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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
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COMMISSION FILE NUMBER 0 - 19300
NORTHERN STATES FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-3449727
(State of incorporation) (I.R.S. Employer
Identification No.)
1601 North Lewis Avenue
Waukegan, Illinois 60085
(847) 244-6000
(Address, including zip code, and telephone number, including
area code, of principal executive office)
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Securities registered pursuant to Section 12(g) of the Act
Name of each exchange
Title of each class which registered
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Common Stock $.40 par value NASDAQ Small-Cap Market
Cover Page 1 of 2
Page 1 of 63 Pages
Exhibit Index Appears on Page 21
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting shares held by nonaffiliates of
the Registrant is $59,438,300, as of March 21, 2000. Solely for the purpose of
this computation, it has been assumed that executive officers and directors of
the Registrant are "affiliates" and that the last price known to management was
a sale on March 21, 2000, of $20.00 per share.
4,460,345 shares of common stock were outstanding as of March 21, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Parts II and IV are incorporated by reference from the
Registrant's 1999 Annual Report to Stockholders; and a portion of Part III is
incorporated by reference from the Registrant's Proxy Statement dated March 28,
2000, for the Annual Meeting of Stockholders to be held April 27, 2000.
Except for those portions of the 1999 Annual Report incorporated by
reference, the Annual Report is not deemed filed as part of this Report.
Cover Page 2 of 2
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INDEX
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PART I Page No.
- ------ --------
Item 1 Business 4
Item 2 Properties 14
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote
of Security Holders 14
PART II
Item 5 Market for the Registrant's Common Stock
and Related Stockholder Matters 15
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis
of Financial Condition and
Results of Operations 15
Item 7A Quantitative and Qualitative Disclosures
about Market Risk 15
Item 8 Financial Statements and Supplementary Data 16
Item 9 Changes in and Disagreements with
Accountants on Accounting
and Financial Disclosure 16
PART III
Item 10 Directors and Executive Officers of the
Registrant 17
Item 11 Executive Compensation 17
Item 12 Security Ownership of Certain Beneficial
Owners and Management 17
Item 13 Certain Relationships and Related
Transactions 17
PART IV
Item 14 Exhibits, Financial Statement Schedules
and Reports on Form 8-K 18
Signatures 19
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PART I
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Item 1. BUSINESS
THE COMPANY
Overview
Northern States Financial Corporation (the "Registrant" or the "Company")
is a bank holding company organized in 1984 under the laws of Delaware, for the
purpose of becoming the parent bank holding company of the Bank of Waukegan (the
"Bank"). In 1991, the Registrant acquired First Federal Bank, fsb ("First
Federal" or the "Thrift"). 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 as the surviving entity in the merger.
The Registrant is registered under the Bank Holding Company Act of 1956, as
amended, and owns all the outstanding stock of the Bank. At December 31, 1999,
the Company had 435 registered stockholders of record, 4,458,345 shares of
Common Stock outstanding, and total consolidated assets of approximately $477
million. Aside from the stock of the Bank and cash, the Registrant has no other
substantial assets.
As a large, community-oriented, independent banking organization in the
Waukegan-Gurnee area in the State of Illinois, the Company is well positioned to
take advantage of the growth in Waukegan-Gurnee and its surrounding communities.
The Company has continuously served the community since 1919 when First Federal
was chartered; complemented by the Bank when it was chartered in 1962. The
Company's local management, coupled with its long record of service, has allowed
it to compete successfully in the banking market. The Company operates as a
traditional community bank with conveniently located branches and a professional
staff.
The Registrant and Bank have no material patents, licenses or franchises
except the corporate franchises and trademarks, which permit them to engage in
banking and trust practices pursuant to law.
The following table shows loans and deposits of the Bank as of December 31,
1999 (in thousands of dollars):
Loans Deposits
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$248,162 $334,251
The principal business of the Registrant, operating through the Bank,
consists of attracting deposits and securities sold under repurchase agreements
from the general public, making commercial loans, loans secured by residential
and commercial real estate and consumer loans, and operating mortgage banking
and trust businesses.
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SUBSIDIARY OPERATIONS
The Bank of Waukegan was chartered as a state bank in 1962 and is located
in Waukegan, Illinois. Waukegan is located approximately 37 miles north of
Chicago, Illinois and has a population of approximately 70,000. At December 31,
1999 the Bank of Waukegan had total assets of approximately $476.5 million,
deposits of approximately $334.9 million and stockholder's equity of
approximately $64.9 million. The Bank has three banking offices located in
Waukegan, one office located in Antioch, Illinois, one office located in Gurnee,
Illinois, and one office located in Winthrop Harbor, Illinois.
The Bank provides services to individuals, businesses and local
governmental units in northeastern Illinois and southeastern Wisconsin.
The Bank's full service banking business includes the customary consumer
and commercial products and services which banks provide, including the
following: demand, savings, and time deposits, securities sold under repurchase
agreements and individual retirement accounts; commercial, consumer and real
estate lending, including installment loans, student loans, lines of credit and
overdraft checking; safe deposit operations; trust services; and a variety of
additional services tailored to the needs of individual customers, such as the
sale of traveler's checks, money orders, cashier's checks and foreign currency,
direct deposit, and other special services.
Commercial and consumer loans are made to corporations, partnerships and
individuals, primarily on a secured basis. Commercial lending focuses on
business, capital, construction, inventory and real estate. The installment loan
department of the Bank makes direct and indirect loans to consumers and
commercial customers. The mortgage division originates and services commercial
and residential mortgages.
The Bank's trust department acts as executor, administrator, trustee,
conservator, guardian, custodian and agent. At December 31, 1999, the Trust
Department had assets under management or custodial arrangements of
approximately $186 million. Its office is located in Waukegan, Illinois.
COMPANY OPERATING STRATEGY
Corporate policy, strategy and goals are established by the Board of
Directors of the Company. Pursuant to the Company's philosophy, operational and
administrative policies for the Bank are also established by the Company. Within
this framework, the Bank focuses on providing personalized services and quality
products to customers to meet the needs of the communities in which they
operate.
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As part of its community banking approach, the Company encourages the
officers of the Bank to actively participate in community organizations. In
addition, within credit and rate of return parameters, the Company attempts to
ensure that the Bank meets the credit needs of the community. In addition, the
Bank invests in local municipal securities.
Lending Activities
General - The Bank provides a range of commercial and retail lending services to
corporations, partnerships and individuals, including, but not limited to,
commercial business loans, commercial and residential real estate construction
and mortgage loans, consumer loans, revolving lines of credit and letters of
credit. The installment loan department makes direct and indirect loans to
consumers and commercial customers. The mortgage department originates and
services commercial and residential mortgages. The Bank's mortgage banking
operation takes and processes loan applications that are "table funded" by the
institution that ultimately funds and owns the loan.
The Bank aggressively markets its services to qualified borrowers in both
the commercial and consumer sectors. The Bank's commercial lending officers
actively solicit the business of new companies entering the surrounding market
as well as long-standing members of the business community. Through personalized
professional service and competitive pricing, the Bank has been successful in
attracting new commercial lending customers. At the same time, the Bank actively
advertises its consumer loan products and continually attempts to make its
lending officers more accessible.
Commercial Loans - The Bank seeks new commercial loans in its market area and
much of the increase in these loans in recent years can be attributed to the
successful solicitation of new business. The Bank's areas of emphasis include,
but are not limited to, loans to manufacturers, building contractors,
developers, business services companies and retailers. The Bank provides a wide
range of commercial business loans, including lines of credit for working
capital purposes and term loans for the acquisition of equipment and other
purposes. Collateral for these loans generally includes accounts receivable,
inventory, equipment and real estate. Loans may be made on an unsecured basis
where warranted by the overall financial condition of the borrower. Terms of
commercial business loans generally range from one to five years. The majority
of the Bank's commercial business loans have floating interest rates or reprice
within one year. The primary repayment risk for commercial loans is the failure
of the business due to economic or financial factors. In most cases, the Bank
has collateralized these loans and/or taken personal guarantees to help assure
repayment.
The Bank regularly provides financing to developers who have demonstrated a
favorable record of performance for the construction of homes. Sales of these
homes have remained very strong in Lake County due to the growth in population.
Mortgage Banking - The Bank conducts a mortgage origination operation through
its mortgage division. Since 1991, the Bank through the former Thrift began to
fund conforming long-term residential mortgage loans and selling them in the
secondary market with servicing retained. During 1998, the Bank's mortgage
banking operation began taking
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and processing loan applications that are "table funded" by the institution that
ultimately funds and owns the loan. These loans are sold without the Bank
retaining servicing. The Bank has a portfolio of serviced mortgages of
approximately $48.1 million at December 31, 1999.
Consumer Lending - The Bank's consumer lending department provides all types of
consumer loans including motor vehicle, home improvement, home equity, student
loans, unsecured loans and small personal credit lines.
Trust Department - The Bank's trust department has been providing trust services
to the community for over 10 years. Currently, the Bank has over $186 million of
trust assets under management and provides a full complement of trust services
for individuals and corporations including land trust services.
To build on the trust department's mainstay of personal trust
administration, the trust department's focus is in two major areas: (i)
investment management for individuals and (ii) administration and investment
services for employee benefit plans.
COMPETITION
The Registrant and its subsidiary encounter significant competition in all
of their activities. The Chicago metropolitan area and suburban Lake County have
a high density of financial institutions, many of which are significantly larger
and have substantially greater financial resources than the Company and its
subsidiary, and all of which are competitors of the Company and its subsidiary
to varying degrees. The Registrant and its subsidiary are subject to competition
from various financial institutions, including state and national banks, state
and federal savings associations, credit unions, certain non-banking consumer
lenders, and other companies or firms, including brokerage houses and mortgage
brokers, that provide similar services in northeastern Illinois. In total, there
are 22 financial institutions which have offices located in the Waukegan-Gurnee
area, including the Bank. These financial institutions consist of 11 banks, 3
savings associations and 8 credit unions. The Bank also competes with money
funds and with insurance companies with respect to its individual retirement
accounts.
Competition may increase as a result of the continuing reduction in the
effective restrictions on the interstate operations of financial institutions.
The Registrant and its subsidiary face additional competition for deposits from
short-term money market mutual funds and other corporate and government
securities funds. Since the elimination of federal interest rate controls on
deposits, the competition from other financial institutions for deposits has
increased.
The primary factors influencing competition for deposits are interest
rates, service, and convenience of office locations. The Company competes for
loans principally through the range and quality of the services it provides,
interest rate and loan fee terms. The Company believes that its long-standing
presence in the community and personal service philosophy
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enhances its ability to compete favorably in attracting and retaining individual
and business customers. The Company actively solicits deposit-related clients
and competes for deposits by offering customers personal attention, professional
service and competitive interest rates.
EMPLOYEES
The Registrant and its subsidiary employed 119 full-time and 29 part-time
employees as of December 31, 1999. None of the Registrant's employees is
represented by any collective bargaining group. The Company offers a variety of
employee benefits and management considers its employee relations to be good.
GOVERNMENTAL MONETARY POLICY AND ECONOMIC CONDITIONS
The earnings and growth of the Company are affected not only by general
economic conditions, but also by the fiscal and monetary policies of the federal
government and its agencies. In particular, the Federal Reserve Board regulates
monetary and credit conditions and interest rates in order to influence general
economic conditions, primarily through open-market operations in U.S. Government
securities, varying the discount rate on bank borrowings, and setting reserve
requirements against bank deposits.
These policies have a significant influence on overall growth and
distribution of the Company's loans, investments and deposits, and affect
interest rates charged on loans and earned on investments or paid for deposits.
The monetary policies of the Federal Reserve Board are expected to continue
their substantial influence on the operating results of banks.
The general effect, if any, of such policies upon the future business and
earnings of the Company and its subsidiary cannot accurately be predicted.
SUPERVISION AND REGULATION
Financial institutions and their holding companies are extensively
regulated under federal and state laws. As a result, the business, financial
condition and prospects of the Company and the Bank can be materially affected
not only by management decisions and general economic conditions, but also by
applicable statutes and regulations and other regulatory pronouncements and
policies promulgated by regulatory agencies with jurisdiction over the Company
and the Bank, such as the Board of Governors of the Federal Reserve System
("FRB"), the Federal Deposit Insurance Corporation ("FDIC") and the Illinois
Office of Banks and Real Estate (the "Office"). Such statutes, regulations and
other pronouncements
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and policies are intended to protect depositors and the FDIC's deposit insurance
funds, not to protect stockholders.
The Company and the Bank are "affiliates" within the meaning of the Federal
Reserve Act so that the Bank is subject to certain restrictions with respect to
loans to the Company and certain other transactions with the Company or
involving its securities.
The Company is a bank holding company subject to the Bank Holding Company
Act of 1956, as amended (the "Act"), and to regulation by the FRB. The Act
limits the activities which may be engaged in by bank holding companies and
their nonbank subsidiaries, with certain exceptions, to those so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
Also, under the Act and the FRB's regulations, a bank holding company, as well
as certain of its subsidiaries, are prohibited from engaging in certain tie-in
arrangements in connection with any extension of credit or provision of any
property or services. The Act also prohibits bank holding companies from
acquiring substantially all the assets of or owning more than 5% of the voting
shares of any bank or nonbanking company, which is not already majority owned,
without the prior approval of the FRB.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (the "GLB Act"). The GLB Act significantly changes
financial services regulation by expanding permissible nonbanking activities of
bank holding companies and removing barriers to affiliations among banks,
insurance companies, securities firms and other financial services entities.
These new activities can be conducted through a holding company structure or,
subject to certain limitations, through a financial subsidiary of a bank. The
GLB Act repeals the anti-affiliation provisions of the Glass-Stegall Act and
revises the Bank Holding Company Act. The GLB Act permits qualifying holding
companies, called "financial holding companies," to engage in, or to affiliate
with companies engaged in, a full range of financial activities including
banking, insurance activities (including insurance underwriting and portfolio
investing), securities activities and merchant banking. A bank holding company's
subsidiary banks must be "well-capitalized" and "well-managed" and have at least
a "satisfactory" Community Reinvestment Act rating for the bank holding company
to elect status as a financial holding company.
The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994
(the "Interstate Act") permits an adequately capitalized and adequately managed
bank holding company to acquire, with FRB approval, a bank located in a state
other than the bank holding company's home state, without regard to whether the
transaction is permitted under any state law, except that a host state may
establish by statute the minimum age of its banks (up to a maximum of 5 years)
subject to acquisition by out-of-state bank holding companies. The FRB may not
approve the acquisition if the applicant bank holding company, upon
consummation, would control more that 10% of total U.S. insured depository
institution deposits or more than 30% of the host state's total insured
depository institution deposits. The Interstate Act also permits a bank, with
the approval of the appropriate Federal bank regulatory agency, to establish a
de novo branch in a state, other than the bank's home state, in which the bank
does not presently maintain a branch if the host state has enacted a law that
applies equally to all banks and expressly permits all out-
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of-state banks to branch de novo into the host state. Banks having different
home states may, with approval of the appropriate Federal bank regulatory
agency, merge across state lines, unless the home state of a participating bank
has opted-out of the Interestate Act prior to June 1, 1997. In addition the
Interstate Act permits any bank subsidiary of a bank holding company to receive
deposits, renew time deposits, close loans, service loans and receive payments
on loans and other obligations as agent for a bank or thrift affiliate, whether
such affiliate is located in a different state or in the same state. Illinois
law allows the Bank to establish branches anywhere in the state.
The Illinois Bank Holding Company Act permits Illinois bank holding
companies to acquire control of banks in any state and permits bank holding
companies whose principal place of business is in another state to acquire
control of Illinois banks or bank holding companies upon satisfactory
application to the Office. In reviewing any such application, the Office will
review, among other things, compliance by the applicant with the requirements of
the Community Reinvestment Act (the "CRA") and other information designed to
determine such banks' abilities to meet community credit needs.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") amended the Act to authorize the FRB to allow bank holding companies
to acquire any savings association (whether healthy, failed or failing) and
removed "tandem operations" restrictions, which previously prohibited savings
associations from being operated in tandem with a bank holding company's other
subsidiaries. As a result, bank holding companies now have expanded
opportunities to acquire savings associations.
Under FIRREA, an insured depository institution which is commonly
controlled with another insured depository institution shall generally be liable
for any loss incurred, or reasonably anticipated to be incurred, by the FDIC in
connection with the default of such commonly controlled institution, or for any
assistance provided by the FDIC to such commonly controlled institution, which
is in danger of default. The term "default" is defined to mean the appointment
of a conservator or receiver for such institution. Such liability is
subordinated in right of payment to deposit liabilities, secured obligations,
any other general or senior liability and any obligation subordinated to
depositors and or other general creditors, other than obligations owed to any
affiliate of the depository institution (with certain exceptions) and any
obligations to stockholders in such capacity.
The Bank is subject to regulation by the FDIC, as well as by the Office.
Under the Illinois Banking Act (the "IBA"), the Bank is permitted to
declare and pay dividends in amounts up to the amount of its accumulated net
profits provided that it shall retain in its additional paid-in capital at least
one-tenth of its net profits since the date of the declaration of its most
recent previous dividend until such additions to additional paid-in capital, in
the aggregate, equal at least the paid-in capital of the Bank. In no event may
the Bank, while it continues its banking business, pay dividends in excess of
its net profits then on hand (after deductions for losses and bad debts).
Under the FDIC's risk-based insurance assessment system, each insured
depository institution is placed in one of nine risk categories based on its
level of capital and other
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relevant information. Each insured depository institution's insurance assessment
rate is then determined by the risk category in which it has been classified by
the FDIC. Under the assessment schedule applicable for the second semi-annual
assessment period of 1999 to BIF-insured institutions (such as the Bank),
assessment rates ranged from 0% to 0.27% of deposits. In addition, the Bank is
subject to "FICO assessments" to repay obligations issued by a federally
chartered corporation to provide financing for resolving the thrift crises of
the 1980s. Currently, the FICO assessment rate is .0208%.
The Federal bank regulators have adopted risk-based capital guidelines
for bank holding companies and banks. The minimum ratio of qualifying total
capital to risk-weighted assets, including certain off-balance sheet items
(Total Capital Ratio), is 8%, and the minimum ratio of that portion of total
capital that is comprised of common stock, related additional paid-in capital,
retained earnings, noncumulative perpetual preferred stock, minority interests
and, for bank holding companies, a limited amount of qualifying cumulative
perpetual preferred stock, less certain intangibles including goodwill (Tier 1
capital), to risk-weighted assets is 4%. The balance of total capital may
consist of other preferred stock, certain other instruments, and limited amounts
of subordinated debt and the loan and lease loss allowance.
The Federal Reserve Board risk-based capital standards contemplate that
evaluation of capital adequacy will take account of a wide range of other
factors, including overall interest rate exposure; liquidity, funding and market
risks; the quality and level of earnings; investment, loan portfolio, and other
concentrations of credit; certain risks arising from nontraditional activities;
the quality of loans and investments; the effectiveness of loan and investment
policies; and management's overall ability to monitor and control financial and
operating risks including the risks presented by concentrations of credit and
nontraditional activities.
In addition, the Federal Reserve has established minimum Leverage Ratio
(Tier 1 capital to quarterly average total assets) guidelines for bank holding
companies and banks. These guidelines provide for a minimum Leverage Ratio of 3%
for bank holding companies and banks that meet certain specified criteria,
including having the highest regulatory rating. All other banking organizations
are required to maintain a Leverage Ratio of at least 3% plus an additional
cushion of 100 to 200 basis points. The guidelines also provide that banking
organizations experiencing internal growth or making acquisitions will be
expected to maintain strong capital positions substantially above the minimum
supervisory levels without significant reliance on intangible assets.
Furthermore, the guidelines indicate that the Federal Reserve Board will
continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals
for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio
of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to
quarterly average total assets. As of December 31, 1999, the Federal Reserve had
not advised the Company of any specific minimum Tangible Tier 1 Leverage Ratio
applicable to it. At December 31, 1999, the Company had a Tangible Tier 1
Leverage Ratio of 14.53%.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") substantially revised the bank regulatory and funding provisions of
the Federal Deposit Insurance Act and made revisions to several other federal
banking statutes. In general,
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FDICIA subjects depository institutions to significantly increased regulation
and supervision. Among other things, FDICIA requires federal bank regulatory
authorities to take "prompt corrective action" with respect to depository
institutions that do not meet minimum capital requirements, and imposes certain
restrictions upon depository institutions which meet minimum capital
requirements but are not "well capitalized" for purposes of FDICIA. FDICIA and
the regulations adopted under it establish five capital categories as follows,
with the category for any institution determined by the lowest of any of these
ratios:
TIER 1 TOTAL
LEVERAGE RATIO RISKED-BASED RATIO RISKED-BASED RATIO
Well Capitalized 5% or above 6% or above 10% or above
Adequately
Capitalized 4% or above* 4% of above 8% or above
Undercapitalized Less than 4% Less than 4% Less than 8%
Significantly
Undercapitalized Less than 3% Less than 3% Less than 6%
RATIO OF
TANGIBLE EQUITY
TO TOTAL ASSETS
Critically Undercapitalized 2% or below
*3% for banks with the highest CAMEL (supervisory) rating.
An insured depository institution may be deemed to be in a capital category
that is lower than is indicated by its capital ratios if it receives an
unsatisfactory rating by its examiners with respect to its assets, management,
earnings or liquidity.
Under FDICIA, a bank that is not well capitalized is generally prohibited
from accepting or renewing brokered deposits and offering interest rates on
deposits significantly higher than the prevailing rate in its normal market area
or nationally (depending upon where the deposits are solicited); in addition,
"pass through" insurance coverage may not be available for certain employee
benefit accounts.
FDICIA generally prohibits a depository institution from making any capital
distribution (including payment of a dividend) or paying any management fee to
its holding company if the depository institution would thereafter be
undercapitalized. Undercapitalized depository institutions are subject to
limitations on growth and are required to submit a capital
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restoration plan, which must be guaranteed by the institution's parent company.
Institutions that fail to submit an acceptable plan, or that are significantly
undercapitalized, are subject to a host of more drastic regulatory restrictions
and measures.
The Bank is considered "well capitalized" according to FDICIA guidelines.
Federal and state statutes and regulations provide financial institution
regulatory agencies with great flexibility to undertake enforcement action
against an institution that fails to comply with regulatory requirements,
particularly capital requirements. Possible enforcement actions range from the
imposition of a capital plan and capital directive to, in the most severe cases,
place the institution into conservatorship or receivership or the termination of
deposit insurance.
FDICIA directs that each federal banking agency prescribe standards for
depository institutions or depository institutions' holding companies relating
to internal controls, information systems, internal audit systems, loan
documentation, credit underwriting, interest rate exposure, asset growth,
compensation, a maximum ratio of classified assets to capital, minimum earnings
sufficient to absorb losses and other standards as they deem appropriate. Many
regulations implementing these directives have been adopted by the agencies
As a member of the FRB, the Bank is subject to regulations requiring
depository institutions to maintain reserves against a specified percentage of
transaction accounts (primarily NOW and regular checking). Reserves are
maintained in the form of vault cash or non-interest bearing deposits with the
FRB. The FRB regulations generally require 3% reserves on the first $39.3
million of transaction accounts; however, the first $5 million of these
otherwise reservable balances (subject to adjustments by the FRB) are exempted
from the 3% reserve requirement. Net transaction balances over $39.3 million are
subject to a reserve requirement of $1,179,000 plus 10% of the amount of the net
transaction balances over $39.3 million. The Bank is in compliance with the
forgoing requirements.
Under the Community Reinvestment Act ("CRA"), a financial institution has a
continuing and affirmative obligation, consistent with the safe and sound
operation of such institution, to serve the "convenience and needs" of the
communities in which they are chartered to do business, including low and
moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community as long as they are
consistent with the CRA. The CRA requires each federal banking agency, in
connection with its examination of a financial institution, to assess and assign
one of four ratings to the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by the institution, including applications for charters, branches
and other deposit facilities, relocations, mergers, consolidations and
acquisitions of assets or assumptions of liabilities. The CRA also requires that
all institutions make public disclosure of their CRA ratings.
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BUSINESS-STATISTICAL DISCLOSURE
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and the Results of Operations" on Pages 14
through 32 of the 1999 Annual Report to Stockholders (filed as Exhibit 13, pages
22 through 40 of this report) is incorporated herein by reference.
ITEM 2. PROPERTIES
The Bank conducts its operations through its main office and five branches.
The Company's office is located in the main office of the Bank. All of such
offices are owned by the Bank and are located in Lake County, Illinois. The Bank
believes that its current facilities are adequate for the conduct of its
business.
The following table sets forth information relating to each of such
offices:
Main Office: Trust Department:
1601 North Lewis Avenue 1601 North Lewis Avenue
Waukegan, Illinois 60085 Waukegan, Illinois 60085
Branches:
3233 Grand Avenue 40220 N. Route 59
Waukegan, Illinois 60085 Antioch, Illinois 60002
216 Madison Street 700 N. Sheridan Road
Waukegan, Illinois 60085 Winthrop Harbor, Illinois 60096
5384 Grand Avenue
Gurnee, Illinois 60031
ITEM 3. LEGAL PROCEEDINGS
Due to the nature of their business, the Registrant and its subsidiary are
often subject to various legal actions. These legal actions, whether pending or
threatened, arise through the normal course of business and are not considered
unusual or material.
Currently, no material legal procedures are pending which involve the
Registrant or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not Applicable
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The information set forth under the captions "Stock Market Information";
"Price Summary"; and "Cash Dividends" on Page 54 of the 1999 Annual Report to
Stockholders (filed as Exhibit 13, page 62 of this report) is incorporated
herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated
Financial Data" on Page 14 of the 1999 Annual Report to Stockholders (filed as
Exhibit 13, page 22 of this report) is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on Pages 14 through
32 of the 1999 Annual Report to Stockholders (filed as Exhibit 13, pages 22
through 40 of this report) is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information set forth under the caption "Quantitative and Qualitative
Disclosures about Market Risk" on Pages 32 through 34 of the 1999 Annual Report
to Stockholders (filed as Exhibit 13, pages 40 through 42 of this report) is
incorporated herein by reference.
15
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Registrant and the Independent
Auditors' Report as set forth on the following pages of the 1999 Annual Report
to Stockholders (filed as Exhibit 13, to this report) are incorporated herein by
reference:
Annual Report
to Stockholders
Page
---------------
Independent Auditors' Report 35
Consolidated Balance Sheets as of
December 31, 1999 and 1998 36
Consolidated Statements of Income for the
Years ended December 31, 1999, 1998 and 1997 37
Consolidated Statements of Cash Flows for the
Years ended December 31, 1999, 1998 and 1997 38
Consolidated Statements of Stockholders'
Equity for the Years ended
December 31, 1999, 1998 and 1997 39
Consolidated Statements of Comprehensive
Income for the Years ended
December 31, 1999, 1998 and 1997 39
Notes to the Consolidated Financial Statements 40
Parent Company Only Financial Statements 52
The portions of the 1999 Annual Report to Stockholders which are not
specifically incorporated by reference as a part of this Form 10-K are not
deemed to be a part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
16
<PAGE> 17
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS - The information with respect to Directors of the Registrant set
forth under the caption "Directors and Executive Management" on pages 2 and 3 of
the Registrant's Proxy Statement, dated March 28, 2000, relating to the April
27, 2000 Annual Meeting of Stockholders is incorporated herein by reference.
EXECUTIVE OFFICERS - The Company's only executive officer is Mr. Fred Abdula,
the President of the Company at December 31, 1999. The information with respect
to Mr. Abdula is set forth under the caption "Directors and Executive
Management" on pages 2 and 3 of the Registrant's Proxy Statement, dated March
28, 2000, relating to the April 27, 2000 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the caption "Executive Compensation" and
"Summary Compensation Table" on page 5 of the Registrant's Proxy Statement,
dated March 28, 2000, relating to the April 27, 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" on page 4 of the Registrant's Proxy Statement,
dated March 28, 2000, relating to the April 27, 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Compensation Committee
Interlocks and Insider Participation" on page 8 of the Registrant's Proxy
Statement, dated March 28, 2000, relating to the April 27, 2000 Annual Meeting
of Stockholders is incorporated herein by reference.
17
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) 1. Financial Statements
All financial statements of the Registrant are incorporated herein by
reference as set forth under Item 8, Part II of this report on Form
10-K.
2. Financial Statement Schedules Not applicable
3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K) The
following exhibits are filed as part of this report:
3-A Articles of Incorporation of the Company, as amended to date.
(Filed with Registrant's annual report on Form 10-K for the year
ended December 31, 1994 Commission File 0-19300 and incorporated
here by reference.)
3-B Bylaws of the Company, as amended to date. (Filed with
Registrant's annual report on Form 10-K for the year ended
December 31, 1994 Commission File 0-19300 and incorporated here by
reference.)
4 Specimen Stock Certificate. (Incorporated by reference to the
Registrant's Registration Statement of Form S-1, as amended (File
No. 33-38697) initially filed with the Commission on January 25,
1991.)
10 1992 Northern States Omnibus Incentive Plan. (Filed with
Registrant's annual report on Form 10-K for the year ended
December 31, 1994 Commission File 0-19300 and incorporated here by
reference.)
11 Statement of Computation of per share earnings. Contained in Notes
1 and 14 to the consolidated financial statements, pages 41 and
51, 1999 Annual Report to Stockholders (filed as Exhibit 13 pages
49 and 59 to this report) is incorporated by reference.
13 Copy of the Company's Annual Report to Stockholders for the year
ended December 31, 1999. This exhibit, except for portions thereof
that have been specifically incorporated by reference into this
report, is furnished for the information of the Commission and
shall not be deemed "filed" as part hereof.
21 List of Subsidiaries.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of the
year ended December 31, 1999.
(c) Exhibit List and Index
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized, on this 28th day of
March 2000.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Fred Abdula,
Chairman of the Board
and President
/s/ Fred Abdula (Principal Executive Officer)
- -----------------------------------
Thomas M. Nemeth,
Vice President and Treasurer
(Principal Financial Officer and
/s/ Thomas M. Nemeth Principal Accounting Officer)
- -----------------------------------
19
<PAGE> 20
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated. Each director of
the Registrant, whose signature appears below, hereby appoints Fred Abdula and
Thomas M. Nemeth and each of them severally, as his attorney-in-fact, to sign in
his name and on his behalf, as a director of the Registrant, and to file with
the Commission any and all Amendments to this Report on Form 10-K, on this 28th
day of March 2000.
Fred Abdula, Director /s/ Fred Abdula
----------------------------
Kenneth W. Balza, Director /s/ Kenneth W. Balza
----------------------------
Jack H. Blumberg, Director /s/ Jack H. Blumberg
----------------------------
Frank Furlan, Director /s/ Frank Furlan
----------------------------
Harry S. Gaples, Director /s/ Harry S. Gaples
----------------------------
Laurance A. Guthrie, Director /s/ Laurance A. Guthrie
----------------------------
James A. Hollensteiner, Director /s/ James A. Hollensteiner
----------------------------
Raymond M. Mota, Director /s/ Raymond M. Mota
----------------------------
Helen Rumsa, Director /s/ Helen Rumsa
----------------------------
Frank Ryskiewicz, Director /s/ Frank Ryskiewicz
----------------------------
Henry G. Tewes, Director /s/ Henry G. Tewes
----------------------------
Arthur J. Wagner, Director /s/ Arthur J. Wagner
----------------------------
20
<PAGE> 21
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Page(s)
- -------- -------
<S> <C> <C>
3-A Articles of Incorporation of the Company,
as amended to date.
(Filed with Registrant's annual report on
Form 10-K for the year ended December 31, 1994
Commission File 0-19300 and incorporated here by reference.)
3-B Bylaws of the Company, as amended to date.
(Filed with Registrant's annual report on
Form 10-K for the year ended December 31, 1994 Commission File 0-19300
and incorporated here by reference.)
4 Specimen Stock Certificate. (Incorporated by reference to the Registrant's
Registration Statement of Form S-1, as amended (File No. 33-38697) initially
filed with the Commission on January 25, 1991.)
10 1992 Northern States Omnibus Incentive Plan.
(Filed with Registrant's annual report on
Form 10-K for the year ended December 31, 1994 Commission File 0-19300
and incorporated here by reference.)
11 Statement of Computation of per share earnings. Contained
in Notes 1 and 14 to the consolidated financial statements,
pages 41 and 51, 1999 Annual Report to Stockholders (filed as
Exhibit 13 to this report) is incorporated by reference. 49 and 59
13 Copy of the Company's Annual Report to Stockholders for
the year ended December 31, 1999. This exhibit, except for
portions thereof that have been specifically incorporated
by reference into this Report, is furnished for the information
of the Commission and shall not be deemed "filed" as part hereof. 22
21 List of Subsidiaries. 63
</TABLE>
21
<PAGE> 1
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s, EXCEPT PER SHARE DATA)
- ---------------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income..........................................$ 32,778 $ 34,206 $ 32,759 $ 31,671 30,893
Interest expense......................................... 15,005 16,896 15,615 14,808 14,705
-----------------------------------------------------------------
Net interest income...................................... 17,773 17,310 17,144 16,863 16,188
Provision for loan losses................................ 0 10 480 1,190 1,480
-----------------------------------------------------------------
Net interest income after provision for loan losses...... 17,773 17,300 16,664 15,673 14,708
Noninterest income....................................... 3,501 2,935 2,687 3,239 2,702
Noninterest expenses..................................... 9,779 9,623 9,132 10,372 10,433
-----------------------------------------------------------------
Income before income taxes............................... 11,495 10,612 10,219 8,540 6,977
Provision for income taxes............................... 3,611 3,308 3,209 2,529 2,040
-----------------------------------------------------------------
NET INCOME...............................................$ 7,884 $ 7,304 $ 7,010 $ 6,011 $ 4,937
=================================================================
BALANCE SHEET DATA:
Cash, noninterest bearing................................$ 16,740 $ 15,176 $ 14,200 $ 15,247 $ 18,119
Investments (2).......................................... 196,944 213,744 192,078 166,585 171,125
Loans, net............................................... 242,794 240,776 236,794 227,814 220,865
Direct lease financing................................... 2,138 987 1,274 999 622
All other assets......................................... 18,065 15,238 14,640 15,919 17,160
-----------------------------------------------------------------
TOTAL ASSETS.............................................$ 476,681 $ 485,921 $458,986 $426,564 $427,891
=================================================================
Deposits.................................................$ 334,251 $ 355,756 $347,950 $328,795 $327,555
Other borrowings......................................... 70,436 47,990 38,504 36,758 43,278
Federal Home Loan Bank advance........................... 0 10,000 5,000 0 0
All other liabilities.................................... 6,460 7,062 7,337 6,176 6,053
Stockholders' equity..................................... 65,534 65,113 60,195 54,835 51,005
-----------------------------------------------------------------
Total Liabilities & Stockholders' Equity.................$ 476,681 $ 485,921 $458,986 $426,564 $427,891
=================================================================
PER SHARE DATA: (4)
Basic earnings per share.................................$ 1.77 $ 1.64 $ 1.58 $ 1.35 $ 1.11
Diluted earnings per share............................... 1.77 1.64 1.57 1.35 1.11
Cash dividends declared.................................. .75 0.60 0.48 0.40 0.33
Book value (at end of year).............................. 14.70 14.63 13.54 12.33 11.49
SELECTED FINANCIAL AND OTHER RATIOS:
Return on average assets (1)............................. 1.67% 1.55% 1.61% 1.43% 1.21%
Return on average equity (1)............................. 12.05 11.66 12.28 11.47 10.15
Average stockholders' equity to average assets (1)....... 13.84 13.29 13.13 12.47 11.93
Tax equivalent interest rate spread...................... 3.26 3.06 3.39 3.64 3.62
Tax equivalent net interest income to average
earning assets (1)..................................... 4.11 3.99 4.33 4.50 4.46
Non-performing assets to total assets.................... 0.72 1.36 0.78 0.94 2.25
Dividend payout ratio (3)................................ 42.42 36.57 30.44 29.60 29.63
</TABLE>
(1) - Does not reflect impact of unrealized gains (losses) on securities
available for sale on average balances.
(2) - Includes interest bearing deposits in other financial institutions,
federal funds sold, securities available for sale.
(3) - Total cash dividends divided by net income.
(4) - Information prior to 1998 was restated to reflect five-for-one
stock split.
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
The following is a discussion and analysis of Northern States Financial
Corporation's (the "Company") financial position and results of operations and
should be read in conjunction with the consolidated financial statements and
notes appearing elsewhere in this report. The Company has one wholly owned
subsidiary, the Bank of Waukegan (the "Bank"). During 1998, the Company received
approval from the applicable regulatory agencies to merge First Federal Bank,
fsb, (the "Thrift"), a wholly owned subsidiary of the Company, into the Bank.
The Bank is a commercial banking company that provides traditional banking
services, including mortgage and trust services, to corporate, retail and civic
entities in the market.
14 NSFC ANNUAL REPORT 1999
<PAGE> 2
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The Company and its subsidiary are subject to regulation by numerous agencies
including the Federal Reserve Board, the Federal Deposit Insurance Corporation
and the Illinois Office of Banks and Real Estate. Among other things, these
agencies limit the activities in which the Company and the Bank may engage, the
investments and loans that the Bank funds, and the reserves against deposits
which the Bank must maintain.
The statements contained in this management's discussion and analysis that
are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are identifiable by
the use of the words "believe", "expect", "intend", "estimate" or similar
expressions. The Company cautions readers of this Annual Report that a number
of important factors could cause the Company's actual results in 2000 and
beyond to differ materially from those expressed in any such forward-looking
statements.
- --------------------------------------------------------------------------------
TABLE 1 ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
- ------------------------------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Loans (1) (2) (3)............$ 244,039 $ 20,896 8.56% $242,020 $ 21,903 9.05% $ 241,019 $ 22,343 9.27%
Taxable securities (5)....... 175,146 10,663 6.00 167,117 10,263 6.16 132,128 8,411 6.34
Securities exempt from
federal income taxes (2) (5) 20,754 1,568 7.68 19,552 1,543 8.18 21,301 1,741 8.38
Interest bearing deposits
in financial institutions.. 296 16 5.41 428 25 5.84 617 35 5.67
Federal funds sold........... 6,171 298 4.83 21,157 1,135 5.36 17,437 965 5.53
------------------------------------------------------------------------------------------------
Interest earning assets.... 446,406 33,441 7.46 450,274 34,869 7.76 412,502 33,495 8.12
Noninterest earning assets... 26,293 20,823 22,344
--------- -------- ---------
Average assets (4).........$ 472,699 $471,097 $ 434,846
========= ======== =========
LIABILITIES AND
STOCKHOLDERS' EQUITY
NOW deposits.................$ 46,403 1,204 2.59 $ 39,310 1,157 2.94 $ 37,672 1,120 2.97
Money market deposits........ 40,557 1,416 3.49 42,400 1,656 3.91 41,945 1,672 3.99
Savings deposits............. 45,553 1,275 2.80 44,067 1,311 2.98 44,458 1,322 2.97
Time deposits................ 169,901 8,526 5.02 188,365 10,413 5.53 171,149 9,714 5.68
Other borrowings............. 54,852 2,584 4.71 45,582 2,359 5.18 35,082 1,787 5.09
------------------------------------------------------------------------------------------------
Interest bearing
liabilities.............. 357,266 15,005 4.20 359,724 16,896 4.70 330,306 15,615 4.73
---------------- ----------------- ----------------
Demand deposits.............. 43,128 40,254 40,112
Other noninterest
bearing liabilities........ 6,886 8,500 7,341
Stockholders' equity......... 65,419 62,619 57,087
--------- -------- ---------
Average liabilities and
stockholders' equity....$ 472,699 $471,097 $ 434,846
========= ======== =========
Net interest income........ $ 18,436 $ 17,973 $ 17,880
======== ========= ========
Net yield on interest
earning assets.......... 4.11% 3.99% 4.33%
===== ===== =====
Interest bearing liabilities
to earning assets ratio. 80.03% 79.89% 80.07%
===== ===== =====
</TABLE>
(1) - Interest income on loans includes loan origination and other fees
of $353 for 1999, $475 for 1998 and $492 for 1997. Average loans
include direct lease financing.
(2) - Tax-exempt income is reflected on a fully tax equivalent basis utilizing
a 34% rate.
(3) - Non-accrual loans are included in average loans.
(4) - Average balances are derived from the average daily balances.
(5) - Rate information was calculated based on the average amortized cost
for securities. The 1999, 1998, and 1997, average balance information
includes an average unrealized gain (loss) for taxable securities of
$(2,425), $397 and $(526). The 1999, 1998, and 1997 average balance
information includes an average unrealized gain (loss) of $344, $682, and
$530 for tax-exempt securities.
NSFC ANNUAL REPORT 1999 15
<PAGE> 3
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NET INTEREST INCOME
- --------------------------------------------------------------------------------
Table 1, "Analysis of Average Balances, Tax Equivalent Yields and Rates", shows
a comparison of net interest income and average volumes, together with effective
yields earned on such assets and rates paid on such funds. The results shown
reflect the excess of interest earned on assets over the interest paid for
funds.
Interest income is the primary source of revenue for the Company. It
comprised 90.4% of the Company's total revenues in 1999, 92.1% in 1998 and 92.4%
in 1997.
Net interest income is the difference between interest income earned on
average interest earning assets, such as loans and securities, and interest
expense on average interest bearing liabilities, such as deposits and other
borrowings. In Table 1, interest income on non-taxable securities and loans has
been adjusted to be fully tax equivalent to be comparable with rates earned and
paid elsewhere. In addition, rates earned on securities are calculated based
upon the average amortized cost of the related securities.
Several factors affect net interest income, one of which is changes in
interest rates that are generally indicated by the changes in the prime lending
rate. The prime rate was stable at 7.75% during the first half of 1999 and
increased during the third quarter to 8.25% and during the fourth quarter to
8.50%. The average weighted prime lending rate in 1999 was 8.02%, a decrease of
34 basis points from 8.36% in 1998, and was 8.44% in 1997. This decline in
general interest rates is evidenced by the decline in average rates earned on
taxable securities in 1999 that decreased 16 basis points to 6.00% from 1998
levels after decreasing 18 basis points in 1998 from 1997. Rates on federal
funds sold in 1999 declined 53 basis points from 1998 after decreasing 17 basis
points in 1998 from 1997. Although average rates in 1999 were below 1998 levels,
rates during 1999 began to rise, especially during the second half of the year.
It is expected that interest rates on average will be higher in 2000 than in
1999.
Another major factor affecting the net interest margin is rates earned on
loans. Table 1 shows that rates earned on average loans decreased to 8.56% in
1999 from 9.05% in 1998 after declining in 1998 from 9.27% in 1997. The yields
on loans during 1999 decreased 49 basis points from 1998 in part as a
consequence of the 34 basis point decline of the average prime lending rate in
1999. Another factor impacting the overall decline in loan rates was competitive
pressures that caused loan rates to decline. It is expected that competitive
pressures will continue to affect loan pricing in 2000. Loan rates in 1998
declined 22 basis points from 1997, primarily as a result of competition and the
decline in the prime rate.
The average earning asset ratio is another important factor affecting net
interest income. The average earning asset ratio is the percentage of average
assets that earn interest income to total average assets. This percentage
declined slightly for the Company during 1999 to 94.44% compared to 95.58% in
1998 and 94.86% in 1997. The reasons for this slight decline are that the
upswing in rates during the second half of 1999 caused the carrying value of the
Bank's securities to decline and the Bank, because of potential customer Y2K
concerns, kept higher levels of cash on hand toward the end of the year.
As indicated in Table 1, the Company's net interest income on a fully tax
equivalent basis rose in 1999 to $18,436,000, an increase of $463,000 from 1998.
The primary reason for the 1999 increase in net interest income was the increase
in the interest rate spread. The interest rate spread is the yield earned on
interest earning assets less rates paid on interest bearing liabilities. The
interest rate spread increased to 3.26% in 1999 as compared to 3.06% in 1998 and
3.39% in 1997. Increases to the interest rate spread have a positive impact on
net interest income.
Rates on interest earning assets declined by 30 basis points to 7.46% in 1999
from 7.76% in 1998 after declining 36 basis points in 1998 from 1997. Rates on
interest bearing liabilities declined to a greater extent than the rates on
interest earning assets during 1999 creating the increased interest rate spread.
Rates on interest bearing liabilities decreased 50 basis points to 4.20% in 1999
from 4.70% in 1998 after declining only 3 basis points in 1998 from 1997. Rates
on NOW, money market and savings deposits were 35, 42 and 18 basis points lower
in 1999 than in 1998 after remaining relatively stable in 1998 compared to 1997.
Rates on NOW and money market deposits were lowered during the fourth quarter of
1998 and rates on NOW deposits were lowered a second time during the second
quarter of 1999 along with the rates paid on savings deposits. As market
interest rates in general increased during the second half of 1999, evidenced by
the increases in prime rate, rates on NOW, money market and savings deposits
were not increased. Average time deposits rates were lower in 1999 than in 1998
by 51 basis points compared to a decrease of only 15 basis points in 1998
compared to 1997. Rates offered for time deposits increased during the second
half of 1999 but the average rates on time deposits declined in 1999 compared to
1998. Many of the time deposits opened in 1998 that had 1999 maturity dates and
time deposits opened during the first half of 1999 were opened at lower interest
rates causing the 1999 average rates on time deposits to decline compared to
1998. It is expected that the average time deposit rates in 2000 will be higher
compared to 1999, as many time deposits opened in the second half of 1999 at
higher rates will remain open until maturity in 2000. The lower average rates on
time deposits in 1999 is also due in part to management choosing in some cases
not to match higher competitive rates offered on time deposits of $100,000 and
over. Rates paid on other borrowings declined 47 basis points in 1999 from 1998
after increasing 9 basis points in 1998 from 1997.
Another factor influencing net interest income is the "interest bearing
liabilities to earning assets ratio" as shown in Table 1. This ratio indicates
how many cents of each dollar of earning assets are funded by an interest
bearing liability. As Table 1 shows, this relationship has increased to 80.03%
in 1999 from 79.89% in 1998, which was lower than 1997's ratio of 80.07%. An
increase in this ratio has a negative impact on net interest income.
The mix of assets and liabilities also affects net interest income. Average
loans as a percentage of earning assets increased to 54.7% in 1999 as compared
to 53.8% in 1998 and 58.4% in 1997. As loans as a percentage of earning assets
increases there is a positive impact on yields earned on earning assets as loans
normally earn higher yields than securities.
In 1999, total average interest bearing deposits decreased $11.7 million from
1998 levels after increasing $18.9 million in 1998 from 1997. The 1999 decline
in average interest bearing deposits was primarily in time deposits, which
decreased $18.5 million,
16 NSFC ANNUAL REPORT 1999
<PAGE> 4
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NET INTEREST INCOME (CONTINUED)
- --------------------------------------------------------------------------------
while lower cost NOW, money market and savings deposits increased $6.7 million.
A portion of the decrease in time deposits was caused by some of the Bank's
customers transferring their time deposits of $100,000 or more into repurchase
agreement products as these products provide the customer with added security in
the form of an investment security pledged by the Company. In some cases the
decrease in time deposits was caused by management's choice not to meet higher
competitive rates on time deposits of $100,000 or more in order to minimize
rates paid on time deposits.
Average other borrowings were $54.9 million in 1999 consisting primarily of
repurchase agreements, advances from the Federal Home Loan Bank and federal
funds purchased. Average borrowings increased $9.3 million in 1999 from 1998
after increasing $10.5 million in 1998 from 1997. Average term advances from the
Federal Home Loan Bank for 1999 were $5.9 million and were paid off by year-end.
Federal funds purchased averaged $2.0 million during 1999 and were borrowed for
short periods of time necessitated by liquidity requirements. The remaining
$46.9 million of the average other borrowings were in the form of securities
sold under repurchase agreements (repurchase agreements) which the Company
continues to offer as an alternative to certificates of deposit. A repurchase
agreement is not subject to FDIC insurance and is not subject to reserve
requirements, and therefore is less costly to the Company. A repurchase
agreement also gives the customer added security for the borrowing in the form
of an investment security pledged by the Company. Average repurchase agreements
in 1999 were $10.7 million greater than 1998 levels, which had increased $2.0
million from 1997. Management expects to continue to offer repurchase agreements
as an alternative to certificates of deposit in the future.
Interest rates paid on deposits and charged for loans during 1999 remained
comparable with other local financial institutions. Management has raised time
deposits rates during the second half of 1999 by 80 to 100 basis points as
general interest rates have increased. The Bank's time deposits remain
competitive except when management chooses not to get involved in a bidding war
for deposits. Management expects that during 2000 average rates on time deposits
will increase compared to 1999. This may have a negative impact on the Bank's
net interest rate spread.
Many other factors beyond management's control have a significant impact on
changes in net interest income from one period to another. Examples of such
factors are: (1) credit demands by customers; (2) fiscal and debt management
policy of federal and state governments; (3) monetary policy of the Federal
Reserve Board; and (4) changes in regulations.
The components of the changes in net interest income are shown in Table 2,
"Analysis of Changes in Interest Income and Expense". Table 2 allocates changes
in net interest income between amounts attributable to changes in rate and
changes in volume for the various categories of interest earning assets and
interest bearing liabilities.
- --------------------------------------------------------------------------------
TABLE 2 ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
- ----------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31 1999 COMPARED TO 1998 1998 COMPARED TO 1997
- ----------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) INCREASE (DECREASE)
CHANGE CHANGE CHANGE CHANGE
TOTAL DUE TO DUE TO TOTAL DUE TO DUE TO
CHANGE VOLUME RATE CHANGE VOLUME RATE
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans...........................$(1,007) $ 181 $(1,188) $ (440) $ 92 $ (532)
Taxable securities.............. 400 656 (256) 1,852 2,103 (251)
Securities exempt from
federal income taxes.......... 25 122 (97) (198) (156) (42)
Interest bearing deposits
in financial institutions..... (9) (7) (2) (10) (11) 1
Federal funds sold.............. (837) (734) (103) 170 200 (30)
-------------------------------------------------------------------------------
Total interest income......... (1,428) 218 (1,646) 1,374 2,228 (854)
-------------------------------------------------------------------------------
INTEREST EXPENSE
NOW deposits.................... 47 194 (147) 37 48 (11)
Money market deposits........... (240) (70) (170) (16) 18 (34)
Savings deposits................ (36) 43 (79) (11) (12) 1
Time deposits................... (1,887) (972) (915) 699 957 (258)
Other borrowings................ 225 450 (225) 572 543 29
-------------------------------------------------------------------------------
Total interest expense........ (1,891) (355) (1,536) 1,281 1,554 (273)
-------------------------------------------------------------------------------
NET INTEREST INCOME..............$ 463 $ 573 $ (110) $ 93 $ 674 $ (581)
===============================================================================
</TABLE>
Rate/volume variances are allocated to the rate variance and the volume
variance on an absolute basis. Tax-exempt income is reflected on a fully tax
equivalent basis utilizing a 34% rate.
NSFC ANNUAL REPORT 1999 17
<PAGE> 5
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
TABLE 3 SECURITIES AVAILABLE FOR SALE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
- ----------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury........................$ 4,998 2.54% $ 13,109 6.53% $ 14,031 7.77%
Government agencies and corporations. 162,091 82.41 152,440 75.89 128,872 71.33
States & political subdivisions...... 20,710 10.53 23,428 11.67 22,408 12.40
Mortgage-backed securities........... 6,712 3.41 9,728 4.84 13,123 7.26
Equity securities.................... 2,173 1.11 2,156 1.07 2,238 1.24
---------------------------------------------------------------------------
Total securities available
for sale......................$196,684 100.00% $200,861 100.00% $180,672 100.00%
===========================================================================
</TABLE>
As of December 31, 1999, the Company had no securities of a single issuer, other
than the U.S. Treasury and U.S. Government agencies and corporations, including
the Federal Home Loan Bank (FHLB), the Federal Home Loan Mortgage Corporation
(FHLMC), the Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (FNMA), and the Federal Farm Credit Bank (FFCB),
that exceeded 10% of consolidated stockholders' equity. Although the Company
holds securities issued by municipalities within the state of Illinois which in
the aggregate exceed 10% of consolidated stockholders' equity, none of the
holdings from individual municipal issuers exceed this threshold.
The Company holds local municipal bonds which, although not rated, are
considered low risk investments.
- --------------------------------------------------------------------------------
SECURITIES
- --------------------------------------------------------------------------------
All securities of the Company at December 31, 1999 are classified as available
for sale. The Company classifies its securities as available for sale to provide
flexibility in the event that it may be necessary to sell securities to raise
cash for liquidity purposes or to adjust the portfolio for interest rate risk or
income tax purposes.
The securities portfolio decreased $4.2 million at year-end 1999 from 1998,
after an increase of $20.2 million at year-end 1998 from 1997. However, average
securities, as shown in Table 1, increased $9.2 million in 1999 from 1998. Table
1 shows that the average federal funds sold decreased $15.0 million in 1999 from
1998 resulting in the increase in average securities. This shift occurred in
order to maximize yields on interest earning assets as securities earn higher
rates than federal funds sold. Holdings of U.S. Treasury securities declined
$8.1 million at December 31, 1999 compared to December 31, 1998. U.S. Government
agency issues increased by $9.7 million, to $162.1 million, at December 31,
1999, from $152.4 million at December 31, 1998. The increase in U.S. Government
agency issues is the result of the Company investing in higher yielding agency
issues that often have call provisions in order to maximize yields on the
Company's securities portfolio while helping to minimize state income taxes. As
can be seen in Table 3, "Securities Available for Sale", U.S. Government agency
securities increased to 82.4% of the total portfolio at year-end 1999, from
75.9% in 1998 and 71.3% in 1997.
Another reason for the growth in U.S. Government agency securities is that
the Company attempts to keep at least half of its portfolio in U.S. Treasury and
U.S. Government agency issues, as indicated for all periods reported in Table 3.
This assists the Company in managing its exposure to changing interest rates,
while minimizing credit risk within the portfolio. U.S. Treasury
18 NSFC ANNUAL REPORT 1999
<PAGE> 6
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
SECURITIES (CONTINUED)
- --------------------------------------------------------------------------------
and U.S. Government agency issues comprised over 84% of the total portfolio at
December 31, 1999.
Holdings of securities issued by states and political subdivisions, of which
over 90% are tax-exempt, decreased by $2.7 million to $20.7 million at December
31, 1999. According to federal tax law, a bank is not allowed an interest
deduction for the cost of deposits or borrowings used to fund most tax-exempt
issues acquired after August 7, 1986. Whenever possible the Company attempts to
purchase "bank qualified" tax-exempt issues from local taxing bodies in an
effort to support the local community, consistent with the investment standards
contained in the investment policy.
The Company, at December 31, 1999, has 3.4% of its securities portfolio
invested in mortgage-backed securities. Mortgage-backed securities balances at
December 31, 1999 were $6.7 million, a decrease of $3.0 million from the
previous year, which reflects principal reductions. These principal reductions
are made to the mortgage-backed securities as borrowers make scheduled principal
payments on the mortgages that underlie these securities.
The Company's equity securities totaled $2.2 million at December 31, 1999 and
consisted of Student Loan Marketing Association (SLMA) and Federal Home Loan
Bank (FHLB) stock.
Efforts by the Company to maintain appropriate liquidity include periodic
adjustments to the securities portfolio, typically accomplished through the
maturities of investments purchased.
The maturity distribution and average yields, on a fully tax equivalent
basis, of the securities portfolio at December 31, 1999 are shown in Table 4,
"Securities Maturity Schedule & Yields".
- --------------------------------------------------------------------------------
TABLE 4 SECURITIES MATURITY SCHEDULE & YIELDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GREATER THAN 1 YR. GREATER THAN 5YRS.
SECURITIES AVAILABLE FOR SALE LESS THAN OR AND LESS THAN OR AND LESS THAN OR GREATER
($ 000s) EQUAL TO 1 YR. EQUAL TO 5 YRS. EQUAL TO 10 YRS. THAN 10 YRS. TOTALS
As of December 31, 1999 BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury................$ 4,000 5.54% $ 998 6.16% $ 0 0.00% $ 0 0.00% $ 4,998 5.66%
U.S. Government agencies
and corporations ......... 2,998 5.86 138,321 6.00 20,772 6.52 0 0.00 162,091 6.06
States & political
subdivisions (1) ......... 5,392 7.89 12,359 7.70 2,959 6.76 0 0.00 20,710 7.62
Mortgage-backed securities (2) 0 0.00 1,150 6.08 1,342 7.29 4,220 6.31 6,712
6.47
Equity securities ............ 1,457 6.30 716 5.33 0 0.00 0 0.00 2,173 5.98
----------------------------------------------------------------------------------------------
Total.................$13,847 6.60% $153,544 6.14% $ 25,073 6.59% $ 4,220 6.31% $196,684 6.23%
==============================================================================================
</TABLE>
(1) - The yield is reflected on a fully tax equivalent basis utilizing a 34% tax
rate.
(2) - Mortgage-backed securities reflect the contractual maturity of the related
instrument.
NSFC ANNUAL REPORT 1999 19
<PAGE> 7
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
TABLE 5 LOAN PORTFOLIO
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
As of December 31 1999 1998 1997 1996 1995
======================================================================================================
<S> <C> <C> <C> <C> <C>
Commercial........................$ 60,570 $ 64,043 $ 54,701 $ 50,762 $ 53,886
Real estate-construction .......... 21,813 17,328 26,768 26,905 23,720
Real estate-mortgage .............. 142,016 141,241 138,134 133,566 126,268
Home equity ....................... 17,259 15,579 14,722 12,986 11,673
Installment ....................... 6,957 8,530 8,544 9,203 10,903
----------------------------------------------------------------
Total loans ..................... 248,615 246,721 242,869 233,422 226,450
Unearned income ................... (69) (99) (154) (240) (370)
Deferred loan fees ................ (384) (413) (491) (529) (701)
----------------------------------------------------------------
Loans, net of unearned income
and deferred loan fees .......... 248,162 246,209 242,224 232,653 225,379
Allowance for loan losses ......... (5,368) (5,433) (5,430) (4,839) (4,514)
----------------------------------------------------------------
Loans, net...................$ 242,794 $ 240,776 $ 236,794 $ 227,814 $ 220,865
================================================================
</TABLE>
The Company had no foreign loans outstanding at December 31, 1999.
- --------------------------------------------------------------------------------
LOAN PORTFOLIO
- --------------------------------------------------------------------------------
Loan growth remained flat during 1999 as competition by financial
institutions for loans continued. As shown in Table 5, "Loan Portfolio", gross
loans increased $1,894,000 or .8% at year-end 1999, following an increase of
$3,852,000 or 1.6% in 1998. Table 1 shows that average loans in 1999 were
$244,039,000, an increase of only $2,019,000 or .8% over the average loans in
1998 compared to an increase to average loans in 1998 of $1,001,000 or .4% over
1997 levels.
Commercial loans at year-end decreased $3.4 million to $60.6 million as of
December 31, 1999 after increasing $9.3 million in 1998. The decline in
commercial loans during 1999 reflects the strong competition from other
financial institutions for such loans.
The real estate construction loan portfolio increased $4.5 million during
1999, with balances at December 31, 1999 of $21.8 million compared to $17.3
million for 1998. The Company has developed an expertise in construction lending
and has developed a portfolio of construction and construction-related loans.
The construction portfolio consists of loans to residential builders and housing
developers and for commercial building projects. The Company recognizes that
successful construction lending is dependent upon the successful completion of
construction contracts and good management of the company doing the
construction. Construction loans are generally made on properties that are under
sales contracts. Loans are secured by first lien positions on the real estate
and have loan to value ratios between 50% - 75% of appraised value. These loans
are usually processed through a title company construction escrow. Terms
generally range from six months to three years. The Company attempts to minimize
the risk of construction lending by granting credit to established customers
experienced in the construction industry.
The mortgage loan portfolio increased by $775,000 at December 31, 1999 as
compared to 1998, as shown in Table 5. During 1998 real estate mortgage loans
had increased $3,107,000 from year-end 1997. A large percentage of the mortgage
loan portfolio is for commercial use and purposes where real estate is used as
collateral for the loan. Many of the Company's construction loans become part of
the mortgage loan portfolio upon completion of the construction projects for
commercial purpose buildings. These commercial related mortgages are primarily
made at fixed rates with call features after five years.
The Bank has a mortgage banking operation that historically originated and
sold home mortgages on the secondary market. During 1999 $11.6 million in loans
were originated by the Bank for sale on the secondary market compared to $28.5
million in 1998. Currently, the Bank primarily takes and processes loan
applications for home mortgages that are then "table funded" by the institution
that ultimately will fund and own the loan, with the Bank receiving a fee.
During 1999 $14.7 million in loans were processed through "table funding"
arrangements as compared to $16.5 million during 1998. Increased home mortgage
rates during 1999 slowed demand for mortgages and accounts for the lesser volume
in 1999 compared to 1998.
20 NSFC ANNUAL REPORT 1999
<PAGE> 8
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
Mortgage loans originated and held for sale in the secondary market are
carried at the lower of cost, net of loan fees collected, or estimated market
value in the aggregate. The sale generally occurs approximately three days after
funding. During 1999, $2,520,000 in loans held for sale were transferred to the
loan portfolio at the lower of cost or estimated market value with no resulting
loss. On December 31, 1999 there were no loans held for sale compared to
$5,799,000 on December 31, 1998 that were classified with real estate mortgage
loans.
The Bank's mortgage banking operation no longer retains servicing on
mortgages funded by the Bank that are sold on the secondary market. The Bank
still services mortgage loans funded and sold in previous years, which generates
additional fee income. The unpaid principal balances of these loans at December
31, 1999 and 1998 were $48.1 million and $60.3 million.
Home equity loans are a product that allows consumers to use the equity in
their homes to finance purchases and may receive an interest deduction on their
tax return. The possible interest deduction has made this product an attractive
alternative to traditional consumer financing and is a product that the Company
expects to grow in the future. The home equity portfolio continued to grow
during 1999 with balances of approximately $17.3 million at December 31, 1999,
an increase of 10.8% from December 31, 1998 levels which had increased 5.8% from
1997.
Installment loans totaled $7.0 million at year-end 1999 decreasing $1.6
million from 1998 levels after maintaining consistent balances during 1998 and
1997. As a part of its responsibility as a community bank, management continues
to make installment loans available to customers despite competition from lower
cost financing alternatives for the purchase of automobiles and other consumer
goods.
The Company has a small direct lease financing portfolio, which increased in
1999 to $2,138,000 from $987,000 in 1998. While the Company does not presently
solicit leasing business, the Company does occasionally make leases to provide
customers with financial alternatives.
Table 5 shows the year-end balance of loans outstanding by loan purpose for
each of the last five years.
- --------------------------------------------------------------------------------
MATURITY OF LOANS
- --------------------------------------------------------------------------------
Table 6, "Loan Maturity Schedule", highlights the maturity distribution of
the Company's commercial and real estate construction loan portfolio.
The short-term sensitivity of the commercial and real estate construction
loan portfolio to interest rate changes is reflected in the fact that
approximately 53.8% of the loans scheduled to mature or subject to rate change
occur within one year. Of the remaining loans maturing beyond one year, 51.5% of
that total are loans subject to immediate repricing.
- --------------------------------------------------------------------------------
TABLE 6 LOAN MATURITY SCHEDULE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GREATER THAN
($ 000s) LESS THAN OR 1 YR. AND LESS THAN GREATER THAN
AS OF DECEMBER 31, 1999 EQUAL TO 1 YR. OR EQUAL TO 5 YRS. 5 YRS. TOTAL
=========================================================================================================
<S> <C> <C> <C> <C>
Commercial.......................................$ 25,309 $22,596 $12,665 $60,570
Real estate-construction ......................... 18,974 1,839 1,000 21,813
-------------------------------------------------------
Total..........................................$ 44,283 $24,435 $13,665 $82,383
=======================================================
Percent of total ................................. 53.75% 29.66% 16.59% 100.00%
=======================================================
</TABLE>
Commercial and construction loans maturing after one year:
Fixed rate..............$ 18,466
Variable rate........... 19,634
---------
Total...................$ 38,100
=========
Real estate-construction loans reflect the contractual maturity of the related
note. Due to anticipated roll-overs of real estate-construction notes,
management estimates that the loans will actually mature between one and five
years based upon the related types of construction. Loans that mature within one
year are considered to be variable rate loans as they can be repriced upon
maturity.
NSFC ANNUAL REPORT 1999 21
<PAGE> 9
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NON-PERFORMING ASSETS
- --------------------------------------------------------------------------------
Non-performing assets consist of non-performing loans and other real estate
owned. Non-performing loans, which include impaired loans, are: (1) loans
accounted for on a non-interest accrual basis; (2) accruing loans contractually
past due ninety days or more as to interest or principal payment; and (3) loans
with terms that have been renegotiated to provide a reduction or deferral of
interest or principal because of a deterioration in the financial condition of
the borrower. Total non-performing loans at December 31, 1999 were $815,000,
decreasing from $4,117,000 at December 31,1998 after increasing during 1998 from
$1,006,000 at December 31, 1997.
Impaired loans are included in non-performing loans and totaled $394,000 and
$3,515,000 at December 31, 1999 and December 31, 1998. The Bank considers a loan
impaired if full principal or interest payments are not anticipated. Impaired
loans are carried at the present value of expected cash flows discounted at the
loan's effective interest rate or at the fair value of the collateral, if the
loan is collateral dependent. Interest income recognized on impaired loans in
1999 was $30,000, which was all cash basis income, compared to $84,000 and
$36,000 of income recognized on impaired loans in 1998 and 1997.
Other real estate owned includes assets acquired through loan foreclosure and
repossession. The carrying value of other real estate owned is reviewed by
management at least quarterly to assure the reasonableness of its carrying
value, which is lower of cost (fair value at date of foreclosure) or fair value
less estimated selling costs.
Loans are placed in non-accrual status when they are 90 days past due, unless
they are fully secured and in the process of collection. As illustrated in Table
7, "Non-performing Assets", non-accrual loans at December 31, 1999 totaled
$394,000 compared to $3,804,000 at December 31, 1998, a decrease of $3,410,000.
Management continues to be conservative in placing loans on non-accrual
status. This conservative approach is used to eliminate any unearned interest
income that would inflate the Company's earnings. Management will continue its
emphasis on the collection of all non-performing loans, including the collection
of unpaid interest.
As Table 7 shows, at December 31, 1999 the Company had $421,000 in loans that
were 90 days past due and still accruing interest. These loans at year-end 1999
were fully secured and in the process of collection. This is an increase of
$108,000 as compared to $313,000 in loans past due and still accruing interest
at December 31, 1998.
As also shown in Table 7, total non-performing assets during 1999 declined
$3,177,000 from the 1998 levels after increasing during 1998 by $3,053,000 from
December 31, 1997. The majority of the decrease in non-performing assets during
1999 is the result of one credit in the amount of $3,010,000 that had been on
nonaccrual status at year-end 1998. During 1999 this credit, secured by an
office building, was foreclosed on and transferred to other real estate owned.
During the third quarter of 1999 the Bank sold the property with a resulting
gain of $157,000.
During 1999 another property that the Company carried in its other real
estate owned portfolio was sold. At the time of sale this property had an
allowance for other real estate losses established prior to 1997 equal to the
Company's basis in the property resulting in a carrying value of the property of
zero. The sale resulted in a gain of $376,000.
During 1999 a loan secured by real estate in the amount of $125,000 was
foreclosed upon and was transferred to other real estate owned. As a result of
these transactions other real estate owned increased during 1999 by $125,000 to
a balance of $2,622,000 at December 31, 1999 from $2,497,000 at December 31,
1998.
On December 31, 1999, one piece of property accounted for approximately 68%
of the total of other real estate owned. The property was acquired by the Bank
through the receipt of a deed in lieu of foreclosure in 1987. The parcel
consists of approximately 525,000 square feet of land situated on Lake Michigan
in Waukegan, Illinois.
During 1994, a purchase agreement for the property, along with some
neighboring parcels, was negotiated for an amount that satisfies the current
carrying value. The option agreement provides for the sale of the property and
provides for a fee to be paid to the Bank for the agreement and any 6-month
extensions of the agreement. During 1999, the Bank received all option and
extension fees at the appropriate time and the agreement remains in force.
Conditions necessary to finalize the purchase include approvals from the City of
Waukegan and favorable legislative actions by the State of Illinois Senate and
House of Representatives. It is still uncertain as to when the state legislature
will consider such approval of the required legislation.
Management continues to emphasize the early identification of loan related
problems. Management is not currently aware of any other significant loan, group
of loans, or segment of the loan portfolio not included in the discussion above
as to which there are serious doubts as to the ability of the borrower(s) to
comply with the present loan payment terms.
There were no other interest earning assets at December 31, 1999 that are
required to be disclosed as non-performing.
22 NSFC ANNUAL REPORT 1999
<PAGE> 10
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
TABLE 7 NON-PERFORMING ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
DECEMBER 31, 1999 1998 1997 1996 1995
=========================================================================================
LOANS
<S> <C> <C> <C> <C> <C>
Non-accrual status ....................$ 394 $3,804 $1,003 $1,108 $5,692
90 days or more past due, still
accruing............................ 421 313 3 58 1,653
-------------------------------------------------
Total non-performing loans ......... 815 4,117 1,006 1,166 7,345
Other real estate owned ............... 2,622 2,497 2,555 2,846 2,311
------------------------------------------------
Total non-performing assets ........$ 3,437 $6,614 $3,561 $4,012 $9,656
=================================================
Non-performing loans as a percentage
of total loans, net of unearned
income and deferred loan fees ....... 0.33% 1.67% 0.42% 0.50% 3.24%
Non-performing assets as a
percentage of total assets .......... 0.72 1.36 0.78 0.94 2.25
Non-performing loans as a percentage
of the allowance for loan losses .... 15.18 75.78 18.53 24.10 161.74
</TABLE>
Loans are placed in non-accrual status when they are 90 days past due, unless
they are fully secured and in the process of collection. Impaired Loans - At
December 31, 1999, 1998, 1997 and 1996 impaired loans totaled $394, $3,515, $754
and $828 and are included in non-accrual loans. Potential Problem Loans - At
December 31, 1999 there were no other loans classified as problem loans that are
not included above. Other Problem Assets - At December 31, 1999, there were no
other assets classified as problem assets other than the loans and other real
estate owned shown above.
- --------------------------------------------------------------------------------
PROVISION FOR LOAN LOSSES
- --------------------------------------------------------------------------------
A provision is credited to an allowance for loan losses, which is maintained
at a level considered by management to be adequate to absorb future loan losses.
The adequacy of the loan loss allowance is analyzed at least quarterly. Factors
considered in assessing the adequacy of the allowance include: changes in the
type and volume of the loan portfolio; review of the larger credits within the
Bank; historical loss experience; current economic trends and conditions; review
of the present value of expected cash flows and fair value of collateral on
impaired loans; loan growth; and other factors management deems appropriate.
As mentioned previously, management discounts impaired loans based on
expected cash flows or collateral values. A portion of the allowance for loan
losses is then allocated to each impaired loan with a calculated collateral
shortage.
During 1999, no provision for loans losses was made as compared to $10,000 in
1998 and $480,000 in 1997. Throughout the year, management reviewed the level of
provision necessary to maintain an adequate allowance based upon current
conditions, outstanding loan volumes, and levels of non-performing and impaired
loans. Management, after this careful review and with the concurrence of the
Board of Directors, lowered the provision in 1999 compared to 1998. If the
levels of non-performing assets do not increase significantly during 2000 and
the allowance for loan losses remains adequate, management does not expect to
increase the loan loss provision for 2000.
As shown in Table 8, "Analysis of the Allowance for Loan Losses", during 1999
there were net charge-offs of $65,000. The net charge-offs lowered the allowance
for loan losses to $5,368,000 at December 31, 1999 from $5,433,000 at December
31, 1998. The allowance for loan losses was 2.16% of gross loans outstanding at
December 31, 1999 compared to 2.21% at the end of the previous year.
Table 8 also indicates the types of loans charged-off and recovered for the
five years from 1995 through 1999 as well as each year's provision.
Because management is not certain as to the full collectibility of the
non-performing loans, potential loss exposure has been provided in the Company's
allocation of the allowance for loan losses, as illustrated in Table 9,
"Allocation of the Allowance for Loan Losses".
Based upon management's analysis, the allowance for loan losses at December
31, 1999, is adequate to cover future loan losses.
NSFC ANNUAL REPORT 1999 23
<PAGE> 11
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
TABLE 8 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
Years Ended December 31, 1999 1998 1997 1996 1995
===================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at the beginning of year...........$ 5,433 $ 5,430 $ 4,839 $ 4,514 $ 3,965
Charge-offs:
Commercial.......................... 86 0 86 288 145
Real estate-construction............ 0 0 0 523 334
Real estate-mortgage................ 557 0 38 125 458
Home equity......................... 0 0 0 20 15
Installment......................... 40 73 85 185 57
------------------------------------------------------------------------
Total charge-offs................ 683 73 209 1,141 1,009
------------------------------------------------------------------------
Recoveries:
Commercial.......................... 101 25 33 183 18
Real estate-construction............ 0 0 0 50 0
Real estate-mortgage................ 501 0 206 0 0
Home equity......................... 0 0 0 15 0
Installment......................... 16 41 81 28 60
------------------------------------------------------------------------
Total recoveries................. 618 66 320 276 78
------------------------------------------------------------------------
Net charge-offs (recoveries)............... 65 7 (111) 865 931
------------------------------------------------------------------------
Additions charged to operations............ 0 10 480 1,190 1,480
------------------------------------------------------------------------
Balance at end of year.....................$ 5,368 $ 5,433 $ 5,430 $ 4,839 $ 4,514
========================================================================
Allowance as a % of total loans, net of
unearned income and deferred loan fees.. 2.16% 2.21% 2.24% 2.08% 2.00%
========================================================================
Net charge-offs (recoveries) during the
year to average loans outstanding
during the year........................ 0.03% 0.00% -0.05% 0.37% 0.42%
========================================================================
</TABLE>
- --------------------------------------------------------------------------------
TABLE 9 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
DECEMBER 31, 1999 1998 1997 1996 1995
================================================================================================================================
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial...................$ 1,438 24.36% $1,312 25.96% $1,335 22.52% $ 947 21.75% $1,741 23.80%
Real estate-construction .... 1,457 8.78 1,511 7.02 389 11.02 184 11.53 727
10.47
Real estate-mortgage ........ 237 57.12 480 57.25 931 56.88 796 57.22 632 55.76
Home equity ................. 2 6.94 16 6.31 15 6.06 13 5.56 12 5.16
Installment ................. 34 2.80 42 3.46 58 3.52 45 3.94 87 4.81
Unallocated ................. 2,200 NA 2,072 NA 2,702 NA 2,854 NA 1,315 NA
--------------------------------------------------------------------------------------------------
Total.....................$ 5,368 100.00% $ 5,433 100.00% $5,430 100.00% $ 4,839 100.00% $4,514 100.00%
==================================================================================================
</TABLE>
24 NSFC ANNUAL REPORT 1999
<PAGE> 12
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NONINTEREST INCOME
- --------------------------------------------------------------------------------
Noninterest income increased by $566,000 or 19.3% during 1999 following an
increase of $248,000 or 9.2% during 1998. Service fees on deposits increased
$90,000 in 1999 over 1998. The major portion of this increase was the result of
higher overdraft fee income, which increased $114,000 from 1998, as average
overdrawn balances were higher in 1999.
Trust income increased $71,000 in 1999 or 10.7% from the same period in 1998
due to additional trust business.
Gains on sales of loans declined $174,000 during 1999 compared to 1998 as
home mortgage rates increased during 1999. The volume of mortgage loans
originated for sale on the secondary market by the Bank's mortgage banking
operation during 1999 was $11.6 million compared to $28.5 million in 1998.
Net gains on sales of other real estate owned were $535,000 greater in 1999
compared to 1998 due to the two sales previously discussed.
Other operating income increased $44,000 or 5.2% in 1999. During 1999 the
Company began charging noncustomers for use of Company owned automated teller
machines which increased other operating income by $95,000. The Company also
realized a $74,000 gain on the sale of a branch office during the first quarter
of 1999. With the merging of First Federal Bank, fsb into 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 of the branch was completed during 1999.
These increases to other operating income during 1999 were partially offset
by decreased mortgage banking fee income. Higher home mortgage rates in 1999
lowered volumes of loans processed by the mortgage banking operation. Besides
the volume of mortgage loans originated for sale on the secondary market
decreasing $16.9 million in 1999, "table funded" loans processed by the Bank
also decreased by $1.8 million in 1999. As a result, fees earned on both "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 were $129,000 less during 1999.
Comparing 1998 to 1997, noninterest income increased $248,000. Service fees
on deposits declined by $173,000 in 1998. The major portion of this decline was
the result of decreased overdraft fee income, which fell $103,000 from 1997 as
average customer demand deposit balances increased in 1998. Service charges
assessed to deposit accounts declined $70,000 in 1998 as average account
balances increased from 1997.
Trust income increased $40,000 or 6.4% from the same period in 1997 due to
changes in the fee structure and additional trust business.
Gains on sales of loans increased $162,000 during 1998 as compared to 1997.
The volume of mortgage loans originated for sale on the secondary market
increased during 1998 with $28.5 million in loans originated in 1998 as compared
to $11.2 million originated in 1997. During the second half of 1998 home
mortgage rates were at the lowest level in years and the Bank expanded its
mortgage banking operation.
Net gains on sales of other real estate owned during 1998 amounted to a
$2,000 loss compared to a $142,000 gain in 1997.
Other operating income increased $363,000 or 75.0% in 1998. The increase is
attributable primarily to the Company booking $319,000 in mortgage brokerage fee
income during the second half of 1998. During 1998, $16.5 million in "table
funded" mortgage loans were processed by the Bank. The $319,000 consists of the
fees earned by the Bank on these "table funded" loans as well as fees from
borrowers of both "table funded" loans and loans originated and funded by the
Bank that were then sold on the secondary mortgage market.
NSFC ANNUAL REPORT 1999 25
<PAGE> 13
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
- --------------------------------------------------------------------------------
In 1999, total noninterest expense increased by $156,000 to $9,779,000, an
increase of only 1.6% from 1998. Over the last three years total noninterest
expense averaged $9,511,000 as the Company emphasized its ability to control
operating expenses. As a percent of average assets, noninterest expenses were
2.1% in 1999 compared to 2.0% in 1998 and 2.1% in 1997.
The efficiency ratio, noninterest expense divided by the sum of net interest
income and noninterest income, is frequently used as an indicator as to how well
a financial institution manages its noninterest expense. A decreasing ratio is
an indication of improving performance. The Company's efficiency ratio was 46.0%
in 1999, 47.6% in 1998 and 46.1% in 1997. Compared to its bank holding company
peers, the Company's ability to control overhead expenses is one of its
operating strengths.
Salaries and other employee expenses increased $167,000 in 1999, which was a
2.9% increase over 1998. Group insurance expenses increased $148,000 during 1999
as insurance premiums increased. The Company expects group insurance expenses to
continue to rise during 2000. Profit sharing and bonus expenses were $39,000
higher during 1999. Salaries for noncommissioned staff increased $36,000 during
1999. Overtime expenses were up $19,000 as there were after hours training
sessions for employees on the new deposit products that the Company began to
offer during 1999. Commissions paid to loan originators in the mortgage banking
operation were $23,000 less during 1999 because of lower volumes. Salary costs
relating to stock appreciation rights were $55,000 less during 1999 due to
changes in the Company's stock price.
Occupancy and equipment expenses increased $73,000 or 5.8% during 1999 as
compared to 1998. During 1999 building and equipment maintenance costs increased
$45,000. During the fourth quarter of 1998, the Bank purchased a branch office
in the neighboring community of Winthrop Harbor, Illinois from another
institution. Increases to building maintenance costs are attributable to this
new branch office. Preparing for Year 2000 issues increased equipment
maintenance expenses during 1999. Real estate taxes during 1999 increased
$19,000 in part because of the new branch office. The new branch office also
contributed to increases in utilities expenses in 1999 that were $10,000 greater
than in 1998.
Data processing expense was $496,000 in 1999 increasing only $1,000 from
1998. During 1999, FDIC deposit insurance expenses were $84,000 as compared to
$86,000 in 1998.
During 1999, FDIC deposit insurance expenses were $84,000 as compared to
$86,000 in 1998.
Other real estate owned expense decreased $35,000 during 1999 to only $41,000
compared to the previous year. Rental incomes received from tenants in
properties held as other real estate owned are credited against other real
estate owned expenses. The two properties sold during 1999 had generated rental
income that was used to offset other real estate owned expenses. As a result of
expected decreases during 2000 in rental income, the Company expects that other
real estate owned expense will increase in 2000.
During 1999, other operating expenses decreased $48,000 or 2.5% from 1998.
Legal expenses declined $150,000 during 1999 as 1998 had legal fees resulting
from the merger between the two subsidiaries, the five-for-one stock split and
the purchase of a branch office and the closing of another branch office.
Director fees declined $16,000 during 1999 due to the combination of the two
subsidiaries, as there were separate Boards of Directors for each of the two
subsidiaries until the merger took place in April 1998. Expenses for
subscriptions decreased $9,000 during 1999 in part from the merger of the two
subsidiaries and from closer examination of the need for various publications.
Marketing expenses increased during 1999 by $53,000 due to the promotion of the
new deposit products that the Company began to offer during 1999. Printing and
supplies expense increased $41,000 and professional fees increased $33,000
during 1999 because of Bank preparations for Year 2000.
In 1998, total noninterest expenses were $9,623,000 increasing by $491,000 or
5.38% over 1997.
Salaries and other employee expenses increased $389,000 in 1998, which was a
7.2% increase over 1997. Salaries for noncommissioned staff increased $200,000
during 1998, or 4.73%, due to yearly pay raises and the addition of four
clerical employees to the mortgage banking operation staff as this area was
expanded during the second half of 1998. Commissions paid to loan originators in
the mortgage banking operation were greater by $189,000
26 NSFC ANNUAL REPORT 1999
<PAGE> 14
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE (CONTINUED)
- --------------------------------------------------------------------------------
during 1998 due to increased volumes of loans originated for sale on the
secondary market and increased volumes of "table funded" loans compared to 1997.
During 1998 occupancy and equipment expenses increased $67,000 or 5.7% as
compared to 1997. During 1998 building and equipment maintenance costs increased
$25,000 partially as a result of equipment updates to handle Year 2000 issues.
Building and equipment expenditures of $1,338,000 were made during 1998 and
depreciation expense increased $22,000 during 1998 as a result. Building
salaries increased during 1998 by $18,000 as an additional person was added to
the building maintenance staff due to the purchase of the new Bank branch.
Data processing expense decreased $16,000 or 3.1% during 1998 as compared to
the same period in 1997, due to decreased data processing expenses resulting
from the merger of the Thrift into the Bank.
FDIC deposit insurance expense increased in 1998 by $14,000 as compared to
1997. This increase is a result of increases in deposits during 1998.
During 1998, other real estate owned expense decreased $64,000 compared to
the previous year, as property taxes on the other real estate owned portfolio
declined due to decreases in the assessed valuation. The slightly smaller real
estate owned portfolio that amounted to $2,497,000 at December 31, 1998 as
compared to $2,555,000 at December 31, 1997 also contributed to lower expense.
Other operating expenses increased $101,000 in 1998, a 5.6% increase from
1997. Legal expenses increased $153,000 during 1998 resulting from the merger
between the two subsidiaries, the five-for-one stock split and the purchase of a
branch office and the closing of another branch office. Expenses related to
loans and express and freight increased $79,000 and $18,000 during 1998
resulting from the increased mortgage banking volumes. Expenses from charged off
checking accounts, bad checks and teller differences declined $74,000 during
1998. Expenses relating to correspondent bank accounts were $43,000 less during
1998 as accounts were consolidated due to the merger of the two subsidiaries.
Director fees also declined $30,000 during 1998 because of the combination of
the two subsidiaries.
- --------------------------------------------------------------------------------
FEDERAL AND STATE INCOME TAXES
- --------------------------------------------------------------------------------
For the years ended December 31, 1999, 1998 and 1997, the Company's provision
for federal and state taxes as a percentage of pretax earnings were 31.4%, 31.2%
and 31.4%.
The actual tax rates differ from the statutory rates because the pretax
earnings include significant amounts of interest on United States Government
securities, which are nontaxable for state income tax purposes. Qualified
interest on loans to local political subdivisions and on qualified state and
local political subdivision securities are nontaxable for federal income tax
purposes and also lower the actual tax rate compared to the statutory rate.
NSFC ANNUAL REPORT 1999 27
<PAGE> 15
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
TABLE 10 MATURITY OR REPRICING OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------SUBJECT TO REPRICING WITHIN---------------
($ 000s) IMMEDIATE 91 DAYS 181 DAYS 1 - 3 3 - 5 5 - 10
DECEMBER 31, 1999 BALANCES TO 90 DAYS TO 180 DAYS TO 365 DAYS YEARS YEARS YEARS
=====================================================================================================================
ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C>
Interest bearing deposits............$ 260 $ 160 $ 0 $ 100 $ 0 $ 0 $ 0
SECURITIES:
U.S. Treasury ..................... 4,998 4,000 0 0 998 0 0
U.S. Government agencies
and corporations ................ 162,091 0 1,001 1,997 19,055 119,266
20,772
States & political subdivisions ... 20,710 784 843 3,765 7,657 4,702 2,959
Mortgage-backed securities (1) .... 6,712 2,340 550 1,042 9 1,141 1,630
Equity securities ................. 2,173 1,457 0 0 0 716 0
Loans:
Commercial ........................ 60,570 40,108 1,538 2,379 6,073 6,708 3,764
Real estate - construction ........ 21,813 19,773 745 1,109 3 183 0
Real estate - mortgage ............ 142,016 33,687 5,733 5,885 25,542 39,043 32,126
Home equity ....................... 17,259 17,259 0 0 0 0 0
Installment, net of unearned income 6,957 2,646 550 861 1,739 941 220
Direct lease financing ............ 2,138 1,144 75 150 353 414 2
-----------------------------------------------------------------------------
TOTAL INTEREST EARNING ASSETS..........$ 447,697 $123,358 $ 11,035 $ 17,288 $ 61,429 $173,114 $ 61,473
=============================================================================
LIABILITIES:
NOW accounts........................$ 41,787 $ 41,787 $ 0 $ 0 $ 0 $ 0 $ 0
Money market accounts ............... 37,636 37,636 0 0 0 0 0
Savings ............................. 44,207 44,207 0 0 0 0 0
Time deposits, $100,000 and over .... 83,266 37,694 14,676 24,767 6,129 0 0
Time deposits, under $100,000 ....... 86,094 33,269 17,650 17,720 17,449 6 0
Other interest bearing liabilities .. 70,436 41,367 10,635 12,434 6,000 0 0
-----------------------------------------------------------------------------
TOTAL INTEREST BEARING LIABILITIES.....$ 363,426 $235,960 $ 42,961 $ 54,921 $ 29,578 $ 6 $ 0
=============================================================================
EXCESS INTEREST EARNING ASSETS (LIABILITIES) $(112,602) $ (31,926) $(37,633) $ 31,851 $ 173,108 $ 61,473
CUMULATIVE EXCESS INTEREST EARNING
ASSETS (LIABILITIES) (112,602) (144,528) (182,161) (150,310) 22,798 84,271
CUMULATIVE INTEREST RATE SENSITIVITY RATIO (2) 0.52 0.48 0.45 0.59 1.06 1.23
</TABLE>
(1) Mortgage-backed securities reflect the time horizon when these financial
instruments are subject to rate change or repricing.
(2) Interest earning assets divided by interest bearing liabilities.
This table does not necessarily indicate the impact of general interest
rate movements on the Company's net interest income because the repricing of
certain assets and liabilities is discretionary and is subject to competition
and other pressures. As a result, assets and liabilities indicated as repricing
within the same period may in fact reprice at different times and at different
rate levels.
- --------------------------------------------------------------------------------
TABLE 11 TIME DEPOSITS, $100,000 AND OVER MATURITY SCHEDULE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GREATER THAN GREATER THAN
($ 000s) LESS THAN OR 3 MOS. & LESS THAN 6 MOS. & LESS THAN GREATER THAN
AS OF DECEMBER 31, 1999 EQUAL TO 3 MOS. OR EQUAL TO 6 MOS. OR EQUAL TO 12 MOS. 12 MOS. TOTAL
==================================================================================================================
<S> <C> <C> <C> <C> <C>
Time deposits, $100,000 and over:
Retail deposits..........................$ 14,850 $ 7,766 $ 7,578 $ 4,586 $ 34,780
Corporate deposits....................... 6,763 1,581 1,155 208 9,707
Public fund deposits..................... 16,081 5,329 16,034 1,335 38,779
---------------------------------------------------------------------
Total time deposits, $100,000 and over.$ 37,694 $ 14,676 $ 24,767 $ 6,129 $ 83,266
=====================================================================
</TABLE>
The Company had no foreign banking offices or deposits.
28 NSFC ANNUAL REPORT 1999
<PAGE> 16
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
LIQUIDITY AND INTEREST RATE SENSITIVITY ANALYSIS
- --------------------------------------------------------------------------------
The primary functions of asset/liability management are to assure adequate
liquidity and maintain an appropriate balance between interest sensitive earning
assets and interest bearing liabilities.
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest earning assets
maturing or repricing within a specific time period and the amount of interest
bearing liabilities maturing or repricing within that same time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities.
A gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. During a
period of rising interest rates, a negative gap would tend to adversely affect
net interest income while a positive gap would tend to result in an increase in
net interest income. During a period of falling interest rates, a negative gap
would tend to result in an increase in net interest income while a positive gap
would tend to adversely affect net interest income. The Company's gap position
is illustrated in Table 10, "Maturity or Repricing of Assets and Liabilities".
Liquidity management involves the ability to meet the cash flow requirements
of customers who may be either depositors wanting to withdraw funds or borrowers
knowing that sufficient funds will be available to meet their credit needs.
Interest bearing deposits in banks and marketable securities, particularly
those of shorter maturities, are principal sources of asset liquidity. The
Company classifies all of its securities as available for sale, which increases
the Company's flexibility in that the Company can sell any of its unpledged
securities to meet liquidity requirements. Securities available for sale
amounted to $196,684,000 at December 31, 1999. Securities at December 31, 1999
in the amount of $136,983,000 were pledged to secure public deposits and
repurchase agreements.
Rate sensitivity varies with different types of interest earning assets and
interest bearing liabilities. Rate sensitivity on loans tied to the prime rate
differs considerably from long-term investment securities and fixed rate loans.
Time deposits over $100,000 are more rate sensitive than savings accounts.
Management has portrayed savings accounts as immediately repricable in Table 10,
because of management's ability to change the savings interest rate.
Table 11, "Time Deposits, $100,000 and Over Maturity Schedule", illustrates
the maturity schedule as of December 31, 1999 of the time deposits $100,000 and
over. At December 31, 1999, 7.4% of the time deposits $100,000 and over mature
after one year, differing from 5.6% at December 31, 1998, showing a lengthening
of maturities in this type of deposit.
The Company historically has a high level of time deposits $100,000 and over.
As of December 31, 1999, time deposits $100,000 and over were 22.9% of total
interest bearing liabilities, a decrease from 26.6% in 1998, and were primarily
from existing local public depositors. Being located in the county seat, the
Company accepts time deposits $100,000 and over from various government
agencies.
Other interest bearing liabilities in Table 10 consist of securities sold
under repurchase agreements and other short-term borrowings that amounted to
$70.4 million at December 31, 1999. Securities sold under repurchase agreements
and other short-term borrowings provide a short-term source of funds to the
Company. As Table 10 indicates, 91.5% of this liability reprices within 1 year
with 58.7% repricing in the immediate to 90-day time frame.
At December 31, 1999 approximately 45.7% of the Company's loan and lease
portfolio floats with the prime rate or is repricable within 90 days, a decrease
from 47.3% at December 31, 1998. This shift to fixed rate loans is a result of
customer demand and competitive pressures. The effect of this shift to fixed
rate loans is a lengthening of loan maturities, which increases the Bank's
negative gap position.
As Table 10 shows, the Company is liability sensitive through the three-year
time horizon by $150.4 million. This is a change from last year, where the
Company was liability sensitive through the three-year time horizon by $116.1
million. Although management has attempted during the past year to reduce its
liability sensitive gap position, its efforts continued to be restricted by
competitive pressures in the area of commercial and commercial real estate
loans. These pressures have increased the level of fixed rate loans with
intermediate term balloon maturities. The Company has increased the maturity
time horizon on its securities by purchasing intermediate term U.S. Government
agency securities that have call provisions in order to maximize yields. U.S.
Government agency securities carried at $158.1 million have call options
allowing the issuers to redeem the securities prior to the contractual maturity
date. Customer preferences and competitive pressures make it difficult for
management to reduce the liability gap position.
To insure the ability to meet its funding needs, including any unexpected
strain on liquidity, the Company has $25 million in federal funds lines of
credit from two independent banks of which $6 million was drawn against on
December 31, 1999. In addition, the Company has the ability to borrow funds, if
necessary, directly from the Federal Reserve Bank and the Federal Home Loan Bank
approximating $12 million with more available depending on the Company's ability
to pledge its assets as security for any advances.
NSFC ANNUAL REPORT 1999 29
<PAGE> 17
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
Securities sold under repurchase agreements (repurchase agreements) and other
short-term borrowings during 1999 have continued to be an alternative to
certificates of deposit as a source of funds. At December 31, 1999, the Company
had balances of $70,436,000 made up of $64,436,000 in repurchase agreements and
$6,000,000 in overnight federal funds purchased.
Most municipalities, other public entities and some other organizations
require that their funds are insured or collateralized as a matter of their
policies. Commercial depositors also find the collateralization of repurchase
agreements attractive as an alternative to certificates of deposits. Repurchase
agreements provide a source of funds and do not increase the Company's reserve
requirements with the Federal Reserve Bank or create an expense relating to FDIC
insurance. Repurchase agreements consequently are less costly to the Company.
Management expects to continue to offer repurchase agreements as an alternative
to certificates of deposit in the future.
The Company experienced a $16.4 million increase in its repurchase agreements
from year-end 1998. Average repurchase agreements during 1999 were $46.9 million
compared to $36.2 million during 1998 and $34.2 million during 1997. This data
attests to the popularity and the stability of repurchase agreements to the
Company.
Short-term borrowings were $6.0 million at December 31, 1999 and consisted of
federal funds purchased from money center banks with which the Bank has
correspondent relationships. Federal funds purchased are borrowed for short
periods of time as necessary for liquidity purposes. Average federal funds
purchased during 1999 were $2.0 million and were negligible during 1998.
Table 12, "Securities Sold under Repurchase Agreements and Other Short-term
Borrowings", provides information as to balances and interest rates for 1999,
1998 and 1997.
- --------------------------------------------------------------------------------
TABLE 12 SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM
BORROWINGS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
At or for the Year Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at end of year ........................ $70,436 $ 7,990 $38,504
Weighted average interest rate at end of year 4.83% 4.91% 5.29%
Maximum amount outstanding .................... $70,436 $47,990 $39,995
Average amount outstanding .................... 48,905 36,155 34,176
Weighted average interest rate .............. 4.66% 5.11% 5.07%
</TABLE>
- --------------------------------------------------------------------------------
CAPITAL RESOURCES
- --------------------------------------------------------------------------------
Capital provides the foundation for future growth. Regulatory agencies have
developed minimum guidelines by which the adequacy of a financial institution's
capital may be evaluated.
Northern States' capital ratios exceed these minimum guidelines, both in
terms of Tier I capital (stockholders' equity of the Company less intangible
assets), and in terms of Tier II capital (Tier I capital plus qualifying
long-term debt and the allowance for loan losses). The portion of the allowance
for loan losses qualifying as Tier II capital is limited to 1.25% of risk
weighted assets. The effect of the unrealized gains (losses) on securities
available for sale is excluded from the capital ratio calculations.
Regulatory capital guidelines require that the amount of capital increase
with the amount of risk inherent in a company's balance sheet and off-balance
sheet exposure. Capital requirements in order for the Company to be considered
well capitalized are that Tier I capital to average assets must be 5.00% and
Tier I capital to risk weighted assets must be 6.00%. The requirements are that
Tier II capital must be 10.00% of risk adjusted assets in order for the Company
to be considered well capitalized.
All of the Company's capital ratios exceed the levels required under
regulatory guidelines as shown in Table 13, "Capital Standards".
30 NSFC ANNUAL REPORT 1999
<PAGE> 18
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
TABLE 13 CAPITAL STANDARDS
- --------------------------------------------------------------------------------
($ 000s) As of December 31, 1999
- --------------------------------------------------------------------------------
QUALIFYING FOR TIER I CAPITAL:
- --------------------------------------------------------------------------------
Common stock.....................................................$ 1,783
Additional paid-in capital....................................... 11,405
Retained earnings................................................ 55,898
Less - Intangible assets......................................... (107)
---------
TOTAL QUALIFYING TIER I CAPITAL...............................$ 68,979
=========
($ 000s) As of December 31, 1999
- --------------------------------------------------------------------------------
QUALIFYING FOR TIER II CAPITAL:
- --------------------------------------------------------------------------------
Total Qualifying Tier I Capital..................................$ 68,979
Allowance for loan losses-
qualifying portion............................................. 4,017
---------
TOTAL QUALIFYING TIER II CAPITAL..............................$ 72,996
=========
TOTAL ASSETS.....................................................$ 482,480
=========
($ 000s) As of December 31, 1999
- --------------------------------------------------------------------------------
RISK-WEIGHTED ASSETS TOTAL RISK-WEIGHTED
- --------------------------------------------------------------------------------
Zero percent risk weighting .......... $ 13,090 $ 0
Twenty percent risk weighting ........ 202,212 40,442
Fifty percent risk weighting ......... 79,205 39,603
One hundred percent risk weighting (1) 241,293 241,293
------------------------
TOTAL RISK-WEIGHTED ASSETS ........ $535,800 $321,338
========================
(1) Includes off-balance-sheet items
($ 000s) As of December 31, 1999
- --------------------------------------------------------------------------------
CAPITAL REQUIREMENTS $ %
- --------------------------------------------------------------------------------
(Tier I Capital to Average Assets)
REQUIRED.......................................$ 23,739 5.00%
ACTUAL......................................... 68,979 14.53
RISK-BASED CAPITAL:
Tier I:
REQUIRED.......................................$ 19,280 6.00%
ACTUAL......................................... 68,979 21.47
Tier II:
REQUIRED.......................................$ 32,134 10.00%
ACTUAL......................................... 72,996 22.72
- --------------------------------------------------------------------------------
CASH FLOWS
- --------------------------------------------------------------------------------
Cash flows from operating activities were greater than accrual basis net income
by $2.5 million in 1999. In 1998 cash flows from operating income were below
accrual basis net income by $4.0 million and in 1997 cash flows from operating
income exceeded net income by $1.8 million. Cash flows from operations were
lower in 1998 because of an increase in loans held for sale at year-end.
Management expects ongoing operating activities to continue to be a primary
source of cash flow for the Company.
Deposits declined $21.5 million in 1999. The Company experienced declines in
its time deposits over $100,000 in the amount of $15.0 million from existing
local public depositors. Demand-noninterest bearing deposits and money market
deposits declined $2.8 million and $3.4 million during 1999, mostly in
commercial deposits. Deposits help the Company to maintain an adequate level of
cash for the Company's activities and the declines to deposits during 1999 were
mainly offset by cash flows provided from repurchase agreements and other
short-term borrowings. Repurchase agreements and other short-term borrowings in
1999 had net cash inflows of $22.4 million. Competition for deposits is expected
to remain keen, and future deposit growth cannot be predicted with any
certainty. The Company plans to continue to actively seek profitable new deposit
business and expects its new deposit products to add to core deposits. During
2000 the Company expects to offer internet banking and anticipates deposit
activity from this source.
During 1999 there were net incoming cash flows from loans held for sale
amounting to $3.4 million while there
NSFC ANNUAL REPORT 1999 31
<PAGE> 19
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CASH FLOWS (CONTINUED)
- --------------------------------------------------------------------------------
were net out flows for loans of $8.4 million. During 1998 and 1997 there were
out flows of cash for funding loans held for sale of $4.3 million and $.3
million. Cash flows from net loans made to customers during 1998 were a $.5
million incoming cash flow and during 1997 there was an outflow of $9.1 million.
Loans are the most important source of interest income revenues to the Company.
Outgoing cash flows from purchases of securities available for sale were
$79.1 million during 1999 while incoming cash flows from the maturity and call
of securities were $76.5 million.
During 1999 the Federal Home Loan Bank advance was paid down in the amount of
$10 million while advances of $5 million were made each year in 1998 and 1997.
The Company's equity capital is in excess of regulatory requirements, as
determined on both risk-based and leverage ratio criteria. Cash dividends as a
percentage of net income have increased during the past three years; 42.4% in
1999, 36.6% in 1998 and 30.4% in 1997.
During 1999 the Company paid out $314,000 for purchases of equipment.
Approximately $117,000 was paid out during 1999 to purchase workstations and
receipt printers in order to ensure that our teller equipment was compliant for
Y2K. Other expenditures in 1999 were for new driveup units at one branch, new
copy machines, updates to ATMs and updated alarm/surveillance systems. Cash paid
out during 1998 for building and equipment was $1,338,000 with the largest
expenditure being $1,000,000 to purchase the branch building in Winthrop Harbor,
Illinois. Expenditures during 1997 for building and equipment totaled $217,000,
of which $64,000 was for telephone equipment, $76,000 for office remodeling and
$77,000 for updating data processing equipment.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
32 NSFC ANNUAL REPORT 1999
<PAGE> 20
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
The Federal Reserve Board, together with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency
Policy Statement on Interest-Rate Risk, effective June 26, 1996. The policy
statement provides guidance to examiners and bankers on sound practices for
managing interest-rate risk, which forms the basis for ongoing evaluation of the
adequacy of interest-rate risk management at supervised institutions. The policy
statement also outlines fundamental elements of sound management that have been
identified in prior Federal Reserve guidance and discusses the importance of
these elements in the context of managing interest-rate risk. Specifically, the
guidance emphasizes the need for active board of director and senior management
oversight and a comprehensive risk-management process that effectively
identifies, measures, and controls interest-rate risk. Several techniques might
be used by an institution to minimize interest-rate risk. One approach used by
the Company is to periodically analyze its assets and liabilities and make
future financing and investment decisions based on payment streams, interest
rates, contractual maturities, and estimated sensitivity to actual or potential
changes in market interest rates. Such activities fall under the broad
definition of asset/liability management. The Company's primary measurement tool
used by management is to "shock" the balance sheet by decreasing rates 2% and
increasing rates 2% using computer simulation models to show the effect of rate
changes on the fair value of the Company's financial instruments.
Several ways an institution can manage interest-rate risk include selling
existing assets or repaying certain liabilities; matching repricing periods for
new assets and liabilities, for example, by shortening terms of new loans or
investments. Financial institutions are also subject to prepayment risk in
falling rate environments. For example, mortgage loans and other financial
assets may be prepaid by a debtor refinancing 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. These funds can be obtained by
increasing deposits, borrowing, or selling assets.
Table 14, "Effect of Interest Shocks on Financial Instruments", compares
information about the current fair value of the Company's financial instruments
at December 31, 1999 to December 31, 1998. Table 14 shows the effects of
interest rate shocks of decreasing rates 2% and increasing rates 2% on the fair
value of the Company's financial instruments. The computer simulation model that
is 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 December 31,
1999 the fair value of securities available for sale increases $8.2 million when
rates are shocked downward 2% while the fair value decreases $11.6 million for a
2% upwards rate shock. The change in fair value of securities is smaller when
rates are shocked down because there are call provisions on $158.1 million of
the U.S. Government agency securities. As rates decline the probability that a
security with call provisions will be called increases. Because of the call
provision the security issuer has the opportunity to reduce his interest expense
by paying off the called security.
The Company's cumulative excess interest earning assets (liabilities) as
shown in Table 10, "Maturity or Repricing of Assets and Liabilities", are
negative through the three-year time frame. This negative gap, meaning that more
interest bearing liabilities reprice than interest earning assets, causes the
fair value of the Company's financial instruments at December 31, 1999 to
increase by $17.8 million if interest rates immediately drop 2%. The rate shock
of immediately increasing interest rates 2% would cause the fair value of the
financial instruments to decline $20.6 million. To minimize interest-rate risk
and its affect on the fair value of the Company's financial instruments and
equity, maturities on time deposits would need to be increased while more
variable rate loans would need to be booked. It should be noted that often the
market dictates the type of financial instrument that the Company is able to
book. Although increasing its variable rate loan portfolio will assist the
Company in managing its interest-rate risk position, borrowers have shown a
preference for fixed rate loans and may take their business to other financial
institutions if the Company does not satisfy their request. On the liability
side of the balance sheet, depositors recently have shown preferences for time
deposits of shorter durations.
NSFC ANNUAL REPORT 1999 33
<PAGE> 21
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
TABLE 14 - EFFECT OF INTEREST SHOCKS ON FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s) 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
Advance from borrowers for taxes and insurance .............................. 645 645 645
Accrued interest payable .................................................... 3,640 3,640 3,640
</TABLE>
<TABLE>
<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
Accrued interest receivable ................................................. 4,408 4,408 4,408
Financial liabilities
Deposits .................................................................... $363,356 $356,971 $350,093
Securities sold under repurchase agreements and other short-term borrowings . 47,994 47,990 47,986
Federal Home Loan Bank term advances ........................................ 9,039 8,482 8,005
Advance from borrowers for taxes and insurance .............................. 992 992 992
Accrued interest payable .................................................... 3,951 3,951 3,951
</TABLE>
34 NSFC ANNUAL REPORT 1999
<PAGE> 22
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
STATEMENT OF MANAGEMENT RESPONSIBILITY
- --------------------------------------------------------------------------------
Northern States Financial Corporation's management is responsible for the
accompanying consolidated financial statements which have been prepared in
conformity with generally accepted accounting principles. They are based on our
best estimates and judgments. Financial information elsewhere in this annual
report is consistent with the data presented in these statements.
We acknowledge the integrity and objectivity of published financial data. To
this end, we maintain an accounting system and related internal controls which
we believe are sufficient in all material respects to provide reasonable
assurance that financial records are reliable for preparing financial statements
and that assets are safeguarded from loss or unauthorized use.
Our independent auditing firm, Crowe, Chizek and Company LLP, provides an
objective review as to management's discharge of its responsibilities insofar as
they relate to the fairness of reported operating results and the financial
condition of the Company. This firm obtains and maintains an understanding of
our accounting and financial controls and employs such testing and verification
procedures as it deems necessary to arrive at an opinion on the fairness of the
consolidated financial statements.
The Board of Directors pursues its responsibilities for the accompanying
consolidated financial statements through its Audit Committee. The Committee
meets periodically with Northern States Financial Corporation's internal auditor
and/or independent auditors to review and approve the scope and timing of the
internal and external audits and the findings therefrom. The Committee
recommends to the Board of Directors the engagement of the independent auditors
and the auditors have direct access to the Audit Committee.
/s/ FRED ABDULA /s/ THOMAS M. NEMETH
FRED ABDULA THOMAS M. NEMETH
Chairman of the Board & Vice President & Treasurer
Chief Executive Officer
- --------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Northern States Financial Corporation
Waukegan, Illinois
We have audited the accompanying consolidated balance sheets of NORTHERN STATES
FINANCIAL CORPORATION as of December 31, 1999 and 1998 and the related
consolidated statements of income, cash flows, stockholders' equity, and
comprehensive income for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based upon our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of NORTHERN
STATES FINANCIAL CORPORATION as of December 31, 1999 and 1998, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1999 in conformity with generally accepted accounting
principles.
/s/ CROWE, CHIZEK AND COMPANY LLP
CROWE, CHIZEK AND COMPANY LLP
Oak Brook, Illinois
February 11, 2000
NSFC ANNUAL REPORT 1999 35
<PAGE> 23
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
- -------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks................................................................$ 16,740 $ 15,176
Interestbearing deposits in financial institutions - maturities less than 90 days...... 160 183
Federal funds sold..................................................................... 0 12,600
--------------------------
Total cash and cash equivalents..................................................... 16,900 27,959
Interestbearing deposits in financial institutions - maturities over 90 days........... 100 100
Securities available for sale.......................................................... 196,684 200,861
Loans.................................................................................. 248,162 246,209
Less: Allowance for loan losses........................................................ (5,368) (5,433)
--------------------------
Loans, net.......................................................................... 242,794 240,776
Direct lease financing................................................................. 2,138 987
Office buildings and equipment, net.................................................... 6,176 6,647
Other real estate owned, net of allowance for losses of $552 in 1998................... 2,622 2,497
Accrued interest receivable............................................................ 4,361 4,408
Other assets........................................................................... 4,906 1,686
--------------------------
Total assets........................................................................$ 476,681 $ 485,921
==========================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Demand - noninterest bearing........................................................$ 41,261 $ 44,075
NOW accounts........................................................................ 41,787 39,180
Money market accounts............................................................... 37,636 41,003
Savings............................................................................. 44,207 45,333
Time, $100,000 and over............................................................. 83,266 98,338
Time, under $100,000................................................................ 86,094 87,827
--------------------------
Total deposits.................................................................... 334,251 355,756
Securities sold under repurchase agreements and other short-term borrowings............ 70,436 47,990
Federal Home Loan Bank advance......................................................... 0 10,000
Advances from borrowers for taxes and insurance........................................ 645 992
Accrued interest payable and other liabilities......................................... 5,815 6,070
--------------------------
Total liabilities................................................................... 411,147 420,808
Stockholders' Equity
Common stock........................................................................... 1,783 1,781
Additional paid-in capital............................................................. 11,405 11,336
Retained earnings...................................................................... 55,898 51,358
Accumulated other comprehensive income (loss), net..................................... (3,552) 638
--------------------------
Total stockholders' equity.......................................................... 65,534 65,113
--------------------------
Total liabilities and stockholders' equity........................................$ 476,681 $ 485,921
==========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36 NSFC ANNUAL REPORT 1999
<PAGE> 24
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s, except per share data)
- ----------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income
Loans (including fee income) ......................... $ 20,766 $ 21,765 $ 22,199
Securities
Taxable ........................................... 10,663 10,263 8,411
Exempt from federal income tax .................... 1,035 1,018 1,149
Interestbearing deposits in financial institutions ... 16 25 35
Federal funds sold ................................... 298 1,135 965
-----------------------------------------
Total interest income ............................. 32,778 34,206 32,759
-----------------------------------------
Interest expense
Time deposits ........................................ 8,526 10,413 9,714
Other deposits ....................................... 3,895 4,124 4,114
Other borrowings ..................................... 2,584 2,359 1,787
-----------------------------------------
Total interest expense ............................ 15,005 16,896 15,615
-----------------------------------------
Net interest income ..................................... 17,773 17,310 17,144
Provision for loan losses ............................... 0 10 480
-----------------------------------------
Net interest income after provision for loan losses ..... 17,773 17,300 16,664
-----------------------------------------
Noninterest income
Service fees on deposits ............................. 1,181 1,091 1,264
Trust income ......................................... 736 665 625
Net gains on sales of loans .......................... 160 334 172
Net gains (losses) on sales of other real estate owned 533 (2) 142
Other operating income ............................... 891 847 484
-----------------------------------------
Total noninterest income .......................... 3,501 2,935 2,687
-----------------------------------------
Noninterest expense
Salaries and employee benefits ....................... 5,963 5,796 5,407
Occupancy and equipment, net ......................... 1,324 1,251 1,184
Data processing ...................................... 496 495 511
FDIC deposit insurance ............................... 84 86 72
Other real estate owned .............................. 41 76 140
Other operating expenses ............................. 1,871 1,919 1,818
-----------------------------------------
Total noninterest expense ......................... 9,779 9,623 9,132
-----------------------------------------
Income before income taxes .............................. 11,495 10,612 10,219
Income tax expense ...................................... 3,611 3,308 3,209
-----------------------------------------
Net income .............................................. $ 7,884 $ 7,304 $ 7,010
=========================================
Basic earnings per share ................................ $ 1.77 $ 1.64 $ 1.58
Diluted earnings per share .............................. $ 1.77 $ 1.64 $ 1.57
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NSFC ANNUAL REPORT 1999 37
<PAGE> 25
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
- ---------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ................................................................. $ 7,884 $ 7,304 $ 7,010
Adjustments to reconcile net income to cash from operating activities:
Depreciation ............................................................ 602 590 568
Provision for loan losses ............................................... 0 10 480
Provision for losses on other real estate owned ......................... 0 10 21
Deferred loan fees ...................................................... (29) (78) (38)
Net change in loans held for sale ....................................... 3,439 (4,267) (349)
Net gains on sales of loans ............................................. (160) (334) (172)
Net gains (losses) on sales of other real estate owned .................. (533) 2 (142)
Net gain on sale of building ............................................ (74) 0 0
Amortization of mortgage servicing rights ............................... 68 65 36
Net change in interest receivable ....................................... 47 (100) (353)
Net change in interest payable .......................................... (311) 260 1,192
Net change in other assets .............................................. (638) 128 742
Net change in other liabilities ......................................... 85 (268) (205)
---------------------------------------------
Net cash from operating activities ................................... 10,380 3,322 8,790
---------------------------------------------
Cash flows from investing activities
Maturities of securities available for sale ............................. 76,476 173,014 90,148
Purchases of securities available for sale .............................. (79,139) (192,926) (120,273)
Change in loans made to customers ....................................... (8,402) 547 (9,151)
Property and equipment expenditures ..................................... (314) (1,338) (217)
Proceeds from sale of building .......................................... 257 0 0
Net change in direct lease financing .................................... (1,151) 287 (275)
Proceeds from sales of other real estate owned .......................... 3,542 46 586
---------------------------------------------
Net cash from investing activities ................................... (8,731) (20,370) (39,182)
---------------------------------------------
Cash flows from financing activities Net increase (decrease) in:
Deposits .............................................................. (21,505) 7,806 19,155
Securities sold under repurchase agreements
and other short-term borrowings .................................... 22,446 9,486 1,746
Advances from borrowers for taxes and insurance ....................... (347) (174) 145
Federal Home Loan Bank advance .......................................... 0 5,000 5,000
Repayment of Federal Home Loan Bank advance ............................. (10,000) 0 0
Net proceeds from exercise of stock options ............................. 42 54 4
Dividends paid .......................................................... (3,344) (2,671) (2,134)
---------------------------------------------
Net cash from financing activities ................................... (12,708) 19,501 23,916
---------------------------------------------
Net change in cash and cash equivalents ....................................... (11,059) 2,453 (6,476)
Cash and cash equivalents at beginning of year ................................ 27,959 25,506 31,982
---------------------------------------------
Cash and cash equivalents at end of year ...................................... $ 16,900 $ 27,959 $ 25,506
=============================================
Supplemental disclosures
Cash paid during the year for
Interest ................................................................ $ 15,316 $ 16,636 $ 14,423
Income taxes ............................................................ 3,410 3,234 3,089
Noncash investing activities
Transfers made from loans to other real estate owned .................... 3,134 0 174
Transfers made from loans held for sale to portfolio loans, at fair value 2,520 0 0
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
38 NSFC ANNUAL REPORT 1999
<PAGE> 26
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED OTHER TOTAL
($ 000s, EXCEPT PER SHARE DATA) COMMON ADDITIONAL RETAINED COMPREHENSIVE STOCKHOLDERS'
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 STOCK PAID-IN CAPITAL EARNINGS INCOME (LOSS), NET EQUITY
====================================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 ..................... $ 1,779 $ 11,216 $ 41,849 $ (9) $ 54,835
Net income ................................... 7,010 7,010
Cash dividends ($.48 per share) .............. (2,134) (2,134)
Exercise of stock options on 500
shares of common stock .................... 4 4
Tax benefit from the exercise of stock options 2 2
Unrealized net gain on securities
available for sale ........................ 478 478
---------------------------------------------------------------------------
Balance, December 31, 1997 ................... 1,779 11,222 46,725 469 60,195
Net income ................................... 7,304 7,304
Cash dividends ($.60 per share) .............. (2,671) (2,671)
Exercise of stock options on 6,535
shares of common stock .................... 2 52 54
Tax benefit from the exercise of stock options 62 62
Unrealized net gain on securities
available for sale ........................ 169 169
---------------------------------------------------------------------------
Balance, December 31, 1998 ................... 1,781 11,336 51,358 638 65,113
Net income ................................... 7,884 7,884
Cash dividends ($.75 per share) .............. (3,344) (3,344)
Exercise of stock options on 4,945
shares of common stock .................... 2 40 42
Tax benefit from the exercise of stock options 29 29
Unrealized net loss on securities
available for sale ........................ (4,190) (4,190)
---------------------------------------------------------------------------
Balance, December 31, 1999 ................... $ 1,783 $ 11,405 $ 55,898 $ (3,552) $ 65,534
===========================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ 000s)
- ---------------------------------------------------------------------------------------------------------------------
YEARS ENDED DECEMBER 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income........................................................... $ 7,884 $ 7,304 $ 7,010
Other comprehensive income (loss):
Unrealized gains (losses) arising during
year on securities available for sale, net of tax............... (4,190) 169 478
------------------------------------------
Comprehensive income................................................. $ 3,694 $ 7,473 $ 7,488
==========================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
NSFC ANNUAL REPORT 1999 39
<PAGE> 27
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of Northern States Financial Corporation (Company) and its wholly owned
subsidiary, Bank of Waukegan ("Bank" or "Subsidiary").
All significant intercompany transactions and balances have been eliminated
in consolidation.
NATURE OF OPERATIONS: The Company's and the Bank's revenues, operating
income, and assets are primarily from the banking industry. Loan customers are
mainly located in Lake County, Illinois and surrounding areas, and include a
wide range of individuals, businesses, and other organizations. A major portion
of loans are secured by various forms of collateral, including real estate,
business assets, consumer property, and other items.
USE OF ESTIMATES: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The collectibility of loans, fair
values of financial instruments, and status of contingencies are particularly
subject to change.
CASH FLOW REPORTING: Cash and cash equivalents are defined as cash and due
from banks, federal funds sold, and interest-bearing deposits in financial
institutions with original maturities under 90 days. Net cash flows are reported
for customer loan and deposit transactions, securities sold under agreements to
repurchase and other short-term borrowings, and interest-bearing deposits in
financial institutions with maturities over 90 days.
SECURITIES: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately as other
comprehensive income, net of tax. Other securities, such as Federal Home Loan
Bank stock and Federal Reserve Bank stock, are carried at cost. Securities are
written down to fair value when a decline in fair value is not temporary.
Gains and losses on sales are determined using the amortized cost of the
specific security sold. Interest income includes amortization of purchase
premiums and discounts.
LOANS HELD FOR SALE: Loans held for sale are reported at the lower of cost or
market value in the aggregate.
LOANS: Loans are reported at the principal balance outstanding, net of
deferred loan fees and costs and the allowance for loan losses. Interest income
is reported on the interest method and includes amortization of net deferred
loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt,
typically when payments are past due over 90 days. Payments received on such
loans are reported as principal reductions.
ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, an
allowance for loan losses is recorded. Increases to the allowance are recorded
by a provision for loan losses charged to expense. Estimating the risk of loss
and the amount of loss on any loan is necessarily subjective. Accordingly, the
allowance is maintained by management at a level considered adequate to cover
losses that are currently anticipated based on past loss experience, general
economic conditions, information about specific borrower situations including
their financial position and collateral values, and other factors and estimates
which are subject to change over time. While management may periodically
allocate portions of the allowance for specific problem loan situations, the
whole allowance is available for any loan charge-offs that occur. A loan is
charged-off by management as a loss when deemed uncollectible, although
collection efforts continue and future recoveries may occur.
While management uses available information to recognize losses on loans,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to provide additions to the allowance
based on their judgements at the time of their examinations.
Loans are considered impaired if full principal or interest payments are not
anticipated. Impaired loans are carried at the present value of expected cash
flows discounted at the loan's effective interest rate or at fair value of the
collateral if the loan is collateral dependent. A portion of the allowance for
loan losses is allocated to impaired loans.
Smaller-balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage loans secured by one-to-four family
residences, residential construction loans, and automobile, home equity and
second mortgage loans. Commercial loans and mortgage loans secured by other
properties are evaluated individually for impairment. All loans in non-accrual
status and other selected watch list loans are considered for impairment.
Impaired loans or portions thereof are charged off when deemed uncollectible.
40 NSFC ANNUAL REPORT 1999
<PAGE> 28
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTE 1 (CONTINUED)
- --------------------------------------------------------------------------------
Increases or decreases in the carrying value of impaired loans are reported
as reductions or increases to the provision of loan losses.
OFFICE BUILDINGS AND EQUIPMENT: Asset cost is reported net of accumulated
depreciation. Depreciation expense is calculated on the straight-line method
over asset useful lives.
OTHER REAL ESTATE: Real estate acquired in settlement of loans is initially
reported at estimated fair value at acquisition. After acquisition, a valuation
allowance reduces the reported amount to the lower of the initial amount or fair
value less costs to sell. Expenses, gains and losses on disposition, and changes
in the valuation allowance are reported in net loss on other real estate.
SERVICING RIGHTS: Servicing rights represent the allocated value of servicing
rights retained on loans sold. Servicing rights are expensed in proportion to,
and over the period of, estimated net servicing revenues. Impairment is
evaluated based on the fair value of the rights, using groupings of the
underlying loans as to interest rates. Any impairment of a grouping is reported
as a valuation allowance.
GOODWILL: Goodwill is the excess of purchase price over identified net assets
in business acquisitions. Goodwill is expensed on the straight-line method over
25 years. Goodwill is assessed for impairment based on estimated undiscounted
cash flows, and written down if necessary.
LONG-TERM ASSETS: These assets are reviewed for impairment when events
indicate their carrying amount may not be recoverable from future undiscounted
cash flows. If impaired, the assets are recorded at discounted amounts.
REPURCHASE AGREEMENTS: Substantially all repurchase agreement liabilities
represent amounts advanced by various customers. Securities are pledged to cover
these liabilities, which are not covered by federal deposit insurance.
EMPLOYEE BENEFITS: A profit sharing plan covers substantially all employees.
Contributions are expensed annually and are made at the discretion of the Board
of Directors. Contributions totaled $259,000, $259,000 and $260,000 in 1999,
1998 and 1997. The plan allows employees to make voluntary contributions,
although such contributions are not matched by the Company.
STOCK COMPENSATION: Expense for employee compensation under stock option
plans is based on Opinion 25, with expense reported only if options are granted
below market price at grant date. Pro forma disclosures of net income and
earnings per share are provided as if the fair value method of SFAS No. 123 are
used for stock-based compensation awarded after January 1, 1995.
INCOME TAXES: Income tax expense is the sum of the current year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments
are estimated using relevant market information and other assumptions, as more
fully disclosed separately. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of existing on- and
off-balance sheet financial instruments does not include the value of
anticipated future business or the values of assets and liabilities not
considered financial instruments.
EARNINGS PER SHARE: Basic earnings per share is based on weighted-average
common shares outstanding. Diluted earnings per share further assumes issue of
any dilutive potential common shares.
COMPREHENSIVE INCOME: Comprehensive income consists of net income and other
comprehensive income (loss). Other comprehensive income (loss) includes
unrealized gains and losses on securities available for sale, net of tax, which
are also recognized as separate components of equity.
FUTURE ACCOUNTING CHANGES: Beginning January 1, 2001, a new accounting
standard will require all derivatives to be recorded at fair value. Unless
designated as hedges, changes in these fair values will be recorded in the
income statement. Fair value changes involving hedges will generally be recorded
by offsetting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. Since the Company has
no derivative holdings, this is not expected to have a material effect but the
effect will depend on derivative holdings when this standard applies.
OPERATING SEGMENTS: Internal financial information is primarily reported and
aggregated in three lines of business, banking, trust and mortgage banking.
NSFC ANNUAL REPORT 1999 41
<PAGE> 29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997
- --------------------------------------------------------------------------------
NOTE 2 SECURITIES
- --------------------------------------------------------------------------------
Year-end securities available for sale were as follows:
<TABLE>
<CAPTION>
AMORTIZED GROSS UNREALIZED FAIR
DECEMBER 31, 1999 COST GAINS LOSSES VALUE
--------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury.................................... $ 4,999 $ 0 $ (1) $ 4,998
U.S. Government agencies & 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>
AMORTIZED GROSS UNREALIZED FAIR
DECEMBER 31, 1998 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 & 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
============================================
</TABLE>
Contractual maturities of securities available for sale at year-end 1999 were
as follows. Securities not due at a single maturity date, primarily
mortgage-backed and equity securities, are shown separately.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
----------------------
<S> <C> <C>
Due in one year or less............................. $ 12,376 $ 12,390
Due after one year through five years............... 156,669 151,678
Due after five years through ten years.............. 24,697 23,731
----------------------
193,742 187,799
Mortgage-backed securities.......................... 6,775 6,712
Equity securities................................... 1,966 2,173
----------------------
Total......................................... $ 202,483 $ 196,684
======================
</TABLE>
Mortgage-backed securities are comprised of investments in pools of
residential mortgages. The mortgage pools are issued and guaranteed by the
Federal Home Loan Mortgage Corporation (FHLMC), the Government National Mortgage
Association (GNMA) or the Federal National Mortgage Association (FNMA).
Agency securities with call options totaled $158,099,000 and $104,748,000 at
December 31, 1999 and 1998. As of December 31, 1999 the Company held no
structured notes.
Securities carried at $136,983,000 and $141,158,000 at year-end 1999 and
1998, were pledged to secure public deposits, repurchase agreements and for
other purposes as required or permitted by law.
42 NSFC ANNUAL REPORT 1999
<PAGE> 30
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTE 2 SECURITIES (CONTINUED)
- --------------------------------------------------------------------------------
As of December 31, 1999, the Company had no securities of a single issuer,
other than the U.S. Treasury and U.S. Government agencies and corporations,
including the FHLB, FHLMC, FNMA, GNMA and the Federal Farm Credit Bank (FFCB),
that exceeded 10% of consolidated stockholders' equity. Although the Company
holds securities issued by municipalities within the state of Illinois, which in
aggregate exceed 10% of consolidated stockholders' equity, none of the holdings
from individual municipal issuers exceeded this threshold.
- --------------------------------------------------------------------------------
NOTE 3 LOANS
- --------------------------------------------------------------------------------
Year-end loans were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------
<S> <C> <C>
Commercial.................................................... $ 60,570 $ 64,043
Real estate - construction.................................... 21,813 17,328
Real estate - mortgage........................................ 142,016 141,241
Home equity................................................... 17,259 15,579
Installment................................................... 6,957 8,530
------------------------
Total loans................................................ 248,615 246,721
Less:
Unearned income............................................ (69) (99)
Deferred loan fees......................................... (384) (413)
------------------------
Loans, net of unearned income and deferred loan fees....... 248,162 246,209
Allowance for loan losses..................................... (5,368) (5,433)
------------------------
Loans, net................................................. $ 242,794 $ 240,776
========================
</TABLE>
Impaired loans were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
<S> <C> <C> <C>
Year-end loans with no allowance for loan losses allocated........... $ 0 $ 0 $ 0
Year-end loans with allowance for loan losses allocated.............. 394 3,515 754
Amount of the allowance allocated.................................... 59 544 125
Year-end non-accrual loans, including impaired loans................. 394 3,804 1,003
Average of impaired loans during the year............................ 779 1,695 776
Interest income recognized during impairment......................... 30 84 36
Cash-basis interest income recognized on impaired loans.............. 30 84 36
</TABLE>
Related party loans were as follows:
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Total loans at beginning of year................................. $ 435
New loans........................................................ 82
Repayments....................................................... (50)
Other changes.................................................... (171)
----------
Total loans at end of year.................................... $ 296
==========
</TABLE>
Real estate loans with a carrying value of $18,276,000 and $20,596,000 were
pledged to secure public deposits at December 31, 1999 and 1998.
There were no loans held for sale at year-end 1999. During 1999, loans held
for sale with a carrying value of $2,520,000 were transfered to portfolio loans.
At year-end 1998 there were $5,799,000 in loans held for sale that were
classified as real estate mortgage loans.
NSFC ANNUAL REPORT 1999 43
<PAGE> 31
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997
- --------------------------------------------------------------------------------
NOTE 4 ALLOWANCES FOR LOAN AND OTHER REAL ESTATE OWNED LOSSES
- --------------------------------------------------------------------------------
Activity in the allowance for loan losses for the year ended December 31,
follows:
1999 1998 1997
-----------------------------
Balance at beginning of year .................. $ 5,433 $ 5,430 $ 4,839
Provision charged to operating expense ........ 0 10 480
Loans charged off ............................. (683) (73) (209)
Recoveries on loans previously charged-off .... 618 66 320
-----------------------------
Balance at end of year ..................... $ 5,368 $ 5,433 $ 5,430
=============================
Activity in the allowance for other real estate owned losses for the year
ended December 31, follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------
<S> <C> <C> <C>
Balance at beginning of year...................................... $ 552 $ 544 $ 532
Provision charged to operating expense ........................... 0 10 21
Charge-off to the allowance for other real estate owned losses ... (176) 0 0
Recovery of allowance upon sale of other real estate owned ....... (376) 0 0
Losses on other real estate owned ................................ 0 (2) (9)
-------------------------
Balance at end of year......................................... $ 0 $ 552 $ 544
=========================
</TABLE>
- --------------------------------------------------------------------------------
NOTE 5 OFFICE BUILDINGS AND EQUIPMENT
- --------------------------------------------------------------------------------
Office buildings and equipment consisted of the following at December 31,
1999 and 1998:
1999 1998
---------------------
Land................................................. $ 1,363 $ 1,413
Office buildings and improvements.................... 8,154 8,340
Furniture and equipment.............................. 4,177 3,918
---------------------
Total cost........................................ 13,694 13,671
Accumulated depreciation............................. (7,518) (7,024)
---------------------
Net book value.................................... $ 6,176 $ 6,647
=====================
Depreciation expense amounted to $602,000 in 1999, $590,000 in 1998, and
$568,000 in 1997.
- --------------------------------------------------------------------------------
NOTE 6 LOAN SERVICING
- --------------------------------------------------------------------------------
Mortgage loans serviced for others are not reported as assets. These loans
totaled $48,093,000 and $60,288,000 at year-end 1999 and 1998. Related escrow
deposit balances were $498,000 and $566,000 at year-end 1999 and 1998.
Activity for capitalized mortgage servicing rights was as follows for 1999,
1998 and 1997:
1999 1998 1997
---------------------------
Beginning of year............... $ 195 $ 120 $ 80
Additions....................... 1 140 76
Amortized to expense............ (68) (65) (36)
---------------------------
End of year.................. $ 128 $ 195 $ 120
===========================
44 NSFC ANNUAL REPORT 1999
<PAGE> 32
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTE 7 DEPOSITS
- --------------------------------------------------------------------------------
At year-end 1999, stated maturities of time deposits were:
2000.............................................. $ 145,776
2001.............................................. 17,536
2002.............................................. 6,042
2003 and thereafter............................... 6
---------
Total.......................................... $ 169,360
=========
Related party deposits at year-end 1999 and 1998 totaled $10,827,000 and
$11,738,000.
- --------------------------------------------------------------------------------
NOTE 8 BORROWINGS
- --------------------------------------------------------------------------------
Securities sold under repurchase agreements and other short-term borrowings
are financing arrangements. Physical control is maintained by the Company for
all other securities sold under repurchase agreements.
The following is a summary of securities sold under repurchase agreements and
other short-term borrowings at December 31, 1999 and 1998:
1999 1998
----------------------
Securities sold under repurchase agreements............ $ 64,436 $ 47,990
Federal funds purchased................................ 6,000 0
----------------------
Total............................................... $ 70,436 $ 47,990
======================
Information concerning securities sold under repurchase agreements and other
short-term borrowings is summarized as follows:
1999 1998
----------------------
Average daily balance during the year................ $ 48,905 $ 36,155
Average interest rate during the year................ 4.66% 5.11%
Maximum month end balance during the year............ $ 70,436 $ 47,990
The following is a schedule of securities sold under repurchase agreements
and related securities as of December 31, 1999 by selected maturity dates:
<TABLE>
<CAPTION>
OVERNIGHT 1-30 DAYS 31-90 DAYS OVER 90 DAYS TOTAL
---------------- ---------------- --------------- --------------- ----------------
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government agencies
and corporations........ $20,770 $20,072 $13,546 $13,003 $ 3,599 $ 3,458 $29,650 $28,507 $67,565 $65,040
=====================================================================================
Repurchase Agreement.... $18,428 $13,361 $ 3,578 $29,069 $64,436
=====================================================================================
</TABLE>
The Company maintains a collateral pledge agreement with the FHLB covering
secured advances whereby the Bank agrees to retain first mortgage loans with an
unpaid principal balances aggregating no less than 167% of the outstanding
secured advance from the FHLB.
NSFC ANNUAL REPORT 1999 45
<PAGE> 33
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997
- --------------------------------------------------------------------------------
NOTE 9 INCOME TAXES
- --------------------------------------------------------------------------------
A summary of federal and state income taxes on operations follows:
1999 1998 1997
------------------------------
Current payable tax:
Federal............................... $ 3,387 $ 3,130 $ 2,940
State................................. 74 86 262
Deferred tax............................. 150 92 7
------------------------------
Income tax expense................. $ 3,611 $ 3,308 $ 3,209
==============================
The components of deferred tax assets and liabilities at December 31, 1999
and 1998 follow:
<TABLE>
<CAPTION>
1999 1998
------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan and other real estate owned losses ...... $ 1,715 $ 1,929
Deferred loan fees ......................................... 7 0
Deferred compensation and directors' fees .................. 155 182
Unrealized net loss on securities available for sale ....... 2,246 0
------------------
Gross deferred tax assets ............................. 4,123 2,111
Deferred tax liabilities:
Accumulated depreciation ................................... (528) (567)
Federal Home Loan Bank stock dividend ...................... (37) (37)
Unrealized net gain on securities available for sale ....... 0 (403)
Deferred loan fees ......................................... 0 (34)
Mortgage servicing rights .................................. (50) (75)
Other items ................................................ (104) (90)
------------------
Gross deferred tax liabilities ........................ (719) (1,206)
------------------
Net deferred tax asset .............................. $ 3,404 $ 905
==================
</TABLE>
No valuation allowance is required for deferred tax assets.
The provision for income taxes differs from that computed at the statutory
federal corporate tax rate as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-----------------------------
<S> <C> <C> <C>
Income tax calculated at statutory rate (34%) ..................... $ 3,908 $ 3,608 $ 3,474
Add (subtract) tax effect of:
Tax-exempt income, net of disallowed interest expense .......... (383) (380) (431)
State income tax, net of federal tax benefit ................... 76 71 156
Other items, net ............................................... 10 9 10
-----------------------------
Income tax expense .......................................... $ 3,611 $ 3,308 $ 3,209
=============================
</TABLE>
Prior to being merged with the Bank, First Federal Bank, fsb (the "Thrift")
qualified under provisions of the Internal Revenue Code which permitted it to
deduct from taxable income a provision for bad debts which differs from the
provision charged to income in the financial statements. Tax legislation passed
in 1996 now requires all thrift institutions to deduct a provision for bad debts
for tax purposes based on actual loss experience and recapture the excess bad
debt reserve accumulated in tax years after 1987 prior to being merged with the
Bank. These provisions carry forward to the Bank after the merger of the Thrift
into the Bank. The related amount of excess bad debt reserve which must be
recaptured is not material. Retained earnings at December 31, 1999 includes
approximately $3,269,000 for which no provision for federal income taxes has
been made. If, in the future, this portion of retained earnings is used for any
purpose other than to absorb bad debt losses, federal income taxes would be
imposed at the then prevailing rates, resulting in recording approximately
$1,266,000 of deferred tax liability which is currently not recorded.
46 NSFC ANNUAL REPORT 1999
<PAGE> 34
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTE 10 - OMNIBUS INCENTIVE PLANS
- --------------------------------------------------------------------------------
The Omnibus Incentive Plan (the "Plan") authorizes the issuance of up to
375,000 shares of the Company's common stock, including granting of
non-qualified stock options, restricted stock and stock appreciation rights.
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123") requires
pro forma disclosures for companies that do not adopt its fair value accounting
method for stock-based employee compensation. The Company has not granted any
stock options since SFAS No. 123 became effective. Stock options are used to
reward directors and officers and provide them with an additional equity
interest. Options are issued for 10 year periods and are fully vested when
granted.
Information about option grants follows:
NUMBER WEIGHTED-AVERAGE
OF OPTIONS EXERCISE PRICE
------------------------------
Outstanding, beginning of 1997.......... 25,890 $ 8.32
Exercised 1997.......................... (500) 8.40
------
Outstanding, end of 1997................ 25,390 8.32
Exercised 1998.......................... (6,535) 8.32
------
Outstanding, end of 1998................ 18,855 8.32
Exercised 1999.......................... (4,945) 8.32
------
Outstanding, end of 1999................ 13,910 8.32
======
At year-end 1999, options outstanding had a remaining option life of 2 years.
The Committee of the Board of Directors at its discretion may grant stock
appreciation rights under the Plan. A stock appreciation right entitles the
holder to receive from the Company an amount equal to the excess, if any, of the
aggregate fair market value of the Company's common stock which is the subject
of such grant over the grant price. As of December 31, 1999 and 1998, 12,280 and
14,990 stock appreciation rights were outstanding at $8.32. The Company's
(income) expense was ($30,000), $25,000, and $114,000, for the years ended
December 31, 1999, 1998, and 1997. The stock appreciation rights will expire
during 2002.
NSFC ANNUAL REPORT 1999 47
<PAGE> 35
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997
- --------------------------------------------------------------------------------
NOTE 11 - COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES
- --------------------------------------------------------------------------------
There are various contingent liabilities that are not reflected in the
financial statements, including claims and legal actions arising in the ordinary
course of business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material effect on financial condition or results of operations.
At year-end 1999 and 1998, reserves of $4,513,000 and $3,165,000 were
required as deposits with the Federal Reserve or as cash on hand. These reserves
do not earn interest.
Some financial instruments are used in the normal course of business to meet
the financing needs of customers and to reduce exposure to interest rate
changes. These financial instruments include commitments to extend credit,
standby letters of credit, and financial guarantees. These involve, to varying
degrees, credit and interest-rate risk in excess of the amount reported in the
financial statements.
Exposure to credit loss if the other party does not perform is represented by
the contractual amount for commitments to extend credit, standby letters of
credit, and financial guarantees written. The same credit policies are used for
commitments and conditional obligations as are used for loans. Collateral or
other security is normally required to support financial instruments with credit
risk.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being used, the commitment does not necessarily represent future
cash requirements. Standby letters of credit and financial guarantees written
are conditional commitments to guarantee a customer's performance to a third
party.
A summary of the notional or contractual amounts of financial instruments
with off-balance-sheet risk at year-end follows:
Unused lines of credit and commitments to make loans:
1999 1998
---------------------
Fixed rate....................... $ 19,776 $ 19,999
Variable rate.................... 67,664 60,009
---------------------
Total......................... $ 87,440 $ 80,008
=====================
Standby letters of credit........... $ 5,318 $ 6,598
=====================
Commitments to make loans at a fixed rate have interest rates ranging primarily
from 6.00% to 9.00% at December 31, 1999.
48 NSFC ANNUAL REPORT 1999
<PAGE> 36
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
The following methods and assumptions were used to estimate fair values for
financial instruments. Securities fair values are based on quoted market prices
or, if no quotes are available, on the rate and term of the security and or
information about the issuer. For loans or deposits and securities sold under
repurchase agreements, the fair value is estimated by discounted cash flow
analysis using current market rates for the estimated life and credit risk. Fair
values for impaired loans are estimated using discounted cash flow analyses or
underlying collateral values, where applicable. Fair value of loans held for
sale is based on market estimates. The fair value of off-balance-sheet items is
based on the fees or cost that would currently be charged to enter or terminate
such arrangements, and the fair value is not material.
The estimated year end fair values of financial instruments were:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
1999 --------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents ................................ $ 16,900 $ 16,900
Interest bearing deposits in financial institutions -
maturities over 90 days ................................. 100 100
Securities available for sale ............................ 196,684 196,684
Loans, net ............................................... 242,794 245,838
Direct lease financing ................................... 2,138 2,175
Accrued interest receivable .............................. 4,361 4,361
Financial liabilities:
Deposits ................................................. $(334,251) $(333,547)
Securities sold under repurchase agreements and other
short-term borrowings ................................... (70,436) (70,436)
Advances from borrowers for taxes and insurance .......... (645) (645)
Accrued interest payable ................................. (3,640) (3,640)
<CAPTION>
CARRYING ESTIMATED
VALUE FAIR VALUE
1998 --------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents ................................ $ 27,959 $ 27,959
Interest bearing deposits in financial institutions -
maturities over 90 days ................................. 100 100
Securities available for sale ............................ 200,861 200,861
Loans, net ............................................... 240,776 250,721
Direct lease financing ................................... 987 1,001
Accrued interest receivable .............................. 4,408 4,408
Financial liabilities:
Deposits ................................................. $(355,756) $(356,971)
Securities sold under repurchase agreements and
other short-term borrowings ............................. (47,990) (47,990)
Federal Home Loan Bank advances .......................... (10,000) (8,482)
Advances from borrowers for taxes and insurance .......... (992) (992)
Accrued interest payable ................................. (3,951) (3,951)
</TABLE>
NSFC ANNUAL REPORT 1999 49
<PAGE> 37
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997
- --------------------------------------------------------------------------------
NOTE 13 - REGULATORY MATTERS
- --------------------------------------------------------------------------------
The Company and Bank are subject to regulatory capital requirements
administered by federal banking agencies. Capital adequacy guidelines and prompt
corrective action regulations involve quantitative measures of assets,
liabilities, and certain off-balance sheet items calculated under regulatory
accounting practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk weighting, and other
factors, and the regulators can lower classifications in certain cases. Failure
to meet various capital requirements can initiate regulatory action that could
have a direct material effect on the financial statements.
The prompt corrective action regulations provide five classifications,
including well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized, although these
terms are not used to represent overall financial condition. If adequately
capitalized, regulatory approval is required to accept brokered deposits. If
undercapitalized, capital distributions are limited, as is asset growth and
expansion, and plans for capital restoration are required.
Actual capital levels and minimum required levels were as follows at December
31, 1999 and 1998:
<TABLE>
<CAPTION>
MINIMUM REQUIRED TO
MINIMUM REQUIRED BE WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS
------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Total Capital
(to risk weighted assets)
Consolidated........................................... $72,996 22.72% $25,707 8.00% $32,134 10.00%
Bank................................................... 72,500 22.57 25,696 8.00 32,120 10.00
Tier I Capital
(to risk weighted assets)
Consolidated........................................... 68,979 21.47 12,854 4.00 19,280 6.00
Bank................................................... 68,485 21.32 12,848 4.00 19,272 6.00
Tier I Capital
(to average assets)
Consolidated........................................... 68,979 14.53 18,991 4.00 23,739 5.00
Bank................................................... 68,485 14.43 18,985 4.00 23,731 5.00
1998
Total Capital
(to risk weighted assets)
Consolidated........................................... $68,264 21.84% $25,004 8.00% $31,256 10.00%
Bank................................................... 67,755 21.69 24,993 8.00 31,241 10.00
Tier I Capital
(to risk weighted assets)
Consolidated........................................... 64,357 20.59 12,502 4.00 18,753 6.00
Bank................................................... 63,850 20.44 12,496 4.00 18,745 6.00
Tier I Capital
(to average assets)
Consolidated........................................... 64,357 13.69 18,801 4.00 23,501 5.00
Bank................................................... 63,850 13.59 18,795 4.00 23,493 5.00
</TABLE>
The Company and Bank at year end 1999 were categorized as well capitalized.
Management knows of no circumstances or events which would change these
categorizations.
The Company's primary source of funds to pay dividends to shareholders is the
dividends it receives from the Bank. The Bank is subject to certain restrictions
on the amount of dividends that it may declare without regulatory approval. At
December 31, 1999, $13,393,000 of the Bank's retained earnings was available for
dividend declaration without prior regulatory approval.
50 NSFC ANNUAL REPORT 1999
<PAGE> 38
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTE 14 - EARNINGS PER SHARE AND CAPITAL MATTERS
- --------------------------------------------------------------------------------
Net income was utilized to calculate both basic and diluted earnings per
share for all years presented. Information regarding weighted average shares
utilized in computing basic and diluted earnings per share is as follows
(restated for the five-for-one stock split in 1998):
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Average outstanding common shares ............................ 4,457,448 4,449,996 4,446,450
Effect of stock options ...................................... 9,023 9,987 9,055
---------------------------------
Average outstanding shares for diluted earnings per share .... 4,466,471 4,459,983 4,455,505
=================================
</TABLE>
On April 23, 1998, the Company's stockholders approved an amendment to the
Company's certificate of incorporation to increase the authorized common shares
and effect a five-for-one stock split. All prior period earnings per share and
dividends per share information have been restated to reflect the five-for-one
stock split. Information related to stockholders' equity at December 31, 1999
and 1998 was as follows:
1999 1998
Par value per share.................... $ 0.40 $ 0.40
Authorized shares...................... 6,500,000 6,500,000
Issued and outstanding shares.......... 4,458,345 4,453,400
NSFC ANNUAL REPORT 1999 51
<PAGE> 39
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Following are condensed parent company financial statements.
Condensed Balance Sheets
<TABLE>
<CAPTION>
December 31, 1999 1998
-----------------
<S> <C> <C>
Assets
Cash on deposit at subsidiary bank - noninterest bearing .... $ 689 $ 775
Interest bearing deposits in unaffiliated bank .............. 39 38
-----------------
Total cash and cash equivalents .......................... 728 813
Investment in wholly-owned subsidiary
Equity in underlying book value of Bank of Waukegan ...... 64,933 64,488
Goodwill, net ............................................ 107 118
-----------------
Total investment in subsidiary ......................... 65,040 64,606
Other assets ................................................ 176 51
-----------------
Total assets ........................................... $65,944 $65,470
=================
Liabilities and Stockholders' Equity
Accounts payable and other liabilities ...................... $ 410 $ 357
Stockholders' equity ........................................ 65,534 65,113
-----------------
Total liabilities and stockholders' equity ............... $65,944 $65,470
=================
</TABLE>
Condensed Statements of Income
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
------------------------
<S> <C> <C> <C>
Operating income
Dividends from Bank .................................... $3,345 $2,677 $2,124
Interest income ........................................ 1 2 1
------------------------
Total operating income ............................... 3,346 2,679 2,125
Operating expenses ........................................ 152 160 218
------------------------
Income before income taxes and equity in undistributed
earnings of Bank ......................................... 3,194 2,519 1,907
Income tax benefit ........................................ 55 57 80
------------------------
Income before equity in undistributed earnings of Bank .... 3,249 2,576 1,987
Equity in undistributed earnings of Bank .................. 4,635 4,728 5,023
------------------------
Net income ............................................. $7,884 $7,304 $7,010
========================
</TABLE>
Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended December 31, 1999 1998 1997
-----------------------------
<S> <C> <C> <C>
Cash flows from operating activities
Net income ....................................... $ 7,884 $ 7,304 $ 7,010
Adjustments to reconcile net income to net
cash from operating activities
Equity in undistributed earnings of Bank ....... (4,635) (4,728) (5,023)
Goodwill amortization .......................... 11 11 11
(Increase) decrease in other assets ............ (125) 77 311
Increase (decrease) in other liabilities ....... 82 (144) (111)
-----------------------------
Net cash from operating activities ............. 3,217 2,520 2,198
Cash flows from financing activities
Exercise of stock options ........................ 42 54 4
Dividends paid ................................... (3,344) (2,671) (2,134)
-----------------------------
Net cash from financing activities ............... (3,302) (2,617) (2,130)
-----------------------------
Increase (decrease) in cash and cash equivalents .... (85) (97) 68
Cash and cash equivalents at beginning of year ...... 813 910 842
-----------------------------
Cash and cash equivalents at end of year ............ $ 728 $ 813 $ 910
=============================
</TABLE>
52 NSFC ANNUAL REPORT 1999
<PAGE> 40
(TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA)
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
NOTE 16 - OTHER COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
Other comprehensive income (loss) components and related taxes were as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------
<S> <C> <C> <C>
Unrealized holding gains (losses) on securities available for sale .... $(6,840) $ 277 $ 797
Tax effect ............................................................ 2,650 (108) (319)
----------------------------
Other comprehensive income (loss) .................................. $(4,190) $ 169 $ 478
=============================
</TABLE>
- --------------------------------------------------------------------------------
NOTE 17 - SEGMENT INFORMATION
- --------------------------------------------------------------------------------
The operating segments are determined by the products and services offered,
primarily distinguished between banking, mortgage banking and trust operations.
Loans, investments 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. The accounting policies used are the same as those described in the
summary of significant accounting policies. 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
net revenues exceeded 10% of total pre-tax income for 1999, 1998 or 1997.
Information reported internally for performance assessment follows:
1999 OTHER TOTAL
BANKING SEGMENTS SEGMENTS
----------------------------
Net interest income .......... $17,773 $ 0 $17,773
Other revenue ................ 2,311 1,190 3,501
Other expenses ............... 8,558 1,221 9,779
----------------------------
Segment profit ............... $11,526 $ (31) $11,495
============================
1998 OTHER TOTAL
BANKING SEGMENTS SEGMENTS
----------------------------
Net interest income .......... $17,310 $ 0 $17,310
Provision for loan losses .... 10 0 10
Other revenue ................ 1,833 1,102 2,935
Other expenses ............... 8,656 967 9,623
----------------------------
Segment profit ............... $10,477 $ 135 $10,612
===========================
1997 OTHER TOTAL
BANKING SEGMENTS SEGMENTS
----------------------------
Net interest income .......... $17,144 $ 0 $17,144
Provision for loan losses .... 480 0 480
Other revenue ................ 2,062 625 2,687
Other expenses ............... 8,668 464 9,132
----------------------------
Segment profit ............... $10,058 $ 161 $10,219
===========================
NSFC ANNUAL REPORT 1999 53
<PAGE> 41
NORTHERN STATES FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING: All stockholders are invited to attend our annual meeting,
which will be held at 4:30 P.M., on Thursday, April 27, 2000 in the lobby of the
Bank of Waukegan, 1601 N. Lewis Avenue, Waukegan, Illinois 60085.
We look forward to meeting all stockholders and welcome your questions at the
annual meeting. Any stockholders unable to attend this year's meeting are
invited to send questions and comments in writing to Fred Abdula, Chairman of
the Board and Chief Executive Officer, at Northern States Financial Corporation.
FORM 10-K: Stockholders who wish to obtain a copy at no charge of Northern
States Financial Corporation's Form 10-K for the fiscal year ended December 31,
1999, as filed with the Securities and Exchange Commission, may do so by writing
Thomas M. Nemeth, Vice President & Treasurer, at Northern States Financial
Corporation.
FOR FURTHER INFORMATION: Stockholders and prospective investors are welcome
to call or write Northern States Financial Corporation with questions or
requests for additional information. Please direct inquiries to:
Thomas M. Nemeth
Vice President & Treasurer
Northern States Financial Corporation
1601 N. Lewis Avenue
Waukegan, Illinois 60085
(847) 244-6000 ext. 269
TRANSFER AGENT, REGISTRAR & DIVIDEND DISBURSEMENTS: Stockholders with a
change of address or related inquiries should contact:
Firstar Bank, NA
Investors Services Unit
1555 N. Rivercenter Dr., Suite 301
Milwaukee, Wisconsin 53212
(800) 637-7549
QUARTERLY CALENDAR: The Company operates on a fiscal year ending December 31.
Quarterly results are announced within 45 days after the end of each quarter,
and audited results are announced within 90 days after year end.
SEMI-ANNUAL DIVIDEND DATES: Dividends are expected to be announced and paid
on the following schedule during 2000:
Half Record Date Payment Date
First May 15 June 1
Second November 15 December 1
STOCK MARKET INFORMATION: The common stock of Northern States Financial
Corporation is traded on the National Association of Securities Dealers
Automated Quotation System (NASDAQ Small-Cap Market) under the ticker symbol
NSFC. Stock price quotations are published daily in the Chicago Tribune and
Chicago Sun-Times newspapers and, when traded, in The Wall Street Journal. The
stock is commonly listed as NthnStat.
As of December 31, 1999 there were 6,500,000 common shares authorized;
4,458,345 common shares were outstanding, held by approximately 435 registered
stockholders.
As of February 29, 2000, the following securities firms indicated they were
maintaining an inventory of Northern States Financial Corporation common stock
and are acting as market makers:
Herzog, Heine, Geduld, Inc.
Miami, Florida
(800) 966-7022 or (305) 932-5880
Howe Barnes Investments, Inc.
Chicago, Illinois
(800) 800-4693 or (312) 655-2995
Spear Leeds & Kellogg Capital Markets
Jersey City, New Jersey
(800) 526-3160 or (201) 418-4000
PRICE SUMMARY: The following schedule details our stock's quarter ending bid
and ask price:
1999 1998
BID ASK BID ASK
- ----------------------------------------------------------
Quarter Ended:
March 31 $ 23 7/8 $ 24 $ 32 $ 33 5/8
June 30 23 1/2 23 7/8 34 3/8 34 3/4
September 30 23 23 1/2 27 27 5/8
December 31 22 1/2 23 24 5/8 25
2000
BID ASK
- -----------------------------------------------------
For the First Quarter:
(through March 1, 2000) $ 20 $ 21
CASH DIVIDENDS: Northern States Financial Corporation pays semi-annual cash
dividends in June and December. Uninterrupted cash dividends have been paid
since the Company's formation in 1984 and have increased each year since then.
The table below shows semi-annual cash dividends per share for the past six
years.
June 1 December 1 Total
----------------------------------
1994 $ .14 $ .15 $ .29
1995 .16 .17 .33
1996 .19 .21 .40
1997 .23 .25 .48
1998 .28 .32 .60
1999 .35 .40 .75
INDEPENDENT AUDITORS:
Crowe, Chizek and Company LLP
Oak Brook, Illinois
54 NSFC ANNUAL REPORT 1999
<PAGE> 1
EXHIBIT 21.
SUBSIDIARIES OF NORTHERN STATES FINANCIAL CORPORATION
Bank of Waukegan
1601 N. Lewis Avenue
Waukegan, Illinois 60085
State of Incorporation - Illinois
A Wholly-Owned Subsidiary of
Northern States Financial Corporation
63
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 16,740
<INT-BEARING-DEPOSITS> 260
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 196,684
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 250,300
<ALLOWANCE> 5,368
<TOTAL-ASSETS> 476,681
<DEPOSITS> 334,251
<SHORT-TERM> 70,436
<LIABILITIES-OTHER> 6,460
<LONG-TERM> 0
0
0
<COMMON> 1,783
<OTHER-SE> 63,751
<TOTAL-LIABILITIES-AND-EQUITY> 476,681
<INTEREST-LOAN> 20,766
<INTEREST-INVEST> 11,698
<INTEREST-OTHER> 314
<INTEREST-TOTAL> 32,778
<INTEREST-DEPOSIT> 12,421
<INTEREST-EXPENSE> 15,005
<INTEREST-INCOME-NET> 17,773
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 9,779
<INCOME-PRETAX> 11,495
<INCOME-PRE-EXTRAORDINARY> 11,495
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,884
<EPS-BASIC> 1.77
<EPS-DILUTED> 1.77
<YIELD-ACTUAL> 4.11
<LOANS-NON> 394
<LOANS-PAST> 421
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,433
<CHARGE-OFFS> 683
<RECOVERIES> 618
<ALLOWANCE-CLOSE> 5,368
<ALLOWANCE-DOMESTIC> 3,168
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,200
</TABLE>
