-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TG48mpQKNKx6j9HcMqVCdDonRYeUjgbZbXXEb0utBwdWI+f5+IRXRFo6ecxSgLfV qbnwZw1eCtJ5h00sV6E2IA== 0000950137-00-001318.txt : 20000329 0000950137-00-001318.hdr.sgml : 20000329 ACCESSION NUMBER: 0000950137-00-001318 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHERN STATES FINANCIAL CORP /DE/ CENTRAL INDEX KEY: 0000744485 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 363449727 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19300 FILM NUMBER: 580411 BUSINESS ADDRESS: STREET 1: 1601 N LEWIS AVE CITY: WAUKEGAN STATE: IL ZIP: 60085 BUSINESS PHONE: 7082446000 MAIL ADDRESS: STREET 1: 1601 NORTH LEWIS AVENUE CITY: WAUKEGAN STATE: IL ZIP: 60085 10-K405 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------ FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ ------------------------------ COMMISSION FILE NUMBER 0 - 19300 NORTHERN STATES FINANCIAL CORPORATION (Exact name of Registrant as specified in its charter) Delaware 36-3449727 (State of incorporation) (I.R.S. Employer Identification No.) 1601 North Lewis Avenue Waukegan, Illinois 60085 (847) 244-6000 (Address, including zip code, and telephone number, including area code, of principal executive office) ------------------------------ Securities registered pursuant to Section 12(g) of the Act Name of each exchange Title of each class which registered --------------------- ----------------------- Common Stock $.40 par value NASDAQ Small-Cap Market Cover Page 1 of 2 Page 1 of 63 Pages Exhibit Index Appears on Page 21 1 2 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting shares held by nonaffiliates of the Registrant is $59,438,300, as of March 21, 2000. Solely for the purpose of this computation, it has been assumed that executive officers and directors of the Registrant are "affiliates" and that the last price known to management was a sale on March 21, 2000, of $20.00 per share. 4,460,345 shares of common stock were outstanding as of March 21, 2000. DOCUMENTS INCORPORATED BY REFERENCE Portions of Parts II and IV are incorporated by reference from the Registrant's 1999 Annual Report to Stockholders; and a portion of Part III is incorporated by reference from the Registrant's Proxy Statement dated March 28, 2000, for the Annual Meeting of Stockholders to be held April 27, 2000. Except for those portions of the 1999 Annual Report incorporated by reference, the Annual Report is not deemed filed as part of this Report. Cover Page 2 of 2 2 3 INDEX ----- PART I Page No. - ------ -------- Item 1 Business 4 Item 2 Properties 14 Item 3 Legal Proceedings 14 Item 4 Submission of Matters to a Vote of Security Holders 14 PART II Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters 15 Item 6 Selected Financial Data 15 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A Quantitative and Qualitative Disclosures about Market Risk 15 Item 8 Financial Statements and Supplementary Data 16 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 16 PART III Item 10 Directors and Executive Officers of the Registrant 17 Item 11 Executive Compensation 17 Item 12 Security Ownership of Certain Beneficial Owners and Management 17 Item 13 Certain Relationships and Related Transactions 17 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 18 Signatures 19 3 4 PART I ------ Item 1. BUSINESS THE COMPANY Overview Northern States Financial Corporation (the "Registrant" or the "Company") is a bank holding company organized in 1984 under the laws of Delaware, for the purpose of becoming the parent bank holding company of the Bank of Waukegan (the "Bank"). In 1991, the Registrant acquired First Federal Bank, fsb ("First Federal" or the "Thrift"). On December 17, 1997, the Company's Board of Directors announced that it had approved the merger of its two wholly owned subsidiaries, Bank of Waukegan and First Federal Bank, fsb. The merger became effective April 21, 1998 with the Bank as the surviving entity in the merger. The Registrant is registered under the Bank Holding Company Act of 1956, as amended, and owns all the outstanding stock of the Bank. At December 31, 1999, the Company had 435 registered stockholders of record, 4,458,345 shares of Common Stock outstanding, and total consolidated assets of approximately $477 million. Aside from the stock of the Bank and cash, the Registrant has no other substantial assets. As a large, community-oriented, independent banking organization in the Waukegan-Gurnee area in the State of Illinois, the Company is well positioned to take advantage of the growth in Waukegan-Gurnee and its surrounding communities. The Company has continuously served the community since 1919 when First Federal was chartered; complemented by the Bank when it was chartered in 1962. The Company's local management, coupled with its long record of service, has allowed it to compete successfully in the banking market. The Company operates as a traditional community bank with conveniently located branches and a professional staff. The Registrant and Bank have no material patents, licenses or franchises except the corporate franchises and trademarks, which permit them to engage in banking and trust practices pursuant to law. The following table shows loans and deposits of the Bank as of December 31, 1999 (in thousands of dollars): Loans Deposits --------------------- $248,162 $334,251 The principal business of the Registrant, operating through the Bank, consists of attracting deposits and securities sold under repurchase agreements from the general public, making commercial loans, loans secured by residential and commercial real estate and consumer loans, and operating mortgage banking and trust businesses. 4 5 SUBSIDIARY OPERATIONS The Bank of Waukegan was chartered as a state bank in 1962 and is located in Waukegan, Illinois. Waukegan is located approximately 37 miles north of Chicago, Illinois and has a population of approximately 70,000. At December 31, 1999 the Bank of Waukegan had total assets of approximately $476.5 million, deposits of approximately $334.9 million and stockholder's equity of approximately $64.9 million. The Bank has three banking offices located in Waukegan, one office located in Antioch, Illinois, one office located in Gurnee, Illinois, and one office located in Winthrop Harbor, Illinois. The Bank provides services to individuals, businesses and local governmental units in northeastern Illinois and southeastern Wisconsin. The Bank's full service banking business includes the customary consumer and commercial products and services which banks provide, including the following: demand, savings, and time deposits, securities sold under repurchase agreements and individual retirement accounts; commercial, consumer and real estate lending, including installment loans, student loans, lines of credit and overdraft checking; safe deposit operations; trust services; and a variety of additional services tailored to the needs of individual customers, such as the sale of traveler's checks, money orders, cashier's checks and foreign currency, direct deposit, and other special services. Commercial and consumer loans are made to corporations, partnerships and individuals, primarily on a secured basis. Commercial lending focuses on business, capital, construction, inventory and real estate. The installment loan department of the Bank makes direct and indirect loans to consumers and commercial customers. The mortgage division originates and services commercial and residential mortgages. The Bank's trust department acts as executor, administrator, trustee, conservator, guardian, custodian and agent. At December 31, 1999, the Trust Department had assets under management or custodial arrangements of approximately $186 million. Its office is located in Waukegan, Illinois. COMPANY OPERATING STRATEGY Corporate policy, strategy and goals are established by the Board of Directors of the Company. Pursuant to the Company's philosophy, operational and administrative policies for the Bank are also established by the Company. Within this framework, the Bank focuses on providing personalized services and quality products to customers to meet the needs of the communities in which they operate. 5 6 As part of its community banking approach, the Company encourages the officers of the Bank to actively participate in community organizations. In addition, within credit and rate of return parameters, the Company attempts to ensure that the Bank meets the credit needs of the community. In addition, the Bank invests in local municipal securities. Lending Activities General - The Bank provides a range of commercial and retail lending services to corporations, partnerships and individuals, including, but not limited to, commercial business loans, commercial and residential real estate construction and mortgage loans, consumer loans, revolving lines of credit and letters of credit. The installment loan department makes direct and indirect loans to consumers and commercial customers. The mortgage department originates and services commercial and residential mortgages. The Bank's mortgage banking operation takes and processes loan applications that are "table funded" by the institution that ultimately funds and owns the loan. The Bank aggressively markets its services to qualified borrowers in both the commercial and consumer sectors. The Bank's commercial lending officers actively solicit the business of new companies entering the surrounding market as well as long-standing members of the business community. Through personalized professional service and competitive pricing, the Bank has been successful in attracting new commercial lending customers. At the same time, the Bank actively advertises its consumer loan products and continually attempts to make its lending officers more accessible. Commercial Loans - The Bank seeks new commercial loans in its market area and much of the increase in these loans in recent years can be attributed to the successful solicitation of new business. The Bank's areas of emphasis include, but are not limited to, loans to manufacturers, building contractors, developers, business services companies and retailers. The Bank provides a wide range of commercial business loans, including lines of credit for working capital purposes and term loans for the acquisition of equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. Loans may be made on an unsecured basis where warranted by the overall financial condition of the borrower. Terms of commercial business loans generally range from one to five years. The majority of the Bank's commercial business loans have floating interest rates or reprice within one year. The primary repayment risk for commercial loans is the failure of the business due to economic or financial factors. In most cases, the Bank has collateralized these loans and/or taken personal guarantees to help assure repayment. The Bank regularly provides financing to developers who have demonstrated a favorable record of performance for the construction of homes. Sales of these homes have remained very strong in Lake County due to the growth in population. Mortgage Banking - The Bank conducts a mortgage origination operation through its mortgage division. Since 1991, the Bank through the former Thrift began to fund conforming long-term residential mortgage loans and selling them in the secondary market with servicing retained. During 1998, the Bank's mortgage banking operation began taking 6 7 and processing loan applications that are "table funded" by the institution that ultimately funds and owns the loan. These loans are sold without the Bank retaining servicing. The Bank has a portfolio of serviced mortgages of approximately $48.1 million at December 31, 1999. Consumer Lending - The Bank's consumer lending department provides all types of consumer loans including motor vehicle, home improvement, home equity, student loans, unsecured loans and small personal credit lines. Trust Department - The Bank's trust department has been providing trust services to the community for over 10 years. Currently, the Bank has over $186 million of trust assets under management and provides a full complement of trust services for individuals and corporations including land trust services. To build on the trust department's mainstay of personal trust administration, the trust department's focus is in two major areas: (i) investment management for individuals and (ii) administration and investment services for employee benefit plans. COMPETITION The Registrant and its subsidiary encounter significant competition in all of their activities. The Chicago metropolitan area and suburban Lake County have a high density of financial institutions, many of which are significantly larger and have substantially greater financial resources than the Company and its subsidiary, and all of which are competitors of the Company and its subsidiary to varying degrees. The Registrant and its subsidiary are subject to competition from various financial institutions, including state and national banks, state and federal savings associations, credit unions, certain non-banking consumer lenders, and other companies or firms, including brokerage houses and mortgage brokers, that provide similar services in northeastern Illinois. In total, there are 22 financial institutions which have offices located in the Waukegan-Gurnee area, including the Bank. These financial institutions consist of 11 banks, 3 savings associations and 8 credit unions. The Bank also competes with money funds and with insurance companies with respect to its individual retirement accounts. Competition may increase as a result of the continuing reduction in the effective restrictions on the interstate operations of financial institutions. The Registrant and its subsidiary face additional competition for deposits from short-term money market mutual funds and other corporate and government securities funds. Since the elimination of federal interest rate controls on deposits, the competition from other financial institutions for deposits has increased. The primary factors influencing competition for deposits are interest rates, service, and convenience of office locations. The Company competes for loans principally through the range and quality of the services it provides, interest rate and loan fee terms. The Company believes that its long-standing presence in the community and personal service philosophy 7 8 enhances its ability to compete favorably in attracting and retaining individual and business customers. The Company actively solicits deposit-related clients and competes for deposits by offering customers personal attention, professional service and competitive interest rates. EMPLOYEES The Registrant and its subsidiary employed 119 full-time and 29 part-time employees as of December 31, 1999. None of the Registrant's employees is represented by any collective bargaining group. The Company offers a variety of employee benefits and management considers its employee relations to be good. GOVERNMENTAL MONETARY POLICY AND ECONOMIC CONDITIONS The earnings and growth of the Company are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government and its agencies. In particular, the Federal Reserve Board regulates monetary and credit conditions and interest rates in order to influence general economic conditions, primarily through open-market operations in U.S. Government securities, varying the discount rate on bank borrowings, and setting reserve requirements against bank deposits. These policies have a significant influence on overall growth and distribution of the Company's loans, investments and deposits, and affect interest rates charged on loans and earned on investments or paid for deposits. The monetary policies of the Federal Reserve Board are expected to continue their substantial influence on the operating results of banks. The general effect, if any, of such policies upon the future business and earnings of the Company and its subsidiary cannot accurately be predicted. SUPERVISION AND REGULATION Financial institutions and their holding companies are extensively regulated under federal and state laws. As a result, the business, financial condition and prospects of the Company and the Bank can be materially affected not only by management decisions and general economic conditions, but also by applicable statutes and regulations and other regulatory pronouncements and policies promulgated by regulatory agencies with jurisdiction over the Company and the Bank, such as the Board of Governors of the Federal Reserve System ("FRB"), the Federal Deposit Insurance Corporation ("FDIC") and the Illinois Office of Banks and Real Estate (the "Office"). Such statutes, regulations and other pronouncements 8 9 and policies are intended to protect depositors and the FDIC's deposit insurance funds, not to protect stockholders. The Company and the Bank are "affiliates" within the meaning of the Federal Reserve Act so that the Bank is subject to certain restrictions with respect to loans to the Company and certain other transactions with the Company or involving its securities. The Company is a bank holding company subject to the Bank Holding Company Act of 1956, as amended (the "Act"), and to regulation by the FRB. The Act limits the activities which may be engaged in by bank holding companies and their nonbank subsidiaries, with certain exceptions, to those so closely related to banking or managing or controlling banks as to be a proper incident thereto. Also, under the Act and the FRB's regulations, a bank holding company, as well as certain of its subsidiaries, are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of any property or services. The Act also prohibits bank holding companies from acquiring substantially all the assets of or owning more than 5% of the voting shares of any bank or nonbanking company, which is not already majority owned, without the prior approval of the FRB. On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley Act (the "GLB Act"). The GLB Act significantly changes financial services regulation by expanding permissible nonbanking activities of bank holding companies and removing barriers to affiliations among banks, insurance companies, securities firms and other financial services entities. These new activities can be conducted through a holding company structure or, subject to certain limitations, through a financial subsidiary of a bank. The GLB Act repeals the anti-affiliation provisions of the Glass-Stegall Act and revises the Bank Holding Company Act. The GLB Act permits qualifying holding companies, called "financial holding companies," to engage in, or to affiliate with companies engaged in, a full range of financial activities including banking, insurance activities (including insurance underwriting and portfolio investing), securities activities and merchant banking. A bank holding company's subsidiary banks must be "well-capitalized" and "well-managed" and have at least a "satisfactory" Community Reinvestment Act rating for the bank holding company to elect status as a financial holding company. The Reigle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Act") permits an adequately capitalized and adequately managed bank holding company to acquire, with FRB approval, a bank located in a state other than the bank holding company's home state, without regard to whether the transaction is permitted under any state law, except that a host state may establish by statute the minimum age of its banks (up to a maximum of 5 years) subject to acquisition by out-of-state bank holding companies. The FRB may not approve the acquisition if the applicant bank holding company, upon consummation, would control more that 10% of total U.S. insured depository institution deposits or more than 30% of the host state's total insured depository institution deposits. The Interstate Act also permits a bank, with the approval of the appropriate Federal bank regulatory agency, to establish a de novo branch in a state, other than the bank's home state, in which the bank does not presently maintain a branch if the host state has enacted a law that applies equally to all banks and expressly permits all out- 9 10 of-state banks to branch de novo into the host state. Banks having different home states may, with approval of the appropriate Federal bank regulatory agency, merge across state lines, unless the home state of a participating bank has opted-out of the Interestate Act prior to June 1, 1997. In addition the Interstate Act permits any bank subsidiary of a bank holding company to receive deposits, renew time deposits, close loans, service loans and receive payments on loans and other obligations as agent for a bank or thrift affiliate, whether such affiliate is located in a different state or in the same state. Illinois law allows the Bank to establish branches anywhere in the state. The Illinois Bank Holding Company Act permits Illinois bank holding companies to acquire control of banks in any state and permits bank holding companies whose principal place of business is in another state to acquire control of Illinois banks or bank holding companies upon satisfactory application to the Office. In reviewing any such application, the Office will review, among other things, compliance by the applicant with the requirements of the Community Reinvestment Act (the "CRA") and other information designed to determine such banks' abilities to meet community credit needs. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") amended the Act to authorize the FRB to allow bank holding companies to acquire any savings association (whether healthy, failed or failing) and removed "tandem operations" restrictions, which previously prohibited savings associations from being operated in tandem with a bank holding company's other subsidiaries. As a result, bank holding companies now have expanded opportunities to acquire savings associations. Under FIRREA, an insured depository institution which is commonly controlled with another insured depository institution shall generally be liable for any loss incurred, or reasonably anticipated to be incurred, by the FDIC in connection with the default of such commonly controlled institution, or for any assistance provided by the FDIC to such commonly controlled institution, which is in danger of default. The term "default" is defined to mean the appointment of a conservator or receiver for such institution. Such liability is subordinated in right of payment to deposit liabilities, secured obligations, any other general or senior liability and any obligation subordinated to depositors and or other general creditors, other than obligations owed to any affiliate of the depository institution (with certain exceptions) and any obligations to stockholders in such capacity. The Bank is subject to regulation by the FDIC, as well as by the Office. Under the Illinois Banking Act (the "IBA"), the Bank is permitted to declare and pay dividends in amounts up to the amount of its accumulated net profits provided that it shall retain in its additional paid-in capital at least one-tenth of its net profits since the date of the declaration of its most recent previous dividend until such additions to additional paid-in capital, in the aggregate, equal at least the paid-in capital of the Bank. In no event may the Bank, while it continues its banking business, pay dividends in excess of its net profits then on hand (after deductions for losses and bad debts). Under the FDIC's risk-based insurance assessment system, each insured depository institution is placed in one of nine risk categories based on its level of capital and other 10 11 relevant information. Each insured depository institution's insurance assessment rate is then determined by the risk category in which it has been classified by the FDIC. Under the assessment schedule applicable for the second semi-annual assessment period of 1999 to BIF-insured institutions (such as the Bank), assessment rates ranged from 0% to 0.27% of deposits. In addition, the Bank is subject to "FICO assessments" to repay obligations issued by a federally chartered corporation to provide financing for resolving the thrift crises of the 1980s. Currently, the FICO assessment rate is .0208%. The Federal bank regulators have adopted risk-based capital guidelines for bank holding companies and banks. The minimum ratio of qualifying total capital to risk-weighted assets, including certain off-balance sheet items (Total Capital Ratio), is 8%, and the minimum ratio of that portion of total capital that is comprised of common stock, related additional paid-in capital, retained earnings, noncumulative perpetual preferred stock, minority interests and, for bank holding companies, a limited amount of qualifying cumulative perpetual preferred stock, less certain intangibles including goodwill (Tier 1 capital), to risk-weighted assets is 4%. The balance of total capital may consist of other preferred stock, certain other instruments, and limited amounts of subordinated debt and the loan and lease loss allowance. The Federal Reserve Board risk-based capital standards contemplate that evaluation of capital adequacy will take account of a wide range of other factors, including overall interest rate exposure; liquidity, funding and market risks; the quality and level of earnings; investment, loan portfolio, and other concentrations of credit; certain risks arising from nontraditional activities; the quality of loans and investments; the effectiveness of loan and investment policies; and management's overall ability to monitor and control financial and operating risks including the risks presented by concentrations of credit and nontraditional activities. In addition, the Federal Reserve has established minimum Leverage Ratio (Tier 1 capital to quarterly average total assets) guidelines for bank holding companies and banks. These guidelines provide for a minimum Leverage Ratio of 3% for bank holding companies and banks that meet certain specified criteria, including having the highest regulatory rating. All other banking organizations are required to maintain a Leverage Ratio of at least 3% plus an additional cushion of 100 to 200 basis points. The guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the guidelines indicate that the Federal Reserve Board will continue to consider a "Tangible Tier 1 Leverage Ratio" in evaluating proposals for expansion or new activities. The Tangible Tier 1 Leverage Ratio is the ratio of Tier 1 capital, less intangibles not deducted from Tier 1 capital, to quarterly average total assets. As of December 31, 1999, the Federal Reserve had not advised the Company of any specific minimum Tangible Tier 1 Leverage Ratio applicable to it. At December 31, 1999, the Company had a Tangible Tier 1 Leverage Ratio of 14.53%. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made revisions to several other federal banking statutes. In general, 11 12 FDICIA subjects depository institutions to significantly increased regulation and supervision. Among other things, FDICIA requires federal bank regulatory authorities to take "prompt corrective action" with respect to depository institutions that do not meet minimum capital requirements, and imposes certain restrictions upon depository institutions which meet minimum capital requirements but are not "well capitalized" for purposes of FDICIA. FDICIA and the regulations adopted under it establish five capital categories as follows, with the category for any institution determined by the lowest of any of these ratios: TIER 1 TOTAL LEVERAGE RATIO RISKED-BASED RATIO RISKED-BASED RATIO Well Capitalized 5% or above 6% or above 10% or above Adequately Capitalized 4% or above* 4% of above 8% or above Undercapitalized Less than 4% Less than 4% Less than 8% Significantly Undercapitalized Less than 3% Less than 3% Less than 6% RATIO OF TANGIBLE EQUITY TO TOTAL ASSETS Critically Undercapitalized 2% or below *3% for banks with the highest CAMEL (supervisory) rating. An insured depository institution may be deemed to be in a capital category that is lower than is indicated by its capital ratios if it receives an unsatisfactory rating by its examiners with respect to its assets, management, earnings or liquidity. Under FDICIA, a bank that is not well capitalized is generally prohibited from accepting or renewing brokered deposits and offering interest rates on deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited); in addition, "pass through" insurance coverage may not be available for certain employee benefit accounts. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be undercapitalized. Undercapitalized depository institutions are subject to limitations on growth and are required to submit a capital 12 13 restoration plan, which must be guaranteed by the institution's parent company. Institutions that fail to submit an acceptable plan, or that are significantly undercapitalized, are subject to a host of more drastic regulatory restrictions and measures. The Bank is considered "well capitalized" according to FDICIA guidelines. Federal and state statutes and regulations provide financial institution regulatory agencies with great flexibility to undertake enforcement action against an institution that fails to comply with regulatory requirements, particularly capital requirements. Possible enforcement actions range from the imposition of a capital plan and capital directive to, in the most severe cases, place the institution into conservatorship or receivership or the termination of deposit insurance. FDICIA directs that each federal banking agency prescribe standards for depository institutions or depository institutions' holding companies relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, a maximum ratio of classified assets to capital, minimum earnings sufficient to absorb losses and other standards as they deem appropriate. Many regulations implementing these directives have been adopted by the agencies As a member of the FRB, the Bank is subject to regulations requiring depository institutions to maintain reserves against a specified percentage of transaction accounts (primarily NOW and regular checking). Reserves are maintained in the form of vault cash or non-interest bearing deposits with the FRB. The FRB regulations generally require 3% reserves on the first $39.3 million of transaction accounts; however, the first $5 million of these otherwise reservable balances (subject to adjustments by the FRB) are exempted from the 3% reserve requirement. Net transaction balances over $39.3 million are subject to a reserve requirement of $1,179,000 plus 10% of the amount of the net transaction balances over $39.3 million. The Bank is in compliance with the forgoing requirements. Under the Community Reinvestment Act ("CRA"), a financial institution has a continuing and affirmative obligation, consistent with the safe and sound operation of such institution, to serve the "convenience and needs" of the communities in which they are chartered to do business, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community as long as they are consistent with the CRA. The CRA requires each federal banking agency, in connection with its examination of a financial institution, to assess and assign one of four ratings to the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by the institution, including applications for charters, branches and other deposit facilities, relocations, mergers, consolidations and acquisitions of assets or assumptions of liabilities. The CRA also requires that all institutions make public disclosure of their CRA ratings. 13 14 BUSINESS-STATISTICAL DISCLOSURE The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and the Results of Operations" on Pages 14 through 32 of the 1999 Annual Report to Stockholders (filed as Exhibit 13, pages 22 through 40 of this report) is incorporated herein by reference. ITEM 2. PROPERTIES The Bank conducts its operations through its main office and five branches. The Company's office is located in the main office of the Bank. All of such offices are owned by the Bank and are located in Lake County, Illinois. The Bank believes that its current facilities are adequate for the conduct of its business. The following table sets forth information relating to each of such offices: Main Office: Trust Department: 1601 North Lewis Avenue 1601 North Lewis Avenue Waukegan, Illinois 60085 Waukegan, Illinois 60085 Branches: 3233 Grand Avenue 40220 N. Route 59 Waukegan, Illinois 60085 Antioch, Illinois 60002 216 Madison Street 700 N. Sheridan Road Waukegan, Illinois 60085 Winthrop Harbor, Illinois 60096 5384 Grand Avenue Gurnee, Illinois 60031 ITEM 3. LEGAL PROCEEDINGS Due to the nature of their business, the Registrant and its subsidiary are often subject to various legal actions. These legal actions, whether pending or threatened, arise through the normal course of business and are not considered unusual or material. Currently, no material legal procedures are pending which involve the Registrant or the Bank. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------- Not Applicable 14 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information set forth under the captions "Stock Market Information"; "Price Summary"; and "Cash Dividends" on Page 54 of the 1999 Annual Report to Stockholders (filed as Exhibit 13, page 62 of this report) is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information set forth under the caption "Selected Consolidated Financial Data" on Page 14 of the 1999 Annual Report to Stockholders (filed as Exhibit 13, page 22 of this report) is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on Pages 14 through 32 of the 1999 Annual Report to Stockholders (filed as Exhibit 13, pages 22 through 40 of this report) is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information set forth under the caption "Quantitative and Qualitative Disclosures about Market Risk" on Pages 32 through 34 of the 1999 Annual Report to Stockholders (filed as Exhibit 13, pages 40 through 42 of this report) is incorporated herein by reference. 15 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Registrant and the Independent Auditors' Report as set forth on the following pages of the 1999 Annual Report to Stockholders (filed as Exhibit 13, to this report) are incorporated herein by reference: Annual Report to Stockholders Page --------------- Independent Auditors' Report 35 Consolidated Balance Sheets as of December 31, 1999 and 1998 36 Consolidated Statements of Income for the Years ended December 31, 1999, 1998 and 1997 37 Consolidated Statements of Cash Flows for the Years ended December 31, 1999, 1998 and 1997 38 Consolidated Statements of Stockholders' Equity for the Years ended December 31, 1999, 1998 and 1997 39 Consolidated Statements of Comprehensive Income for the Years ended December 31, 1999, 1998 and 1997 39 Notes to the Consolidated Financial Statements 40 Parent Company Only Financial Statements 52 The portions of the 1999 Annual Report to Stockholders which are not specifically incorporated by reference as a part of this Form 10-K are not deemed to be a part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 16 17 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS - The information with respect to Directors of the Registrant set forth under the caption "Directors and Executive Management" on pages 2 and 3 of the Registrant's Proxy Statement, dated March 28, 2000, relating to the April 27, 2000 Annual Meeting of Stockholders is incorporated herein by reference. EXECUTIVE OFFICERS - The Company's only executive officer is Mr. Fred Abdula, the President of the Company at December 31, 1999. The information with respect to Mr. Abdula is set forth under the caption "Directors and Executive Management" on pages 2 and 3 of the Registrant's Proxy Statement, dated March 28, 2000, relating to the April 27, 2000 Annual Meeting of Stockholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the caption "Executive Compensation" and "Summary Compensation Table" on page 5 of the Registrant's Proxy Statement, dated March 28, 2000, relating to the April 27, 2000 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" on page 4 of the Registrant's Proxy Statement, dated March 28, 2000, relating to the April 27, 2000 Annual Meeting of Stockholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Compensation Committee Interlocks and Insider Participation" on page 8 of the Registrant's Proxy Statement, dated March 28, 2000, relating to the April 27, 2000 Annual Meeting of Stockholders is incorporated herein by reference. 17 18 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - -------------------------------------------------------------------------- (a) 1. Financial Statements All financial statements of the Registrant are incorporated herein by reference as set forth under Item 8, Part II of this report on Form 10-K. 2. Financial Statement Schedules Not applicable 3. Exhibits (Numbered in accordance with Item 601 of Regulation S-K) The following exhibits are filed as part of this report: 3-A Articles of Incorporation of the Company, as amended to date. (Filed with Registrant's annual report on Form 10-K for the year ended December 31, 1994 Commission File 0-19300 and incorporated here by reference.) 3-B Bylaws of the Company, as amended to date. (Filed with Registrant's annual report on Form 10-K for the year ended December 31, 1994 Commission File 0-19300 and incorporated here by reference.) 4 Specimen Stock Certificate. (Incorporated by reference to the Registrant's Registration Statement of Form S-1, as amended (File No. 33-38697) initially filed with the Commission on January 25, 1991.) 10 1992 Northern States Omnibus Incentive Plan. (Filed with Registrant's annual report on Form 10-K for the year ended December 31, 1994 Commission File 0-19300 and incorporated here by reference.) 11 Statement of Computation of per share earnings. Contained in Notes 1 and 14 to the consolidated financial statements, pages 41 and 51, 1999 Annual Report to Stockholders (filed as Exhibit 13 pages 49 and 59 to this report) is incorporated by reference. 13 Copy of the Company's Annual Report to Stockholders for the year ended December 31, 1999. This exhibit, except for portions thereof that have been specifically incorporated by reference into this report, is furnished for the information of the Commission and shall not be deemed "filed" as part hereof. 21 List of Subsidiaries. (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of the year ended December 31, 1999. (c) Exhibit List and Index 18 19 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized, on this 28th day of March 2000. NORTHERN STATES FINANCIAL CORPORATION (Registrant) Fred Abdula, Chairman of the Board and President /s/ Fred Abdula (Principal Executive Officer) - ----------------------------------- Thomas M. Nemeth, Vice President and Treasurer (Principal Financial Officer and /s/ Thomas M. Nemeth Principal Accounting Officer) - ----------------------------------- 19 20 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each director of the Registrant, whose signature appears below, hereby appoints Fred Abdula and Thomas M. Nemeth and each of them severally, as his attorney-in-fact, to sign in his name and on his behalf, as a director of the Registrant, and to file with the Commission any and all Amendments to this Report on Form 10-K, on this 28th day of March 2000. Fred Abdula, Director /s/ Fred Abdula ---------------------------- Kenneth W. Balza, Director /s/ Kenneth W. Balza ---------------------------- Jack H. Blumberg, Director /s/ Jack H. Blumberg ---------------------------- Frank Furlan, Director /s/ Frank Furlan ---------------------------- Harry S. Gaples, Director /s/ Harry S. Gaples ---------------------------- Laurance A. Guthrie, Director /s/ Laurance A. Guthrie ---------------------------- James A. Hollensteiner, Director /s/ James A. Hollensteiner ---------------------------- Raymond M. Mota, Director /s/ Raymond M. Mota ---------------------------- Helen Rumsa, Director /s/ Helen Rumsa ---------------------------- Frank Ryskiewicz, Director /s/ Frank Ryskiewicz ---------------------------- Henry G. Tewes, Director /s/ Henry G. Tewes ---------------------------- Arthur J. Wagner, Director /s/ Arthur J. Wagner ---------------------------- 20 21 NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARIES FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 EXHIBIT INDEX
Exhibits Page(s) - -------- ------- 3-A Articles of Incorporation of the Company, as amended to date. (Filed with Registrant's annual report on Form 10-K for the year ended December 31, 1994 Commission File 0-19300 and incorporated here by reference.) 3-B Bylaws of the Company, as amended to date. (Filed with Registrant's annual report on Form 10-K for the year ended December 31, 1994 Commission File 0-19300 and incorporated here by reference.) 4 Specimen Stock Certificate. (Incorporated by reference to the Registrant's Registration Statement of Form S-1, as amended (File No. 33-38697) initially filed with the Commission on January 25, 1991.) 10 1992 Northern States Omnibus Incentive Plan. (Filed with Registrant's annual report on Form 10-K for the year ended December 31, 1994 Commission File 0-19300 and incorporated here by reference.) 11 Statement of Computation of per share earnings. Contained in Notes 1 and 14 to the consolidated financial statements, pages 41 and 51, 1999 Annual Report to Stockholders (filed as Exhibit 13 to this report) is incorporated by reference. 49 and 59 13 Copy of the Company's Annual Report to Stockholders for the year ended December 31, 1999. This exhibit, except for portions thereof that have been specifically incorporated by reference into this Report, is furnished for the information of the Commission and shall not be deemed "filed" as part hereof. 22 21 List of Subsidiaries. 63
21 EX-13 2 1999 ANNUAL REPORT TO SHAREHOLDERS 1 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- SELECTED CONSOLIDATED FINANCIAL DATA - --------------------------------------------------------------------------------
($ 000s, EXCEPT PER SHARE DATA) - --------------------------------------------------------------------------------------------------------------------------- AT OR FOR THE YEAR ENDED DECEMBER 31, 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- INCOME STATEMENT DATA: Interest income..........................................$ 32,778 $ 34,206 $ 32,759 $ 31,671 30,893 Interest expense......................................... 15,005 16,896 15,615 14,808 14,705 ----------------------------------------------------------------- Net interest income...................................... 17,773 17,310 17,144 16,863 16,188 Provision for loan losses................................ 0 10 480 1,190 1,480 ----------------------------------------------------------------- Net interest income after provision for loan losses...... 17,773 17,300 16,664 15,673 14,708 Noninterest income....................................... 3,501 2,935 2,687 3,239 2,702 Noninterest expenses..................................... 9,779 9,623 9,132 10,372 10,433 ----------------------------------------------------------------- Income before income taxes............................... 11,495 10,612 10,219 8,540 6,977 Provision for income taxes............................... 3,611 3,308 3,209 2,529 2,040 ----------------------------------------------------------------- NET INCOME...............................................$ 7,884 $ 7,304 $ 7,010 $ 6,011 $ 4,937 ================================================================= BALANCE SHEET DATA: Cash, noninterest bearing................................$ 16,740 $ 15,176 $ 14,200 $ 15,247 $ 18,119 Investments (2).......................................... 196,944 213,744 192,078 166,585 171,125 Loans, net............................................... 242,794 240,776 236,794 227,814 220,865 Direct lease financing................................... 2,138 987 1,274 999 622 All other assets......................................... 18,065 15,238 14,640 15,919 17,160 ----------------------------------------------------------------- TOTAL ASSETS.............................................$ 476,681 $ 485,921 $458,986 $426,564 $427,891 ================================================================= Deposits.................................................$ 334,251 $ 355,756 $347,950 $328,795 $327,555 Other borrowings......................................... 70,436 47,990 38,504 36,758 43,278 Federal Home Loan Bank advance........................... 0 10,000 5,000 0 0 All other liabilities.................................... 6,460 7,062 7,337 6,176 6,053 Stockholders' equity..................................... 65,534 65,113 60,195 54,835 51,005 ----------------------------------------------------------------- Total Liabilities & Stockholders' Equity.................$ 476,681 $ 485,921 $458,986 $426,564 $427,891 ================================================================= PER SHARE DATA: (4) Basic earnings per share.................................$ 1.77 $ 1.64 $ 1.58 $ 1.35 $ 1.11 Diluted earnings per share............................... 1.77 1.64 1.57 1.35 1.11 Cash dividends declared.................................. .75 0.60 0.48 0.40 0.33 Book value (at end of year).............................. 14.70 14.63 13.54 12.33 11.49 SELECTED FINANCIAL AND OTHER RATIOS: Return on average assets (1)............................. 1.67% 1.55% 1.61% 1.43% 1.21% Return on average equity (1)............................. 12.05 11.66 12.28 11.47 10.15 Average stockholders' equity to average assets (1)....... 13.84 13.29 13.13 12.47 11.93 Tax equivalent interest rate spread...................... 3.26 3.06 3.39 3.64 3.62 Tax equivalent net interest income to average earning assets (1)..................................... 4.11 3.99 4.33 4.50 4.46 Non-performing assets to total assets.................... 0.72 1.36 0.78 0.94 2.25 Dividend payout ratio (3)................................ 42.42 36.57 30.44 29.60 29.63
(1) - Does not reflect impact of unrealized gains (losses) on securities available for sale on average balances. (2) - Includes interest bearing deposits in other financial institutions, federal funds sold, securities available for sale. (3) - Total cash dividends divided by net income. (4) - Information prior to 1998 was restated to reflect five-for-one stock split. - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- The following is a discussion and analysis of Northern States Financial Corporation's (the "Company") financial position and results of operations and should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this report. The Company has one wholly owned subsidiary, the Bank of Waukegan (the "Bank"). During 1998, the Company received approval from the applicable regulatory agencies to merge First Federal Bank, fsb, (the "Thrift"), a wholly owned subsidiary of the Company, into the Bank. The Bank is a commercial banking company that provides traditional banking services, including mortgage and trust services, to corporate, retail and civic entities in the market. 14 NSFC ANNUAL REPORT 1999 2 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- The Company and its subsidiary are subject to regulation by numerous agencies including the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Illinois Office of Banks and Real Estate. Among other things, these agencies limit the activities in which the Company and the Bank may engage, the investments and loans that the Bank funds, and the reserves against deposits which the Bank must maintain. The statements contained in this management's discussion and analysis that are not historical facts are forward-looking statements subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identifiable by the use of the words "believe", "expect", "intend", "estimate" or similar expressions. The Company cautions readers of this Annual Report that a number of important factors could cause the Company's actual results in 2000 and beyond to differ materially from those expressed in any such forward-looking statements. - -------------------------------------------------------------------------------- TABLE 1 ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES - --------------------------------------------------------------------------------
($ 000s) - ------------------------------------------------------------------------------------------------------------------------------ FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------ AVERAGE AVERAGE AVERAGE BALANCE INTEREST RATE BALANCE INTEREST RATE BALANCE INTEREST RATE ------------------------------------------------------------------------------------------------ ASSETS Loans (1) (2) (3)............$ 244,039 $ 20,896 8.56% $242,020 $ 21,903 9.05% $ 241,019 $ 22,343 9.27% Taxable securities (5)....... 175,146 10,663 6.00 167,117 10,263 6.16 132,128 8,411 6.34 Securities exempt from federal income taxes (2) (5) 20,754 1,568 7.68 19,552 1,543 8.18 21,301 1,741 8.38 Interest bearing deposits in financial institutions.. 296 16 5.41 428 25 5.84 617 35 5.67 Federal funds sold........... 6,171 298 4.83 21,157 1,135 5.36 17,437 965 5.53 ------------------------------------------------------------------------------------------------ Interest earning assets.... 446,406 33,441 7.46 450,274 34,869 7.76 412,502 33,495 8.12 Noninterest earning assets... 26,293 20,823 22,344 --------- -------- --------- Average assets (4).........$ 472,699 $471,097 $ 434,846 ========= ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY NOW deposits.................$ 46,403 1,204 2.59 $ 39,310 1,157 2.94 $ 37,672 1,120 2.97 Money market deposits........ 40,557 1,416 3.49 42,400 1,656 3.91 41,945 1,672 3.99 Savings deposits............. 45,553 1,275 2.80 44,067 1,311 2.98 44,458 1,322 2.97 Time deposits................ 169,901 8,526 5.02 188,365 10,413 5.53 171,149 9,714 5.68 Other borrowings............. 54,852 2,584 4.71 45,582 2,359 5.18 35,082 1,787 5.09 ------------------------------------------------------------------------------------------------ Interest bearing liabilities.............. 357,266 15,005 4.20 359,724 16,896 4.70 330,306 15,615 4.73 ---------------- ----------------- ---------------- Demand deposits.............. 43,128 40,254 40,112 Other noninterest bearing liabilities........ 6,886 8,500 7,341 Stockholders' equity......... 65,419 62,619 57,087 --------- -------- --------- Average liabilities and stockholders' equity....$ 472,699 $471,097 $ 434,846 ========= ======== ========= Net interest income........ $ 18,436 $ 17,973 $ 17,880 ======== ========= ======== Net yield on interest earning assets.......... 4.11% 3.99% 4.33% ===== ===== ===== Interest bearing liabilities to earning assets ratio. 80.03% 79.89% 80.07% ===== ===== =====
(1) - Interest income on loans includes loan origination and other fees of $353 for 1999, $475 for 1998 and $492 for 1997. Average loans include direct lease financing. (2) - Tax-exempt income is reflected on a fully tax equivalent basis utilizing a 34% rate. (3) - Non-accrual loans are included in average loans. (4) - Average balances are derived from the average daily balances. (5) - Rate information was calculated based on the average amortized cost for securities. The 1999, 1998, and 1997, average balance information includes an average unrealized gain (loss) for taxable securities of $(2,425), $397 and $(526). The 1999, 1998, and 1997 average balance information includes an average unrealized gain (loss) of $344, $682, and $530 for tax-exempt securities. NSFC ANNUAL REPORT 1999 15 3 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NET INTEREST INCOME - -------------------------------------------------------------------------------- Table 1, "Analysis of Average Balances, Tax Equivalent Yields and Rates", shows a comparison of net interest income and average volumes, together with effective yields earned on such assets and rates paid on such funds. The results shown reflect the excess of interest earned on assets over the interest paid for funds. Interest income is the primary source of revenue for the Company. It comprised 90.4% of the Company's total revenues in 1999, 92.1% in 1998 and 92.4% in 1997. Net interest income is the difference between interest income earned on average interest earning assets, such as loans and securities, and interest expense on average interest bearing liabilities, such as deposits and other borrowings. In Table 1, interest income on non-taxable securities and loans has been adjusted to be fully tax equivalent to be comparable with rates earned and paid elsewhere. In addition, rates earned on securities are calculated based upon the average amortized cost of the related securities. Several factors affect net interest income, one of which is changes in interest rates that are generally indicated by the changes in the prime lending rate. The prime rate was stable at 7.75% during the first half of 1999 and increased during the third quarter to 8.25% and during the fourth quarter to 8.50%. The average weighted prime lending rate in 1999 was 8.02%, a decrease of 34 basis points from 8.36% in 1998, and was 8.44% in 1997. This decline in general interest rates is evidenced by the decline in average rates earned on taxable securities in 1999 that decreased 16 basis points to 6.00% from 1998 levels after decreasing 18 basis points in 1998 from 1997. Rates on federal funds sold in 1999 declined 53 basis points from 1998 after decreasing 17 basis points in 1998 from 1997. Although average rates in 1999 were below 1998 levels, rates during 1999 began to rise, especially during the second half of the year. It is expected that interest rates on average will be higher in 2000 than in 1999. Another major factor affecting the net interest margin is rates earned on loans. Table 1 shows that rates earned on average loans decreased to 8.56% in 1999 from 9.05% in 1998 after declining in 1998 from 9.27% in 1997. The yields on loans during 1999 decreased 49 basis points from 1998 in part as a consequence of the 34 basis point decline of the average prime lending rate in 1999. Another factor impacting the overall decline in loan rates was competitive pressures that caused loan rates to decline. It is expected that competitive pressures will continue to affect loan pricing in 2000. Loan rates in 1998 declined 22 basis points from 1997, primarily as a result of competition and the decline in the prime rate. The average earning asset ratio is another important factor affecting net interest income. The average earning asset ratio is the percentage of average assets that earn interest income to total average assets. This percentage declined slightly for the Company during 1999 to 94.44% compared to 95.58% in 1998 and 94.86% in 1997. The reasons for this slight decline are that the upswing in rates during the second half of 1999 caused the carrying value of the Bank's securities to decline and the Bank, because of potential customer Y2K concerns, kept higher levels of cash on hand toward the end of the year. As indicated in Table 1, the Company's net interest income on a fully tax equivalent basis rose in 1999 to $18,436,000, an increase of $463,000 from 1998. The primary reason for the 1999 increase in net interest income was the increase in the interest rate spread. The interest rate spread is the yield earned on interest earning assets less rates paid on interest bearing liabilities. The interest rate spread increased to 3.26% in 1999 as compared to 3.06% in 1998 and 3.39% in 1997. Increases to the interest rate spread have a positive impact on net interest income. Rates on interest earning assets declined by 30 basis points to 7.46% in 1999 from 7.76% in 1998 after declining 36 basis points in 1998 from 1997. Rates on interest bearing liabilities declined to a greater extent than the rates on interest earning assets during 1999 creating the increased interest rate spread. Rates on interest bearing liabilities decreased 50 basis points to 4.20% in 1999 from 4.70% in 1998 after declining only 3 basis points in 1998 from 1997. Rates on NOW, money market and savings deposits were 35, 42 and 18 basis points lower in 1999 than in 1998 after remaining relatively stable in 1998 compared to 1997. Rates on NOW and money market deposits were lowered during the fourth quarter of 1998 and rates on NOW deposits were lowered a second time during the second quarter of 1999 along with the rates paid on savings deposits. As market interest rates in general increased during the second half of 1999, evidenced by the increases in prime rate, rates on NOW, money market and savings deposits were not increased. Average time deposits rates were lower in 1999 than in 1998 by 51 basis points compared to a decrease of only 15 basis points in 1998 compared to 1997. Rates offered for time deposits increased during the second half of 1999 but the average rates on time deposits declined in 1999 compared to 1998. Many of the time deposits opened in 1998 that had 1999 maturity dates and time deposits opened during the first half of 1999 were opened at lower interest rates causing the 1999 average rates on time deposits to decline compared to 1998. It is expected that the average time deposit rates in 2000 will be higher compared to 1999, as many time deposits opened in the second half of 1999 at higher rates will remain open until maturity in 2000. The lower average rates on time deposits in 1999 is also due in part to management choosing in some cases not to match higher competitive rates offered on time deposits of $100,000 and over. Rates paid on other borrowings declined 47 basis points in 1999 from 1998 after increasing 9 basis points in 1998 from 1997. Another factor influencing net interest income is the "interest bearing liabilities to earning assets ratio" as shown in Table 1. This ratio indicates how many cents of each dollar of earning assets are funded by an interest bearing liability. As Table 1 shows, this relationship has increased to 80.03% in 1999 from 79.89% in 1998, which was lower than 1997's ratio of 80.07%. An increase in this ratio has a negative impact on net interest income. The mix of assets and liabilities also affects net interest income. Average loans as a percentage of earning assets increased to 54.7% in 1999 as compared to 53.8% in 1998 and 58.4% in 1997. As loans as a percentage of earning assets increases there is a positive impact on yields earned on earning assets as loans normally earn higher yields than securities. In 1999, total average interest bearing deposits decreased $11.7 million from 1998 levels after increasing $18.9 million in 1998 from 1997. The 1999 decline in average interest bearing deposits was primarily in time deposits, which decreased $18.5 million, 16 NSFC ANNUAL REPORT 1999 4 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NET INTEREST INCOME (CONTINUED) - -------------------------------------------------------------------------------- while lower cost NOW, money market and savings deposits increased $6.7 million. A portion of the decrease in time deposits was caused by some of the Bank's customers transferring their time deposits of $100,000 or more into repurchase agreement products as these products provide the customer with added security in the form of an investment security pledged by the Company. In some cases the decrease in time deposits was caused by management's choice not to meet higher competitive rates on time deposits of $100,000 or more in order to minimize rates paid on time deposits. Average other borrowings were $54.9 million in 1999 consisting primarily of repurchase agreements, advances from the Federal Home Loan Bank and federal funds purchased. Average borrowings increased $9.3 million in 1999 from 1998 after increasing $10.5 million in 1998 from 1997. Average term advances from the Federal Home Loan Bank for 1999 were $5.9 million and were paid off by year-end. Federal funds purchased averaged $2.0 million during 1999 and were borrowed for short periods of time necessitated by liquidity requirements. The remaining $46.9 million of the average other borrowings were in the form of securities sold under repurchase agreements (repurchase agreements) which the Company continues to offer as an alternative to certificates of deposit. A repurchase agreement is not subject to FDIC insurance and is not subject to reserve requirements, and therefore is less costly to the Company. A repurchase agreement also gives the customer added security for the borrowing in the form of an investment security pledged by the Company. Average repurchase agreements in 1999 were $10.7 million greater than 1998 levels, which had increased $2.0 million from 1997. Management expects to continue to offer repurchase agreements as an alternative to certificates of deposit in the future. Interest rates paid on deposits and charged for loans during 1999 remained comparable with other local financial institutions. Management has raised time deposits rates during the second half of 1999 by 80 to 100 basis points as general interest rates have increased. The Bank's time deposits remain competitive except when management chooses not to get involved in a bidding war for deposits. Management expects that during 2000 average rates on time deposits will increase compared to 1999. This may have a negative impact on the Bank's net interest rate spread. Many other factors beyond management's control have a significant impact on changes in net interest income from one period to another. Examples of such factors are: (1) credit demands by customers; (2) fiscal and debt management policy of federal and state governments; (3) monetary policy of the Federal Reserve Board; and (4) changes in regulations. The components of the changes in net interest income are shown in Table 2, "Analysis of Changes in Interest Income and Expense". Table 2 allocates changes in net interest income between amounts attributable to changes in rate and changes in volume for the various categories of interest earning assets and interest bearing liabilities. - -------------------------------------------------------------------------------- TABLE 2 ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE - --------------------------------------------------------------------------------
($ 000s) - ---------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31 1999 COMPARED TO 1998 1998 COMPARED TO 1997 - ---------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) INCREASE (DECREASE) CHANGE CHANGE CHANGE CHANGE TOTAL DUE TO DUE TO TOTAL DUE TO DUE TO CHANGE VOLUME RATE CHANGE VOLUME RATE ------------------------------------------------------------------------------- INTEREST INCOME Loans...........................$(1,007) $ 181 $(1,188) $ (440) $ 92 $ (532) Taxable securities.............. 400 656 (256) 1,852 2,103 (251) Securities exempt from federal income taxes.......... 25 122 (97) (198) (156) (42) Interest bearing deposits in financial institutions..... (9) (7) (2) (10) (11) 1 Federal funds sold.............. (837) (734) (103) 170 200 (30) ------------------------------------------------------------------------------- Total interest income......... (1,428) 218 (1,646) 1,374 2,228 (854) ------------------------------------------------------------------------------- INTEREST EXPENSE NOW deposits.................... 47 194 (147) 37 48 (11) Money market deposits........... (240) (70) (170) (16) 18 (34) Savings deposits................ (36) 43 (79) (11) (12) 1 Time deposits................... (1,887) (972) (915) 699 957 (258) Other borrowings................ 225 450 (225) 572 543 29 ------------------------------------------------------------------------------- Total interest expense........ (1,891) (355) (1,536) 1,281 1,554 (273) ------------------------------------------------------------------------------- NET INTEREST INCOME..............$ 463 $ 573 $ (110) $ 93 $ 674 $ (581) ===============================================================================
Rate/volume variances are allocated to the rate variance and the volume variance on an absolute basis. Tax-exempt income is reflected on a fully tax equivalent basis utilizing a 34% rate. NSFC ANNUAL REPORT 1999 17 5 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- TABLE 3 SECURITIES AVAILABLE FOR SALE - --------------------------------------------------------------------------------
($ 000s) - ---------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- % OF TOTAL % OF TOTAL % OF TOTAL AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO --------------------------------------------------------------------------- U.S. Treasury........................$ 4,998 2.54% $ 13,109 6.53% $ 14,031 7.77% Government agencies and corporations. 162,091 82.41 152,440 75.89 128,872 71.33 States & political subdivisions...... 20,710 10.53 23,428 11.67 22,408 12.40 Mortgage-backed securities........... 6,712 3.41 9,728 4.84 13,123 7.26 Equity securities.................... 2,173 1.11 2,156 1.07 2,238 1.24 --------------------------------------------------------------------------- Total securities available for sale......................$196,684 100.00% $200,861 100.00% $180,672 100.00% ===========================================================================
As of December 31, 1999, the Company had no securities of a single issuer, other than the U.S. Treasury and U.S. Government agencies and corporations, including the Federal Home Loan Bank (FHLB), the Federal Home Loan Mortgage Corporation (FHLMC), the Government National Mortgage Association (GNMA), the Federal National Mortgage Association (FNMA), and the Federal Farm Credit Bank (FFCB), that exceeded 10% of consolidated stockholders' equity. Although the Company holds securities issued by municipalities within the state of Illinois which in the aggregate exceed 10% of consolidated stockholders' equity, none of the holdings from individual municipal issuers exceed this threshold. The Company holds local municipal bonds which, although not rated, are considered low risk investments. - -------------------------------------------------------------------------------- SECURITIES - -------------------------------------------------------------------------------- All securities of the Company at December 31, 1999 are classified as available for sale. The Company classifies its securities as available for sale to provide flexibility in the event that it may be necessary to sell securities to raise cash for liquidity purposes or to adjust the portfolio for interest rate risk or income tax purposes. The securities portfolio decreased $4.2 million at year-end 1999 from 1998, after an increase of $20.2 million at year-end 1998 from 1997. However, average securities, as shown in Table 1, increased $9.2 million in 1999 from 1998. Table 1 shows that the average federal funds sold decreased $15.0 million in 1999 from 1998 resulting in the increase in average securities. This shift occurred in order to maximize yields on interest earning assets as securities earn higher rates than federal funds sold. Holdings of U.S. Treasury securities declined $8.1 million at December 31, 1999 compared to December 31, 1998. U.S. Government agency issues increased by $9.7 million, to $162.1 million, at December 31, 1999, from $152.4 million at December 31, 1998. The increase in U.S. Government agency issues is the result of the Company investing in higher yielding agency issues that often have call provisions in order to maximize yields on the Company's securities portfolio while helping to minimize state income taxes. As can be seen in Table 3, "Securities Available for Sale", U.S. Government agency securities increased to 82.4% of the total portfolio at year-end 1999, from 75.9% in 1998 and 71.3% in 1997. Another reason for the growth in U.S. Government agency securities is that the Company attempts to keep at least half of its portfolio in U.S. Treasury and U.S. Government agency issues, as indicated for all periods reported in Table 3. This assists the Company in managing its exposure to changing interest rates, while minimizing credit risk within the portfolio. U.S. Treasury 18 NSFC ANNUAL REPORT 1999 6 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- SECURITIES (CONTINUED) - -------------------------------------------------------------------------------- and U.S. Government agency issues comprised over 84% of the total portfolio at December 31, 1999. Holdings of securities issued by states and political subdivisions, of which over 90% are tax-exempt, decreased by $2.7 million to $20.7 million at December 31, 1999. According to federal tax law, a bank is not allowed an interest deduction for the cost of deposits or borrowings used to fund most tax-exempt issues acquired after August 7, 1986. Whenever possible the Company attempts to purchase "bank qualified" tax-exempt issues from local taxing bodies in an effort to support the local community, consistent with the investment standards contained in the investment policy. The Company, at December 31, 1999, has 3.4% of its securities portfolio invested in mortgage-backed securities. Mortgage-backed securities balances at December 31, 1999 were $6.7 million, a decrease of $3.0 million from the previous year, which reflects principal reductions. These principal reductions are made to the mortgage-backed securities as borrowers make scheduled principal payments on the mortgages that underlie these securities. The Company's equity securities totaled $2.2 million at December 31, 1999 and consisted of Student Loan Marketing Association (SLMA) and Federal Home Loan Bank (FHLB) stock. Efforts by the Company to maintain appropriate liquidity include periodic adjustments to the securities portfolio, typically accomplished through the maturities of investments purchased. The maturity distribution and average yields, on a fully tax equivalent basis, of the securities portfolio at December 31, 1999 are shown in Table 4, "Securities Maturity Schedule & Yields". - -------------------------------------------------------------------------------- TABLE 4 SECURITIES MATURITY SCHEDULE & YIELDS - --------------------------------------------------------------------------------
GREATER THAN 1 YR. GREATER THAN 5YRS. SECURITIES AVAILABLE FOR SALE LESS THAN OR AND LESS THAN OR AND LESS THAN OR GREATER ($ 000s) EQUAL TO 1 YR. EQUAL TO 5 YRS. EQUAL TO 10 YRS. THAN 10 YRS. TOTALS As of December 31, 1999 BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD BALANCE YIELD =========================================================================================================================== U.S. Treasury................$ 4,000 5.54% $ 998 6.16% $ 0 0.00% $ 0 0.00% $ 4,998 5.66% U.S. Government agencies and corporations ......... 2,998 5.86 138,321 6.00 20,772 6.52 0 0.00 162,091 6.06 States & political subdivisions (1) ......... 5,392 7.89 12,359 7.70 2,959 6.76 0 0.00 20,710 7.62 Mortgage-backed securities (2) 0 0.00 1,150 6.08 1,342 7.29 4,220 6.31 6,712 6.47 Equity securities ............ 1,457 6.30 716 5.33 0 0.00 0 0.00 2,173 5.98 ---------------------------------------------------------------------------------------------- Total.................$13,847 6.60% $153,544 6.14% $ 25,073 6.59% $ 4,220 6.31% $196,684 6.23% ==============================================================================================
(1) - The yield is reflected on a fully tax equivalent basis utilizing a 34% tax rate. (2) - Mortgage-backed securities reflect the contractual maturity of the related instrument. NSFC ANNUAL REPORT 1999 19 7 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- TABLE 5 LOAN PORTFOLIO - --------------------------------------------------------------------------------
($ 000s) As of December 31 1999 1998 1997 1996 1995 ====================================================================================================== Commercial........................$ 60,570 $ 64,043 $ 54,701 $ 50,762 $ 53,886 Real estate-construction .......... 21,813 17,328 26,768 26,905 23,720 Real estate-mortgage .............. 142,016 141,241 138,134 133,566 126,268 Home equity ....................... 17,259 15,579 14,722 12,986 11,673 Installment ....................... 6,957 8,530 8,544 9,203 10,903 ---------------------------------------------------------------- Total loans ..................... 248,615 246,721 242,869 233,422 226,450 Unearned income ................... (69) (99) (154) (240) (370) Deferred loan fees ................ (384) (413) (491) (529) (701) ---------------------------------------------------------------- Loans, net of unearned income and deferred loan fees .......... 248,162 246,209 242,224 232,653 225,379 Allowance for loan losses ......... (5,368) (5,433) (5,430) (4,839) (4,514) ---------------------------------------------------------------- Loans, net...................$ 242,794 $ 240,776 $ 236,794 $ 227,814 $ 220,865 ================================================================
The Company had no foreign loans outstanding at December 31, 1999. - -------------------------------------------------------------------------------- LOAN PORTFOLIO - -------------------------------------------------------------------------------- Loan growth remained flat during 1999 as competition by financial institutions for loans continued. As shown in Table 5, "Loan Portfolio", gross loans increased $1,894,000 or .8% at year-end 1999, following an increase of $3,852,000 or 1.6% in 1998. Table 1 shows that average loans in 1999 were $244,039,000, an increase of only $2,019,000 or .8% over the average loans in 1998 compared to an increase to average loans in 1998 of $1,001,000 or .4% over 1997 levels. Commercial loans at year-end decreased $3.4 million to $60.6 million as of December 31, 1999 after increasing $9.3 million in 1998. The decline in commercial loans during 1999 reflects the strong competition from other financial institutions for such loans. The real estate construction loan portfolio increased $4.5 million during 1999, with balances at December 31, 1999 of $21.8 million compared to $17.3 million for 1998. The Company has developed an expertise in construction lending and has developed a portfolio of construction and construction-related loans. The construction portfolio consists of loans to residential builders and housing developers and for commercial building projects. The Company recognizes that successful construction lending is dependent upon the successful completion of construction contracts and good management of the company doing the construction. Construction loans are generally made on properties that are under sales contracts. Loans are secured by first lien positions on the real estate and have loan to value ratios between 50% - 75% of appraised value. These loans are usually processed through a title company construction escrow. Terms generally range from six months to three years. The Company attempts to minimize the risk of construction lending by granting credit to established customers experienced in the construction industry. The mortgage loan portfolio increased by $775,000 at December 31, 1999 as compared to 1998, as shown in Table 5. During 1998 real estate mortgage loans had increased $3,107,000 from year-end 1997. A large percentage of the mortgage loan portfolio is for commercial use and purposes where real estate is used as collateral for the loan. Many of the Company's construction loans become part of the mortgage loan portfolio upon completion of the construction projects for commercial purpose buildings. These commercial related mortgages are primarily made at fixed rates with call features after five years. The Bank has a mortgage banking operation that historically originated and sold home mortgages on the secondary market. During 1999 $11.6 million in loans were originated by the Bank for sale on the secondary market compared to $28.5 million in 1998. Currently, the Bank primarily takes and processes loan applications for home mortgages that are then "table funded" by the institution that ultimately will fund and own the loan, with the Bank receiving a fee. During 1999 $14.7 million in loans were processed through "table funding" arrangements as compared to $16.5 million during 1998. Increased home mortgage rates during 1999 slowed demand for mortgages and accounts for the lesser volume in 1999 compared to 1998. 20 NSFC ANNUAL REPORT 1999 8 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- LOAN PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost, net of loan fees collected, or estimated market value in the aggregate. The sale generally occurs approximately three days after funding. During 1999, $2,520,000 in loans held for sale were transferred to the loan portfolio at the lower of cost or estimated market value with no resulting loss. On December 31, 1999 there were no loans held for sale compared to $5,799,000 on December 31, 1998 that were classified with real estate mortgage loans. The Bank's mortgage banking operation no longer retains servicing on mortgages funded by the Bank that are sold on the secondary market. The Bank still services mortgage loans funded and sold in previous years, which generates additional fee income. The unpaid principal balances of these loans at December 31, 1999 and 1998 were $48.1 million and $60.3 million. Home equity loans are a product that allows consumers to use the equity in their homes to finance purchases and may receive an interest deduction on their tax return. The possible interest deduction has made this product an attractive alternative to traditional consumer financing and is a product that the Company expects to grow in the future. The home equity portfolio continued to grow during 1999 with balances of approximately $17.3 million at December 31, 1999, an increase of 10.8% from December 31, 1998 levels which had increased 5.8% from 1997. Installment loans totaled $7.0 million at year-end 1999 decreasing $1.6 million from 1998 levels after maintaining consistent balances during 1998 and 1997. As a part of its responsibility as a community bank, management continues to make installment loans available to customers despite competition from lower cost financing alternatives for the purchase of automobiles and other consumer goods. The Company has a small direct lease financing portfolio, which increased in 1999 to $2,138,000 from $987,000 in 1998. While the Company does not presently solicit leasing business, the Company does occasionally make leases to provide customers with financial alternatives. Table 5 shows the year-end balance of loans outstanding by loan purpose for each of the last five years. - -------------------------------------------------------------------------------- MATURITY OF LOANS - -------------------------------------------------------------------------------- Table 6, "Loan Maturity Schedule", highlights the maturity distribution of the Company's commercial and real estate construction loan portfolio. The short-term sensitivity of the commercial and real estate construction loan portfolio to interest rate changes is reflected in the fact that approximately 53.8% of the loans scheduled to mature or subject to rate change occur within one year. Of the remaining loans maturing beyond one year, 51.5% of that total are loans subject to immediate repricing. - -------------------------------------------------------------------------------- TABLE 6 LOAN MATURITY SCHEDULE - --------------------------------------------------------------------------------
GREATER THAN ($ 000s) LESS THAN OR 1 YR. AND LESS THAN GREATER THAN AS OF DECEMBER 31, 1999 EQUAL TO 1 YR. OR EQUAL TO 5 YRS. 5 YRS. TOTAL ========================================================================================================= Commercial.......................................$ 25,309 $22,596 $12,665 $60,570 Real estate-construction ......................... 18,974 1,839 1,000 21,813 ------------------------------------------------------- Total..........................................$ 44,283 $24,435 $13,665 $82,383 ======================================================= Percent of total ................................. 53.75% 29.66% 16.59% 100.00% =======================================================
Commercial and construction loans maturing after one year: Fixed rate..............$ 18,466 Variable rate........... 19,634 --------- Total...................$ 38,100 ========= Real estate-construction loans reflect the contractual maturity of the related note. Due to anticipated roll-overs of real estate-construction notes, management estimates that the loans will actually mature between one and five years based upon the related types of construction. Loans that mature within one year are considered to be variable rate loans as they can be repriced upon maturity. NSFC ANNUAL REPORT 1999 21 9 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NON-PERFORMING ASSETS - -------------------------------------------------------------------------------- Non-performing assets consist of non-performing loans and other real estate owned. Non-performing loans, which include impaired loans, are: (1) loans accounted for on a non-interest accrual basis; (2) accruing loans contractually past due ninety days or more as to interest or principal payment; and (3) loans with terms that have been renegotiated to provide a reduction or deferral of interest or principal because of a deterioration in the financial condition of the borrower. Total non-performing loans at December 31, 1999 were $815,000, decreasing from $4,117,000 at December 31,1998 after increasing during 1998 from $1,006,000 at December 31, 1997. Impaired loans are included in non-performing loans and totaled $394,000 and $3,515,000 at December 31, 1999 and December 31, 1998. The Bank considers a loan impaired if full principal or interest payments are not anticipated. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at the fair value of the collateral, if the loan is collateral dependent. Interest income recognized on impaired loans in 1999 was $30,000, which was all cash basis income, compared to $84,000 and $36,000 of income recognized on impaired loans in 1998 and 1997. Other real estate owned includes assets acquired through loan foreclosure and repossession. The carrying value of other real estate owned is reviewed by management at least quarterly to assure the reasonableness of its carrying value, which is lower of cost (fair value at date of foreclosure) or fair value less estimated selling costs. Loans are placed in non-accrual status when they are 90 days past due, unless they are fully secured and in the process of collection. As illustrated in Table 7, "Non-performing Assets", non-accrual loans at December 31, 1999 totaled $394,000 compared to $3,804,000 at December 31, 1998, a decrease of $3,410,000. Management continues to be conservative in placing loans on non-accrual status. This conservative approach is used to eliminate any unearned interest income that would inflate the Company's earnings. Management will continue its emphasis on the collection of all non-performing loans, including the collection of unpaid interest. As Table 7 shows, at December 31, 1999 the Company had $421,000 in loans that were 90 days past due and still accruing interest. These loans at year-end 1999 were fully secured and in the process of collection. This is an increase of $108,000 as compared to $313,000 in loans past due and still accruing interest at December 31, 1998. As also shown in Table 7, total non-performing assets during 1999 declined $3,177,000 from the 1998 levels after increasing during 1998 by $3,053,000 from December 31, 1997. The majority of the decrease in non-performing assets during 1999 is the result of one credit in the amount of $3,010,000 that had been on nonaccrual status at year-end 1998. During 1999 this credit, secured by an office building, was foreclosed on and transferred to other real estate owned. During the third quarter of 1999 the Bank sold the property with a resulting gain of $157,000. During 1999 another property that the Company carried in its other real estate owned portfolio was sold. At the time of sale this property had an allowance for other real estate losses established prior to 1997 equal to the Company's basis in the property resulting in a carrying value of the property of zero. The sale resulted in a gain of $376,000. During 1999 a loan secured by real estate in the amount of $125,000 was foreclosed upon and was transferred to other real estate owned. As a result of these transactions other real estate owned increased during 1999 by $125,000 to a balance of $2,622,000 at December 31, 1999 from $2,497,000 at December 31, 1998. On December 31, 1999, one piece of property accounted for approximately 68% of the total of other real estate owned. The property was acquired by the Bank through the receipt of a deed in lieu of foreclosure in 1987. The parcel consists of approximately 525,000 square feet of land situated on Lake Michigan in Waukegan, Illinois. During 1994, a purchase agreement for the property, along with some neighboring parcels, was negotiated for an amount that satisfies the current carrying value. The option agreement provides for the sale of the property and provides for a fee to be paid to the Bank for the agreement and any 6-month extensions of the agreement. During 1999, the Bank received all option and extension fees at the appropriate time and the agreement remains in force. Conditions necessary to finalize the purchase include approvals from the City of Waukegan and favorable legislative actions by the State of Illinois Senate and House of Representatives. It is still uncertain as to when the state legislature will consider such approval of the required legislation. Management continues to emphasize the early identification of loan related problems. Management is not currently aware of any other significant loan, group of loans, or segment of the loan portfolio not included in the discussion above as to which there are serious doubts as to the ability of the borrower(s) to comply with the present loan payment terms. There were no other interest earning assets at December 31, 1999 that are required to be disclosed as non-performing. 22 NSFC ANNUAL REPORT 1999 10 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- TABLE 7 NON-PERFORMING ASSETS - --------------------------------------------------------------------------------
($ 000s) DECEMBER 31, 1999 1998 1997 1996 1995 ========================================================================================= LOANS Non-accrual status ....................$ 394 $3,804 $1,003 $1,108 $5,692 90 days or more past due, still accruing............................ 421 313 3 58 1,653 ------------------------------------------------- Total non-performing loans ......... 815 4,117 1,006 1,166 7,345 Other real estate owned ............... 2,622 2,497 2,555 2,846 2,311 ------------------------------------------------ Total non-performing assets ........$ 3,437 $6,614 $3,561 $4,012 $9,656 ================================================= Non-performing loans as a percentage of total loans, net of unearned income and deferred loan fees ....... 0.33% 1.67% 0.42% 0.50% 3.24% Non-performing assets as a percentage of total assets .......... 0.72 1.36 0.78 0.94 2.25 Non-performing loans as a percentage of the allowance for loan losses .... 15.18 75.78 18.53 24.10 161.74
Loans are placed in non-accrual status when they are 90 days past due, unless they are fully secured and in the process of collection. Impaired Loans - At December 31, 1999, 1998, 1997 and 1996 impaired loans totaled $394, $3,515, $754 and $828 and are included in non-accrual loans. Potential Problem Loans - At December 31, 1999 there were no other loans classified as problem loans that are not included above. Other Problem Assets - At December 31, 1999, there were no other assets classified as problem assets other than the loans and other real estate owned shown above. - -------------------------------------------------------------------------------- PROVISION FOR LOAN LOSSES - -------------------------------------------------------------------------------- A provision is credited to an allowance for loan losses, which is maintained at a level considered by management to be adequate to absorb future loan losses. The adequacy of the loan loss allowance is analyzed at least quarterly. Factors considered in assessing the adequacy of the allowance include: changes in the type and volume of the loan portfolio; review of the larger credits within the Bank; historical loss experience; current economic trends and conditions; review of the present value of expected cash flows and fair value of collateral on impaired loans; loan growth; and other factors management deems appropriate. As mentioned previously, management discounts impaired loans based on expected cash flows or collateral values. A portion of the allowance for loan losses is then allocated to each impaired loan with a calculated collateral shortage. During 1999, no provision for loans losses was made as compared to $10,000 in 1998 and $480,000 in 1997. Throughout the year, management reviewed the level of provision necessary to maintain an adequate allowance based upon current conditions, outstanding loan volumes, and levels of non-performing and impaired loans. Management, after this careful review and with the concurrence of the Board of Directors, lowered the provision in 1999 compared to 1998. If the levels of non-performing assets do not increase significantly during 2000 and the allowance for loan losses remains adequate, management does not expect to increase the loan loss provision for 2000. As shown in Table 8, "Analysis of the Allowance for Loan Losses", during 1999 there were net charge-offs of $65,000. The net charge-offs lowered the allowance for loan losses to $5,368,000 at December 31, 1999 from $5,433,000 at December 31, 1998. The allowance for loan losses was 2.16% of gross loans outstanding at December 31, 1999 compared to 2.21% at the end of the previous year. Table 8 also indicates the types of loans charged-off and recovered for the five years from 1995 through 1999 as well as each year's provision. Because management is not certain as to the full collectibility of the non-performing loans, potential loss exposure has been provided in the Company's allocation of the allowance for loan losses, as illustrated in Table 9, "Allocation of the Allowance for Loan Losses". Based upon management's analysis, the allowance for loan losses at December 31, 1999, is adequate to cover future loan losses. NSFC ANNUAL REPORT 1999 23 11 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- TABLE 8 ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES - --------------------------------------------------------------------------------
($ 000s) Years Ended December 31, 1999 1998 1997 1996 1995 =================================================================================================================== Balance at the beginning of year...........$ 5,433 $ 5,430 $ 4,839 $ 4,514 $ 3,965 Charge-offs: Commercial.......................... 86 0 86 288 145 Real estate-construction............ 0 0 0 523 334 Real estate-mortgage................ 557 0 38 125 458 Home equity......................... 0 0 0 20 15 Installment......................... 40 73 85 185 57 ------------------------------------------------------------------------ Total charge-offs................ 683 73 209 1,141 1,009 ------------------------------------------------------------------------ Recoveries: Commercial.......................... 101 25 33 183 18 Real estate-construction............ 0 0 0 50 0 Real estate-mortgage................ 501 0 206 0 0 Home equity......................... 0 0 0 15 0 Installment......................... 16 41 81 28 60 ------------------------------------------------------------------------ Total recoveries................. 618 66 320 276 78 ------------------------------------------------------------------------ Net charge-offs (recoveries)............... 65 7 (111) 865 931 ------------------------------------------------------------------------ Additions charged to operations............ 0 10 480 1,190 1,480 ------------------------------------------------------------------------ Balance at end of year.....................$ 5,368 $ 5,433 $ 5,430 $ 4,839 $ 4,514 ======================================================================== Allowance as a % of total loans, net of unearned income and deferred loan fees.. 2.16% 2.21% 2.24% 2.08% 2.00% ======================================================================== Net charge-offs (recoveries) during the year to average loans outstanding during the year........................ 0.03% 0.00% -0.05% 0.37% 0.42% ========================================================================
- -------------------------------------------------------------------------------- TABLE 9 ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES - --------------------------------------------------------------------------------
($ 000s) DECEMBER 31, 1999 1998 1997 1996 1995 ================================================================================================================================ PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF LOANS IN EACH LOANS IN EACH LOANS IN EACH LOANS IN EACH LOANS IN EACH CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO CATEGORY TO AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS -------------------------------------------------------------------------------------------------- Commercial...................$ 1,438 24.36% $1,312 25.96% $1,335 22.52% $ 947 21.75% $1,741 23.80% Real estate-construction .... 1,457 8.78 1,511 7.02 389 11.02 184 11.53 727 10.47 Real estate-mortgage ........ 237 57.12 480 57.25 931 56.88 796 57.22 632 55.76 Home equity ................. 2 6.94 16 6.31 15 6.06 13 5.56 12 5.16 Installment ................. 34 2.80 42 3.46 58 3.52 45 3.94 87 4.81 Unallocated ................. 2,200 NA 2,072 NA 2,702 NA 2,854 NA 1,315 NA -------------------------------------------------------------------------------------------------- Total.....................$ 5,368 100.00% $ 5,433 100.00% $5,430 100.00% $ 4,839 100.00% $4,514 100.00% ==================================================================================================
24 NSFC ANNUAL REPORT 1999 12 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NONINTEREST INCOME - -------------------------------------------------------------------------------- Noninterest income increased by $566,000 or 19.3% during 1999 following an increase of $248,000 or 9.2% during 1998. Service fees on deposits increased $90,000 in 1999 over 1998. The major portion of this increase was the result of higher overdraft fee income, which increased $114,000 from 1998, as average overdrawn balances were higher in 1999. Trust income increased $71,000 in 1999 or 10.7% from the same period in 1998 due to additional trust business. Gains on sales of loans declined $174,000 during 1999 compared to 1998 as home mortgage rates increased during 1999. The volume of mortgage loans originated for sale on the secondary market by the Bank's mortgage banking operation during 1999 was $11.6 million compared to $28.5 million in 1998. Net gains on sales of other real estate owned were $535,000 greater in 1999 compared to 1998 due to the two sales previously discussed. Other operating income increased $44,000 or 5.2% in 1999. During 1999 the Company began charging noncustomers for use of Company owned automated teller machines which increased other operating income by $95,000. The Company also realized a $74,000 gain on the sale of a branch office during the first quarter of 1999. With the merging of First Federal Bank, fsb into the Bank of Waukegan in April 1998 the Bank had two branches within two city blocks of one another. The Bank closed the smaller of the two branches during 1998 and entered into a sales contract with a party who wished to purchase the branch for a purpose other than banking. The sale of the branch was completed during 1999. These increases to other operating income during 1999 were partially offset by decreased mortgage banking fee income. Higher home mortgage rates in 1999 lowered volumes of loans processed by the mortgage banking operation. Besides the volume of mortgage loans originated for sale on the secondary market decreasing $16.9 million in 1999, "table funded" loans processed by the Bank also decreased by $1.8 million in 1999. As a result, fees earned on both "table funded" loans as well as fees for appraisals and credit bureau costs from borrowers of both "table funded" loans and loans originated and funded by the Bank and sold on the secondary market were $129,000 less during 1999. Comparing 1998 to 1997, noninterest income increased $248,000. Service fees on deposits declined by $173,000 in 1998. The major portion of this decline was the result of decreased overdraft fee income, which fell $103,000 from 1997 as average customer demand deposit balances increased in 1998. Service charges assessed to deposit accounts declined $70,000 in 1998 as average account balances increased from 1997. Trust income increased $40,000 or 6.4% from the same period in 1997 due to changes in the fee structure and additional trust business. Gains on sales of loans increased $162,000 during 1998 as compared to 1997. The volume of mortgage loans originated for sale on the secondary market increased during 1998 with $28.5 million in loans originated in 1998 as compared to $11.2 million originated in 1997. During the second half of 1998 home mortgage rates were at the lowest level in years and the Bank expanded its mortgage banking operation. Net gains on sales of other real estate owned during 1998 amounted to a $2,000 loss compared to a $142,000 gain in 1997. Other operating income increased $363,000 or 75.0% in 1998. The increase is attributable primarily to the Company booking $319,000 in mortgage brokerage fee income during the second half of 1998. During 1998, $16.5 million in "table funded" mortgage loans were processed by the Bank. The $319,000 consists of the fees earned by the Bank on these "table funded" loans as well as fees from borrowers of both "table funded" loans and loans originated and funded by the Bank that were then sold on the secondary mortgage market. NSFC ANNUAL REPORT 1999 25 13 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NONINTEREST EXPENSE - -------------------------------------------------------------------------------- In 1999, total noninterest expense increased by $156,000 to $9,779,000, an increase of only 1.6% from 1998. Over the last three years total noninterest expense averaged $9,511,000 as the Company emphasized its ability to control operating expenses. As a percent of average assets, noninterest expenses were 2.1% in 1999 compared to 2.0% in 1998 and 2.1% in 1997. The efficiency ratio, noninterest expense divided by the sum of net interest income and noninterest income, is frequently used as an indicator as to how well a financial institution manages its noninterest expense. A decreasing ratio is an indication of improving performance. The Company's efficiency ratio was 46.0% in 1999, 47.6% in 1998 and 46.1% in 1997. Compared to its bank holding company peers, the Company's ability to control overhead expenses is one of its operating strengths. Salaries and other employee expenses increased $167,000 in 1999, which was a 2.9% increase over 1998. Group insurance expenses increased $148,000 during 1999 as insurance premiums increased. The Company expects group insurance expenses to continue to rise during 2000. Profit sharing and bonus expenses were $39,000 higher during 1999. Salaries for noncommissioned staff increased $36,000 during 1999. Overtime expenses were up $19,000 as there were after hours training sessions for employees on the new deposit products that the Company began to offer during 1999. Commissions paid to loan originators in the mortgage banking operation were $23,000 less during 1999 because of lower volumes. Salary costs relating to stock appreciation rights were $55,000 less during 1999 due to changes in the Company's stock price. Occupancy and equipment expenses increased $73,000 or 5.8% during 1999 as compared to 1998. During 1999 building and equipment maintenance costs increased $45,000. During the fourth quarter of 1998, the Bank purchased a branch office in the neighboring community of Winthrop Harbor, Illinois from another institution. Increases to building maintenance costs are attributable to this new branch office. Preparing for Year 2000 issues increased equipment maintenance expenses during 1999. Real estate taxes during 1999 increased $19,000 in part because of the new branch office. The new branch office also contributed to increases in utilities expenses in 1999 that were $10,000 greater than in 1998. Data processing expense was $496,000 in 1999 increasing only $1,000 from 1998. During 1999, FDIC deposit insurance expenses were $84,000 as compared to $86,000 in 1998. During 1999, FDIC deposit insurance expenses were $84,000 as compared to $86,000 in 1998. Other real estate owned expense decreased $35,000 during 1999 to only $41,000 compared to the previous year. Rental incomes received from tenants in properties held as other real estate owned are credited against other real estate owned expenses. The two properties sold during 1999 had generated rental income that was used to offset other real estate owned expenses. As a result of expected decreases during 2000 in rental income, the Company expects that other real estate owned expense will increase in 2000. During 1999, other operating expenses decreased $48,000 or 2.5% from 1998. Legal expenses declined $150,000 during 1999 as 1998 had legal fees resulting from the merger between the two subsidiaries, the five-for-one stock split and the purchase of a branch office and the closing of another branch office. Director fees declined $16,000 during 1999 due to the combination of the two subsidiaries, as there were separate Boards of Directors for each of the two subsidiaries until the merger took place in April 1998. Expenses for subscriptions decreased $9,000 during 1999 in part from the merger of the two subsidiaries and from closer examination of the need for various publications. Marketing expenses increased during 1999 by $53,000 due to the promotion of the new deposit products that the Company began to offer during 1999. Printing and supplies expense increased $41,000 and professional fees increased $33,000 during 1999 because of Bank preparations for Year 2000. In 1998, total noninterest expenses were $9,623,000 increasing by $491,000 or 5.38% over 1997. Salaries and other employee expenses increased $389,000 in 1998, which was a 7.2% increase over 1997. Salaries for noncommissioned staff increased $200,000 during 1998, or 4.73%, due to yearly pay raises and the addition of four clerical employees to the mortgage banking operation staff as this area was expanded during the second half of 1998. Commissions paid to loan originators in the mortgage banking operation were greater by $189,000 26 NSFC ANNUAL REPORT 1999 14 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NONINTEREST EXPENSE (CONTINUED) - -------------------------------------------------------------------------------- during 1998 due to increased volumes of loans originated for sale on the secondary market and increased volumes of "table funded" loans compared to 1997. During 1998 occupancy and equipment expenses increased $67,000 or 5.7% as compared to 1997. During 1998 building and equipment maintenance costs increased $25,000 partially as a result of equipment updates to handle Year 2000 issues. Building and equipment expenditures of $1,338,000 were made during 1998 and depreciation expense increased $22,000 during 1998 as a result. Building salaries increased during 1998 by $18,000 as an additional person was added to the building maintenance staff due to the purchase of the new Bank branch. Data processing expense decreased $16,000 or 3.1% during 1998 as compared to the same period in 1997, due to decreased data processing expenses resulting from the merger of the Thrift into the Bank. FDIC deposit insurance expense increased in 1998 by $14,000 as compared to 1997. This increase is a result of increases in deposits during 1998. During 1998, other real estate owned expense decreased $64,000 compared to the previous year, as property taxes on the other real estate owned portfolio declined due to decreases in the assessed valuation. The slightly smaller real estate owned portfolio that amounted to $2,497,000 at December 31, 1998 as compared to $2,555,000 at December 31, 1997 also contributed to lower expense. Other operating expenses increased $101,000 in 1998, a 5.6% increase from 1997. Legal expenses increased $153,000 during 1998 resulting from the merger between the two subsidiaries, the five-for-one stock split and the purchase of a branch office and the closing of another branch office. Expenses related to loans and express and freight increased $79,000 and $18,000 during 1998 resulting from the increased mortgage banking volumes. Expenses from charged off checking accounts, bad checks and teller differences declined $74,000 during 1998. Expenses relating to correspondent bank accounts were $43,000 less during 1998 as accounts were consolidated due to the merger of the two subsidiaries. Director fees also declined $30,000 during 1998 because of the combination of the two subsidiaries. - -------------------------------------------------------------------------------- FEDERAL AND STATE INCOME TAXES - -------------------------------------------------------------------------------- For the years ended December 31, 1999, 1998 and 1997, the Company's provision for federal and state taxes as a percentage of pretax earnings were 31.4%, 31.2% and 31.4%. The actual tax rates differ from the statutory rates because the pretax earnings include significant amounts of interest on United States Government securities, which are nontaxable for state income tax purposes. Qualified interest on loans to local political subdivisions and on qualified state and local political subdivision securities are nontaxable for federal income tax purposes and also lower the actual tax rate compared to the statutory rate. NSFC ANNUAL REPORT 1999 27 15 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- TABLE 10 MATURITY OR REPRICING OF ASSETS AND LIABILITIES - --------------------------------------------------------------------------------
---------------------SUBJECT TO REPRICING WITHIN--------------- ($ 000s) IMMEDIATE 91 DAYS 181 DAYS 1 - 3 3 - 5 5 - 10 DECEMBER 31, 1999 BALANCES TO 90 DAYS TO 180 DAYS TO 365 DAYS YEARS YEARS YEARS ===================================================================================================================== ASSETS: Interest bearing deposits............$ 260 $ 160 $ 0 $ 100 $ 0 $ 0 $ 0 SECURITIES: U.S. Treasury ..................... 4,998 4,000 0 0 998 0 0 U.S. Government agencies and corporations ................ 162,091 0 1,001 1,997 19,055 119,266 20,772 States & political subdivisions ... 20,710 784 843 3,765 7,657 4,702 2,959 Mortgage-backed securities (1) .... 6,712 2,340 550 1,042 9 1,141 1,630 Equity securities ................. 2,173 1,457 0 0 0 716 0 Loans: Commercial ........................ 60,570 40,108 1,538 2,379 6,073 6,708 3,764 Real estate - construction ........ 21,813 19,773 745 1,109 3 183 0 Real estate - mortgage ............ 142,016 33,687 5,733 5,885 25,542 39,043 32,126 Home equity ....................... 17,259 17,259 0 0 0 0 0 Installment, net of unearned income 6,957 2,646 550 861 1,739 941 220 Direct lease financing ............ 2,138 1,144 75 150 353 414 2 ----------------------------------------------------------------------------- TOTAL INTEREST EARNING ASSETS..........$ 447,697 $123,358 $ 11,035 $ 17,288 $ 61,429 $173,114 $ 61,473 ============================================================================= LIABILITIES: NOW accounts........................$ 41,787 $ 41,787 $ 0 $ 0 $ 0 $ 0 $ 0 Money market accounts ............... 37,636 37,636 0 0 0 0 0 Savings ............................. 44,207 44,207 0 0 0 0 0 Time deposits, $100,000 and over .... 83,266 37,694 14,676 24,767 6,129 0 0 Time deposits, under $100,000 ....... 86,094 33,269 17,650 17,720 17,449 6 0 Other interest bearing liabilities .. 70,436 41,367 10,635 12,434 6,000 0 0 ----------------------------------------------------------------------------- TOTAL INTEREST BEARING LIABILITIES.....$ 363,426 $235,960 $ 42,961 $ 54,921 $ 29,578 $ 6 $ 0 ============================================================================= EXCESS INTEREST EARNING ASSETS (LIABILITIES) $(112,602) $ (31,926) $(37,633) $ 31,851 $ 173,108 $ 61,473 CUMULATIVE EXCESS INTEREST EARNING ASSETS (LIABILITIES) (112,602) (144,528) (182,161) (150,310) 22,798 84,271 CUMULATIVE INTEREST RATE SENSITIVITY RATIO (2) 0.52 0.48 0.45 0.59 1.06 1.23
(1) Mortgage-backed securities reflect the time horizon when these financial instruments are subject to rate change or repricing. (2) Interest earning assets divided by interest bearing liabilities. This table does not necessarily indicate the impact of general interest rate movements on the Company's net interest income because the repricing of certain assets and liabilities is discretionary and is subject to competition and other pressures. As a result, assets and liabilities indicated as repricing within the same period may in fact reprice at different times and at different rate levels. - -------------------------------------------------------------------------------- TABLE 11 TIME DEPOSITS, $100,000 AND OVER MATURITY SCHEDULE - --------------------------------------------------------------------------------
GREATER THAN GREATER THAN ($ 000s) LESS THAN OR 3 MOS. & LESS THAN 6 MOS. & LESS THAN GREATER THAN AS OF DECEMBER 31, 1999 EQUAL TO 3 MOS. OR EQUAL TO 6 MOS. OR EQUAL TO 12 MOS. 12 MOS. TOTAL ================================================================================================================== Time deposits, $100,000 and over: Retail deposits..........................$ 14,850 $ 7,766 $ 7,578 $ 4,586 $ 34,780 Corporate deposits....................... 6,763 1,581 1,155 208 9,707 Public fund deposits..................... 16,081 5,329 16,034 1,335 38,779 --------------------------------------------------------------------- Total time deposits, $100,000 and over.$ 37,694 $ 14,676 $ 24,767 $ 6,129 $ 83,266 =====================================================================
The Company had no foreign banking offices or deposits. 28 NSFC ANNUAL REPORT 1999 16 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- LIQUIDITY AND INTEREST RATE SENSITIVITY ANALYSIS - -------------------------------------------------------------------------------- The primary functions of asset/liability management are to assure adequate liquidity and maintain an appropriate balance between interest sensitive earning assets and interest bearing liabilities. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring an institution's interest rate sensitivity "gap". An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that same time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, a negative gap would tend to adversely affect net interest income while a positive gap would tend to result in an increase in net interest income. During a period of falling interest rates, a negative gap would tend to result in an increase in net interest income while a positive gap would tend to adversely affect net interest income. The Company's gap position is illustrated in Table 10, "Maturity or Repricing of Assets and Liabilities". Liquidity management involves the ability to meet the cash flow requirements of customers who may be either depositors wanting to withdraw funds or borrowers knowing that sufficient funds will be available to meet their credit needs. Interest bearing deposits in banks and marketable securities, particularly those of shorter maturities, are principal sources of asset liquidity. The Company classifies all of its securities as available for sale, which increases the Company's flexibility in that the Company can sell any of its unpledged securities to meet liquidity requirements. Securities available for sale amounted to $196,684,000 at December 31, 1999. Securities at December 31, 1999 in the amount of $136,983,000 were pledged to secure public deposits and repurchase agreements. Rate sensitivity varies with different types of interest earning assets and interest bearing liabilities. Rate sensitivity on loans tied to the prime rate differs considerably from long-term investment securities and fixed rate loans. Time deposits over $100,000 are more rate sensitive than savings accounts. Management has portrayed savings accounts as immediately repricable in Table 10, because of management's ability to change the savings interest rate. Table 11, "Time Deposits, $100,000 and Over Maturity Schedule", illustrates the maturity schedule as of December 31, 1999 of the time deposits $100,000 and over. At December 31, 1999, 7.4% of the time deposits $100,000 and over mature after one year, differing from 5.6% at December 31, 1998, showing a lengthening of maturities in this type of deposit. The Company historically has a high level of time deposits $100,000 and over. As of December 31, 1999, time deposits $100,000 and over were 22.9% of total interest bearing liabilities, a decrease from 26.6% in 1998, and were primarily from existing local public depositors. Being located in the county seat, the Company accepts time deposits $100,000 and over from various government agencies. Other interest bearing liabilities in Table 10 consist of securities sold under repurchase agreements and other short-term borrowings that amounted to $70.4 million at December 31, 1999. Securities sold under repurchase agreements and other short-term borrowings provide a short-term source of funds to the Company. As Table 10 indicates, 91.5% of this liability reprices within 1 year with 58.7% repricing in the immediate to 90-day time frame. At December 31, 1999 approximately 45.7% of the Company's loan and lease portfolio floats with the prime rate or is repricable within 90 days, a decrease from 47.3% at December 31, 1998. This shift to fixed rate loans is a result of customer demand and competitive pressures. The effect of this shift to fixed rate loans is a lengthening of loan maturities, which increases the Bank's negative gap position. As Table 10 shows, the Company is liability sensitive through the three-year time horizon by $150.4 million. This is a change from last year, where the Company was liability sensitive through the three-year time horizon by $116.1 million. Although management has attempted during the past year to reduce its liability sensitive gap position, its efforts continued to be restricted by competitive pressures in the area of commercial and commercial real estate loans. These pressures have increased the level of fixed rate loans with intermediate term balloon maturities. The Company has increased the maturity time horizon on its securities by purchasing intermediate term U.S. Government agency securities that have call provisions in order to maximize yields. U.S. Government agency securities carried at $158.1 million have call options allowing the issuers to redeem the securities prior to the contractual maturity date. Customer preferences and competitive pressures make it difficult for management to reduce the liability gap position. To insure the ability to meet its funding needs, including any unexpected strain on liquidity, the Company has $25 million in federal funds lines of credit from two independent banks of which $6 million was drawn against on December 31, 1999. In addition, the Company has the ability to borrow funds, if necessary, directly from the Federal Reserve Bank and the Federal Home Loan Bank approximating $12 million with more available depending on the Company's ability to pledge its assets as security for any advances. NSFC ANNUAL REPORT 1999 29 17 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS - -------------------------------------------------------------------------------- Securities sold under repurchase agreements (repurchase agreements) and other short-term borrowings during 1999 have continued to be an alternative to certificates of deposit as a source of funds. At December 31, 1999, the Company had balances of $70,436,000 made up of $64,436,000 in repurchase agreements and $6,000,000 in overnight federal funds purchased. Most municipalities, other public entities and some other organizations require that their funds are insured or collateralized as a matter of their policies. Commercial depositors also find the collateralization of repurchase agreements attractive as an alternative to certificates of deposits. Repurchase agreements provide a source of funds and do not increase the Company's reserve requirements with the Federal Reserve Bank or create an expense relating to FDIC insurance. Repurchase agreements consequently are less costly to the Company. Management expects to continue to offer repurchase agreements as an alternative to certificates of deposit in the future. The Company experienced a $16.4 million increase in its repurchase agreements from year-end 1998. Average repurchase agreements during 1999 were $46.9 million compared to $36.2 million during 1998 and $34.2 million during 1997. This data attests to the popularity and the stability of repurchase agreements to the Company. Short-term borrowings were $6.0 million at December 31, 1999 and consisted of federal funds purchased from money center banks with which the Bank has correspondent relationships. Federal funds purchased are borrowed for short periods of time as necessary for liquidity purposes. Average federal funds purchased during 1999 were $2.0 million and were negligible during 1998. Table 12, "Securities Sold under Repurchase Agreements and Other Short-term Borrowings", provides information as to balances and interest rates for 1999, 1998 and 1997. - -------------------------------------------------------------------------------- TABLE 12 SECURITIES SOLD UNDER REPURCHASE AGREEMENTS AND OTHER SHORT-TERM BORROWINGS - --------------------------------------------------------------------------------
($ 000s) At or for the Year Ended December 31, 1999 1998 1997 - ------------------------------------------------------------------------------------- Balance at end of year ........................ $70,436 $ 7,990 $38,504 Weighted average interest rate at end of year 4.83% 4.91% 5.29% Maximum amount outstanding .................... $70,436 $47,990 $39,995 Average amount outstanding .................... 48,905 36,155 34,176 Weighted average interest rate .............. 4.66% 5.11% 5.07%
- -------------------------------------------------------------------------------- CAPITAL RESOURCES - -------------------------------------------------------------------------------- Capital provides the foundation for future growth. Regulatory agencies have developed minimum guidelines by which the adequacy of a financial institution's capital may be evaluated. Northern States' capital ratios exceed these minimum guidelines, both in terms of Tier I capital (stockholders' equity of the Company less intangible assets), and in terms of Tier II capital (Tier I capital plus qualifying long-term debt and the allowance for loan losses). The portion of the allowance for loan losses qualifying as Tier II capital is limited to 1.25% of risk weighted assets. The effect of the unrealized gains (losses) on securities available for sale is excluded from the capital ratio calculations. Regulatory capital guidelines require that the amount of capital increase with the amount of risk inherent in a company's balance sheet and off-balance sheet exposure. Capital requirements in order for the Company to be considered well capitalized are that Tier I capital to average assets must be 5.00% and Tier I capital to risk weighted assets must be 6.00%. The requirements are that Tier II capital must be 10.00% of risk adjusted assets in order for the Company to be considered well capitalized. All of the Company's capital ratios exceed the levels required under regulatory guidelines as shown in Table 13, "Capital Standards". 30 NSFC ANNUAL REPORT 1999 18 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- TABLE 13 CAPITAL STANDARDS - -------------------------------------------------------------------------------- ($ 000s) As of December 31, 1999 - -------------------------------------------------------------------------------- QUALIFYING FOR TIER I CAPITAL: - -------------------------------------------------------------------------------- Common stock.....................................................$ 1,783 Additional paid-in capital....................................... 11,405 Retained earnings................................................ 55,898 Less - Intangible assets......................................... (107) --------- TOTAL QUALIFYING TIER I CAPITAL...............................$ 68,979 ========= ($ 000s) As of December 31, 1999 - -------------------------------------------------------------------------------- QUALIFYING FOR TIER II CAPITAL: - -------------------------------------------------------------------------------- Total Qualifying Tier I Capital..................................$ 68,979 Allowance for loan losses- qualifying portion............................................. 4,017 --------- TOTAL QUALIFYING TIER II CAPITAL..............................$ 72,996 ========= TOTAL ASSETS.....................................................$ 482,480 ========= ($ 000s) As of December 31, 1999 - -------------------------------------------------------------------------------- RISK-WEIGHTED ASSETS TOTAL RISK-WEIGHTED - -------------------------------------------------------------------------------- Zero percent risk weighting .......... $ 13,090 $ 0 Twenty percent risk weighting ........ 202,212 40,442 Fifty percent risk weighting ......... 79,205 39,603 One hundred percent risk weighting (1) 241,293 241,293 ------------------------ TOTAL RISK-WEIGHTED ASSETS ........ $535,800 $321,338 ======================== (1) Includes off-balance-sheet items ($ 000s) As of December 31, 1999 - -------------------------------------------------------------------------------- CAPITAL REQUIREMENTS $ % - -------------------------------------------------------------------------------- (Tier I Capital to Average Assets) REQUIRED.......................................$ 23,739 5.00% ACTUAL......................................... 68,979 14.53 RISK-BASED CAPITAL: Tier I: REQUIRED.......................................$ 19,280 6.00% ACTUAL......................................... 68,979 21.47 Tier II: REQUIRED.......................................$ 32,134 10.00% ACTUAL......................................... 72,996 22.72 - -------------------------------------------------------------------------------- CASH FLOWS - -------------------------------------------------------------------------------- Cash flows from operating activities were greater than accrual basis net income by $2.5 million in 1999. In 1998 cash flows from operating income were below accrual basis net income by $4.0 million and in 1997 cash flows from operating income exceeded net income by $1.8 million. Cash flows from operations were lower in 1998 because of an increase in loans held for sale at year-end. Management expects ongoing operating activities to continue to be a primary source of cash flow for the Company. Deposits declined $21.5 million in 1999. The Company experienced declines in its time deposits over $100,000 in the amount of $15.0 million from existing local public depositors. Demand-noninterest bearing deposits and money market deposits declined $2.8 million and $3.4 million during 1999, mostly in commercial deposits. Deposits help the Company to maintain an adequate level of cash for the Company's activities and the declines to deposits during 1999 were mainly offset by cash flows provided from repurchase agreements and other short-term borrowings. Repurchase agreements and other short-term borrowings in 1999 had net cash inflows of $22.4 million. Competition for deposits is expected to remain keen, and future deposit growth cannot be predicted with any certainty. The Company plans to continue to actively seek profitable new deposit business and expects its new deposit products to add to core deposits. During 2000 the Company expects to offer internet banking and anticipates deposit activity from this source. During 1999 there were net incoming cash flows from loans held for sale amounting to $3.4 million while there NSFC ANNUAL REPORT 1999 31 19 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- CASH FLOWS (CONTINUED) - -------------------------------------------------------------------------------- were net out flows for loans of $8.4 million. During 1998 and 1997 there were out flows of cash for funding loans held for sale of $4.3 million and $.3 million. Cash flows from net loans made to customers during 1998 were a $.5 million incoming cash flow and during 1997 there was an outflow of $9.1 million. Loans are the most important source of interest income revenues to the Company. Outgoing cash flows from purchases of securities available for sale were $79.1 million during 1999 while incoming cash flows from the maturity and call of securities were $76.5 million. During 1999 the Federal Home Loan Bank advance was paid down in the amount of $10 million while advances of $5 million were made each year in 1998 and 1997. The Company's equity capital is in excess of regulatory requirements, as determined on both risk-based and leverage ratio criteria. Cash dividends as a percentage of net income have increased during the past three years; 42.4% in 1999, 36.6% in 1998 and 30.4% in 1997. During 1999 the Company paid out $314,000 for purchases of equipment. Approximately $117,000 was paid out during 1999 to purchase workstations and receipt printers in order to ensure that our teller equipment was compliant for Y2K. Other expenditures in 1999 were for new driveup units at one branch, new copy machines, updates to ATMs and updated alarm/surveillance systems. Cash paid out during 1998 for building and equipment was $1,338,000 with the largest expenditure being $1,000,000 to purchase the branch building in Winthrop Harbor, Illinois. Expenditures during 1997 for building and equipment totaled $217,000, of which $64,000 was for telephone equipment, $76,000 for office remodeling and $77,000 for updating data processing equipment. - -------------------------------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------------------------------------------------------- Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued by the Financial Accounting Standards Board (FASB) in 1998 and is effective for the Company on January 1, 2001. It requires that all derivatives be recorded at fair value in the balance sheet, with changes to fair value charged or credited to income. If derivatives are documented and effective as hedges, the change in derivative fair value will be offset by an equal change in the fair value of the hedged item. Since the Company has no derivative or hedging activities, adoption of Statement 133 will have no material impact on the Company's financial statements. - -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- The Company's primary market risk exposure is interest rate risk and, to a lesser extent, liquidity risk. Interest-rate risk ("IRR") is the exposure of a banking organization's financial condition to adverse movements in interest rates. Accepting this risk can be an important source of profitability and stockholder value, however excessive levels of IRR can pose a significant threat to the Company's earnings and capital base. Accordingly, effective risk management that maintains IRR at prudent levels is essential to the Company's safety and soundness. Evaluating a financial institution's exposure to changes in interest rates includes assessing both the adequacy of the management process used to control IRR and the organization's quantitative level of exposure. When assessing the IRR management process, the Company seeks to ensure that appropriate policies, procedures, management information systems and internal controls are in place to maintain IRR at prudent levels with consistency and continuity. Evaluating the quantitative level of IRR exposure requires the Company to assess the existing and potential future effects of changes in interest rates on its consolidated financial condition, including capital adequacy, earnings, liquidity, and, where appropriate, asset quality. 32 NSFC ANNUAL REPORT 1999 20 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------------------- The Federal Reserve Board, together with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, adopted a Joint Agency Policy Statement on Interest-Rate Risk, effective June 26, 1996. The policy statement provides guidance to examiners and bankers on sound practices for managing interest-rate risk, which forms the basis for ongoing evaluation of the adequacy of interest-rate risk management at supervised institutions. The policy statement also outlines fundamental elements of sound management that have been identified in prior Federal Reserve guidance and discusses the importance of these elements in the context of managing interest-rate risk. Specifically, the guidance emphasizes the need for active board of director and senior management oversight and a comprehensive risk-management process that effectively identifies, measures, and controls interest-rate risk. Several techniques might be used by an institution to minimize interest-rate risk. One approach used by the Company is to periodically analyze its assets and liabilities and make future financing and investment decisions based on payment streams, interest rates, contractual maturities, and estimated sensitivity to actual or potential changes in market interest rates. Such activities fall under the broad definition of asset/liability management. The Company's primary measurement tool used by management is to "shock" the balance sheet by decreasing rates 2% and increasing rates 2% using computer simulation models to show the effect of rate changes on the fair value of the Company's financial instruments. Several ways an institution can manage interest-rate risk include selling existing assets or repaying certain liabilities; matching repricing periods for new assets and liabilities, for example, by shortening terms of new loans or investments. Financial institutions are also subject to prepayment risk in falling rate environments. For example, mortgage loans and other financial assets may be prepaid by a debtor refinancing their obligations at new, lower rates. Prepayments of assets carrying higher rates reduce the Company's interest income and overall asset yields. A large portion of an institution's liabilities may be short term or due on demand, while most of its assets may be invested in long-term loans or investments. Accordingly, the Company seeks to have in place sources of cash to meet short-term demands. These funds can be obtained by increasing deposits, borrowing, or selling assets. Table 14, "Effect of Interest Shocks on Financial Instruments", compares information about the current fair value of the Company's financial instruments at December 31, 1999 to December 31, 1998. Table 14 shows the effects of interest rate shocks of decreasing rates 2% and increasing rates 2% on the fair value of the Company's financial instruments. The computer simulation model that is used to do the interest rate shocks and calculate the effect on the fair value of the Company's financial instruments takes into consideration maturity and repricing schedules of the various assets and liabilities. At December 31, 1999 the fair value of securities available for sale increases $8.2 million when rates are shocked downward 2% while the fair value decreases $11.6 million for a 2% upwards rate shock. The change in fair value of securities is smaller when rates are shocked down because there are call provisions on $158.1 million of the U.S. Government agency securities. As rates decline the probability that a security with call provisions will be called increases. Because of the call provision the security issuer has the opportunity to reduce his interest expense by paying off the called security. The Company's cumulative excess interest earning assets (liabilities) as shown in Table 10, "Maturity or Repricing of Assets and Liabilities", are negative through the three-year time frame. This negative gap, meaning that more interest bearing liabilities reprice than interest earning assets, causes the fair value of the Company's financial instruments at December 31, 1999 to increase by $17.8 million if interest rates immediately drop 2%. The rate shock of immediately increasing interest rates 2% would cause the fair value of the financial instruments to decline $20.6 million. To minimize interest-rate risk and its affect on the fair value of the Company's financial instruments and equity, maturities on time deposits would need to be increased while more variable rate loans would need to be booked. It should be noted that often the market dictates the type of financial instrument that the Company is able to book. Although increasing its variable rate loan portfolio will assist the Company in managing its interest-rate risk position, borrowers have shown a preference for fixed rate loans and may take their business to other financial institutions if the Company does not satisfy their request. On the liability side of the balance sheet, depositors recently have shown preferences for time deposits of shorter durations. NSFC ANNUAL REPORT 1999 33 21 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- TABLE 14 - EFFECT OF INTEREST SHOCKS ON FINANCIAL INSTRUMENTS - --------------------------------------------------------------------------------
($ 000s) 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 Advance from borrowers for taxes and insurance .............................. 645 645 645 Accrued interest payable .................................................... 3,640 3,640 3,640
Fair Value at December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ DOWN 2% CURRENT UP 2% - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS Cash and cash equivalents ................................................... $ 27,960 $ 27,959 $ 27,958 Interest bearing deposits in financial institutions - maturities over 90 days 101 100 99 Securities available for sale ............................................... 213,608 200,861 189,199 Loans ....................................................................... 259,503 250,721 242,283 Direct lease financing ...................................................... 1,017 1,001 987 Accrued interest receivable ................................................. 4,408 4,408 4,408 Financial liabilities Deposits .................................................................... $363,356 $356,971 $350,093 Securities sold under repurchase agreements and other short-term borrowings . 47,994 47,990 47,986 Federal Home Loan Bank term advances ........................................ 9,039 8,482 8,005 Advance from borrowers for taxes and insurance .............................. 992 992 992 Accrued interest payable .................................................... 3,951 3,951 3,951
34 NSFC ANNUAL REPORT 1999 22 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- STATEMENT OF MANAGEMENT RESPONSIBILITY - -------------------------------------------------------------------------------- Northern States Financial Corporation's management is responsible for the accompanying consolidated financial statements which have been prepared in conformity with generally accepted accounting principles. They are based on our best estimates and judgments. Financial information elsewhere in this annual report is consistent with the data presented in these statements. We acknowledge the integrity and objectivity of published financial data. To this end, we maintain an accounting system and related internal controls which we believe are sufficient in all material respects to provide reasonable assurance that financial records are reliable for preparing financial statements and that assets are safeguarded from loss or unauthorized use. Our independent auditing firm, Crowe, Chizek and Company LLP, provides an objective review as to management's discharge of its responsibilities insofar as they relate to the fairness of reported operating results and the financial condition of the Company. This firm obtains and maintains an understanding of our accounting and financial controls and employs such testing and verification procedures as it deems necessary to arrive at an opinion on the fairness of the consolidated financial statements. The Board of Directors pursues its responsibilities for the accompanying consolidated financial statements through its Audit Committee. The Committee meets periodically with Northern States Financial Corporation's internal auditor and/or independent auditors to review and approve the scope and timing of the internal and external audits and the findings therefrom. The Committee recommends to the Board of Directors the engagement of the independent auditors and the auditors have direct access to the Audit Committee. /s/ FRED ABDULA /s/ THOMAS M. NEMETH FRED ABDULA THOMAS M. NEMETH Chairman of the Board & Vice President & Treasurer Chief Executive Officer - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- Board of Directors and Stockholders Northern States Financial Corporation Waukegan, Illinois We have audited the accompanying consolidated balance sheets of NORTHERN STATES FINANCIAL CORPORATION as of December 31, 1999 and 1998 and the related consolidated statements of income, cash flows, stockholders' equity, and comprehensive income for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based upon our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NORTHERN STATES FINANCIAL CORPORATION as of December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. /s/ CROWE, CHIZEK AND COMPANY LLP CROWE, CHIZEK AND COMPANY LLP Oak Brook, Illinois February 11, 2000 NSFC ANNUAL REPORT 1999 35 23 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS - --------------------------------------------------------------------------------
($ 000s) - ------------------------------------------------------------------------------------------------------------------- December 31, 1999 1998 - ------------------------------------------------------------------------------------------------------------------- ASSETS Cash and due from banks................................................................$ 16,740 $ 15,176 Interestbearing deposits in financial institutions - maturities less than 90 days...... 160 183 Federal funds sold..................................................................... 0 12,600 -------------------------- Total cash and cash equivalents..................................................... 16,900 27,959 Interestbearing deposits in financial institutions - maturities over 90 days........... 100 100 Securities available for sale.......................................................... 196,684 200,861 Loans.................................................................................. 248,162 246,209 Less: Allowance for loan losses........................................................ (5,368) (5,433) -------------------------- Loans, net.......................................................................... 242,794 240,776 Direct lease financing................................................................. 2,138 987 Office buildings and equipment, net.................................................... 6,176 6,647 Other real estate owned, net of allowance for losses of $552 in 1998................... 2,622 2,497 Accrued interest receivable............................................................ 4,361 4,408 Other assets........................................................................... 4,906 1,686 -------------------------- Total assets........................................................................$ 476,681 $ 485,921 ========================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits Demand - noninterest bearing........................................................$ 41,261 $ 44,075 NOW accounts........................................................................ 41,787 39,180 Money market accounts............................................................... 37,636 41,003 Savings............................................................................. 44,207 45,333 Time, $100,000 and over............................................................. 83,266 98,338 Time, under $100,000................................................................ 86,094 87,827 -------------------------- Total deposits.................................................................... 334,251 355,756 Securities sold under repurchase agreements and other short-term borrowings............ 70,436 47,990 Federal Home Loan Bank advance......................................................... 0 10,000 Advances from borrowers for taxes and insurance........................................ 645 992 Accrued interest payable and other liabilities......................................... 5,815 6,070 -------------------------- Total liabilities................................................................... 411,147 420,808 Stockholders' Equity Common stock........................................................................... 1,783 1,781 Additional paid-in capital............................................................. 11,405 11,336 Retained earnings...................................................................... 55,898 51,358 Accumulated other comprehensive income (loss), net..................................... (3,552) 638 -------------------------- Total stockholders' equity.......................................................... 65,534 65,113 -------------------------- Total liabilities and stockholders' equity........................................$ 476,681 $ 485,921 ==========================
The accompanying notes are an integral part of these consolidated financial statements. 36 NSFC ANNUAL REPORT 1999 24 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------------
($ 000s, except per share data) - ---------------------------------------------------------------------------------------------------------- Years Ended December 31, 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- Interest income Loans (including fee income) ......................... $ 20,766 $ 21,765 $ 22,199 Securities Taxable ........................................... 10,663 10,263 8,411 Exempt from federal income tax .................... 1,035 1,018 1,149 Interestbearing deposits in financial institutions ... 16 25 35 Federal funds sold ................................... 298 1,135 965 ----------------------------------------- Total interest income ............................. 32,778 34,206 32,759 ----------------------------------------- Interest expense Time deposits ........................................ 8,526 10,413 9,714 Other deposits ....................................... 3,895 4,124 4,114 Other borrowings ..................................... 2,584 2,359 1,787 ----------------------------------------- Total interest expense ............................ 15,005 16,896 15,615 ----------------------------------------- Net interest income ..................................... 17,773 17,310 17,144 Provision for loan losses ............................... 0 10 480 ----------------------------------------- Net interest income after provision for loan losses ..... 17,773 17,300 16,664 ----------------------------------------- Noninterest income Service fees on deposits ............................. 1,181 1,091 1,264 Trust income ......................................... 736 665 625 Net gains on sales of loans .......................... 160 334 172 Net gains (losses) on sales of other real estate owned 533 (2) 142 Other operating income ............................... 891 847 484 ----------------------------------------- Total noninterest income .......................... 3,501 2,935 2,687 ----------------------------------------- Noninterest expense Salaries and employee benefits ....................... 5,963 5,796 5,407 Occupancy and equipment, net ......................... 1,324 1,251 1,184 Data processing ...................................... 496 495 511 FDIC deposit insurance ............................... 84 86 72 Other real estate owned .............................. 41 76 140 Other operating expenses ............................. 1,871 1,919 1,818 ----------------------------------------- Total noninterest expense ......................... 9,779 9,623 9,132 ----------------------------------------- Income before income taxes .............................. 11,495 10,612 10,219 Income tax expense ...................................... 3,611 3,308 3,209 ----------------------------------------- Net income .............................................. $ 7,884 $ 7,304 $ 7,010 ========================================= Basic earnings per share ................................ $ 1.77 $ 1.64 $ 1.58 Diluted earnings per share .............................. $ 1.77 $ 1.64 $ 1.57
The accompanying notes are an integral part of these consolidated financial statements. NSFC ANNUAL REPORT 1999 37 25 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------
($ 000s) - --------------------------------------------------------------------------------------------------------------------------------- Years Ended December 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Net income ................................................................. $ 7,884 $ 7,304 $ 7,010 Adjustments to reconcile net income to cash from operating activities: Depreciation ............................................................ 602 590 568 Provision for loan losses ............................................... 0 10 480 Provision for losses on other real estate owned ......................... 0 10 21 Deferred loan fees ...................................................... (29) (78) (38) Net change in loans held for sale ....................................... 3,439 (4,267) (349) Net gains on sales of loans ............................................. (160) (334) (172) Net gains (losses) on sales of other real estate owned .................. (533) 2 (142) Net gain on sale of building ............................................ (74) 0 0 Amortization of mortgage servicing rights ............................... 68 65 36 Net change in interest receivable ....................................... 47 (100) (353) Net change in interest payable .......................................... (311) 260 1,192 Net change in other assets .............................................. (638) 128 742 Net change in other liabilities ......................................... 85 (268) (205) --------------------------------------------- Net cash from operating activities ................................... 10,380 3,322 8,790 --------------------------------------------- Cash flows from investing activities Maturities of securities available for sale ............................. 76,476 173,014 90,148 Purchases of securities available for sale .............................. (79,139) (192,926) (120,273) Change in loans made to customers ....................................... (8,402) 547 (9,151) Property and equipment expenditures ..................................... (314) (1,338) (217) Proceeds from sale of building .......................................... 257 0 0 Net change in direct lease financing .................................... (1,151) 287 (275) Proceeds from sales of other real estate owned .......................... 3,542 46 586 --------------------------------------------- Net cash from investing activities ................................... (8,731) (20,370) (39,182) --------------------------------------------- Cash flows from financing activities Net increase (decrease) in: Deposits .............................................................. (21,505) 7,806 19,155 Securities sold under repurchase agreements and other short-term borrowings .................................... 22,446 9,486 1,746 Advances from borrowers for taxes and insurance ....................... (347) (174) 145 Federal Home Loan Bank advance .......................................... 0 5,000 5,000 Repayment of Federal Home Loan Bank advance ............................. (10,000) 0 0 Net proceeds from exercise of stock options ............................. 42 54 4 Dividends paid .......................................................... (3,344) (2,671) (2,134) --------------------------------------------- Net cash from financing activities ................................... (12,708) 19,501 23,916 --------------------------------------------- Net change in cash and cash equivalents ....................................... (11,059) 2,453 (6,476) Cash and cash equivalents at beginning of year ................................ 27,959 25,506 31,982 --------------------------------------------- Cash and cash equivalents at end of year ...................................... $ 16,900 $ 27,959 $ 25,506 ============================================= Supplemental disclosures Cash paid during the year for Interest ................................................................ $ 15,316 $ 16,636 $ 14,423 Income taxes ............................................................ 3,410 3,234 3,089 Noncash investing activities Transfers made from loans to other real estate owned .................... 3,134 0 174 Transfers made from loans held for sale to portfolio loans, at fair value 2,520 0 0
The accompanying notes are an integral part of these consolidated financial statements. 38 NSFC ANNUAL REPORT 1999 26 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - --------------------------------------------------------------------------------
ACCUMULATED OTHER TOTAL ($ 000s, EXCEPT PER SHARE DATA) COMMON ADDITIONAL RETAINED COMPREHENSIVE STOCKHOLDERS' YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 STOCK PAID-IN CAPITAL EARNINGS INCOME (LOSS), NET EQUITY ==================================================================================================================================== Balance, January 1, 1997 ..................... $ 1,779 $ 11,216 $ 41,849 $ (9) $ 54,835 Net income ................................... 7,010 7,010 Cash dividends ($.48 per share) .............. (2,134) (2,134) Exercise of stock options on 500 shares of common stock .................... 4 4 Tax benefit from the exercise of stock options 2 2 Unrealized net gain on securities available for sale ........................ 478 478 --------------------------------------------------------------------------- Balance, December 31, 1997 ................... 1,779 11,222 46,725 469 60,195 Net income ................................... 7,304 7,304 Cash dividends ($.60 per share) .............. (2,671) (2,671) Exercise of stock options on 6,535 shares of common stock .................... 2 52 54 Tax benefit from the exercise of stock options 62 62 Unrealized net gain on securities available for sale ........................ 169 169 --------------------------------------------------------------------------- Balance, December 31, 1998 ................... 1,781 11,336 51,358 638 65,113 Net income ................................... 7,884 7,884 Cash dividends ($.75 per share) .............. (3,344) (3,344) Exercise of stock options on 4,945 shares of common stock .................... 2 40 42 Tax benefit from the exercise of stock options 29 29 Unrealized net loss on securities available for sale ........................ (4,190) (4,190) --------------------------------------------------------------------------- Balance, December 31, 1999 ................... $ 1,783 $ 11,405 $ 55,898 $ (3,552) $ 65,534 ===========================================================================
The accompanying notes are an integral part of these consolidated financial statements. - -------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - --------------------------------------------------------------------------------
($ 000s) - --------------------------------------------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 1999 1998 1997 - --------------------------------------------------------------------------------------------------------------------- Net income........................................................... $ 7,884 $ 7,304 $ 7,010 Other comprehensive income (loss): Unrealized gains (losses) arising during year on securities available for sale, net of tax............... (4,190) 169 478 ------------------------------------------ Comprehensive income................................................. $ 3,694 $ 7,473 $ 7,488 ==========================================
The accompanying notes are an integral part of these consolidated financial statements. NSFC ANNUAL REPORT 1999 39 27 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997 - -------------------------------------------------------------------------------- NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of Northern States Financial Corporation (Company) and its wholly owned subsidiary, Bank of Waukegan ("Bank" or "Subsidiary"). All significant intercompany transactions and balances have been eliminated in consolidation. NATURE OF OPERATIONS: The Company's and the Bank's revenues, operating income, and assets are primarily from the banking industry. Loan customers are mainly located in Lake County, Illinois and surrounding areas, and include a wide range of individuals, businesses, and other organizations. A major portion of loans are secured by various forms of collateral, including real estate, business assets, consumer property, and other items. USE OF ESTIMATES: To prepare financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The collectibility of loans, fair values of financial instruments, and status of contingencies are particularly subject to change. CASH FLOW REPORTING: Cash and cash equivalents are defined as cash and due from banks, federal funds sold, and interest-bearing deposits in financial institutions with original maturities under 90 days. Net cash flows are reported for customer loan and deposit transactions, securities sold under agreements to repurchase and other short-term borrowings, and interest-bearing deposits in financial institutions with maturities over 90 days. SECURITIES: Securities are classified as held to maturity and carried at amortized cost when management has the positive intent and ability to hold them to maturity. Securities are classified as available for sale when they might be sold before maturity. Securities available for sale are carried at fair value, with unrealized holding gains and losses reported separately as other comprehensive income, net of tax. Other securities, such as Federal Home Loan Bank stock and Federal Reserve Bank stock, are carried at cost. Securities are written down to fair value when a decline in fair value is not temporary. Gains and losses on sales are determined using the amortized cost of the specific security sold. Interest income includes amortization of purchase premiums and discounts. LOANS HELD FOR SALE: Loans held for sale are reported at the lower of cost or market value in the aggregate. LOANS: Loans are reported at the principal balance outstanding, net of deferred loan fees and costs and the allowance for loan losses. Interest income is reported on the interest method and includes amortization of net deferred loan fees and costs over the loan term. Interest income is not reported when full loan repayment is in doubt, typically when payments are past due over 90 days. Payments received on such loans are reported as principal reductions. ALLOWANCE FOR LOAN LOSSES: Because some loans may not be repaid in full, an allowance for loan losses is recorded. Increases to the allowance are recorded by a provision for loan losses charged to expense. Estimating the risk of loss and the amount of loss on any loan is necessarily subjective. Accordingly, the allowance is maintained by management at a level considered adequate to cover losses that are currently anticipated based on past loss experience, general economic conditions, information about specific borrower situations including their financial position and collateral values, and other factors and estimates which are subject to change over time. While management may periodically allocate portions of the allowance for specific problem loan situations, the whole allowance is available for any loan charge-offs that occur. A loan is charged-off by management as a loss when deemed uncollectible, although collection efforts continue and future recoveries may occur. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. Such agencies may require the Bank to provide additions to the allowance based on their judgements at the time of their examinations. Loans are considered impaired if full principal or interest payments are not anticipated. Impaired loans are carried at the present value of expected cash flows discounted at the loan's effective interest rate or at fair value of the collateral if the loan is collateral dependent. A portion of the allowance for loan losses is allocated to impaired loans. Smaller-balance homogeneous loans are evaluated for impairment in total. Such loans include residential first mortgage loans secured by one-to-four family residences, residential construction loans, and automobile, home equity and second mortgage loans. Commercial loans and mortgage loans secured by other properties are evaluated individually for impairment. All loans in non-accrual status and other selected watch list loans are considered for impairment. Impaired loans or portions thereof are charged off when deemed uncollectible. 40 NSFC ANNUAL REPORT 1999 28 (TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NOTE 1 (CONTINUED) - -------------------------------------------------------------------------------- Increases or decreases in the carrying value of impaired loans are reported as reductions or increases to the provision of loan losses. OFFICE BUILDINGS AND EQUIPMENT: Asset cost is reported net of accumulated depreciation. Depreciation expense is calculated on the straight-line method over asset useful lives. OTHER REAL ESTATE: Real estate acquired in settlement of loans is initially reported at estimated fair value at acquisition. After acquisition, a valuation allowance reduces the reported amount to the lower of the initial amount or fair value less costs to sell. Expenses, gains and losses on disposition, and changes in the valuation allowance are reported in net loss on other real estate. SERVICING RIGHTS: Servicing rights represent the allocated value of servicing rights retained on loans sold. Servicing rights are expensed in proportion to, and over the period of, estimated net servicing revenues. Impairment is evaluated based on the fair value of the rights, using groupings of the underlying loans as to interest rates. Any impairment of a grouping is reported as a valuation allowance. GOODWILL: Goodwill is the excess of purchase price over identified net assets in business acquisitions. Goodwill is expensed on the straight-line method over 25 years. Goodwill is assessed for impairment based on estimated undiscounted cash flows, and written down if necessary. LONG-TERM ASSETS: These assets are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at discounted amounts. REPURCHASE AGREEMENTS: Substantially all repurchase agreement liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. EMPLOYEE BENEFITS: A profit sharing plan covers substantially all employees. Contributions are expensed annually and are made at the discretion of the Board of Directors. Contributions totaled $259,000, $259,000 and $260,000 in 1999, 1998 and 1997. The plan allows employees to make voluntary contributions, although such contributions are not matched by the Company. STOCK COMPENSATION: Expense for employee compensation under stock option plans is based on Opinion 25, with expense reported only if options are granted below market price at grant date. Pro forma disclosures of net income and earnings per share are provided as if the fair value method of SFAS No. 123 are used for stock-based compensation awarded after January 1, 1995. INCOME TAXES: Income tax expense is the sum of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed separately. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates. The fair value estimates of existing on- and off-balance sheet financial instruments does not include the value of anticipated future business or the values of assets and liabilities not considered financial instruments. EARNINGS PER SHARE: Basic earnings per share is based on weighted-average common shares outstanding. Diluted earnings per share further assumes issue of any dilutive potential common shares. COMPREHENSIVE INCOME: Comprehensive income consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale, net of tax, which are also recognized as separate components of equity. FUTURE ACCOUNTING CHANGES: Beginning January 1, 2001, a new accounting standard will require all derivatives to be recorded at fair value. Unless designated as hedges, changes in these fair values will be recorded in the income statement. Fair value changes involving hedges will generally be recorded by offsetting gains and losses on the hedge and on the hedged item, even if the fair value of the hedged item is not otherwise recorded. Since the Company has no derivative holdings, this is not expected to have a material effect but the effect will depend on derivative holdings when this standard applies. OPERATING SEGMENTS: Internal financial information is primarily reported and aggregated in three lines of business, banking, trust and mortgage banking. NSFC ANNUAL REPORT 1999 41 29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997 - -------------------------------------------------------------------------------- NOTE 2 SECURITIES - -------------------------------------------------------------------------------- Year-end securities available for sale were as follows:
AMORTIZED GROSS UNREALIZED FAIR DECEMBER 31, 1999 COST GAINS LOSSES VALUE -------------------------------------------- U.S. Treasury.................................... $ 4,999 $ 0 $ (1) $ 4,998 U.S. Government agencies & corporations.......... 168,024 0 (5,933) 162,091 States and political subdivisions................ 20,719 172 (181) 20,710 Mortgage-backed securities....................... 6,775 10 (73) 6,712 Equity securities................................ 1,966 211 (4) 2,173 -------------------------------------------- Total......................................... $ 202,483 $ 393 $ (6,192) $ 196,684 ============================================
AMORTIZED GROSS UNREALIZED FAIR DECEMBER 31, 1998 COST GAINS LOSSES VALUE -------------------------------------------- U.S. Treasury.................................... $ 13,022 $ 87 $ 0 $ 13,109 U.S. Government agencies and corporations........ 152,558 208 (326) 152,440 States & political subdivisions.................. 22,693 737 (2) 23,428 Mortgage-backed securities....................... 9,622 106 0 9,728 Equity securities................................ 1,925 242 (11) 2,156 -------------------------------------------- Total......................................... $ 199,820 $1,380 $ (339) $ 200,861 ============================================
Contractual maturities of securities available for sale at year-end 1999 were as follows. Securities not due at a single maturity date, primarily mortgage-backed and equity securities, are shown separately.
AMORTIZED FAIR COST VALUE ---------------------- Due in one year or less............................. $ 12,376 $ 12,390 Due after one year through five years............... 156,669 151,678 Due after five years through ten years.............. 24,697 23,731 ---------------------- 193,742 187,799 Mortgage-backed securities.......................... 6,775 6,712 Equity securities................................... 1,966 2,173 ---------------------- Total......................................... $ 202,483 $ 196,684 ======================
Mortgage-backed securities are comprised of investments in pools of residential mortgages. The mortgage pools are issued and guaranteed by the Federal Home Loan Mortgage Corporation (FHLMC), the Government National Mortgage Association (GNMA) or the Federal National Mortgage Association (FNMA). Agency securities with call options totaled $158,099,000 and $104,748,000 at December 31, 1999 and 1998. As of December 31, 1999 the Company held no structured notes. Securities carried at $136,983,000 and $141,158,000 at year-end 1999 and 1998, were pledged to secure public deposits, repurchase agreements and for other purposes as required or permitted by law. 42 NSFC ANNUAL REPORT 1999 30 (TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NOTE 2 SECURITIES (CONTINUED) - -------------------------------------------------------------------------------- As of December 31, 1999, the Company had no securities of a single issuer, other than the U.S. Treasury and U.S. Government agencies and corporations, including the FHLB, FHLMC, FNMA, GNMA and the Federal Farm Credit Bank (FFCB), that exceeded 10% of consolidated stockholders' equity. Although the Company holds securities issued by municipalities within the state of Illinois, which in aggregate exceed 10% of consolidated stockholders' equity, none of the holdings from individual municipal issuers exceeded this threshold. - -------------------------------------------------------------------------------- NOTE 3 LOANS - -------------------------------------------------------------------------------- Year-end loans were as follows:
1999 1998 ------------------------ Commercial.................................................... $ 60,570 $ 64,043 Real estate - construction.................................... 21,813 17,328 Real estate - mortgage........................................ 142,016 141,241 Home equity................................................... 17,259 15,579 Installment................................................... 6,957 8,530 ------------------------ Total loans................................................ 248,615 246,721 Less: Unearned income............................................ (69) (99) Deferred loan fees......................................... (384) (413) ------------------------ Loans, net of unearned income and deferred loan fees....... 248,162 246,209 Allowance for loan losses..................................... (5,368) (5,433) ------------------------ Loans, net................................................. $ 242,794 $ 240,776 ========================
Impaired loans were as follows:
1999 1998 1997 -------------------------------- Year-end loans with no allowance for loan losses allocated........... $ 0 $ 0 $ 0 Year-end loans with allowance for loan losses allocated.............. 394 3,515 754 Amount of the allowance allocated.................................... 59 544 125 Year-end non-accrual loans, including impaired loans................. 394 3,804 1,003 Average of impaired loans during the year............................ 779 1,695 776 Interest income recognized during impairment......................... 30 84 36 Cash-basis interest income recognized on impaired loans.............. 30 84 36
Related party loans were as follows:
1999 ---------- Total loans at beginning of year................................. $ 435 New loans........................................................ 82 Repayments....................................................... (50) Other changes.................................................... (171) ---------- Total loans at end of year.................................... $ 296 ==========
Real estate loans with a carrying value of $18,276,000 and $20,596,000 were pledged to secure public deposits at December 31, 1999 and 1998. There were no loans held for sale at year-end 1999. During 1999, loans held for sale with a carrying value of $2,520,000 were transfered to portfolio loans. At year-end 1998 there were $5,799,000 in loans held for sale that were classified as real estate mortgage loans. NSFC ANNUAL REPORT 1999 43 31 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997 - -------------------------------------------------------------------------------- NOTE 4 ALLOWANCES FOR LOAN AND OTHER REAL ESTATE OWNED LOSSES - -------------------------------------------------------------------------------- Activity in the allowance for loan losses for the year ended December 31, follows: 1999 1998 1997 ----------------------------- Balance at beginning of year .................. $ 5,433 $ 5,430 $ 4,839 Provision charged to operating expense ........ 0 10 480 Loans charged off ............................. (683) (73) (209) Recoveries on loans previously charged-off .... 618 66 320 ----------------------------- Balance at end of year ..................... $ 5,368 $ 5,433 $ 5,430 ============================= Activity in the allowance for other real estate owned losses for the year ended December 31, follows:
1999 1998 1997 ------------------------- Balance at beginning of year...................................... $ 552 $ 544 $ 532 Provision charged to operating expense ........................... 0 10 21 Charge-off to the allowance for other real estate owned losses ... (176) 0 0 Recovery of allowance upon sale of other real estate owned ....... (376) 0 0 Losses on other real estate owned ................................ 0 (2) (9) ------------------------- Balance at end of year......................................... $ 0 $ 552 $ 544 =========================
- -------------------------------------------------------------------------------- NOTE 5 OFFICE BUILDINGS AND EQUIPMENT - -------------------------------------------------------------------------------- Office buildings and equipment consisted of the following at December 31, 1999 and 1998: 1999 1998 --------------------- Land................................................. $ 1,363 $ 1,413 Office buildings and improvements.................... 8,154 8,340 Furniture and equipment.............................. 4,177 3,918 --------------------- Total cost........................................ 13,694 13,671 Accumulated depreciation............................. (7,518) (7,024) --------------------- Net book value.................................... $ 6,176 $ 6,647 ===================== Depreciation expense amounted to $602,000 in 1999, $590,000 in 1998, and $568,000 in 1997. - -------------------------------------------------------------------------------- NOTE 6 LOAN SERVICING - -------------------------------------------------------------------------------- Mortgage loans serviced for others are not reported as assets. These loans totaled $48,093,000 and $60,288,000 at year-end 1999 and 1998. Related escrow deposit balances were $498,000 and $566,000 at year-end 1999 and 1998. Activity for capitalized mortgage servicing rights was as follows for 1999, 1998 and 1997: 1999 1998 1997 --------------------------- Beginning of year............... $ 195 $ 120 $ 80 Additions....................... 1 140 76 Amortized to expense............ (68) (65) (36) --------------------------- End of year.................. $ 128 $ 195 $ 120 =========================== 44 NSFC ANNUAL REPORT 1999 32 (TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NOTE 7 DEPOSITS - -------------------------------------------------------------------------------- At year-end 1999, stated maturities of time deposits were: 2000.............................................. $ 145,776 2001.............................................. 17,536 2002.............................................. 6,042 2003 and thereafter............................... 6 --------- Total.......................................... $ 169,360 ========= Related party deposits at year-end 1999 and 1998 totaled $10,827,000 and $11,738,000. - -------------------------------------------------------------------------------- NOTE 8 BORROWINGS - -------------------------------------------------------------------------------- Securities sold under repurchase agreements and other short-term borrowings are financing arrangements. Physical control is maintained by the Company for all other securities sold under repurchase agreements. The following is a summary of securities sold under repurchase agreements and other short-term borrowings at December 31, 1999 and 1998: 1999 1998 ---------------------- Securities sold under repurchase agreements............ $ 64,436 $ 47,990 Federal funds purchased................................ 6,000 0 ---------------------- Total............................................... $ 70,436 $ 47,990 ====================== Information concerning securities sold under repurchase agreements and other short-term borrowings is summarized as follows: 1999 1998 ---------------------- Average daily balance during the year................ $ 48,905 $ 36,155 Average interest rate during the year................ 4.66% 5.11% Maximum month end balance during the year............ $ 70,436 $ 47,990 The following is a schedule of securities sold under repurchase agreements and related securities as of December 31, 1999 by selected maturity dates:
OVERNIGHT 1-30 DAYS 31-90 DAYS OVER 90 DAYS TOTAL ---------------- ---------------- --------------- --------------- ---------------- AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE COST VALUE COST VALUE COST VALUE -------------------------------------------------------------------------------------- U.S. Government agencies and corporations........ $20,770 $20,072 $13,546 $13,003 $ 3,599 $ 3,458 $29,650 $28,507 $67,565 $65,040 ===================================================================================== Repurchase Agreement.... $18,428 $13,361 $ 3,578 $29,069 $64,436 =====================================================================================
The Company maintains a collateral pledge agreement with the FHLB covering secured advances whereby the Bank agrees to retain first mortgage loans with an unpaid principal balances aggregating no less than 167% of the outstanding secured advance from the FHLB. NSFC ANNUAL REPORT 1999 45 33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997 - -------------------------------------------------------------------------------- NOTE 9 INCOME TAXES - -------------------------------------------------------------------------------- A summary of federal and state income taxes on operations follows: 1999 1998 1997 ------------------------------ Current payable tax: Federal............................... $ 3,387 $ 3,130 $ 2,940 State................................. 74 86 262 Deferred tax............................. 150 92 7 ------------------------------ Income tax expense................. $ 3,611 $ 3,308 $ 3,209 ============================== The components of deferred tax assets and liabilities at December 31, 1999 and 1998 follow:
1999 1998 ------------------ Deferred tax assets: Allowance for loan and other real estate owned losses ...... $ 1,715 $ 1,929 Deferred loan fees ......................................... 7 0 Deferred compensation and directors' fees .................. 155 182 Unrealized net loss on securities available for sale ....... 2,246 0 ------------------ Gross deferred tax assets ............................. 4,123 2,111 Deferred tax liabilities: Accumulated depreciation ................................... (528) (567) Federal Home Loan Bank stock dividend ...................... (37) (37) Unrealized net gain on securities available for sale ....... 0 (403) Deferred loan fees ......................................... 0 (34) Mortgage servicing rights .................................. (50) (75) Other items ................................................ (104) (90) ------------------ Gross deferred tax liabilities ........................ (719) (1,206) ------------------ Net deferred tax asset .............................. $ 3,404 $ 905 ==================
No valuation allowance is required for deferred tax assets. The provision for income taxes differs from that computed at the statutory federal corporate tax rate as follows:
1999 1998 1997 ----------------------------- Income tax calculated at statutory rate (34%) ..................... $ 3,908 $ 3,608 $ 3,474 Add (subtract) tax effect of: Tax-exempt income, net of disallowed interest expense .......... (383) (380) (431) State income tax, net of federal tax benefit ................... 76 71 156 Other items, net ............................................... 10 9 10 ----------------------------- Income tax expense .......................................... $ 3,611 $ 3,308 $ 3,209 =============================
Prior to being merged with the Bank, First Federal Bank, fsb (the "Thrift") qualified under provisions of the Internal Revenue Code which permitted it to deduct from taxable income a provision for bad debts which differs from the provision charged to income in the financial statements. Tax legislation passed in 1996 now requires all thrift institutions to deduct a provision for bad debts for tax purposes based on actual loss experience and recapture the excess bad debt reserve accumulated in tax years after 1987 prior to being merged with the Bank. These provisions carry forward to the Bank after the merger of the Thrift into the Bank. The related amount of excess bad debt reserve which must be recaptured is not material. Retained earnings at December 31, 1999 includes approximately $3,269,000 for which no provision for federal income taxes has been made. If, in the future, this portion of retained earnings is used for any purpose other than to absorb bad debt losses, federal income taxes would be imposed at the then prevailing rates, resulting in recording approximately $1,266,000 of deferred tax liability which is currently not recorded. 46 NSFC ANNUAL REPORT 1999 34 (TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NOTE 10 - OMNIBUS INCENTIVE PLANS - -------------------------------------------------------------------------------- The Omnibus Incentive Plan (the "Plan") authorizes the issuance of up to 375,000 shares of the Company's common stock, including granting of non-qualified stock options, restricted stock and stock appreciation rights. Statement of Financial Accounting Standards No. 123 ("SFAS No. 123") requires pro forma disclosures for companies that do not adopt its fair value accounting method for stock-based employee compensation. The Company has not granted any stock options since SFAS No. 123 became effective. Stock options are used to reward directors and officers and provide them with an additional equity interest. Options are issued for 10 year periods and are fully vested when granted. Information about option grants follows: NUMBER WEIGHTED-AVERAGE OF OPTIONS EXERCISE PRICE ------------------------------ Outstanding, beginning of 1997.......... 25,890 $ 8.32 Exercised 1997.......................... (500) 8.40 ------ Outstanding, end of 1997................ 25,390 8.32 Exercised 1998.......................... (6,535) 8.32 ------ Outstanding, end of 1998................ 18,855 8.32 Exercised 1999.......................... (4,945) 8.32 ------ Outstanding, end of 1999................ 13,910 8.32 ====== At year-end 1999, options outstanding had a remaining option life of 2 years. The Committee of the Board of Directors at its discretion may grant stock appreciation rights under the Plan. A stock appreciation right entitles the holder to receive from the Company an amount equal to the excess, if any, of the aggregate fair market value of the Company's common stock which is the subject of such grant over the grant price. As of December 31, 1999 and 1998, 12,280 and 14,990 stock appreciation rights were outstanding at $8.32. The Company's (income) expense was ($30,000), $25,000, and $114,000, for the years ended December 31, 1999, 1998, and 1997. The stock appreciation rights will expire during 2002. NSFC ANNUAL REPORT 1999 47 35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997 - -------------------------------------------------------------------------------- NOTE 11 - COMMITMENTS, OFF-BALANCE SHEET RISK, AND CONTINGENCIES - -------------------------------------------------------------------------------- There are various contingent liabilities that are not reflected in the financial statements, including claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material effect on financial condition or results of operations. At year-end 1999 and 1998, reserves of $4,513,000 and $3,165,000 were required as deposits with the Federal Reserve or as cash on hand. These reserves do not earn interest. Some financial instruments are used in the normal course of business to meet the financing needs of customers and to reduce exposure to interest rate changes. These financial instruments include commitments to extend credit, standby letters of credit, and financial guarantees. These involve, to varying degrees, credit and interest-rate risk in excess of the amount reported in the financial statements. Exposure to credit loss if the other party does not perform is represented by the contractual amount for commitments to extend credit, standby letters of credit, and financial guarantees written. The same credit policies are used for commitments and conditional obligations as are used for loans. Collateral or other security is normally required to support financial instruments with credit risk. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being used, the commitment does not necessarily represent future cash requirements. Standby letters of credit and financial guarantees written are conditional commitments to guarantee a customer's performance to a third party. A summary of the notional or contractual amounts of financial instruments with off-balance-sheet risk at year-end follows: Unused lines of credit and commitments to make loans: 1999 1998 --------------------- Fixed rate....................... $ 19,776 $ 19,999 Variable rate.................... 67,664 60,009 --------------------- Total......................... $ 87,440 $ 80,008 ===================== Standby letters of credit........... $ 5,318 $ 6,598 ===================== Commitments to make loans at a fixed rate have interest rates ranging primarily from 6.00% to 9.00% at December 31, 1999. 48 NSFC ANNUAL REPORT 1999 36 (TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NOTE 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS - -------------------------------------------------------------------------------- The following methods and assumptions were used to estimate fair values for financial instruments. Securities fair values are based on quoted market prices or, if no quotes are available, on the rate and term of the security and or information about the issuer. For loans or deposits and securities sold under repurchase agreements, the fair value is estimated by discounted cash flow analysis using current market rates for the estimated life and credit risk. Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Fair value of loans held for sale is based on market estimates. The fair value of off-balance-sheet items is based on the fees or cost that would currently be charged to enter or terminate such arrangements, and the fair value is not material. The estimated year end fair values of financial instruments were:
CARRYING ESTIMATED VALUE FAIR VALUE 1999 -------------------------- Financial assets: Cash and cash equivalents ................................ $ 16,900 $ 16,900 Interest bearing deposits in financial institutions - maturities over 90 days ................................. 100 100 Securities available for sale ............................ 196,684 196,684 Loans, net ............................................... 242,794 245,838 Direct lease financing ................................... 2,138 2,175 Accrued interest receivable .............................. 4,361 4,361 Financial liabilities: Deposits ................................................. $(334,251) $(333,547) Securities sold under repurchase agreements and other short-term borrowings ................................... (70,436) (70,436) Advances from borrowers for taxes and insurance .......... (645) (645) Accrued interest payable ................................. (3,640) (3,640) CARRYING ESTIMATED VALUE FAIR VALUE 1998 -------------------------- Financial assets: Cash and cash equivalents ................................ $ 27,959 $ 27,959 Interest bearing deposits in financial institutions - maturities over 90 days ................................. 100 100 Securities available for sale ............................ 200,861 200,861 Loans, net ............................................... 240,776 250,721 Direct lease financing ................................... 987 1,001 Accrued interest receivable .............................. 4,408 4,408 Financial liabilities: Deposits ................................................. $(355,756) $(356,971) Securities sold under repurchase agreements and other short-term borrowings ............................. (47,990) (47,990) Federal Home Loan Bank advances .......................... (10,000) (8,482) Advances from borrowers for taxes and insurance .......... (992) (992) Accrued interest payable ................................. (3,951) (3,951)
NSFC ANNUAL REPORT 1999 49 37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997 - -------------------------------------------------------------------------------- NOTE 13 - REGULATORY MATTERS - -------------------------------------------------------------------------------- The Company and Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weighting, and other factors, and the regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action that could have a direct material effect on the financial statements. The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. Actual capital levels and minimum required levels were as follows at December 31, 1999 and 1998:
MINIMUM REQUIRED TO MINIMUM REQUIRED BE WELL CAPITALIZED FOR CAPITAL UNDER PROMPT CORRECTIVE ACTUAL ADEQUACY PURPOSES ACTION REGULATIONS ------------------------------------------------------------ AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------------------------------------------------------------ 1999 Total Capital (to risk weighted assets) Consolidated........................................... $72,996 22.72% $25,707 8.00% $32,134 10.00% Bank................................................... 72,500 22.57 25,696 8.00 32,120 10.00 Tier I Capital (to risk weighted assets) Consolidated........................................... 68,979 21.47 12,854 4.00 19,280 6.00 Bank................................................... 68,485 21.32 12,848 4.00 19,272 6.00 Tier I Capital (to average assets) Consolidated........................................... 68,979 14.53 18,991 4.00 23,739 5.00 Bank................................................... 68,485 14.43 18,985 4.00 23,731 5.00 1998 Total Capital (to risk weighted assets) Consolidated........................................... $68,264 21.84% $25,004 8.00% $31,256 10.00% Bank................................................... 67,755 21.69 24,993 8.00 31,241 10.00 Tier I Capital (to risk weighted assets) Consolidated........................................... 64,357 20.59 12,502 4.00 18,753 6.00 Bank................................................... 63,850 20.44 12,496 4.00 18,745 6.00 Tier I Capital (to average assets) Consolidated........................................... 64,357 13.69 18,801 4.00 23,501 5.00 Bank................................................... 63,850 13.59 18,795 4.00 23,493 5.00
The Company and Bank at year end 1999 were categorized as well capitalized. Management knows of no circumstances or events which would change these categorizations. The Company's primary source of funds to pay dividends to shareholders is the dividends it receives from the Bank. The Bank is subject to certain restrictions on the amount of dividends that it may declare without regulatory approval. At December 31, 1999, $13,393,000 of the Bank's retained earnings was available for dividend declaration without prior regulatory approval. 50 NSFC ANNUAL REPORT 1999 38 (TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NOTE 14 - EARNINGS PER SHARE AND CAPITAL MATTERS - -------------------------------------------------------------------------------- Net income was utilized to calculate both basic and diluted earnings per share for all years presented. Information regarding weighted average shares utilized in computing basic and diluted earnings per share is as follows (restated for the five-for-one stock split in 1998):
1999 1998 1997 --------------------------------- Average outstanding common shares ............................ 4,457,448 4,449,996 4,446,450 Effect of stock options ...................................... 9,023 9,987 9,055 --------------------------------- Average outstanding shares for diluted earnings per share .... 4,466,471 4,459,983 4,455,505 =================================
On April 23, 1998, the Company's stockholders approved an amendment to the Company's certificate of incorporation to increase the authorized common shares and effect a five-for-one stock split. All prior period earnings per share and dividends per share information have been restated to reflect the five-for-one stock split. Information related to stockholders' equity at December 31, 1999 and 1998 was as follows: 1999 1998 Par value per share.................... $ 0.40 $ 0.40 Authorized shares...................... 6,500,000 6,500,000 Issued and outstanding shares.......... 4,458,345 4,453,400 NSFC ANNUAL REPORT 1999 51 39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 & 1997 - -------------------------------------------------------------------------------- NOTE 15 - PARENT COMPANY CONDENSED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Following are condensed parent company financial statements. Condensed Balance Sheets
December 31, 1999 1998 ----------------- Assets Cash on deposit at subsidiary bank - noninterest bearing .... $ 689 $ 775 Interest bearing deposits in unaffiliated bank .............. 39 38 ----------------- Total cash and cash equivalents .......................... 728 813 Investment in wholly-owned subsidiary Equity in underlying book value of Bank of Waukegan ...... 64,933 64,488 Goodwill, net ............................................ 107 118 ----------------- Total investment in subsidiary ......................... 65,040 64,606 Other assets ................................................ 176 51 ----------------- Total assets ........................................... $65,944 $65,470 ================= Liabilities and Stockholders' Equity Accounts payable and other liabilities ...................... $ 410 $ 357 Stockholders' equity ........................................ 65,534 65,113 ----------------- Total liabilities and stockholders' equity ............... $65,944 $65,470 =================
Condensed Statements of Income
Years ended December 31, 1999 1998 1997 ------------------------ Operating income Dividends from Bank .................................... $3,345 $2,677 $2,124 Interest income ........................................ 1 2 1 ------------------------ Total operating income ............................... 3,346 2,679 2,125 Operating expenses ........................................ 152 160 218 ------------------------ Income before income taxes and equity in undistributed earnings of Bank ......................................... 3,194 2,519 1,907 Income tax benefit ........................................ 55 57 80 ------------------------ Income before equity in undistributed earnings of Bank .... 3,249 2,576 1,987 Equity in undistributed earnings of Bank .................. 4,635 4,728 5,023 ------------------------ Net income ............................................. $7,884 $7,304 $7,010 ========================
Condensed Statements of Cash Flows
Years ended December 31, 1999 1998 1997 ----------------------------- Cash flows from operating activities Net income ....................................... $ 7,884 $ 7,304 $ 7,010 Adjustments to reconcile net income to net cash from operating activities Equity in undistributed earnings of Bank ....... (4,635) (4,728) (5,023) Goodwill amortization .......................... 11 11 11 (Increase) decrease in other assets ............ (125) 77 311 Increase (decrease) in other liabilities ....... 82 (144) (111) ----------------------------- Net cash from operating activities ............. 3,217 2,520 2,198 Cash flows from financing activities Exercise of stock options ........................ 42 54 4 Dividends paid ................................... (3,344) (2,671) (2,134) ----------------------------- Net cash from financing activities ............... (3,302) (2,617) (2,130) ----------------------------- Increase (decrease) in cash and cash equivalents .... (85) (97) 68 Cash and cash equivalents at beginning of year ...... 813 910 842 ----------------------------- Cash and cash equivalents at end of year ............ $ 728 $ 813 $ 910 =============================
52 NSFC ANNUAL REPORT 1999 40 (TABLE AMOUNTS IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- NOTE 16 - OTHER COMPREHENSIVE INCOME - -------------------------------------------------------------------------------- Other comprehensive income (loss) components and related taxes were as follows:
1999 1998 1997 ---------------------------- Unrealized holding gains (losses) on securities available for sale .... $(6,840) $ 277 $ 797 Tax effect ............................................................ 2,650 (108) (319) ---------------------------- Other comprehensive income (loss) .................................. $(4,190) $ 169 $ 478 =============================
- -------------------------------------------------------------------------------- NOTE 17 - SEGMENT INFORMATION - -------------------------------------------------------------------------------- The operating segments are determined by the products and services offered, primarily distinguished between banking, mortgage banking and trust operations. Loans, investments and deposits provide the revenues in the banking operation, servicing fees and loan sales provide the revenues in mortgage banking, and trust fees provide the revenues in trust operations. All operations are domestic. Management began evaluating mortgage banking as a separate segment in August, 1998. The accounting policies used are the same as those described in the summary of significant accounting policies. Mortgage banking and trust segment performance is evaluated using fee income net of direct expenses. Income taxes are not allocated to these segments and selected indirect expenses are allocated. There are no transactions among segments. Substantially all assets are related to the banking segment. Neither mortgage banking nor trust pre-tax net revenues exceeded 10% of total pre-tax income for 1999, 1998 or 1997. Information reported internally for performance assessment follows: 1999 OTHER TOTAL BANKING SEGMENTS SEGMENTS ---------------------------- Net interest income .......... $17,773 $ 0 $17,773 Other revenue ................ 2,311 1,190 3,501 Other expenses ............... 8,558 1,221 9,779 ---------------------------- Segment profit ............... $11,526 $ (31) $11,495 ============================ 1998 OTHER TOTAL BANKING SEGMENTS SEGMENTS ---------------------------- Net interest income .......... $17,310 $ 0 $17,310 Provision for loan losses .... 10 0 10 Other revenue ................ 1,833 1,102 2,935 Other expenses ............... 8,656 967 9,623 ---------------------------- Segment profit ............... $10,477 $ 135 $10,612 =========================== 1997 OTHER TOTAL BANKING SEGMENTS SEGMENTS ---------------------------- Net interest income .......... $17,144 $ 0 $17,144 Provision for loan losses .... 480 0 480 Other revenue ................ 2,062 625 2,687 Other expenses ............... 8,668 464 9,132 ---------------------------- Segment profit ............... $10,058 $ 161 $10,219 =========================== NSFC ANNUAL REPORT 1999 53 41 NORTHERN STATES FINANCIAL CORPORATION - -------------------------------------------------------------------------------- STOCKHOLDER INFORMATION - -------------------------------------------------------------------------------- ANNUAL MEETING: All stockholders are invited to attend our annual meeting, which will be held at 4:30 P.M., on Thursday, April 27, 2000 in the lobby of the Bank of Waukegan, 1601 N. Lewis Avenue, Waukegan, Illinois 60085. We look forward to meeting all stockholders and welcome your questions at the annual meeting. Any stockholders unable to attend this year's meeting are invited to send questions and comments in writing to Fred Abdula, Chairman of the Board and Chief Executive Officer, at Northern States Financial Corporation. FORM 10-K: Stockholders who wish to obtain a copy at no charge of Northern States Financial Corporation's Form 10-K for the fiscal year ended December 31, 1999, as filed with the Securities and Exchange Commission, may do so by writing Thomas M. Nemeth, Vice President & Treasurer, at Northern States Financial Corporation. FOR FURTHER INFORMATION: Stockholders and prospective investors are welcome to call or write Northern States Financial Corporation with questions or requests for additional information. Please direct inquiries to: Thomas M. Nemeth Vice President & Treasurer Northern States Financial Corporation 1601 N. Lewis Avenue Waukegan, Illinois 60085 (847) 244-6000 ext. 269 TRANSFER AGENT, REGISTRAR & DIVIDEND DISBURSEMENTS: Stockholders with a change of address or related inquiries should contact: Firstar Bank, NA Investors Services Unit 1555 N. Rivercenter Dr., Suite 301 Milwaukee, Wisconsin 53212 (800) 637-7549 QUARTERLY CALENDAR: The Company operates on a fiscal year ending December 31. Quarterly results are announced within 45 days after the end of each quarter, and audited results are announced within 90 days after year end. SEMI-ANNUAL DIVIDEND DATES: Dividends are expected to be announced and paid on the following schedule during 2000: Half Record Date Payment Date First May 15 June 1 Second November 15 December 1 STOCK MARKET INFORMATION: The common stock of Northern States Financial Corporation is traded on the National Association of Securities Dealers Automated Quotation System (NASDAQ Small-Cap Market) under the ticker symbol NSFC. Stock price quotations are published daily in the Chicago Tribune and Chicago Sun-Times newspapers and, when traded, in The Wall Street Journal. The stock is commonly listed as NthnStat. As of December 31, 1999 there were 6,500,000 common shares authorized; 4,458,345 common shares were outstanding, held by approximately 435 registered stockholders. As of February 29, 2000, the following securities firms indicated they were maintaining an inventory of Northern States Financial Corporation common stock and are acting as market makers: Herzog, Heine, Geduld, Inc. Miami, Florida (800) 966-7022 or (305) 932-5880 Howe Barnes Investments, Inc. Chicago, Illinois (800) 800-4693 or (312) 655-2995 Spear Leeds & Kellogg Capital Markets Jersey City, New Jersey (800) 526-3160 or (201) 418-4000 PRICE SUMMARY: The following schedule details our stock's quarter ending bid and ask price: 1999 1998 BID ASK BID ASK - ---------------------------------------------------------- Quarter Ended: March 31 $ 23 7/8 $ 24 $ 32 $ 33 5/8 June 30 23 1/2 23 7/8 34 3/8 34 3/4 September 30 23 23 1/2 27 27 5/8 December 31 22 1/2 23 24 5/8 25 2000 BID ASK - ----------------------------------------------------- For the First Quarter: (through March 1, 2000) $ 20 $ 21 CASH DIVIDENDS: Northern States Financial Corporation pays semi-annual cash dividends in June and December. Uninterrupted cash dividends have been paid since the Company's formation in 1984 and have increased each year since then. The table below shows semi-annual cash dividends per share for the past six years. June 1 December 1 Total ---------------------------------- 1994 $ .14 $ .15 $ .29 1995 .16 .17 .33 1996 .19 .21 .40 1997 .23 .25 .48 1998 .28 .32 .60 1999 .35 .40 .75 INDEPENDENT AUDITORS: Crowe, Chizek and Company LLP Oak Brook, Illinois 54 NSFC ANNUAL REPORT 1999 EX-21 3 LIST OF SUBSIDIARIES 1 EXHIBIT 21. SUBSIDIARIES OF NORTHERN STATES FINANCIAL CORPORATION Bank of Waukegan 1601 N. Lewis Avenue Waukegan, Illinois 60085 State of Incorporation - Illinois A Wholly-Owned Subsidiary of Northern States Financial Corporation 63 EX-27 4 FINANCIAL DATA SCHEDULE
9 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 16,740 260 0 0 196,684 0 0 250,300 5,368 476,681 334,251 70,436 6,460 0 0 0 1,783 63,751 476,681 20,766 11,698 314 32,778 12,421 15,005 17,773 0 0 9,779 11,495 11,495 0 0 7,884 1.77 1.77 4.11 394 421 0 0 5,433 683 618 5,368 3,168 0 2,200
-----END PRIVACY-ENHANCED MESSAGE-----