salaries and employee benefits expense was $10,000 less during the nine
months ended September 30, 2000 as compared to the same period last year.
Commissions relating to the mortgage banking department were $151,000 less
during first three-quarters of 2000 compared to the same period last year as
higher home mortgage rates reduced this department's activities. Regular salary
expense was 4.33% or $143,000 greater during the first three-quarters of 2000 as
a result of yearly merit increases.
Occupancy expenses were $98,000 less during the first nine months of 2000
when compared to the same period of 1999. Depreciation expenses for building and
equipment were $122,000 lower than for the same period of 1999 as new equipment
purchased in 1994 when the Company changed data processing systems became fully
depreciated during 1999. Utility expenses for the first nine months of 2000
increased $22,000 caused by rising energy costs.
Data processing expense decreased slightly by $14,000 during the first nine
months of 2000 when compared to the same period of 1999.
25
<PAGE> 27
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FDIC deposit insurance expense was $53,000 for the first three-quarters of
2000, $10,000 less than for the same period last year. With the increases in
deposits during the first nine months of 2000 it is expected that FDIC deposit
insurance expenses will begin to rise.
Other real estate owned expenses were $24,000 greater during the nine months
ended September 30, 2000 as compared to the same period last year as extensive
repairs were made during 2000 to one of the foreclosed properties to prepare it
for market.
Miscellaneous other operating expenses increased $76,000 for the nine
months ended September 30, 2000 as compared to the same period last year.
Product development costs related to the checking account that the Company began
offering during the third quarter of 1999 were $86,000 greater during nine
months ended September 30, 2000 compared to last year. Professional fees and
telephone expense increased $19,000 and $20,000 during the first three-quarters
of 2000 as the Company prepared to release its new Internet banking product.
Expenses relating to audit and examinations increased $25,000 during the first
nine months of 2000 in part from new requirements effective in 2000 that public
companies have their quarterly financial statements reviewed by their
independent accountants. Printing and supplies expenses increased by $12,000
during the first three-quarters of 2000 as paper prices increased. Offsetting
these increases during the first nine months of 2000 was a decline of $90,000 to
loan expenses related to originating mortgage loans for sale on the secondary
market as volumes slowed due to higher mortgage rates.
FEDERAL AND STATE INCOME TAXES
For the three months ended September 30, 2000 and 1999, the Company's
provisions for federal and state income taxes were $880,000 and $932,000, which
as a percentage of pretax earnings was 31.80% and 31.44%. For the nine months
ended September 30, 2000, the Company's provisions for federal and state taxes
totaled $2,516,000 or 29.90% of pretax earnings as compared to $2,548,000 or
31.07% of pretax earnings for the nine months ended September 30, 1999. During
the first quarter of 2000, the Company received additional information to
support a charitable contribution on real estate owned sold during 1999 to a
municipal entity and the Company recorded a $153,000 tax benefit related to this
sale. When discounting this one-time factor, income taxes as a percentage of
pretax earning during the first nine months of 2000 would have been 31.71%.
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, 2001. 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
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 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's
financial instruments. This approach falls under the broad definition of
asset/liability management. The Company's primary asset/liability management
technique is the interest rate shock.
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, "Effect of Interest Shocks on Financial Instruments
as of June 30, 2000 and December 31, 1999", shows how interest rate shocks of
decreasing rates 2% and increasing rates 2% effect the fair value of the
Company's financial instruments. The data shown in Table 3 is as of June 30,
2000 as it is the most current period available from the computer simulation
model. The computer simulation model used to do the interest rate shocks and
calculate the effect on the fair value of the Company's financial instruments
takes into consideration maturity and repricing schedules of the various assets
and liabilities. At June 30, 2000 the fair value of securities available for
sale increases $8.5 million
27
<PAGE> 29
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
when rates are shocked downward 2% while the fair value decreases $9.9 million
for a 2% upwards rate shock. The change in fair value of securities is smaller
when rates are shocked down because there were call provisions on $151.6 million
of the U.S. Government agency securities at June 30, 2000. As rates decline the
probability that a security with call provisions will be called increase because
the security issuer has the opportunity to reduce their interest expense by
paying off the called security. At June 30, 2000 the fair value of the Company's
financial asset instruments was $492.1 million compared to the book value on the
Company's financial asset instruments at June 30, 2000 of $494.5 million.
TABLE 3
NORTHERN STATES FINANCIAL CORPORATION
EFFECT OF INTEREST SHOCKS ON FINANCIAL INSTRUMENTS
as of June 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
Fair Value at June 30, 2000
--------------------------------------------
Down 2% Current Up 2%
--------------------------------------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 18,381 $18,380 $ 18,379
Interest bearing deposits in financial
institutions - maturities over 90 days 100 100 100
Securities available for sale 195,681 187,138 177,251
Loans 289,543 279,941 271,039
Direct lease financing 2,199 2,135 2,078
Accrued interest receivable 4,358 4,358 4,358
Financial liabilities:
Deposits $354,722 $346,686 $340,413
Securities sold under repurchase agreements
and other short-term borrowings 73,326 73,319 73,312
Federal Home Loan Bank term advances 10,001 10,000 9,999
Advances from borrowers for taxes and insurance 937 937 937
Accrued interest payable 4,169 4,169 4,169
<CAPTION>
Fair Value at December 31, 1999
--------------------------------------------
Down 2% Current Up 2%
--------------------------------------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 16,900 $ 16,900 $ 16,900
Interest bearing deposits in financial
institutions - maturities over 90 days 101 100 99
Securities available for sale 204,914 196,684 185,041
Loans 255,395 245,838 236,915
Direct lease financing 2,211 2,175 2,142
Accrued interest receivable 4,361 4,361 4,361
Financial liabilities:
Deposits $341,331 $333,547 $327,593
Securities sold under repurchase agreements
and other short-term borrowings 70,440 70,436 70,432
Advances from borrowers for taxes and insurance 645 645 645
Accrued interest payable 3,640 3,640 3,640
</TABLE>
28
<PAGE> 30
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 9th day of November 2000.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Date: November 9, 2000 By: /s/ Fred Abdula
----------------------------- ----------------------------------
Fred Abdula
Chairman of the Board of
Directors and President
Date: November 9, 2000 By: /s/ Thomas M. Nemeth
----------------------------- ----------------------------------
Thomas M. Nemeth
Vice President and Treasurer
29
