<PAGE> 1
================================================================================
United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ending June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
--------------------------------
NORTHERN STATES FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 0-19300 36-3449727
(State of Incorporation) (Commission (I.R.S. Employer
File Number) Identification No.)
1601 North Lewis Avenue
Waukegan, Illinois 60085
(847) 244-6000
(Address, including zip code, and telephone number, including
area code, of principal executive office)
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
YES: XXX NO:
----- -----
4,460,845 shares of common stock were outstanding
as of June 30, 2000
<PAGE> 2
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
<S> <C>
Independent Accountants' Report..........................................................2
Condensed consolidated balance sheets as of June 30,
2000, December 31, 1999 and June 30, 1999...............................................3
Condensed consolidated statements of income for the three and
six months ended June 30, 2000 and 1999.................................................4
Condensed consolidated statements of comprehensive income
the three and six months ended June 30, 2000 and 1999...................................5
Condensed consolidated statements of cash flows for
the six months ended June 30, 2000 and 1999.............................................6
Notes to condensed consolidated financial statements................................7 - 17
Item 2. Management's discussion and analysis of financial
condition and results of operations..........................................18 - 25
Item 7A. Quantitative and qualitative disclosures
about market risk............................................................26 - 27
PART II. OTHER INFORMATION
Signatures..............................................................................28
</TABLE>
1
<PAGE> 3
NORTHERN STATES FINANCIAL CORPORATION
FORM 10-Q
JUNE 30, 2000
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
Northern States Financial Corporation
Waukegan, Illinois
We have reviewed the condensed consolidated balance sheet of NORTHERN
STATES FINANCIAL CORPORATION as of June 30, 2000 and the condensed consolidated
statements of income and comprehensive income for the three month and six month
periods ended June 30, 2000 and 1999 and the condensed consolidated statements
of cash flows for the six month periods ended June 30, 2000 and 1999. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
/s/ Crowe, Chizek and Company LLP
--------------------------------------------
Oak Brook, Illinois
July 21, 2000
2
<PAGE> 4
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000, December 31, 1999 and June 30, 1999
(In thousands of dollars)
<TABLE>
<CAPTION>
June 30, December 31, June 30,
2000 1999 1999
--------- --------- ---------
<S> <C> <C> <C>
Assets
Cash and due from banks ............................. $ 17,180 $ 16,740 $ 14,113
Interest bearing deposits in financial institutions -
maturities less than 90 days .................... 200 160 196
Federal funds sold .................................. 1,000 0 0
--------- --------- ---------
Total cash and cash equivalents .................. 18,380 16,900 14,309
Interest bearing deposits in financial institutions -
maturities over 90 days ......................... 100 100 100
Securities available for sale ....................... 187,138 196,684 199,865
Loans ............................................... 282,436 248,162 242,466
Less: Allowance for loan losses ..................... (5,275) (5,368) (4,799)
--------- --------- ---------
Loans, net ....................................... 277,161 242,794 237,667
Direct lease financing .............................. 2,110 2,138 927
Office buildings and equipment, net ................. 5,978 6,176 6,334
Other real estate owned, net of allowance for losses
of $552 at June 30, 1999 ......................... 2,622 2,622 5,007
Accrued interest receivable ......................... 4,358 4,361 4,135
Other assets ........................................ 5,546 4,906 3,154
--------- --------- ---------
Total assets ..................................... $ 503,393 $ 476,681 $ 471,498
========= ========= =========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest bearing ..................... $ 42,753 $ 41,261 $ 43,668
NOW accounts ..................................... 46,708 41,787 49,040
Money market accounts ............................ 33,888 37,636 39,917
Savings .......................................... 44,577 44,207 46,210
Time, $100,000 and over .......................... 85,696 83,266 79,633
Time, under $100,000 ............................. 93,321 86,094 86,641
--------- --------- ---------
Total deposits ................................ 346,943 334,251 345,109
Securities sold under repurchase agreements
and other short-term borrowings .................. 73,319 70,436 51,083
Federal Home Loan Bank advance ...................... 10,000 0 5,000
Advances from borrowers for taxes and insurance ..... 665 645 662
Accrued interest payable and other liabilities ...... 5,967 5,815 5,116
--------- --------- ---------
Total liabilities ............................. 436,894 411,147 406,970
Stockholders' Equity
Common stock ........................................ 1,784 1,783 1,783
Additional paid-in capital .......................... 11,424 11,405 11,376
Retained earnings ................................... 57,993 55,898 53,417
Accumulated other comprehensive loss, net ........... (4,702) (3,552) (2,048)
--------- --------- ---------
Total stockholders' equity ....................... 66,499 65,534 64,528
--------- --------- ---------
Total liabilities and stockholders' equity ....... $ 503,393 $ 476,681 $ 471,498
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months and six months ended June 30, 2000 and 1999
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income
Loans (including fee income) ..................... $ 6,004 $ 5,078 $11,516 $10,214
Securities
Taxable ........................................ 2,704 2,551 5,442 5,057
Exempt from federal income tax ................ 230 262 470 527
Interest bearing deposits in financial institutions 3 6 7 9
Federal funds sold ............................... 76 93 121 253
------- ------- ------- -------
Total interest income ......................... 9,017 7,990 17,556 16,060
------- ------- ------- -------
Interest expense
Time deposits .................................... 2,508 2,069 4,839 4,269
Other deposits ................................... 930 983 1,849 1,961
Other borrowings ................................. 980 591 1,801 1,220
------- ------- ------- -------
Total interest expense ........................ 4,418 3,643 8,489 7,450
------- ------- ------- -------
Net interest income ................................. 4,599 4,347 9,067 8,610
Provision for loan losses ........................... 0 0 0 0
------- ------- ------- -------
Net interest income after provision for
loan losses ...................................... 4,599 4,347 9,067 8,610
------- ------- ------- -------
Noninterest income
Service fees on deposits ......................... 356 277 698 539
Trust income ..................................... 187 184 379 381
Mortgage banking income .......................... 22 35 43 217
Net gains on sales of loans ...................... 0 69 0 155
Other operating income ........................... 182 148 349 333
------- ------- ------- -------
Total noninterest income ...................... 747 713 1,469 1,625
------- ------- ------- -------
Noninterest expense
Salaries and employee benefits ................... 1,498 1,489 2,958 3,056
Occupancy and equipment, net ..................... 303 330 621 684
Data processing .................................. 122 122 241 252
FDIC deposit insurance ........................... 15 22 35 43
Other real estate owned .......................... 20 17 32 38
Other operating expenses ......................... 508 427 1,000 926
------- ------- ------- -------
Total noninterest expense ..................... 2,466 2,407 4,887 4,999
------- ------- ------- -------
Income before income taxes .......................... 2,880 2,653 5,649 5,236
Provision for income taxes .......................... 918 821 1,636 1,616
------- ------- ------- -------
Net income .......................................... $ 1,962 $ 1,832 $ 4,013 $ 3,620
======= ======= ======= =======
Basic earnings per share ............................ $ 0.44 $ 0.41 $ 0.90 $ 0.81
Diluted earnings per share .......................... $ 0.44 $ 0.41 $ 0.90 $ 0.81
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months and six months ended June 30, 2000 and 1999
(In thousands of dollars)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income .......................................... $ 1,962 $ 1,832 $ 4,013 $ 3,620
Other comprehensive income:
Unrealized gains (losses) arising during period
on securities available for sale, net of tax
of $64, ($1,227), ($727) and ($1,698) ....... 103 (1,941) (1,150) (2,686)
------- ------- ------- -------
Comprehensive income (loss) ......................... $ 2,065 ($ 109) $ 2,863 $ 934
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2000 and 1999
(In thousands of dollars)
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net income .................................................... $ 4,013 $ 3,620
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation ............................................... 233 333
Deferred loan fees ......................................... 112 (16)
Net change in loans held for sale .......................... 0 3,434
Net gains on sales of loans ................................ 0 (155)
Net gain on sale of building ............................... 0 (74)
Net gain on sale of other real estate owned .............. (3) 0
Amortization of mortgage servicing rights .................. 27 36
Net change in interest receivable .......................... 3 273
Net change in interest payable ............................. 529 (575)
Net change in other assets ................................. 60 194
Net change in other liabilities ............................ (377) (379)
-------- --------
Net cash from operating activities ...................... 4,597 6,691
-------- --------
Cash flows from investing activities
Maturities of securities available for sale ............... 8,401 59,282
Purchases of securities available for sale ................. (732) (62,670)
Change in loans made to customers .......................... (34,559) (2,664)
Property and equipment expenditures ........................ (35) (203)
Proceeds from sale of building ............................. 0 257
Proceeds from sale of other real estate owned .............. 83 0
Net change in direct lease financing ....................... 28 60
-------- --------
Net cash from investing activities ...................... (26,814) (5,938)
-------- --------
Cash flows from financing activities
Net increase (decrease) in:
Deposits ................................................. 12,692 (10,647)
Securities sold under repurchase agreements
and other short-term borrowings ........................ 2,883 3,093
Advances from borrowers for taxes and insurance .......... 20 (330)
Federal Home Loan Bank advance ............................. 10,000 0
Repayment of Federal Home Loan Bank advance ................ 0 (5,000)
Net proceeds from exercise of stock options ................ 20 42
Dividends paid ............................................. (1,918) (1,561)
-------- --------
Net cash from financing activities ...................... 23,697 (14,403)
-------- --------
Net change in cash and cash equivalents .............................. 1,480 (13,650)
Cash and cash equivalents at beginning of period ..................... 16,900 27,959
-------- --------
Cash and cash equivalents at end of period ........................... $ 18,380 $ 14,309
======== ========
Supplemental disclosures
Cash paid during the period for
Interest ................................................ $ 7,960 $ 8,025
Income taxes ............................................ 1,771 1,605
Noncash investing activities
Transfers made from loans to other real estate owned .... 80 2,510
Transfers made from loans held for sale to portfolio .... 0 2,520
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 8
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 1 - Basis of Presentation
The accompanying interim condensed consolidated financial statements are
prepared without audit and reflect all adjustments which are of a normal and
recurring nature and, in the opinion of management, are necessary to present
interim financial statements of Northern States Financial Corporation (the
"Company") in accordance with generally accepted accounting principles. The
interim financial statements do not purport to contain all the necessary
financial disclosures covered by generally accepted accounting principles that
might otherwise be necessary for complete financial statements.
The condensed consolidated balance sheets are as of June 30, 2000, December
31, 1999 and June 30, 1999. The condensed consolidated statements of income and
comprehensive income are for the three and six months ended June 30, 2000 and
1999. The condensed consolidated statements of cash flows are for the six months
ended June 30, 2000 and 1999.
The interim condensed financial statements should be read in conjunction
with the audited financial statements and accompanying notes (or "notes
thereto") of the Company for the years ended December 31, 1999, 1998 and 1997.
The results of operations for the three and six month periods ended June
30, 2000, are not necessarily indicative of the results to be expected for the
full year.
Basic earnings per share is based on weighted-average shares outstanding of
4,460,678 and 4,458,345 for the three months ended June 30, 2000 and 1999 and
4,460,012 and 4,456,551 for the six months ended June 30, 2000 and 1999. Diluted
earnings per share further assumes issue of any dilutive potential common
shares. Common stock information is summarized as follows:
June 30, December 31, June 30,
2000 1999 1999
------------------------------------
Common shares authorized............. 6,500,000 6,500,000 6,500,000
Common shares outstanding............ 4,460,845 4,458,345 4,458,345
Par value per share ................. $0.40 $0.40 $0.40
7
<PAGE> 9
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 2 - Securities
The amortized cost, gross unrealized gains and losses and fair value of
securities available for sale as of June 30, 2000, December 31, 1999 and June
30, 1999 are as follows:
<TABLE>
<CAPTION>
June 30, 2000 Amortized Gross Unrealized Fair
------------- Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury............................ $ 999 $ 0 $ (11) $ 988
U.S. Government agencies and
corporations........................... 167,020 0 (7,508) 159,512
States and political subdivision......... 18,758 71 (221) 18,608
Mortgage-backed securities............... 6,046 4 (112) 5,938
Equity securities........................ 1,991 185 (84) 2,092
-----------------------------------------------------------
Total................................. $ 194,814 $ 260 $ (7,936) $ 187,138
===========================================================
<CAPTION>
December 31, 1999 Amortized Gross Unrealized Fair
----------------- Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury............................ $ 4,999 $ 0 $ 1 $ 4,998
U.S. Government agencies and
corporation............................ 168,024 0 (5,933) 162,091
States and political subdivision......... 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
===========================================================
<CAPTION>
June 30, 1999 Amortized Gross Unrealized Fair
------------- Cost Gains Losses Value
----------- --------- ----------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury............................ $ 10,000 $ 19 $ 0 $ 10,019
U.S. Government agencies and
corporations........................... 160,923 6 (3,770) 157,159
States and political subdivision......... 22,209 328 (105) 22,432
Mortgage-backed securities............... 8,110 32 (70) 8,072
Equity securities........................ 1,966 231 (14) 2,183
-----------------------------------------------------------
Total................................. $ 203,208 $ 616 $ (3,959) $ 199,865
===========================================================
</TABLE>
8
<PAGE> 10
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Contractual maturities of securities available for sale at June 30, 2000
were as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities and equity securities, are shown separately.
Amortized Fair
Cost Value
------------------
Due in one year of less........................... $ 10,657 $ 10,621
Due after one year through five years............. 158,585 151,993
Due after five years through ten years............ 17,535 16,494
------------------
186,777 179,108
Mortgage-backed securities........................ 6,046 5,938
Equity securities................................. 1,991 2,092
------------------
Total.................................... $194,814 $187,138
==================
Mortgage-backed securities are comprised of investments in pools of
residential mortgages. The mortgage pools are issued and guaranteed by the
Federal Home Loan Mortgage Corporation (FHLMC), the Government National Mortgage
Corporation (GNMA) or the Federal National Mortgage Association (FNMA).
The fair value of agency securities with call options totaled $151,644 at
June 30, 2000. As of June 30, 2000, the Company held no structured notes.
There were no sales of securities during the six months ended June 30, 2000
and 1999.
Securities carried at $145,748, $136,983 and $127,040 at June 30, 2000,
December 31, 1999 and June 30, 1999 were pledged to secure public deposits,
repurchase agreements and for other purposes as required or permitted by law.
9
<PAGE> 11
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 3 - Loans
The Company makes loans to, and obtains deposits from, customers primarily
in Lake County, Illinois and surrounding areas. Most loans are secured by
specific items of collateral, including commercial and residential real estate
and other business and consumer assets.
Loans at June 30, 2000, December 31, 1999 and June 30, 1999 were as
follows:
June 30, December 3 June 30,
2000 1999 1999
-----------------------------
Commercial....................... $84,048 $60,570 $57,037
Real estate - construction....... 25,759 21,813 20,923
Real estate - mortgage........... 147,075 142,016 141,044
Home equity...................... 18,107 17,259 15,984
Installment...................... 7,978 6,957 7,982
-----------------------------
Total loans................... 282,967 248,615 242,970
Unearned income.................. (35) (69) (107)
Deferred loan fees............... (496) (384) (397)
-----------------------------
Loans, net of unearned income
and deferred loan fees........ 282,436 248,162 242,466
Allowance for loan losses........ (5,275) (5,368) (4,799)
-----------------------------
Loans, net.................... $277,161 $242,794 $237,667
=============================
The were no loans held for sale on June 30, 2000, December 31, 1999, and
June 30, 1999. During the first six months of 1999 the Company transferred loans
held for sale with a book value and fair value of $2,520 to portfolio loans.
Real estate - mortgage loans with a carrying value of $16,012, $18,276 and
$21,244 were pledged to secure public deposits at June 30, 2000, December 31,
1999 and June 30, 1999. The Company has also pledged real estate - mortgage
loans on residential property in an amount equal to at least 167% of the
outstanding Federal Home Loan Bank advances.
Non-performing loans, which includes loans contractually past due ninety
days or more, loans accounted for on a nonaccrual basis, and loans whose terms
have been renegotiated to provide a reduction or deferral of interest or
principal because of deterioration in the financial position of the borrower,
amounted to $1,850 at June 30, 2000, $815 at December 31, 1999 and $352 at June
30, 1999.
10
<PAGE> 12
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Impaired loans were as follows for June 30, 2000, December 31, 1999 and
June 30, 1999:
June 30, December 3 June 30,
2000 1999 1999
------------------------------
Loans with no allowance
for losses allocated..... $0 $0 $0
Loans with allowance
for losses allocated..... 627 394 491
Amount of the allowance
allocated................ 94 59 74
The average balance and income recognized on impaired loans were as follows
for the three and six months ended June 30, 2000 and June 30, 1999:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------------------------------------
Average of impaired loans
during the period............... $627 $367 $524 $1,191
Interest income recognized during
the impairment period........... 0 4 0 18
Cash-basis interest income recognized
during the impairment period.... 0 4 0 18
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans, standby letters of
credit, and unused lines of credit. The Company's exposure to credit loss in the
event of nonperformance by the other parties to these financial instruments is
represented by the contractual amount of the instruments. The Company uses the
same credit policy to make such commitments as it uses for on-balance-sheet
items.
11
<PAGE> 13
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
At June 30, 2000, December 31, 1999 and June 30, 1999, the contractual
amount of the Company's off-balance sheet commitments was as follows:
June 30, December 3 June 30,
2000 1999 1999
----------------------------
Unused lines of credit and
commitments to make loans:
Fixed rate.......................... $11,823 $19,776 $20,950
Variable rate....................... 87,166 67,664 69,329
----------------------------
Total............................ $98,989 $87,440 $90,279
============================
Standby letters of credit.............. $4,550 $5,318 $4,791
Since many commitments to make loans expire without being used, the amounts
above do not necessarily represent future cash commitments. Collateral obtained
upon exercise of the commitments is determined using management's credit
evaluation of the borrower, and may include commercial and residential real
estate and other business and consumer assets.
12
<PAGE> 14
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 4 - Allowance for Loan Losses and Other Real Estate Owned Losses
Activity in the allowance for loan losses for the six months ended June 30,
2000, twelve months ended December 31, 1999 and six months ended June 30, 1999
is as follows:
June 30, December 3, June 30,
2000 1999 1999
----------------------------
Balance at beginning of year $5,368 $5,433 $5,433
Provision charged to operating expense.... 0 0 0
Loans charged off......................... (163) (683) (660)
Recoveries on loans
previously charged off.................. 70 618 26
----------------------------
Balance at end of period............... $5,275 $5,368 $4,799
============================
There was no activity or balance in the allowance for other real estate
owned losses during the six months ended June 30, 2000. Activity in the
allowance for other real estate owned losses for the twelve months ended
December 31, 1999 and six months ended June 30, 1999 is as follows:
December 31, June 30,
1999 1999
-----------------------
Balance at beginning of year............... $552 $552
Provision charged to operation expense..... 0 0
Charge-off to the allowance for other
real estate owned losses................ (176) 0
Recovery of allowance upon sale of
other real estate owned (376) 0
Losses on other real estate owned.......... 0 0
----------------------
Balance at end of period................ $0 $552
======================
13
<PAGE> 15
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 5 - Provision for Income Tax
The provision for income taxes represents federal and state income tax
expense calculated using annualized rates on taxable income generated during the
respective periods. During the first quarter of 2000, the Company received
additional information to support a charitable contribution for real estate
owned sold during 1999 to a municipal entity. Accordingly, the Company recorded
a $153 tax benefit related to this sale in the first quarter of 2000.
Note 6 - Stockholders' Equity
For the six months ended June 30, 2000 total stockholders' equity increased
$965. The increase is a result of net income of $4,013, less the change in the
valuation allowance from December 31, 1999 for the fair value of securities
available for sale, net of tax, of $1,150, plus $20 due to the exercise of 2,500
stock options pursuant to the Omnibus Incentive Plan, less cash dividends paid
of $1,918 or $ .43 per share.
For the six months ended June 30, 1999 total stockholders' equity declined
$585. The decrease was the result of net income of $3,620, less the change in
the valuation allowance from December 31, 1998 for the fair value of securities
available for sale, net of tax, of $2,686, plus $42 due to the exercise of 4,945
stock options pursuant to the Omnibus Incentive Plan, less cash dividends paid
of $1,561 or $ .35 per share.
Note 7 - Omnibus Incentive Plan Instruments
The 1992 Omnibus Incentive Plan (the "Plan") authorizes the issuance of up
to 375,000 shares of the Company's common stock, including the granting of
non-qualified stock options, restricted stock and stock appreciation rights.
Statement of Financial Accounting Standards No. 123 requires pro forma
disclosures for companies that do not adopt its fair value accounting method for
stock based employee compensation. The Company did not grant any stock options
during the six months ended June 30, 2000 or during the entire year 1999. Stock
options may be used to reward directors and employees and provide them with an
additional equity interest in the Company. Options have been issued for 10 year
periods and are fully vested when granted.
14
<PAGE> 16
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Information about option grants follow:
Number of Weighted-Avg.
Options Exercise Price
--------------------------
Outstanding at January 1, 1999... 18,855 $8.32
Exercised during period ended
June 30, 1999................ (4,945) 8.32
--------------------------
Outstanding at June 30, 1999..... 13,910 $8.32
==========
Outstanding at January 1, 2000... 13,910 $8.32
Exercised during period ended
June 30, 2000................ (2,500) 8.32
--------------------------
Outstanding at June 30, 2000..... 11,410 $8.32
===========
At June 30, 2000, all remaining options had an exercise price of $8.32. The
options outstanding had a remaining life of 1.5 years.
The Company at its discretion may grant stock appreciation rights under the
Plan. A stock appreciation right entitles the holder to receive from the Company
an amount equal to the excess, if any, of the aggregate fair market value of the
Company's common stock which is the subject of such a grant over the grant
price. During the six months ended June 30, 2000, no stock appreciation rights
were exercised. At both June 30, 2000 and 1999, 12,280 stock appreciation rights
were outstanding at the grant price $8.32 per share. The Company's expense was
$5 and ($4) for the three months ended June 30, 2000 and 1999 and ($43) and
($18) for the six months ended June 30, 2000 and 1999. The stock appreciation
rights will expire during 2002.
15
<PAGE> 17
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
June 30, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Note 8 - Other Comprehensive Income
Other comprehensive income components and related taxes for the three and
six months ended June 30, 2000 and 1999 follows:
Three months ended Six months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
--------------------------------------
Unrealized holding losses on
securities available........ $167 ($3,168) ($1,877) ($4,384)
Tax effect..................... 64 (1,227) (727) (1,698)
--------------------------------------
Other comprehensive loss.... $103 ($1,941) ($1,150) ($2,686)
======================================
Note 9 - Segment Information
The operating segments are determined by the products and services offered,
primarily distinguished between banking, mortgage banking and trust operations.
Loans, securities and deposits provide the revenues in the banking operation,
servicing fees and loan sales provide the revenues in mortgage banking, and
trust fees provide the revenues in trust operations. All operations are
domestic.
Management began evaluating mortgage banking as a separate segment in
August, 1998. Mortgage banking and trust segment performance is evaluated using
fee income net of direct expenses. Income taxes are not allocated to these
segments and selected indirect expenses are allocated. There are no transactions
among segments. Substantially all assets are related to the banking segment.
Neither mortgage banking nor trust pre-tax revenues exceeded 10% of total
pre-tax income for the three or six months ended June 30, 2000 or 1999.
16
<PAGE> 18
Information reported internally for performance assessment of operating
segments for the three six months ended June 30, 2000 and 1999 follows:
Three months ended June 30, 2000
--------------------------------
Banking Other Segments Total
--------------------------------
Net interest income..... $4,599 $0 $4,599
Other revenue........... 508 239 747
Other expenses.......... 2,241 225 2,466
--------------------------------
Segment profit....... $2,866 $14 $2,880
================================
Three months ended June 30, 1999
--------------------------------
Banking Other Segments Total
--------------------------------
Net interest income..... $4,347 $0 $4,347
Other revenue........... 426 287 713
Other expenses.......... 2,090 317 2,407
--------------------------------
Segment profit (loss) $2,683 ($30) $2,653
================================
Six months ended June 30, 2000
------------------------------
Banking Other Segments Total
--------------------------------
Net interest income..... $9,067 $0 $9,067
Other revenue........... 987 482 1,469
Other expenses.......... 4,412 475 4,887
--------------------------------
Segment profit....... $5,642 $7 $5,649
================================
Six months ended June 30, 1999
------------------------------
Banking Other Segments Total
--------------------------------
Net interest income..... $8,610 $0 $8,610
Other revenue........... 874 751 1,625
Other expenses.......... 4,209 790 4,999
--------------------------------
Segment profit (loss) $5,275 ($39) $5,236
================================
17
<PAGE> 19
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion focuses on the consolidated financial condition of
the Northern States Financial Corporation (the "Company") at June 30, 2000 and
the consolidated results of operations for the three and six month periods ended
June 30, 2000, compared to the same periods of 1999. The purpose of this
discussion is to provide a better understanding of the condensed consolidated
financial statements and the operations of its subsidiary, the Bank of Waukegan
(the "Bank"). This discussion should be read in conjunction with the interim
condensed consolidated financial statements and notes thereto included herein.
The statements contained in this management's discussion and analysis that
are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers of this report that a number of important factors could
cause the Company's actual results subsequent to June 30, 2000 to differ
materially from those expressed in any such forward-looking statements.
FINANCIAL CONDITION
The consolidated total assets for the Company were $503.4 million at June
30, 2000, increasing $26.7 million from the Company's year-end, December 31,
1999.
The Company had $1.0 million in federal fund sold at June 30, 2000, as
compared to none at December 31, 1999.
The fair value of securities at June 30, 2000 was $187.1 million decreasing
by $9.5 million from the previous year-end. The fair value of the securities
portfolio has declined by $7.7 because of net maturities with the balance of the
decrease attributable to changes in the fair value of the securities. Net
maturities in the portfolio lowered U.S. Treasury securities by $4.0 million,
U.S. Government agency securities by $1.0 million, securities issued by states
and political subdivisions by $2.0 million and mortgage-backed securities by
$.7 million. Proceeds from these maturities were used to fund loan growth.
Despite higher interest rates the local economy continued to thrive and
loans grew over the first six months of 2000 increasing $34.3 million or 13.81%
from December 31, 1999. The Company saw growth in all categories of loans during
this period. Commercial loans increased $23.5 million and real estate
construction loans increased $3.9 million. Real estate mortgages increased $5.1
million while home equity and installment loans grew $.8 and $1.0 million.
At June 30, 2000 deposits at the Company increased $12.7 million from
December 31, 1999. With increased interest rates and uncertainty with the stock
market, time deposits became a viable option to investors. This is evidenced by
time deposits increasing $9.6 million, mostly in longer-term retail time
deposits. Another factor in the growth of time deposits is that some depositors
at year-end kept their funds in liquid deposit products because of Y2K concerns
and have since transferred their deposits back into longer term time deposits.
This is evidenced by money market deposits, which have declined $3.7 million
from year-end. Increases occurred also to demand deposits and NOW accounts,
which have grown $1.5 million and $4.9 million from December 31, 1999. The
growth in NOW accounts was from public entities. The Company is located in the
county seat and accepts deposits from local municipalities
18
<PAGE> 20
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
and various government agencies. The first half of property taxes were paid in
early June 2000 and resulted in public depositors increasing their NOW account
balances. Finally savings accounts increased slightly by $.4 million during the
first six months of 2000.
Securities sold under repurchase agreements (repurchase agreements) and
other short-term borrowings at the Company increased $2.8 million from December
31, 1999 to $73.3 million at June 30, 2000. These funds mainly consist of
repurchase agreements that are offered through an overnight repurchase agreement
product and a term product with maturities from 7 days to one year. Commercial
customers have increasingly placed their funds into repurchase agreements as
repurchase agreements provides the commercial customer with added security for
their funds in the form of an investment that is pledged by the Company.
Repurchase agreements also provide a source of funds to the Company that does
not increase reserve requirements with the Federal Reserve Bank or create an
expense relating to FDIC insurance and, therefore, are less costly to the
Company.
On June 30, 2000 the Company had a term advance from the Federal Home Loan
Bank in the amount of $10.0 million while it had none at December 31, 1999. The
funds provided by the term advance have been used for liquidity purposes to help
fund the loan growth the Company has experienced.
Total stockholders' equity increased $965,000 during the six months ended
June 30, 2000. The increase is the result of net income of $4,013,000, less the
adjustment in the valuation allowance for the market value of securities
available-for-sale, net of tax, of $1,150,000, plus $20,000 due to the exercise
of 2,500 stock options pursuant to the Omnibus Incentive Plan, less cash
dividends paid of $1,918,000.
The tier 1 capital to average asset ratio at June 30, 2000 was 14.58% and
the total capital to asset ratio, on a risk adjusted basis, amounted to 21.11%,
exceeding the minimum required to be capitalized under prompt corrective action
regulations, which minimums are 5.00% and 10.00%. Book value per share, was
$14.91 at June 30, 2000 as compared to $14.70 at December 31, 1999. On June 30,
2000, the Company and its subsidiary were in compliance with all applicable
regulatory capital requirements.
RESULTS OF OPERATIONS
NET INCOME
The consolidated net income for the quarter ended June 30, 2000 was
$1,962,000, an increase of $130,000 or 7.10%, as compared to net income of
$1,832,000 for the same period the previous year. The annualized return on
average assets was 1.62% for the quarter, which was slightly higher than the
return on average assets for the quarter the previous year of 1.57%. The
consolidated net income for the six months ended June 30, 2000 was $4,013,000,
an increase of $393,000, over the first half of 1999. The annualized return on
average assets for the first six months of 2000 was 1.67%, which was higher than
the return on average assets for the same period the previous year, which was
1.54%.
19
<PAGE> 21
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NET INTEREST INCOME
Net interest income, the difference between interest income earned on
average interest earning assets and interest expense on average interest bearing
liabilities, increased $252,000 or 5.80% during the three months ended June 30,
2000 compared to the same three months in 1999. The major reason for the
increase in net interest income is that interest earning assets have increased
$16.5 million during the second quarter of 2000 as compared to the second
quarter of 1999. This increase is shown in Table 1, "Analysis of Average Balance
and Tax Equivalent Rates for the Three Months ended June 30, 2000 and 1999".
During this period there has been a slight decline in the net yield on earning
assets but the higher volume of interest earning assets, mainly in loans, was
responsible for the increased net interest income.
During the first six months of 2000, net interest income increased $457,000
or 5.31% over the same period of 1999. Table 2, "Analysis of Average Balance and
Tax Equivalent Rates for the Six Months ended June 30, 2000 and 1999" shows that
the Company's net yield on interest earning assets increased slightly to 4.06%
for the first six months of 2000 as compared to 4.02% in 1999. The table also
shows that interest earning assets increased $8.3 million during the first half
of 2000 compared to 1999. This combination of a greater net yield on interest
earning assets with increases in the amounts of interest earning assets caused
net interest income to rise.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses during the three months and six
months ended June 30, 2000 and June 30, 1999. Management, with the concurrence
of the Board of Directors, after carefully reviewing the adequacy of the
allowance for loan losses and the levels of nonperforming and impaired loans,
found that no provision for loan losses was necessary during these periods.
At June 30, 2000, the allowance for loan losses was $5,275,000 or 1.87% of
loans as compared to $5,368,000 or 2.16% of loans at December 31, 1999.
Nonperforming loans, at June 30, 2000, were $1,850,000, increasing from $815,000
at December 31, 1999. Impaired loans totaled $627,000 or .22% of loans at June
30, 1999 as compared to impaired loans of $394,000 at December 31, 1999 or .16%
of loans. The amount of the allowance for loan losses allocated for impaired
loans at June 30, 2000 was $94,000 compared to $59,000 at December 31, 1999.
Other real estate owned, a non-performing asset, at June 30, 2000 was
$2,622,000. During the first half of 2000 one property used to secure a loan was
foreclosed upon and $80,000 was transferred from loans to other real estate
owned. This property was consequently sold netting proceeds of $83,000 that
resulted in a gain from the sale of $3,000.
Loans totaling $163,000 were charged off to the allowance for loan losses
have during the first six months of 2000 as compared to $660,000 during the same
period of 1999. During the first six months of 2000 recoveries of loans
previously charged off were $70,000 as compared to $26,000 during the same
period in 1999.
20
<PAGE> 22
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended June 30, 2000 and 1999
($ 000s)
<TABLE>
<CAPTION>
2000 1999
--------------------------------------- ----------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3) $264,967 $6,025 9.10% $241,777 $5,112 8.46%
Taxable securities 169,446 2,704 6.11% 170,233 2,551 5.96%
Securities exempt from Taxes (2) 18,317 350 7.57% 21,150 398 7.69%
Interest bearing deposits in banks 240 3 5.00% 386 6 6.22%
Federal funds sold 4,955 76 6.14% 7,847 93 4.74%
---------------------------- ----------------------------
Interest earning assets 457,925 9,158 7.87% 441,393 8,160 7.38%
-------------- --------------
Noninterest earning assets 27,562 26,826
-------------- --------------
Average assets $485,487 $468,219
============== ==============
Liabilities and stockholders' equity
NOW deposits $ 43,746 289 2.64% $ 46,017 302 2.63%
Money market deposits 36,073 333 3.69% 41,185 359 3.49%
Savings deposits 45,299 308 2.72% 46,111 322 2.79%
Time deposits 174,416 2,508 5.75% 168,053 2,069 4.92%
Other borrowings 68,416 980 5.73% 51,110 591 4.63%
---------------------------- ----------------------------
Interest bearing Liabilities 367,950 4,418 4.80% 352,476 3,643 4.13%
-------------- --------------
Demand deposits 43,743 42,823
Other noninterest bearing
liabilities 8,285 6,969
Stockholders' equity 65,509 65,951
-------------- --------------
Average liabilities and
Stockholders' equity $485,487 $468,219
============== ==============
Net interest income $4,740 $4,517
============== ==============
Net yield on interest
Earning assets 4.07% 4.09%
========== ==========
Interest bearing liabilities to
earning assets ratio 79.01% 79.74%
========== ==========
</TABLE>
(1) - Interest income on loans includes loan origination fees of $88 and
$83 for the three months ended June 30, 2000 and 1999.
(2) - Tax-exempt income is reflected on a fully tax equivalent basis
utilizing a 34% rate.
(3) - Non-accrual loans are included in average loans.
21
<PAGE> 23
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 2
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Six Months Ended June 30, 2000 and 1999
($ 000s)
<TABLE>
<CAPTION>
2000 1999
--------------------------------------- -------------------------------------------
Average Average
Balance Interest Rate Balance Interest Rate
--------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Loans (1)(2)(3) $259,122 $11,559 8.92% $243,227 $10,284 8.46%
Taxable securities 171,145 5,442 6.10% 169,343 5,057 5.95%
Securities exempt from
Federal income taxes (2) 18,721 713 7.56% 21,338 799 7.69%
Interest bearing deposits in banks 255 7 5.49% 311 9 5.79%
Federal funds sold 4,019 121 6.02% 10,742 253 4.71%
---------------------------- -------------------------------
Interest earning assets 453,262 17,842 7.75% 444,961 16,402 7.37%
-------------- ---------------
Noninterest earning assets 26,967 25,385
-------------- ----------------
Average assets $480,229 $470,346
============== ================
Liabilities and stockholders' equity
NOW deposits $ 43,349 573 2.64% $ 43,634 583 2.67%
Money market deposits 36,785 661 3.59% 41,823 725 3.47%
Savings deposits 45,149 615 2.72% 45,649 653 2.86%
Time deposits 173,290 4,839 5.58% 172,257 4,269 4.96%
Other borrowings 65,898 1,801 5.47% 51,642 1,220 4.72%
---------------------------- -------------------------------
Interest bearing liabilities 364,471 8,489 4.66% 355,005 7,450 4.20%
-------------- ---------------
Demand deposits 42,791 42,569
Other noninterest bearing
liabilities 7,488 7,009
Stockholders' equity 65,479 65,763
-------------- ----------------
Average liabilities and
Stockholders' equity $480,229 $470,346
============== ================
Net interest income $ 9,353 $ 8,952
============== ===============
Net yield on interest
Earning assets 4.06% 4.02%
=========== ============
Interest bearing liabilities to
Earning assets ratio 79.12% 79.79%
=========== ============
</TABLE>
(1) - Interest income on loans includes loan origination fees of $171 and
$175 for the six months ended June 30, 2000 and 1999.
(2) - Tax-exempt income is reflected on a fully tax equivalent basis
utilizing a 34% rate.
(3) - Non-accrual loans are included in average loans.
22
<PAGE> 24
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management and the Board of Directors analyze the adequacy of the allowance
for loan losses at least quarterly. Loans judged to be impaired, loans with
potential loss exposure, loans that are no longer accruing interest, and
historical net loan loss percentages are reviewed in the analysis of the
allowance for loan losses. Based on management's and the Board of Directors'
analysis, the allowance for loan losses at June 30, 2000 is adequate to cover
future possible loan losses. If the level of impaired and nonperforming loans
remains low during the remainder of 2000, no additional loan loss provision is
budgeted for the remainder of 2000.
NONINTEREST INCOME
Noninterest income for the three months ended June 30, 2000 was $747,000 as
compared to $713,000 for the three months ended June 30, 1999, an increase of
$34,000. Service fees on deposits increased $79,000 as compared to the same
quarter last year. Service charges for the new deposit product "Classic Gold
Checking" and overdraft fees were $37,000 and $46,000 greater during the second
quarter of 2000 than the same period last year. Trust fee income increased
$3,000 during the three months ended June 30, 2000. Income from mortgage banking
activities and net gains from sales of loans were $13,000 and $69,000 less
during the second quarter of 2000 as increased home mortgage rates slowed the
number of mortgages refinanced as compared to the second quarter of 1999. Other
operating income during the second quarter of 2000 was $34,000 more than the
same period last year as a result of greater loan fees collected on commercial
loans.
For the first six months of 2000 noninterest income was $1,469,000 as
compared to $1,625,000 for the same period of 1999, a decrease of $156,000.
Service fees on deposits were $159,000 greater during the first half of 2000 as
compared to the same period last year because of increased service charge income
on the new deposit product "Classic Gold Checking" that were $67,000 higher and
overdraft fees that increased $100,000. Trust income for the six months ended
June 30, 2000 declined slightly by $2,000. Mortgage banking income was only
$43,000 during the first half of 2000, decreasing $174,000 from last year as
higher home mortgage interest rates caused the volume of mortgages refinanced to
plummet compared to the previous year. These developments also caused gains on
sales of loans to decrease $155,000 during the first half of 2000 compared to
the same period of 1999. The growth in commercial loans during the first half of
2000 and fees generated from these loans resulted in other operating income
increasing by $16,000 during the six months ended June 30, 2000 compared to the
same time period last year.
NONINTEREST EXPENSES
Noninterest expenses were $2,466,000 during the three months ended June 30,
2000 an increase of $59,000 from the same quarter last year. The Company's
efficiency ratio, noninterest expenses divided by the sum of net interest income
and noninterest income, was 46.13% for the second quarter of 2000 as compared to
47.57% for the same quarter of 1999. The efficiency ratio is frequently used as
an indicator as to how well a financial institution manages its noninterest
expenses with a decreasing ratio indicating improved performance. Compared to
its peers, the Company's ability to control overhead is one of its operating
strengths.
23
<PAGE> 25
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Increases in salary and employee benefits expenses of $9,000 occurred
during the second quarter of 2000 compared to the same period last year, an
increase of .60%. Regular salary expense was $33,000 greater during the second
quarter of 2000 due to annual salary increases. Group insurance expenses were
$11,000 more during the three months ended June 30, 2000 as the result of
increased premiums. Increases in the Company's stock price during the second
quarter of 2000 caused salary expenses relating to stock appreciation rights to
increase by $9,000 from last year. Expenses relating to commissions paid to
mortgage banking staff declined $45,000 during the second quarter of 2000 as
compared to last year as increased home mortgage rates decreased the volume of
activity of this Bank segment.
Occupancy expenses for the second quarter of 2000 were $303,000, $27,000
less when compared to the second quarter of 1999. Depreciation expense for the
quarter was $47,000 less during 2000 compared to 1999 as new equipment purchased
in 1994 when the Company changed data processing systems became fully
depreciated during 1999. Expense for real estate taxes increased by $15,000 in
the second quarter of 2000 compared to the same quarter of 1999 due to higher
tax rates.
Data processing expense during the three months ended June 30, 2000 was
$122,000; no change from the same quarter last year. FDIC insurance during the
second quarter of 2000 declined $7,000 from the same three month period last
year. Other real estate owned expenses also increased slightly during the second
quarter of 2000 by $3,000, to $20,000.
Miscellaneous other operating expenses were $81,000 greater during the
three months ended June 30, 2000 compared to the same three months last year.
Product development expenses relating to the new checking account products
introduced in the third quarter of 1999 were $30,000 greater during the second
quarter of 2000. Telephone expenses were $19,000 greater during the second
quarter of 2000 as the Company changed service providers and received final
bills from the old service provider and had additional set up charges from the
new service provider. The Company believes that this change will keep telephone
expenses from increasing in the future. Expenses relating to auditing and
examinations increased $14,000 during the second quarter of 2000 in part from
new requirements made effective in 2000 that public companies have their
quarterly financial statements reviewed by their independent accountants. Legal
expenses also were $12,000 greater during the second quarter as the result of
the increases in nonperforming loans.
During the six months ended June 30, 2000, total noninterest expenses were
$4,887,000 or $112,000 less than during the same period last year, a decline of
2.24%. The Company's efficiency ratio for the first half of 2000 was 46.38% as
compared to 48.84% for the first half of 1999.
Salaries and employee benefit expenses declined 3.21% or $98,000 during the
six months ending June 30, 1999 as compared to the same period last year.
Expenses relating to commissions for the mortgage banking staff were $149,000
less during the first half of 2000 as compared to 1999 as the volumes of
mortgages sold decreased due to higher home mortgage rates. Overtime and FICA
expenses also declined $7,000 and $4,000 during the first half of 2000 as the
result of the decline in activity in the mortgage banking segment compared to
1999. Decreases to the Company's stock price lowered salary expenses relating to
stock appreciation rights by $25,000 from last year. Regular employee salary
expense increased 4.31% or $94,000 during the six months ended June 30, 2000
compared to the same period last year as the result of annual salary increases.
24
<PAGE> 26
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Occupancy expenses were $63,000 less during the first six months of 2000
when compared to the same period of 1999. Depreciation expenses for building and
equipment were $100,000 lower than for the same period of 1999. During the
fourth quarter of 1994 the Bank changed data processing systems and purchased
new equipment in conjunction with that change. This equipment became fully
depreciated by January 2000 causing depreciation expense to decline during the
first half of 2000. Real estate taxes increased $30,000 during the first half of
2000 as tax rates increased on the Company's properties.
Data processing expense was $11,000 lower during the first six months of
2000 when compared to the same period of 1999. During the first half of 1999
there were additional data processing expenses relating to new software and
testing of the data processing systems for Y2K compliance.
FDIC deposit insurance expense was $35,000 for the first two quarters of
2000 declining $8,000 from the same period last year. Other real estate owned
expenses also declined slightly by $6,000 during the six months ending June 30,
2000.
Miscellaneous other operating expenses were $74,000 more for the six months
ending June 30, 2000 than they were the same period last year. Expenses relating
to product development of the new checking account products introduced in the
third quarter of 1999 were $56,000 greater during the first half of 2000. Audit
and examination expenses also increased $19,000 during the first half of 2000 in
part as the result of new requirements that public companies have their
independent accountants review their quarterly financial statements.
FEDERAL AND STATE INCOME TAXES
For the three months ended June 30, 2000 and 1999, the Company's provisions
for federal and state income taxes were $918,000 and $821,000, which as a
percentage of pretax earnings was 31.88% and 30.95%. For the six months ended
June 30, 2000, the Company's provision for federal and state taxes was
$1,636,000 or 28.96% of pretax earnings as compared to $1,616,000 or 30.86% of
pretax earnings for the six months ending June 30, 1999. During the first
quarter of 2000, the Company received additional information to support a
charitable contribution on real estate owned sold during 1999 to a municipal
entity and the Company recorded a $153,000 tax benefit related to this sale.
When discounting this one-time factor, income taxes as a percentage of pretax
earning during the first half of 2000 would have been 31.67%.
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 will be 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 should have no material impact on the Company's financial
statements.
25
<PAGE> 27
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. Interest-rate risk ("IRR") is the exposure of a
banking organization's financial condition to adverse movements in interest
rates. Accepting this risk can be an important source of profitability and
stockholder value, however excessive levels of IRR can pose a significant threat
to the Company's earnings and capital base. Accordingly, effective risk
management that maintains IRR at prudent levels is essential to the Company's
safety and soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organization's quantitative level of exposure. When assessing the
IRR management process, the Company seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR at prudent levels with consistency and continuity. Evaluating the
quantitative level of IRR exposure requires the Company to assess the existing
and potential future effects of changes in interest rates on its consolidated
financial condition, including capital adequacy, earnings, liquidity, and, where
appropriate, asset quality.
The Federal Reserve Board, together with the Office of the Comptroller of
the Currency and the Federal Deposit Insurance Corporation, adopted a Joint
Agency Policy Statement on Interest-Rate Risk, effective June 26, 1996. The
policy statement provides guidance to examiners and bankers on sound practices
for managing IRR, which will form the basis for ongoing evaluation of the
adequacy of IRR management at supervised institutions. The policy statement also
outlines fundamental elements of sound management that have been identified in
prior Federal Reserve guidance and discusses the importance of these elements in
the context of managing IRR. Specifically, the guidance emphasizes the need for
active board of director and management oversight and a comprehensive
risk-management process that effectively identifies, measures, and controls IRR.
Several techniques might be used by an institution to minimize IRR. One approach
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 to show the effect of rate changes on the
fair value of the Company's financial instruments.
Several ways an institution can manage IRR include: selling existing assets
or repaying certain liabilities; matching repricing periods for new assets and
liabilities for example, by shortening terms of new loans or investments.
Financial institutions are also subject to prepayment risk in falling rate
environments. For example, a debtor may prepay other financial assets so that
the debtor may refinance their obligations at new, lower rates. Prepayments of
assets carrying higher rates reduce the Company's interest income and overall
asset yields. A large portion of an institution's liabilities may be short term
or due on demand, while most of its assets may be invested in long-term loans or
investments. Accordingly, the Company seeks to have in place sources of cash to
meet short-term demands. By increasing deposits, borrowing, or selling assets
the Company can obtain these funds.
Table 3, "Effect of Interest Shocks on Financial Instruments", compares
information about the current fair value of the Company's financial instruments
at March 31, 2000 to December 31, 1999. Table 3 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 balance sheet takes into
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<PAGE> 28
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
consideration maturity and repricing schedules of the various assets and
liabilities. March 31, 2000 is used in Table 3 as it has the most recent data
made available from the computer simulation model. At March 31, 2000 the fair
value of securities available for sale increases $9.0 million when rates are
shocked downward 2% while the fair value decreases $11.0 million for a 2%
upwards rate shock. The change in fair value of securities is smaller when rates
are shocked down because there were call provisions on $151.6 million of the
U.S. Government agency securities at March 31, 2000. As rates decline the
probability that a security with call provisions will be called increase because
the security issuer has the opportunity to reduce their interest expense by
paying off the called security.
TABLE 3
NORTHERN STATES FINANCIAL CORPORATION
EFFECT OF INTEREST SHOCKS ON FINANCIAL INSTRUMENTS
as of March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
Fair Value at March 31, 2000
--------------------------------------------------
Down 2% Current Up 2%
--------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 25,545 $ 25,544 $ 25,543
Interest bearing deposits in financial
institutions - maturities over 90 days 101 100 99
Securities available for sale 198,333 189,295 178,294
Loans 262,814 252,439 242,771
Direct lease financing 2,338 2,259 2,187
Accrued interest receivable 4,828 4,828 4,828
Financial liabilities:
Deposits $354,389 $346,413 $340,265
Securities sold under repurchase agreements
and other short-term borrowings 55,762 55,756 55,750
Federal Home Loan Bank term advances 10,001 10,000 9,999
Advances from borrowers for taxes and insurance 937 937 937
Accrued interest payable 3,798 3,798 3,798
Fair Value at December 31, 1999
--------------------------------------------------
Down 2% Current Up 2%
--------------------------------------------------
Assets
Cash and cash equivalents $ 16,900 $ 16,900 $ 16,900
Interest bearing deposits in financial
institutions - maturities over 90 days 101 100 99
Securities available for sale 204,914 196,684 185,041
Loans 255,395 245,838 236,915
Direct lease financing 2,211 2,175 2,142
Accrued interest receivable 4,361 4,361 4,361
Financial liabilities:
Deposits $341,331 $333,547 $327,593
Securities sold under repurchase agreements
and other short-term borrowings 70,440 70,436 70,432
Advances from borrowers for taxes and insurance 645 645 645
Accrued interest payable 3,640 3,640 3,640
</TABLE>
27
<PAGE> 29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to sign on its behalf by the undersigned
hereunto duly authorized, on this 13th day of August 2000.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Date: August 10, 2000 By: /s/ Fred Abdula
--------------------------- -----------------------------------
Fred Abdula
Chairman of the Board of
Directors and President
Date: August 10, 2000 By: /s/ Thomas M. Nemeth
--------------------------- -----------------------------------
Thomas M. Nemeth
Vice President and Treasurer
28
