<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 March 31, 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:
----- -----
4,460,345 shares of common stock were outstanding
as of March 31, 2000
<PAGE> 2
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
MARCH 31, 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 March 31,
2000, December 31, 1999, and March 31, 1999........................................3
Condensed consolidated statements of income for the three
months ended March 31, 2000 and 1999...............................................4
Condensed consolidated statements of comprehensive income
the three months ended March 31, 2000 and 1999.....................................5
Condensed consolidated statements of cash flows for
the three months ended March 31, 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 - 24
Item 7A. Quantitative and qualitative disclosures
about market risk.......................................................24 - 26
PART II. OTHER INFORMATION
Signatures.........................................................................27
</TABLE>
1
<PAGE> 3
NORTHERN STATES FINANCIAL CORPORATION
FORM 10-Q
MARCH 31, 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 March 31, 2000 and the related condensed
consolidated statements of income, comprehensive income and cash flows of the
three-month periods ended March 31, 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
April 27, 2000
2
<PAGE> 4
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2000, December 31, 1999 and March 31, 1999
(In thousands of dollars)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
Assets 2000 1999 1999
-------- ----------- ---------
<S> <C> <C> <C>
Cash and due from banks.......................................... $ 12,933 $ 16,740 $ 16,532
Interest bearing deposits in financial institutions -
maturities less than 90 days................................. 111 160 51
Federal funds sold............................................... 12,500 0 19,500
-------- -------- --------
Total cash and cash equivalents............................... 25,544 16,900 36,083
Interest bearing deposits in financial institutions -
maturities over 90 days...................................... 100 100 100
Securities available for sale.................................... 189,295 196,684 181,408
Loans............................................................ 255,284 248,162 239,689
Less: Allowance for loan losses.................................. (5,241) (5,368) (4,791)
-------- -------- --------
Loans, net.................................................... 250,043 242,794 234,898
Direct lease financing........................................... 2,228 2,138 956
Office buildings and equipment, net.............................. 6,086 6,176 6,438
Other real estate owned, net of allowance for losses
of $552 at March 31,1999...................................... 2,702 2,622 5,007
Accrued interest receivable...................................... 4,828 4,361 4,296
Other assets..................................................... 5,626 4,906 2,099
-------- -------- --------
Total assets.................................................. $486,452 $476,681 $471,285
======== ======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest bearing.................................. $ 44,222 $ 41,261 $ 42,823
NOW accounts.................................................. 43,696 41,787 42,539
Money market accounts......................................... 37,713 37,636 42,661
Savings....................................................... 46,549 44,207 46,178
Time, $100,000 and over....................................... 80,542 83,266 82,029
Time, under $100,000.......................................... 94,373 86,094 85,648
-------- -------- --------
Total deposits............................................. 347,095 334,251 341,878
Securities sold under repurchase agreements
and other short-term borrowings............................... 55,756 70,436 45,815
Federal Home Loan Bank advance................................... 10,000 0 10,000
Advances from borrowers for taxes and insurance.................. 937 645 1,288
Accrued interest payable and other liabilities................... 6,315 5,815 6,130
-------- -------- --------
Total liabilities.......................................... 420,103 411,147 405,111
Stockholders' Equity
Common stock..................................................... 1,784 1,783 1,782
Additional paid-in capital....................................... 11,421 11,405 11,353
Retained earnings................................................ 57,949 55,898 53,146
Accumulated other comprehensive loss, net........................ (4,805) (3,552) (107)
-------- -------- --------
Total stockholders' equity.................................... 66,349 65,534 66,174
-------- -------- --------
Total liabilities and stockholders' equity.................... $486,452 $476,681 $471,285
======== ======== ========
</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 ended March 31, 2000 and 1999
(In thousands of dollars, except per share data)
<TABLE>
<CAPTION>
2000 1999
------ ------
<S> <C> <C>
Interest income
Loans (including fee income)..................................... $5,512 $5,136
Securities
Taxable........................................................ 2,738 2,506
Exempt from federal income tax................................. 240 265
Interest bearing deposits in financial institutions.............. 4 3
Federal funds sold............................................... 45 160
------ ------
Total interest income......................................... 8,539 8,070
------ ------
Interest expense
Time deposits.................................................... 2,331 2,200
Other deposits................................................... 919 978
Other borrowings................................................. 821 629
------ ------
Total interest expense........................................ 4,071 3,807
------ ------
Net interest income................................................. 4,468 4,263
Provision for loan losses........................................... 0 0
------ ------
Net interest income after provision for
loan losses...................................................... 4,468 4,263
------ ------
Noninterest income
Service fees on deposits......................................... 342 262
Trust income..................................................... 192 197
Mortgage banking income.......................................... 21 182
Net gains on sales of loans...................................... 0 86
Other operating income........................................... 167 185
------ ------
Total noninterest income...................................... 722 912
------ ------
Noninterest expense
Salaries and employee benefits................................... 1,460 1,567
Occupancy and equipment, net..................................... 318 354
Data processing.................................................. 119 130
FDIC deposit insurance........................................... 20 21
Other real estate owned.......................................... 12 21
Other operating expenses......................................... 492 499
------ ------
Total noninterest expense..................................... 2,421 2,592
------ ------
Income before income taxes.......................................... 2,769 2,583
Provision for income taxes.......................................... 718 795
------ ------
Net income.......................................................... $2,051 $1,788
====== ======
Basic earnings per share............................................ $ 0.46 $ 0.40
Diluted earnings per share.......................................... $ 0.46 $ 0.40
</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 ended March 31, 2000 and 1999
(In thousands of dollars)
2000 1999
------ ------
Net income................................................ $2,051 $1,788
Other comprehensive income:
Unrealized losses arising during period
on securities available for sale, net of tax
of ($791) and ($471).............................. (1,253) (745)
------ ------
Comprehensive income...................................... $ 798 $1,043
====== ======
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
Three months ended March 31, 2000 and 1999
(In thousands of dollars)
<TABLE>
<CAPTION>
2000 1999
------- -------
<S> <C> <C>
Cash flows from operating activities
Net income.................................................................. $ 2,051 $ 1,788
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation............................................................. 117 169
Deferred loan fees....................................................... (32) (11)
Net change in loans held for sale........................................ 0 863
Net gains on sales of loans.............................................. 0 (85)
Net gain on sale of building............................................. 0 (74)
Amortization of mortgage servicing rights................................ 14 18
Net change in interest receivable........................................ (467) 112
Net change in interest payable........................................... 158 (444)
Net change in other assets............................................... 57 40
Net change in other liabilities.......................................... 342 504
------- -------
Net cash from operating activities.................................... 2,240 2,880
------- -------
Cash flows from investing activities
Maturities of securities available for sale.............................. 5,645 42,449
Purchases of securities available for sale............................... (300) (24,212)
Change in loans made to customers........................................ (7,297) 2,601
Property and equipment expenditures...................................... (27) (143)
Proceeds from sale of building........................................... 0 257
Net change in direct lease financing..................................... (90) 31
------- -------
Net cash from investing activities.................................... (2,069) 20,983
------- -------
Cash flows from financing activities
Net increase (decrease) in:
Deposits............................................................... 12,844 (13,878)
Securities sold under repurchase agreements
and other short-term borrowings...................................... (14,680) (2,175)
Advances from borrowers for taxes and insurance........................ 292 296
Federal Home Loan Bank advance........................................... 10,000 0
Net proceeds from exercise of stock options.............................. 17 18
------- -------
Net cash from financing activities.................................... 8,473 (15,739)
------- -------
Net change in cash and cash equivalents............................................ 8,644 8,124
Cash and cash equivalents at beginning of period................................... 16,900 27,959
------- -------
Cash and cash equivalents at end of period......................................... $25,544 $36,083
======= =======
Supplemental disclosures
Cash paid during the period for
Interest.............................................................. $ 3,913 $ 4,251
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 1,224
</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
March 31, 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 March 31, 2000,
December 31, 1999 and March 31, 1999. The condensed consolidated statements of
income and the condensed consolidated statements of comprehensive income are for
the three months ended March 31, 2000 and 1999. The condensed statements
consolidated statements of cash flows are for the three months ended March 31,
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 month period ended March 31, 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.
Diluted earnings per share further assumes issue of any dilutive potential
common shares. Common stock information is summarized as follows:
March 31, December 31, March 31,
2000 1999 1999
----------------------------------------
Common shares authorized .......... 6,500,000 6,500,000 6,500,000
Common shares outstanding ......... 4,460,345 4,458,345 4,455,435
Par value per share ............... $0.40 $0.40 $0.40
7
<PAGE> 9
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 2000, December 31, 1999 and March
31, 1999 are as follows:
<TABLE>
<CAPTION>
March 31, 2000 Amortized Gross Unrealized Fair
- -------------- Cost Gains Losses Value
--------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury .............................. $ 999 $ 0 $ (5) $ 994
U.S. Government agencies and corporations .. 168,021 0 (7,759) 160,262
States and political subdivisions .......... 19,726 92 (249) 19,569
Mortgage-backed securities ................. 6,426 6 (114) 6,318
Equity securities .......................... 1,966 186 0 2,152
--------------------------------------------------
Total ................................... $197,138 $ 284 $(8,127) $189,295
==================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 Amortized Gross Unrealized Fair
- ----------------- Cost Gains Losses Value
--------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury .............................. $ 4,999 $ 0 $ (1) $ 4,998
U.S. Government agencies and corporations .. 168,024 0 (5,933) 162,091
States and political subdivisions .......... 20,719 172 (181) 20,710
Mortgage-backed securities ................. 6,775 10 (73) 6,712
Equity securities .......................... 1,966 211 (4) 2,173
--------------------------------------------------
Total ................................... $202,483 $ 393 $(6,192) $196,684
==================================================
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999 Amortized Gross Unrealized Fair
- -------------- Cost Gains Losses Value
--------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury .............................. $ 13,009 $ 54 $ 0 $ 13,063
U.S. Government agencies and corporations .. 135,969 53 (1,094) 134,928
States and political subdivisions .......... 21,895 535 (23) 22,407
Mortgage-backed securities ................. 8,785 97 (5) 8,877
Equity securities .......................... 1,925 210 (2) 2,133
--------------------------------------------------
Total ................................... $181,583 $ 949 $(1,124) $181,408
==================================================
</TABLE>
8
<PAGE> 10
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Contractual maturities of securities available for sale at March 31, 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 .................. $ 11,243 $ 11,232
Due after one year through five years .... 159,011 152,145
Due after five years through ten years ... 18,492 17,448
----------------------
188,746 180,825
Mortgage-backed securities ............... 6,426 6,318
Equity securities ........................ 1,966 2,152
----------------------
Total ........................... $197,138 $189,295
======================
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 $151,396 at
March 31, 2000. As of March 31, 2000, the Company held no structured notes.
There were no sales of securities during the three months ended March 31,
2000 and 1999.
Securities carried at $139,910 and $131,957 at March 31, 2000 and 1999 were
pledged to secure public deposits, repurchase agreements and for other purposes
as required or permitted by law.
9
<PAGE> 11
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 March 31, 2000, December 31, 1999 and March 31, 1999 were as
follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
--------------------------------------
<S> <C> <C> <C>
Commercial......................................... $ 63,447 $ 60,570 $ 62,132
Real estate - construction......................... 23,507 21,813 16,165
Real estate - mortgage............................. 143,946 142,016 137,394
Home equity........................................ 17,544 17,259 15,543
Installment........................................ 7,242 6,957 8,965
--------------------------------------
Total loans..................................... 255,686 248,615 240,199
Unearned income.................................... (50) (69) (108)
Deferred loan fees................................. (352) (384) (402)
--------------------------------------
Loans, net of unearned income
and deferred loan fees.......................... 255,284 248,162 239,689
Allowance for loan losses.......................... (5,241) (5,368) (4,791)
--------------------------------------
Loans, net...................................... $250,043 $242,794 $234,898
======================================
</TABLE>
The were no loans held for sale on March 31, 2000 or December 31, 1999. On
March 31, 1999 loans held for sale were approximately $3,797 and were classified
as real estate loans. During the first quarter of 1999 the Company transferred
loans held for sale with a book value and fair value of $1,244 to portfolio
loans.
Real estate - mortgage loans with a carrying value of $17,973, $18,276 and
$18,047 were pledged to secure public deposits at March 31, 2000, December 31,
1999 and March 31, 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 $1,047 at March 31, 2000, $815 at December 31, 1999 and $465 at
March 31, 1999.
10
<PAGE> 12
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Impaired loans were as follows for March 31, 2000, December 31, 1999 and
March 31, 1999:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
--------------------------------------
<S> <C> <C> <C>
Loans with no allowance
for losses allocated.................... $ 0 $ 0 $ 0
Loans with allowance
for losses allocated.................... 628 394 364
Amount of the allowance
allocated............................... 94 59 55
</TABLE>
The average balance and income recognized on impaired loans were as follows
for the three months ended March 31, 2000 and March 31, 1999:
<TABLE>
<CAPTION>
Three months ended
March 31, March 31,
2000 1999
------------------------
<S> <C> <C>
Average of impaired loans during the period.............................. $422 $2,016
Interest income recognized during the impairment period................... 0 14
Cash-basis interest income recognized during the impairment period........ 0 14
</TABLE>
The Company is a party to financial instruments with off-balance sheet risk
in the normal course of business to meet financing needs of its customers. These
financial instruments include commitments to make loans, standby letters of
credit, and unused lines of credit. The Company's exposure to credit loss in the
event of nonperformance by the other parties to these financial instruments is
represented by the contractual amount of the instruments. The Company uses the
same credit policy to make such commitments as it uses for on-balance-sheet
items.
11
<PAGE> 13
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
At March 31, 2000, December 31, 1999 and March 31, 1999, the contract
amount of the Company's off-balance sheet commitments was as follows:
March 31, December 31, March 31,
2000 1999 1999
-------------------------------------
Unused lines of credit and
commitments to make loans:
Fixed rate ..................... $ 15,359 $ 19,776 $ 21,155
Variable rate .................. 91,314 67,664 59,776
-------------------------------------
Total ....................... $106,673 $ 87,440 $ 80,931
=====================================
Standby letters of credit.......... $ 5,284 $ 5,318 $ 5,658
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
March 31, 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 three months ended March
31, 2000, twelve months ended December 31, 1999 and three months ended March 31,
1999 is as follows:
<TABLE>
<CAPTION>
March 31, December 31, March 31,
2000 1999 1999
-------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year...................... $5,368 $5,433 $5,433
Provision charged to operating expense............ 0 0 0
Loans charged off................................. (155) (683) (654)
Recoveries on loans
previously charged off.......................... 28 618 12
-------------------------------------------
Balance at end of period....................... $5,241 $5,368 $4,791
===========================================
</TABLE>
There was no activity or balance in the allowance for other real estate
owned losses during the three months ended March 31, 2000. Activity in the
allowance for other real estate owned losses for the twelve months ended
December 31, 1999 and three months ended March 31, 1999 is as follows:
December 31, March 31,
1999 1999
--------------------------
Balance at beginning of year................. $552 $552
Provision charged to operating expense....... 0 0
Charge-off to the allowance for other
real estate owned losses.................. (176) 0
Recovery of allowance upon sale of
other real estate owned.................... (376) 0
Losses on other real estate owned............ 0 0
--------------------------
Balance at end of period.................. $ 0 $552
==========================
13
<PAGE> 15
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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 three months ended March 31, 2000 total stockholders' equity
increased $815. The increase is a result of net income of $2,051, less the
change in the valuation allowance from December 31, 1999 for the fair value of
securities available for sale, net of tax, of $1,253, plus $17 due to the
exercise of 2,000 stock options pursuant to the Omnibus Incentive Plan.
For the three months ended March 31, 1999 total stockholders' equity
increased $1,061 due to net income of $1,788, less the change in the valuation
allowance from December 31, 1998 for the fair value of securities available for
sale, net of tax, of $745, plus $18 due to the exercise of 2,035 stock options
pursuant to the Omnibus Incentive Plan.
Note 7 - Omnibus Incentive Plan Instruments
The 1992 Omnibus Incentive Plan (the "Plan") authorizes the issuance of up
to 375,000 shares of the Company's common stock, including the granting of
non-qualified stock options, restricted stock and stock appreciation rights.
Statement of Financial Accounting Standards No. 123 requires pro forma
disclosures for companies that do not adopt its fair value accounting method for
stockbased employee compensation. The Company did not grant any stock options
during the three months ended March 31, 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
March 31, 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
March 31, 1999......................... (2,035) 8.32
---------------------------
Outstanding at March 31, 1999.............. 16,820 $8.32
==========
Outstanding at January 1, 2000............. 13,910 $8.32
Exercised during period ended
March 31, 2000......................... (2,000) 8.32
---------------------------
Outstanding at March 31, 2000.............. 11,910 $8.32
==========
At March 31, 2000, all remaining options had an exercise price of $8.32.
The options outstanding had a remaining life of 1.75 years.
The Company at its discretion may grant stock appreciation rights under the
Plan. A stock appreciation right entitles the holder to receive from the Company
an amount equal to the excess, if any, of the aggregate fair market value of the
Company's common stock which is the subject of such a grant over the grant
price. During the three months ended March 31, 2000, no stock appreciation
rights were exercised. At both March 31, 2000 and 1999, 12,280 stock
appreciation rights were outstanding at the grant price $8.32 per share. The
Company's expense was ($48) and ($14) for the three months ended March 31, 2000
and 1999. The stock appreciation rights will expire during 2002.
15
<PAGE> 17
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 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
months ended March 31, 2000 and 1999 follows:
<TABLE>
<CAPTION>
2000 1999
----------------------
<S> <C> <C>
Unrealized holding losses on securities available for sale..... ($2,044) ($1,216)
Tax effect..................................................... (791) (471)
----------------------
Other comprehensive loss.................................... ($1,253) ($745)
======================
</TABLE>
Note 9 - Segment Information
The operating segments are determined by the products and services offered,
primarily distinguished between banking, mortgage banking and trust operations.
Loans, securities and deposits provide the revenues in the banking operation,
servicing fees and loan sales provide the revenues in mortgage banking, and
trust fees provide the revenues in trust operations. All operations are
domestic.
Management began evaluating mortgage banking as a separate segment in
August, 1998. Mortgage banking and trust segment performance is evaluated using
fee income net of direct expenses. Income taxes are not allocated to these
segments and selected indirect expenses are allocated. There are no transactions
among segments. Substantially all assets are related to the banking segment.
Neither mortgage banking nor trust pre-tax revenues exceeded 10% of total
pre-tax income for the three months ended March 31, 2000 or 1999.
16
<PAGE> 18
NORTHERN STATES FINANCIAL CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000
(Dollar amounts in thousands, except per share data)
(Unaudited)
Information reported internally for performance assessment of operating
segments for the three months ended March 31, 2000 and 1999 follows:
Three months ended March 31, 2000
-----------------------------------
Other Total
Banking Segments Segments
-----------------------------------
Net interest income ................. $4,468 $ 0 $4,468
Provision for loan losses ........... 0 0 0
Other revenue ....................... 479 243 722
Other expenses ...................... 2,171 250 2,421
-----------------------------------
Segment profit ................... $2,776 $ (7) $2,769
===================================
Three months ended March 31, 1999
-----------------------------------
Other Total
Banking Segments Segments
-----------------------------------
Net interest income ................. $4,263 $ 0 $4,263
Provision for loan losses ........... 0 0 0
Other revenue ....................... 448 464 912
Other expenses ...................... 2,119 473 2,592
-----------------------------------
Segment profit ................... $2,592 $ (9) $2,583
===================================
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 at March 31, 2000 and the consolidated
results of operations for the three month period ended March 31, 2000, compared
to the same period 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 March 31, 2000 to differ
materially from those expressed in any such forward-looking statements.
FINANCIAL CONDITION
The consolidated total assets for the Company were $486.5 million at March
31, 2000, increasing $9.8 million or 2.05% from the Company's year-end, December
31, 1999.
Securities in total declined $7.4 million or 3.76% from the previous
year-end. The statement of cash flows shows that $5.3 million more in securities
matured or were called than were purchased during the first quarter of 2000. The
fair value of securities decreased $2.1 million over the same period due to
changes in market conditions. The cash flows from the maturing securities were
used for liquidity purposes to increase federal funds sold which went up $12.5
million from December 31, 1999.
During the first quarter of 2000 loan demand increased, causing the
Company's loans to grow $7.1 million or 2.84% from December 31, 1999. Although
lending rates increased during the quarter, as evidenced by the prime rate going
from 8.50% at the beginning of the quarter to 9.00% at March 31, 2000, the local
economy remained strong and all types of loans offered by the Company increased.
Commercial loans increased $2.9 million, real estate mortgage loans increased
$1.9 million and real estate construction loans increased $1.7 million. Home
equity loans and installment loans increased by $ .3 million each.
During the first three months of 2000 deposits increased $12.8 million to
$347.1 million. Total time deposits increased $5.6 million. Time deposits under
$100,000 increased $8.3 million mostly in retail deposits. Time deposit rate
increases made these instruments more attractive as an investment to savers as
compared to investment in the fluctuating stock market. Another factor in the
growth of time deposits under $100,000 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. Time deposits of
$100,000 and over decreased $2.7 million from year-end as commercial depositors
drew down their balances and put them into more liquid deposits for business
purposes. Noninterest-bearing demand deposits, NOW and money market accounts
increased by $3.0 million, $1.9 million and $ .1 million primarily as a result
of the transfer of corporate funds from time deposits, $100,000 and over.
Savings deposits also increased from year-end by $2.3 million or 5.30% due to
increases in retail deposits.
18
<PAGE> 20
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Securities sold under repurchase agreements and other short-term borrowings
declined $14.7 million from December 31, 1999 to $55.7 million at March 31,
2000. At December 31, 1999 the Company had short-term borrowings made up of
federal funds purchased in the amount of $6.0 million with the balance of the
short-term borrowings being securities sold under repurchase agreements. As of
March 31, 2000 the short term borrowings in federal funds purchased had been
paid off. Securities sold under repurchase agreements to corporate customers
declined $8.7 million from year-end as commercial customers drew down their
balances and put them into liquid deposits. Securities sold under repurchase
agreements are offered through an overnight repurchase agreement product and a
term product with maturities from 7 days to one year. Repurchase agreements
provide a source of funds to the Company that do not increase reserve
requirements with the Federal Reserve Bank or create an expense relating to FDIC
insurance and, therefore, are less costly to the Company.
During the first quarter the Company received term advances from the Federal
Home Loan Bank in the amount of $10.0 million. These funds were used to pay off
the federal funds purchased with the excess used to fund federal funds sold,
which are used by the Company for liquidity purposes.
Total stockholders' equity increased $815,000 during the three months ended
March 31, 2000. The increase is the result of net income of $2,051,000, less the
adjustment in the valuation allowance for the market value of securities
available for sale, net of tax, of $1,253,000, plus $17,000 due to the exercise
of 2,000 stock options pursuant to the Omnibus Incentive Plan.
The tier 1 capital to average assets ratio at March 31, 2000 was 14.96% and
the total capital to asset ratio, on a risk adjusted basis, amounted to 22.11%,
exceeding the minimum required to be well capitalized under prompt corrective
action regulations, which minimums are 5% and 10%. Book value per share was
$14.88 at March 31, 2000 as compared to $14.70 at December 31, 1999. On March
31, 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 March 31, 2000 was
$2,051,000, an increase of $263,000 or 14.71%, as compared to net income of
$1,788,000 for the same period the previous year. The annualized return on
average assets was 1.73% for the quarter, higher than the 1.51% return on
average assets for the first quarter of the previous year.
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 $153,000
tax benefit related to this sale in the first quarter of 2000. Excluding this
one-time factor, net income increased 6.15% over last year's first three months
and the annualized return on average assets was 1.60% for the quarter ended
March 31, 2000 compared to 1.51% during the same period last year.
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 $205,000 or 4.81% during the three months ended March 31,
2000, compared to the same three months in 1999. The increased net interest
income is the result of rates on interest earning assets increasing faster than
rates paid on interest bearing liabilities. As evidenced in Table 1, "Analysis
of Average Balance and Tax Equivalent Rates for the Three Months ended March 31,
2000 and 1999", the yield on interest earning assets increased 27 basis points
to 7.63% during the first quarter of 2000 from 7.36% last year. Increases to
market interest rates caused the interest rates on average interest earning
assets to increase during the first three months of 2000 compared to the same
period last year. This is evidenced by the prime lending rate, which was at
9.00% at March 31, 2000 compared to 7.75% at March 31, 1999.
Table 1 also indicates that rates paid on interest bearing liabilities also
increased, but at a slightly slower pace than rates on interest earning assets.
Rates paid on interest bearing liabilities increased only 25 basis points to
4.51% during the three months ended March 31, 2000 as compared to 4.26% for the
same period last year. Rates on NOW and money market deposits during 2000
remained comparable to rates paid on these deposits last year. The savings rate
declined 20 basis points in the first quarter of 2000 compared to the first
quarter of 1999 as management decreased the rates offered on savings accounts
during the second quarter of 1999. Rates on time deposits and other borrowings
increased for the quarter ended March 31, 2000 by 43 and 36 basis points because
of the general increase in rates this year compared to last. At the end of the
first quarter of 2000 management, in order to meet competitive pressures, began
offering a new money market product that pays rates tied to a United States
Treasury note rate index to money market depositors that have balances greater
than $25,000. It is expected that rates paid on money market balance will
increase in future quarters as a result.
PROVISION FOR LOAN LOSSES
There was no provision for loan losses during the quarter ended March 31,
2000 or for the same quarter last year. Management, with the concurrence of the
Board of Directors, after a careful review of the adequacy of the allowance for
loan losses and the levels of non-performing and impaired loans, found that no
provision for loan losses was necessary during these periods.
At March 31, 2000, the allowance for loan losses was $5,241,000 or 2.05% of
loans as compared to $5,368,000 or 2.16% of loans at December 31, 1999.
Nonperforming loans, at March 31, 2000, were $1,047,000, increasing from
$815,000 at December 31, 1999. Impaired loans were $628,000 or .25 % of loans at
March 31, 2000 as compared to impaired loans of $394,000 or .16% of loans at
December 31, 1999. The amount of the allowance for loan losses allocated for
impaired loans at March 31, 2000 was $94,000 compared to $59,000 at December 31,
1999.
Other real estate owned, a non-performing asset, at March 31, 2000 was
$2,702,000 increasing $80,000 from December 31, 1999. One property used to
secure a loan was foreclosed upon during the first quarter of 2000 and $80,000
was transferred from loans to other real estate owned.
20
<PAGE> 22
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended March 31, 2000 and 1999
($ 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) $253,277 $5,534 8.74% $244,677 $5,172 8.46%
Taxable securities 172,844 2,738 6.09% 168,453 2,506 5.95%
Securities exempt from
Taxes (2) 19,125 363 7.56% 21,526 401 7.69%
Interest bearing deposits in banks 270 4 5.93% 236 3 5.08%
Federal funds sold 3,083 45 5.84% 13,637 160 4.69%
--------------------------- ---------------------------
Interest earning assets 448,599 8,684 7.63% 448,529 8,242 7.36%
----------- ----------
Noninterest earning assets 26,372 23,944
------------- -------------
Average assets $474,971 $472,473
============= =============
Liabilities and stockholders'
equity
NOW deposits $ 42,952 284 2.64% $ 41,251 281 2.72%
Money market deposits 37,497 328 3.50% 42,461 366 3.45%
Savings deposits 44,999 307 2.73% 45,187 331 2.93%
Time deposits 172,164 2,331 5.42% 176,461 2,200 4.99%
Other borrowings 63,380 821 5.18% 52,174 629 4.82%
--------------------------- ---------------------------
Interest bearing
Liabilities 360,992 4,071 4.51% 357,534 3,807 4.26%
----------- ----------
Demand deposits 41,839 42,315
Other noninterest bearing liabilities 6,691 7,049
Stockholders' equity 65,449 65,575
------------- -------------
Average liabilities and
Stockholders' equity $474,971 $472,473
============= =============
Net interest income $4,613 $4,435
=========== ==========
Net yield on interest
Earning assets 4.05% 3.96%
======== =========
Interest bearing liabilities to
Earning Ratio assets 80.47% 79.84%
======== =========
</TABLE>
(1) - Interest income on loans includes loan origination fees of $83 and $92
for the three months ended March 31, 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
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 March 31, 2000 is adequate to cover
future possible loan losses. If the level of impaired and nonperforming loans
remains low during the balance of 2000, management has budgeted no additional
provision for loan losses during 2000.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 2000 was $722,000 as
compared to $912,000 for the three months ended March 31, 1999, a decline of
$190,000. The decrease in noninterest income primarily resulted from decreased
activities in the Bank's mortgage banking operation. Mortgage banking income and
gains on sales of loans declined $161,000 and $86,000 during the first quarter
of 2000 compared to the same period last year. During the first quarter of 2000
only $1,096,000 in "table funded" loans were processed by the mortgage banking
operation compared to $8,574,000 during the first three months of 1999. There
were no loans originated and funded by the Bank and sold on the secondary market
during the first quarter of 2000 compared to $8,016,000 during the first quarter
of 1999. Home mortgage interest rates have risen and the volume of refinancing
existing mortgage loans has dropped significantly compared to the first quarter
of 1999. During the first quarter of 2000 the "table funded" loans processed
were mainly for home purchases.
Other factors contributing to the decline in the Company's noninterest
income during the first quarter of 2000 were the Company's other operating
income and trust income. Other operating income declined $18,000 during the
quarter ended March 31, 2000 because the Company realized a one-time $74,000
gain on the sale of a branch office during the first quarter of 1999. With the
merging of First Federal Bank, fsb with the Bank of Waukegan in April 1998 the
Bank had two branches within two city blocks of one another. The smaller of the
two branches was sold during January 1999 to a party who purchased the branch
building for a purpose other than banking. Trust income decreased slightly by
$5,000 during the first quarter of 2000 as well.
Offsetting a portion of the decline in noninterest income was service fees
on deposits, which were $80,000 greater during the first quarter of 2000 as
compared to the same quarter last year. Overdraft income was $54,000 greater
during the first three months of 2000 compared to last year. During the first
quarter of 2000 the Company instituted a daily overdraft fee for each day an
account remains overdrawn after the first three days. During the third quarter
of 1999 the Company introduced two new checking account products that packages
bank services for a membership fee. Fees on this type of account were $30,000
during the first quarter of 2000.
NONINTEREST EXPENSES
Noninterest expenses decreased $171,000 or 6.60% during the three months
ended March 31, 2000. The Company's efficiency ratio, noninterest expenses
divided by the sum of net interest income and noninterest income, was 46.65% for
the first quarter of 2000 as compared to 50.09% for the first 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.
22
<PAGE> 24
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Expenses relating to salaries and employee benefits declined $107,000 during
the first quarter of 2000 compared to the same period last year. Expenses
relating to commission for the mortgage banking staff were $104,000 less during
the first quarter of 2000 as compared to 1999 as the volumes decreased due to
higher home mortgage rates. Mortgage banking staff decreased to 4 employees from
10 employees last year as commissioned staff left the Bank's employ because of
declining commissions.
Occupancy expenses for the first quarter of 2000 were $36,000 less than the
first quarter of 1999. This decline is attributable to decreased equipment
depreciation expense of $50,000 during the three months ended March 31, 2000
compared to the same period last year. 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 quarter of 2000.
Data processing expense declined $11,000 during the first quarter of 2000 to
$119,000. During the first quarter of 1999 there were additional data processing
expenses relating to new software and testing of the data processing systems for
Y2K compliance.
FDIC insurance expense was $20,000 during the three months ended March 31,
2000, which was $1,000 less than last year.
Other real estate owned expenses declined slightly during the first quarter
of 2000 by $9,000 to $12,000.
Miscellaneous other operating expenses decreased slightly by $7,000 compared
to the same quarter last year. Expenses relating to loan originations and sales
by the mortgage banking operation decreased $51,000 because of lower volumes of
home mortgages processed. Expenses relating to the new checking account products
introduced in the third quarter of 1999 were $26,000 greater during the first
quarter of 2000. Professional fee and general insurance expenses during the
first quarter of 2000 were $8,000 and $7,000 greater than during the same period
last year.
FEDERAL AND STATE INCOME TAXES
For the three months ended March 31, 2000 and 1999, the Company's provision
for federal and state income taxes were $718,000 and $795,000, which as a
percentage of pretax earnings was 25.93% for 2000 and 30.78% for 1999. 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 and 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 quarter of 2000 would have been 31.46%.
23
<PAGE> 25
NORTHERN STATES FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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.
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
24
<PAGE> 26
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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 2, "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 2 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 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 were call provisions on $158.1 million of the
U.S. Government agency securities at December 31, 1999. As rates decline the
probability that a security with call provisions will be called increase because
the security issuer has the opportunity to reduce his interest expense by paying
off the called security.
25
<PAGE> 27
NORTHERN STATES FINANCIAL CORPORATION
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
TABLE 2
NORTHERN STATES FINANCIAL CORPORATION
EFFECT OF INTEREST SHOCKS ON FINANCIAL INSTRUMENTS
as of December 31, 1999 and December 31, 1998
<TABLE>
<CAPTION>
Fair Value at December 31, 1999
--------------------------------------------------
Down 2% Current Up 2%
--------------------------------------------------
<S> <C> <C> <C>
Assets
Cash and cash equivalents $ 16,900 $ 16,900 $ 16,900
Interest bearing deposits in financial
institutions - maturities over 90 days 101 100 99
Securities available for sale 204,914 196,684 185,041
Loans 255,395 245,838 236,915
Direct lease financing 2,211 2,175 2,142
Accrued interest receivable 4,361 4,361 4,361
Financial liabilities:
Deposits $341,331 $333,547 $327,593
Securities sold under repurchase agreements
and other short-term borrowings 70,440 70,436 70,432
Advances from borrowers for taxes and insurance 645 645 645
Accrued interest payable 3,640 3,640 3,640
<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
Advances from borrowers for taxes and insurance 992 992 992
Accrued interest payable 3,951 3,951 3,951
</TABLE>
26
<PAGE> 28
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 12th day of May 1999.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Date: May 12, 2000 By: /s/ Fred Abdula
----------------------- ----------------------------------
Fred Abdula
Chairman of the Board of
Directors and President
Date: May 12, 2000 By: /s/ Thomas M. Nemeth
----------------------- ----------------------------------
Thomas M. Nemeth
Vice President and Treasurer
27
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 12,933
<INT-BEARING-DEPOSITS> 211
<FED-FUNDS-SOLD> 12,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 189,295
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 257,512
<ALLOWANCE> 5,241
<TOTAL-ASSETS> 486,452
<DEPOSITS> 347,095
<SHORT-TERM> 55,756
<LIABILITIES-OTHER> 7,252
<LONG-TERM> 10,000
0
0
<COMMON> 1,784
<OTHER-SE> 64,565
<TOTAL-LIABILITIES-AND-EQUITY> 486,452
<INTEREST-LOAN> 5,512
<INTEREST-INVEST> 2,978
<INTEREST-OTHER> 49
<INTEREST-TOTAL> 8,539
<INTEREST-DEPOSIT> 3,250
<INTEREST-EXPENSE> 4,071
<INTEREST-INCOME-NET> 4,468
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,421
<INCOME-PRETAX> 2,769
<INCOME-PRE-EXTRAORDINARY> 2,769
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,051
<EPS-BASIC> .46
<EPS-DILUTED> .46
<YIELD-ACTUAL> 4.05
<LOANS-NON> 732
<LOANS-PAST> 315
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 5,368
<CHARGE-OFFS> 155
<RECOVERIES> 28
<ALLOWANCE-CLOSE> 5,241
<ALLOWANCE-DOMESTIC> 3,177
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 2,064
</TABLE>
