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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
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NORTHERN STATES FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 0-19300 36-3449727
(State of Incorporation) (Commission (I.R.S. Employer
File Number) Identification No.)
1601 North Lewis Avenue
Waukegan, Illinois 60085
(847) 244-6000
(Address, including zip code, and telephone number, including
area code, of principal executive office)
---------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days. YES: XXX NO:
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES: XXX NO:
--- ---
4,295,105 shares of common stock were outstanding
as of May 5, 2005
NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARY
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FORM 10-Q
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FOR THE QUARTER ENDED MARCH 31, 2005
------------------------------------
INDEX
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page Number
Report of Independent Registered Public Accounting Firm........2
Condensed Consolidated Financial Statements and Notes..........3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................7
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.........................................16
Item 4. Controls and Procedures......................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...........................................18
Item 2. Unregistered Sales of Equity Securities
and Use of Proceeds.......................................19
Item 3. Defaults upon Senior Securities.............................19
Item 4. Submission of Matters to a Vote of Security Holders.........19
Item 5. Other Information...........................................19
Item 6. Exhibits....................................................19
Signatures...........................................................20
EXHIBIT INDEX...........................................................21
1
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Northern States Financial Corporation
Waukegan, Illinois
We have reviewed the accompanying interim condensed consolidated
balance sheet of NORTHERN STATES FINANCIAL CORPORATION as of March 31, 2005 and
the condensed consolidated statements of income and cash flows for the three
month periods ended March 31, 2005 and 2004. These interim financial statements
are the responsibility of the Company's management.
We conducted our review in accordance with standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying interim condensed financial statements
for them to be in conformity with U.S. generally accepted accounting principles.
/s/ Crowe Chizek and Company LLC
- --------------------------------
Oak Brook, Illinois
May 9, 2005
2
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2005 and December 31, 2004
(In thousands of dollars) (Unaudited)
March 31, December 31,
2005 2004
--------- ------------
Assets
Cash and due from banks............................................ $ 22,764 $ 20,292
Interest bearing deposits in financial institutions - maturities
less than 90 days............................................... 160 75
Federal funds sold................................................. 19,743 8,932
-------- --------
Total cash and cash equivalents................................. 42,667 29,299
Securities available for sale...................................... 242,289 250,929
Loans and leases................................................... 424,437 442,562
Less: Allowance for loan and lease losses.......................... (7,993) (7,812)
-------- --------
Loans and leases, net........................................... 416,444 434,750
Federal Home Loan Bank and Federal Reserve Bank stock.............. 2,165 2,138
Office buildings and equipment, net................................ 9,220 9,313
Other real estate owned............................................ 5,978 4,802
Goodwill........................................................... 9,522 9,522
Core deposit intangible asset...................................... 2,666 2,782
Accrued interest receivable and other assets....................... 7,588 6,049
-------- --------
Total assets.................................................... $738,539 $749,584
======== ========
Liabilities and Stockholders' Equity
Liabilities
Deposits
Demand - noninterest bearing.................................... $ 59,952 $ 61,907
Interest bearing................................................ 534,757 527,437
-------- --------
Total deposits............................................... 594,709 589,344
Securities sold under repurchase agreements........................ 58,071 59,764
Federal funds purchased............................................ 0 15,000
Federal Home Loan Bank advances.................................... 6,500 6,500
Advances from borrowers for taxes and insurance.................... 1,350 906
Accrued interest payable and other liabilities..................... 5,351 4,888
-------- --------
Total liabilities............................................ 665,981 676,402
Stockholders' Equity
Common stock....................................................... 1,789 1,789
Additional paid-in capital......................................... 11,584 11,584
Retained earnings.................................................. 67,127 66,102
Accumulated other comprehensive loss, net.......................... (3,282) (1,633)
Treasury stock, at cost............................................ (4,660) (4,660)
-------- --------
Total stockholders' equity...................................... 72,558 73,182
-------- --------
Total liabilities and stockholders' equity................... $738,539 $749,584
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2005 and 2004
(In thousands of dollars, except per share data)(Unaudited)
Three months ended
March 31, March 31,
2005 2004
--------- ---------
Interest income
Loans (including fee income)......................... $6,503 $5,651
Securities
Taxable........................................... 1,903 1,918
Exempt from federal income tax.................... 83 97
Federal funds sold and other......................... 93 95
------ ------
Total interest income............................. 8,582 7,761
------ ------
Interest expense
Time deposits........................................ 2,017 1,631
Other deposits....................................... 539 377
Repurchase agreements, federal funds purchased
and Federal Home Loan Bank advances.................. 410 305
------ ------
Total interest expense............................ 2,966 2,313
------ ------
Net interest income..................................... 5,616 5,448
Provision for loan and lease losses..................... 653 250
------ ------
Net interest income after provision for loan and lease
losses................................................ 4,963 5,198
Noninterest income
Service fees on deposits............................. 554 619
Trust income......................................... 194 215
Mortgage banking income.............................. 41 18
Loss on sale of securities available for sale........ (169) 0
Other operating income............................... 249 214
------ ------
Total noninterest income.......................... 869 1,066
Noninterest expense
Salaries and employee benefits....................... 2,250 2,116
Occupancy and equipment, net......................... 508 465
Data processing...................................... 376 317
Legal................................................ 72 168
Audit and other professional......................... 313 141
Amortization of core deposit intangible asset........ 116 116
Other operating expenses............................. 719 454
------ ------
Total noninterest expense......................... 4,354 3,777
------ ------
Income before income taxes.............................. 1,478 2,487
Provision for income taxes.............................. 453 826
------ ------
Net income.............................................. $1,025 $1,661
====== ======
Earnings per share...................................... $0.24 $0.39
Comprehensive income (loss)............................. ($624) $3,059
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2005 and 2004
(In thousands of dollars) (Unaudited)
Three months ended
March 31, March 31,
2005 2004
--------- ---------
Cash flows from operating activities
Net income........................................................... $ 1,025 $ 1,661
Adjustments to reconcile net income to net cash from operating
activities:
Depreciation...................................................... 134 136
Federal Home Loan Bank stock dividends............................ (27) (30)
Loss on sale of securities available for sale..................... 169 0
Provision for loan and lease losses............................... 653 250
Proceeds from sale of loans....................................... 86 530
Loans originated for sale......................................... (86) (203)
Amortization of other intangible assets........................... 116 116
Net change in accrued interest receivable and other assets........ (496) 1,939
Net change in accrued interest payable and other liabilities...... 463 641
-------- ---------
Net cash from operating activities.............................. 2,037 5,040
-------- ---------
Cash flows from investing activities
Acquisition of subsidiary, net of cash equivalents received.......... 0 (366)
Proceeds from sales of securities available for sale................. 6,127 0
Proceeds from maturities and calls of securities available for sale.. 15,163 200,882
Purchases of securities available for sale........................... (15,511) (166,806)
Change in loans made to customers.................................... 16,477 (2,379)
Property and equipment expenditures.................................. (41) (105)
-------- ---------
Net cash from investing activities................................ 22,215 31,226
-------- ---------
Cash flows from financing activities
Net increase (decrease) in:
Deposits.......................................................... 5,365 40,389
Securities sold under repurchase agreements and
federal funds purchased........................................ (16,693) (44,146)
Advances from borrowers for taxes and insurance................... 444 484
Federal Home Loan Bank term advances................................. 15,000 0
Repayment of Federal Home Loan Bank term advances.................... (15,000) 0
-------- ---------
Net cash from financing activities................................ (10,884) (3,273)
-------- ---------
Net change in cash and cash equivalents................................. 13,368 32,993
Cash and cash equivalents at beginning of period........................ 29,299 38,584
-------- ---------
Cash and cash equivalents at end of period.............................. $ 42,667 $ 71,577
======== =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
NORTHERN STATES FINANCIAL CORPORATION
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------
March 31, 2005
(Dollar amounts in thousands, except share and per share data)
(Unaudited)
Note 1 - Basis of Presentation
- ------------------------------
The accompanying interim condensed consolidated financial statements
are prepared without audit and reflect all adjustments which are of a normal and
recurring nature and, in the opinion of management, are necessary to present
interim financial statements of Northern States Financial Corporation (the
"Company") in accordance with accounting principles generally accepted in the
United States of America. The interim financial statements do not purport to
contain all the necessary financial disclosures covered by accounting principles
generally accepted in the United States of America that might otherwise be
necessary for complete financial statements.
To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, 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 allowance for loan
and lease losses and status of contingencies are particularly subject to change.
The interim condensed financial statements should be read in
conjunction with the audited financial statements and accompanying notes (or
"notes thereto") of the Company for the years ended December 31, 2004 and 2003.
The results of operations for the three month period ended March 31, 2005, are
not necessarily indicative of the results to be expected for the full year.
Net income was utilized to calculate both basic and diluted earnings
per share for all periods presented. The average outstanding common shares
utilized in computing basic and diluted earnings per share were 4,295,105 and
4,305,105 for the three-month periods ended March 31, 2005 and 2004. The Company
had no common stock equivalents during the two periods.
On April 17, 2002, the Company announced that its Board of Directors
had approved a stock repurchase program that allows the Company to purchase up
to 200,000 shares of Northern States Financial Corporation stock either in open
market or private transactions. On February 19, 2003, the Company announced that
its Board of Directors had approved an additional repurchase program to purchase
200,000 additional shares of its stock. During the three months ended March 31,
2005 no shares of stock were repurchased. At March 31, 2005, the Company had a
total of 177,150 shares of treasury stock that it purchased under these
programs. Treasury stock is carried at cost.
Information related to common stock was as follows:
March 31, December 31,
2005 2004
--------- ------------
Par value per share .......................... $0.40 $0.40
Authorized shares ............................ 6,500,000 6,500,000
Issued shares ................................ 4,472,255 4,472,255
Treasury shares .............................. 177,150 177,150
Outstanding shares ........................... 4,295,105 4,295,105
6
NORTHERN STATES FINANCIAL CORPORATION
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
The following discussion focuses on the consolidated financial
condition of Northern States Financial Corporation (the "Company") at March 31,
2005 and the consolidated results of operations for the three month period ended
March 31, 2005, compared with the same period of 2004. The purpose of this
discussion is to provide a better understanding of the condensed consolidated
financial statements of Northern States Financial Corporation and the operations
of its wholly owned subsidiaries, Bank of Waukegan (the "Bank") and First State
Bank of Round Lake ("First State Bank") and the Bank's wholly owned subsidiary,
Northern States Community Development Corporation ("NSCDC"). This discussion
should be read in conjunction with the interim condensed consolidated unaudited
financial statements and notes thereto included herein.
Statements contained in this report that are not historical facts may
constitute forward-looking statements (within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended), which involve significant risks
and uncertainties. The Company intends such forward-looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and is including this
statement for purposes of invoking these safe harbor provisions. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies and expectations of the Company, are generally identifiable by the
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project," "plan," or similar expressions. The Company's ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain and actual results may differ from those predicted. The Company
undertakes no obligation to update these forward-looking statements in the
future. The Company cautions readers of this report that a number of important
factors could cause the Company's actual results subsequent to March 31, 2005 to
differ materially from those expressed in forward-looking statements. Factors
that could cause actual results to differ from those predicted and could have a
material adverse effect on the operations of the Company and its subsidiaries
include, but are not limited to, the potential for further deterioration in the
credit quality of the Company's loan and lease portfolios, uncertainty regarding
the Company's ability to ultimately recover on the surety bonds and cash held by
the bankruptcy trustee relating to equipment lease pools and other loans
currently on nonaccrual status, unanticipated changes in interest rates, general
economic conditions, increasing regulatory compliance burdens or potential
legislative/regulatory changes, monetary and fiscal policies of the U.S.
Government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the Company's loan or investment
portfolios, deposit flows, competition, demand for loan products and financial
services in the Company's market area, and changes in accounting principles,
policies and guidelines. These risks and uncertainties should be considered in
evaluating forward-looking statements.
7
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
OVERVIEW
- --------
At March 31, 2005, total assets were $738.5 million compared with
$749.6 million at December 31, 2004. Loans and leases totaled $424.4 million at
March 31, 2005, decreasing $18.1 million from year-end 2004, as borrowers paid
down their loan balances. Deposits at March 31, 2005, totaled $594.7 million,
increasing $5.4 million from December 31, 2004. Book value per share decreased
to $16.89 per share from $17.04 per share at December 31, 2004.
Earnings decreased $636,000 during the first quarter of 2005 to $.24
per share, or $1,025,000 as compared to $.39 per share, or $1,661,000 for the
first quarter of 2004, a decline of 38.3%, primarily due to increases to
impaired loans and leases. Net interest income increased $168,000 during the
quarter ended March 31, 2005 compared with the same quarter last year due to the
collection of $273,000 in past due interest on nonaccrual loans from one
borrower through legal proceedings. The provision for loan and lease losses for
the three months ended March 31, 2005 was $653,000 compared to $250,000 for the
same period last year. Much of this additional provision was allocated to the
impaired loans that totaled $31.9 million at March 31, 2005 as compared to $29.9
million at December 31, 2004. Included in impaired loans at March 31, 2005 are
$14.8 million of loans that have been restructured to provide a reduction or
deferral of principal payments due to deterioration in the financial condition
of the borrowers. This is an increase of $4.1 million from $10.7 million of
restructured loans at December 31, 2004.
Noninterest income decreased $197,000 during the first quarter of 2005
as compared with the same quarter of 2004. The decrease resulted from a $169,000
loss recognized on the sale of securities available for sale. The securities
were sold for liquidity purposes and provided a cash inflow of $6.1 million.
Noninterest expense was $577,000 greater during the first quarter of
2005 compared with the same quarter last year. Salaries and employee benefits
expense was greater as yearly salary increases went into effect and group
insurance premiums rose. Audit and other professional expenses were $172,000
higher, primarily due to expenses associated with the Sarbanes-Oxley Section 404
internal control assessment process. The increased levels of impaired loans and
leases and other real estate owned caused related expenses for collection
efforts to increase during 2005 by $87,000 compared to the same period of 2004.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Certain critical accounting policies involve estimates and assumptions
by management. To prepare financial statements in conformity with accounting
principles generally accepted in the United States of America, 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 allowance for loan
and lease losses is a critical accounting policy for the Company because
management must make estimates of losses and these estimates are subject to
change.
The allowance for loan and lease losses is a valuation allowance for
probable incurred credit losses, increased by the provision for loan and lease
losses and decreased by charge-offs less recoveries. Management estimates the
allowance balance required using past loan and lease loss experience, the nature
and volume of the portfolio, information about specific borrower situations,
estimated collateral values, economic conditions and other factors. Allocations
of the allowance may be made for specific loans and leases, but the entire
allowance is available for any loan or lease that, based on management's
judgment, should be charged-off.
8
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Management analyzes the adequacy of the allowance for loan and lease
losses at least quarterly. Loans and leases judged to be impaired, with probable
incurred loss exposure, that are no longer accruing interest, and historical net
loss percentages are reviewed in the analysis of the allowance for loan and
lease losses. Factors considered in assessing the adequacy of the allowance
include: changes in the type and volume of the loan and lease portfolio; review
of the larger credits within the subsidiary banks; historical loss experience;
current economic trends and conditions; review of the present value of expected
cash flows or fair value of collateral on impaired loans and leases; portfolio
growth; and other factors management deems appropriate. Based on management's
analysis, the allowance for loan and lease losses at March 31, 2005 is adequate
to cover probable incurred credit losses.
One of the components of the allowance for loan losses is historical
loss experience. Different loan classifications within the portfolio have
different loss experience ratios. For example, loans secured by real estate
generally have a better loss experience than loans secured by other assets.
Changes in the classification between periods can impact the allocation for
historical losses.
Management specifically analyzes its nonperforming loans for probable
losses. The change in the volume of nonperforming loans may significantly impact
the amount of estimated losses specifically allocated to these loans depending
on the adequacy of the loan collateral and the borrowers' ability to repay the
loans. As specific allocations are done on a loan-by-loan basis, the amount of
the specific allocation is more likely subject to fluctuation than an allocation
for a pool of loans based on historical loss trends. The amount of the
allocations on nonperforming loans may fluctuate in future periods due to
changes in conditions of underlying collateral and changes in the borrowers'
ability to repay.
Goodwill results from business acquisitions and represents the excess
of the purchase price over the fair value of acquired tangible assets and
liabilities and identifiable intangible assets. Goodwill is assessed for
impairment quarterly and any such impairment will be recognized in the period
identified.
Other intangible assets consist of core deposit and acquired customer
relationship intangible assets arising from whole bank and branch acquisitions.
They are initially measured at fair value and then are amortized on the
straight-line method over their estimated useful life of seven years.
FINANCIAL CONDITION
- -------------------
The Company's federal funds sold at March 31, 2005 increased $10.8
million to $19.7 million compared with $8.9 million at December 31, 2004. The
Company's federal funds sold position increased as loans and leases declined
$18.2 million and securities available for sale declined $8.6 million from
year-end to $242.3 million at March 31, 2005. At March 31, 2005, the Company
held $154.2 million in U.S. government-sponsored entity securities with call
options.
Loans and leases, at March 31, 2005, decreased $18.2 million and
totaled $424.4 million as compared with $442.6 million at December 31, 2004. The
decrease in loans resulted from loan repayments outpacing loan growth during the
quarter. Management does not expect this trend to continue as it primarily
resulted from one borrower during the quarter that paid off $16.3 million in
loans while consolidating their borrowings at another financial institution.
Loans to the lodging industry at March 31, 2005 totaled $26.0 million. Loan
commitments have decreased $11.3 million to $103.0 million at March 31, 2005
compared with $114.3 million at December 31, 2004 as some borrowers have allowed
the loan commitments issued to them to lapse. At March 31, 2005, loans to
related parties totaled $3.8 million, increasing $141,000 from December 31,
2004. Loan commitments to related parties were $1,838,000 at March 31, 2005.
9
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Accrued interest receivable and other assets increased $1.6 million at
March 31, 2005 to $7.6 million as compared to $6.0 million at December 31, 2004.
Accrued interest receivable increased $500,000 from year-end December 31, 2005
as interest rates increased during the quarter. Increasing interest rates caused
the unrealized loss on the Company's securities available for sale portfolio at
March 31, 2005 to increase $2.7 million from year-end 2004. Deferred taxes, a
component of other assets, were adjusted to reflect this change and increased
$1.0 million as a result.
During the first three months of 2005, deposits increased to $594.7
million at March 31, 2005, from $589.3 million at December 31, 2004. Much of the
growth is attributable to increases to brokered time deposits that totaled $82.2
million at March 31, 2005 compared with $71.3 million at December 31, 2004.
Brokered time deposits are deposits placed in the Bank by a broker from
depositors outside the Bank's geographic area. The brokered time deposits have
rates that are generally 10 to 15 basis points greater than the rates offered to
local depositors.
Securities sold under repurchase agreements decreased by $1.7 million
to $58.1 million at March 31, 2005 from $59.8 million at December 31, 2004.
There were no federal funds purchased at March 31, 2005 compared to $15.0
million at December 31, 2004, indicating an increase in the Company's liquidity
during the quarter. Borrowings from the Federal Home Loan Bank through term
advances remained at $6.5 million at March 31, 2005.
Included in other liabilities at March 31, 2005 is $400,000 related to
estimated environmental clean-up expenses from conditions in a sale of a parcel
of other real estate sold in previous years. The Company intends to seek
reimbursement of these expenses from the State of Illinois that has a fund for
this type of cleanup. However, there can be no assurance that the Company will
be successful in obtaining any such reimbursement.
CAPITAL
- -------
Total stockholders' equity decreased $624,000 to $72.6 million during
the three months ended March 31, 2005 from $73.2 million at December 31, 2004.
The decrease is the result of net income of $1.0 million, less the adjustment
for unrealized losses on securities available for sale, net of deferred tax, of
$1.6 million.
On a consolidated basis, the Company's total risk-based capital ratio
and Tier 1 risk based capital ratio, both calculated in accordance with the
regulations of the Board of Governors of the Federal Reserve System, were 12.72%
and 13.97%, respectively, as of March 31, 2005. Because these ratios exceeded 6%
and 10%, respectively, and the Company was not operating under any agreement,
order or directive issued by the Federal Reserve requiring the Company to meet
and maintain a specific level for any capital measure, the Company met the
Federal Reserve's definition of "well capitalized" as of March 31, 2005.
LIQUIDITY
- ---------
Liquidity management involves the ability to meet the cash flow
requirements of customers. The Company needs to have proper cash flow to meet
the requirements of depositors wanting to withdraw funds. Federal funds sold,
interest bearing deposits in banks and available for sale securities,
particularly those of shorter maturities, are principal sources of liquidity.
Federal funds sold at March 31, 2005 were $19.7 million. The Company sells
excess funds overnight to money center banks. 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 had a carrying value of $242.3
million at March 31, 2005, of which $151.1 million were pledged to secure public
deposits and repurchase agreements.
10
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Other sources of liquidity available to the Company for funds are
deposits and borrowings. The Company also uses brokered deposits as another
source of liquidity. To help ensure the ability to meet its funding needs,
including any unexpected strain on liquidity, the Company has arrangements that
allow it to purchase $25.0 million in federal funds from an independent bank. At
March 31, 2005 the Company had no purchases of federal funds compared with $15.0
million at December 31, 2004.
RESULTS OF OPERATIONS
- ---------------------
NET INCOME
Consolidated net income for the quarter ended March 31, 2005 was
$1,025,000, decreasing $636,000 compared with net income of $1,661,000 for the
same quarter of 2004. The annualized return on average assets was .55% for the
quarter, a decrease from .85% for the same quarter the previous year. The
decline in net income for the quarter is primarily the result of increases to
the provision for the allowance for loan and lease losses, losses recognized on
the sale of securities available for sale and increased noninterest expense.
NET INTEREST INCOME
Net interest income, the difference between interest income on earning
assets and interest expense on interest bearing liabilities, increased $168,000
or 3.1% to $5,616,000 during the three months ended March 31, 2005 compared with
$5,448,000 for the same period of 2004. During the quarter ended March 31, 2005,
$273,000 of interest on nonaccrual loans from one borrower was received when
these loans were paid off through the legal proceedings.
During the first three months of 2005, short-term interest rates
increased, as evidenced by the prime lending rate that was 5.25% on January 1,
2005 and increased to 5.75% by March 31, 2005. During the first quarter of 2004,
the prime lending rate remained at 4.00% during the entire quarter. Table 1
shows that the yield on interest earning assets increased 66 basis points to
4.92% during the first quarter of 2005 from 4.26% during the same quarter last
year. In calculating the yield, the $273,000 in past due interest collected on
nonaccrual loans was included. The rates on interest bearing liabilities
increased 50 basis points during the first quarter of 2005 to 1.96% as compared
with 1.46% during the first quarter of 2004. Interest rates on time deposits
increased 58 basis points from the same quarter last year and are expected to
continue to rise in 2005 based on competitive pressures. It is expected that,
due to the rising time deposit interest rates and the one-time recovery of
$273,000 in nonaccrual interest during the first quarter of 2005 discussed
above, net interest income during the second quarter of 2005 will decline when
compared to the first quarter of 2005.
ASSET QUALITY AND THE PROVISION FOR LOAN AND LEASE LOSSES
Management, with the concurrence of the Board of Directors, after
carefully reviewing the adequacy of the allowance for loan and lease losses and
the levels of nonperforming and impaired loans and leases, found that a $653,000
provision for loan and lease losses was necessary for the three months ended
March 31, 2005 compared with $250,000 for the same period of 2004. Deterioration
in the credit quality of loans at the Bank was the reason for the increased
provision during the first quarter of 2005. The majority of the increased
provision for loan and lease losses during the first quarter of 2005 resulted
from allocations made to a borrower's $4.2 million of loans that are secured by
motels. These loans have been restructured because of deterioration in the
borrower's financial condition and declining occupancy rates at the motels. At
March 31, 2005, these loans are classified as impaired loans.
11
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
TABLE 1
NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended March 31, 2005 and 2004 - Rates are Annualized
($ 000s)
2005 2004
---------------------------- --------------------------
Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ----- -------- -------- ------
Assets
Loans (1)(2)(3) $436,189 $6,521 5.98% $428,041 $5,675 5.30%
Taxable securities (4) 238,186 1,903 3.15% 256,390 1,918 2.99%
Tax advantaged securities (2)(4) 10,048 126 5.03% 11,001 147 5.48%
Federal funds sold 15,005 93 2.48% 39,685 95 .96%
-------- ------ ----- -------- ------ ------
Interest earning assets (4) 699,428 8,643 4.92% 735,117 7,835 4.26%
Noninterest earning assets 47,181 44,796
-------- --------
Average assets $746,609 $779,913
======== ========
Liabilities and stockholders'
equity
NOW deposits $ 63,556 $ 116 0.73% $ 61,159 $ 82 0.54%
Money market deposits 63,611 238 1.50% 68,415 145 0.85%
Savings deposits 82,990 185 0.89% 81,783 150 0.73%
Time deposits 325,817 2,017 2.48% 344,121 1,631 1.90%
Other borrowings 69,095 410 2.37% 78,470 305 1.55%
-------- ------ ----- -------- ------ ------
Total interest bearing
liabilities 605,069 2,966 1.96% 633,948 2,313 1.46%
------ ----- ------ ------
Demand deposits 62,119 62,503
Other noninterest bearing
liabilities 5,860 6,167
Stockholders' equity 73,561 77,295
-------- --------
Average liabilities and
Stockholders' equity $746,609 $779,913
======== ========
Net interest income $5,677 $5,522
====== ======
Net yield on interest
earning assets (4) 3.23% 3.01%
====== ======
Interest-bearing liabilities
to earning assets ratio 86.12% 86.26%
====== ======
(1) - Interest income on loans includes loan origination fees of $99 and $106
for the three months ended March 31, 2005 and 2004.
(2) - Tax-exempt income is reflected on a fully tax equivalent
basis utilizing a 34% rate.
(3) - Non-accrual loans are included in average loans.
(4) - Rate information was calculated on the average amortized cost for
securities. For the three months ended March 31, 2005 and 2004 average
balance information includes an average unrealized gain (loss) for
taxable securities of ($3,214) and ($69) and for tax-advantaged
securities of $35 and $262.
12
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
At March 31, 2005, the Company had $3.0 million of its allowance for
loan and lease losses allocated to nonperforming lease pools totaling $11.3
million that were placed on nonaccrual status at June 30, 2002. The $11.3
million in lease pools were purchased in late 2000 and 2001 from Commercial
Money Center, a now bankrupt equipment leasing company, and are secured by
equipment and carry surety bonds that were designed to provide protection
against losses from defaults on these lease pools. The sureties are Illinois
Union Insurance Company, a wholly owned subsidiary of Ace Limited Insurance
Company, and RLI Insurance Company. The Company is continuing its efforts to
collect on these leases from the sureties through litigation. The sureties have
asserted certain defenses against having to pay under the surety bonds. No
assurance can be given as to the exact amounts that will be ultimately collected
from the bankruptcy trustee and the sureties.
Since the beginning of the bankruptcy, payments by the underlying
obligors on the lease pools have been held by the lease servicer at the
direction of the bankruptcy trustee. The Company's portion of these held
payments at March 31, 2005 is approximately $1.5 million. In the second quarter
of 2004, the bankruptcy trustee brought suit against financial institutions that
had participated in the various lease pools, including the Company, alleging
that the position of the Company and the other participants in the lease pools
should be no better than that of unsecured creditors. In September 2004, the
bankruptcy judge directed all parties to engage in mediation, which occurred
later that month. The parties are now attempting to negotiate a settlement based
on the mediation. A final resolution of these bankruptcy matters is expected in
the third quarter of 2005.
At March 31, 2005, the allowance for loan and lease losses was
$7,993,000 or 1.89% of loans and leases as compared with $7,812,000 or 1.77% of
total loans and leases at December 31, 2004. During the first quarter of 2005,
$536,000 in loans were charged off against the allowance compared with
$1,508,000 during the same period last year. Of the $536,000 charged off during
the first three months of 2005, the Company had specific loss allocations of
$590,000 at December 31, 2004. There was $64,000 in recoveries of loans
previously charged off during the first three months of 2005 compared with
$4,000 in recoveries during the same period in 2004.
Nonperforming loans and leases, which include loans and leases on
nonaccrual status in addition to loans and leases 90 days or more past due and
still accruing interest, were $17.2 million at March 31, 2005 or 4.06% of total
loans and leases as compared with $19.5 million at December 31, 2004 or 4.40% of
loans and leases. The decrease in nonperforming loans and leases is primarily
the result of the charge off of $536,000 of loans and the transfer of $1.2
million in nonperforming loans to other real estate owned through foreclosure.
Also decreasing nonperforming loans from year-end was the collection and payoff
of $835,000 in nonaccrual loans brought about by collection efforts.
Included as part of the $17.2 million of nonperforming loans at March
31, 2005 were the $11.3 million in nonaccrual lease pools previously discussed
and a $4.3 million nonaccrual loan that is for a 90-unit condominium
construction project. The Company participated in this 90-unit condominium
construction project with other financial institutions and only has a portion of
the total loan. The construction project has experienced substantial cost
overruns and the principal borrowers have declared bankruptcy. The participating
financial institutions have begun foreclosure procedures. The construction
project has been completed with 68 of the 90 units having been sold and
occupied. The proceeds from the sale of these units are being held in escrow
pending the resolution of the bankruptcy and foreclosure litigation. This
litigation is not expected to be concluded prior to year-end 2005.
Impaired loans and leases at March 31, 2005 totaled $31.9 million. The
Company considers a loan or lease impaired if full principal and interest will
not be collected under the contractual terms of the note. Nonaccrual loans and
leases are included as impaired. Impaired loans and leases 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 or lease is collateral
dependent. Included as impaired loans at March 31, 2005 are
13
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
$14.8 million of restructured loans. The amount of the allowance for loan and
lease losses specifically allocated for impaired loans and leases was $5.3
million at March 31, 2005.
Another component of nonperforming assets is other real estate owned,
consisting of assets acquired through loan foreclosure and repossession. The
fair value of other real estate owned is reviewed by management at least
quarterly to help ensure the reasonableness of its carrying value, which is
lower of cost or the fair value less estimated selling costs. During the quarter
ended March 31, 2005, two properties were transferred into other real estate
owned totaling $1.2 million. One property was a foreclosed motel that has a fair
value of $1.1 million and another property with a fair value of $126,000. At
March 31, 2005, other real estate owned totaled $6.0 million. One major piece of
property reported as other real estate owned is carried at the amount of
$1,783,000 and was acquired by the Bank of Waukegan 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. The
Bank carries this property in its fully owned subsidiary, Northern States
Community Development Corporation ("NSCDC"). For purposes of financial
reporting, NSCDC is consolidated into the Bank's financial statements and the
Company carries this property as other real estate owned. This subsidiary was
formed for the purpose of developing and selling this parcel as part of the City
of Waukegan's lakefront development plans. Proposals under discussion for use of
this property include the building of a minor league baseball park and
condominiums. The Company also took title to a local office building in 2004,
valued at $1.2 million, that secured loans to a business that went bankrupt and
the Company also has title to two motels, valued together at $1.5 million. The
Company is actively attempting to sell all of these properties.
NONINTEREST INCOME
Noninterest income for the three months ended March 31, 2005 was
$869,000 decreasing $197,000 as compared with $1,066,000 for the three months
ended March 31, 2004. The decrease was primarily attributable to loss of
$169,000 on the sale of securities available for sale that had been carried at
$6.3 million prior to the sale. The securities were sold for liquidity purposes.
NONINTEREST EXPENSE
Noninterest expense for the quarter ended March 31, 2005 was
$4,354,000, increasing $577,000 from the same quarter last year. The Company's
efficiency ratio, noninterest expense divided by the sum of net interest income
and noninterest income, was 65.43% (disregarding the securities losses) for the
first quarter of 2005 as compared with 57.98% for the same quarter of 2004.
Increased salaries and employee benefits and audit and other professional fees
were the primary factors affecting noninterest expense.
Salary and employee benefits were $134,000 greater during the first
quarter of 2005 compared to the same period last year as annual salary increases
went into effect in January 2005. Continued increases to group insurance
premiums also contributed to the increase.
Audit and other nonlegal professional fees increased during the first
quarter of 2005 by $172,000 totaling $313,000 as compared with $141,000 for same
quarter last year. These fees are the result of the Company's efforts to comply
with Section 404 of the Sarbanes-Oxley Act. This additional work necessitated
that the Company hire consultants to assist management with its assessment of
its internal controls. The Company's outside auditors are required to do testing
of the Company's internal controls in order to attest to the effectiveness of
the Company's internal controls over financial reporting. It is expected that
audit and other professional fees will continue to be at higher levels during
the remaining quarters of 2005 than they were in 2004 as the Sarbanes-Oxley
Section 404 assessment must be performed annually and the Company has chosen to
outsource a majority of its internal audit work.
14
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
Other operating expenses were $719,000 for the first quarter of 2005,
increasing $265,000 compared with the first quarter of 2004. The Bank had
increases of $87,000 to loan and collection expenses and other real estate owned
expenses due to increases in impaired loans and the transfer of $1.2 million of
loans to other real estate owned. The Bank's FDIC assessment rate was increased
during 2005 and FDIC expense for the quarter ended March 31, 2005 increased
$41,000 as compared with the same period last year. Operating losses from check
forgeries and fraud increased $43,000 during the first quarter of 2005, as
during the first quarter of 2004 there had been a recovery of $48,000.
Occupancy expenses increased $43,000, data processing expense increased
$59,000 and legal expenses declined $96,000 during the three months ended March
31, 2005 compared with the same period last year. Increased maintenance expenses
related to buildings and equipment as it has aged account for the increase in
occupancy expenses. The increase in data processing expense is the result of the
outsourcing of the Company's item processing function in April 2004. Legal
expenses declined as the Company received a reimbursement of $83,000 in legal
fees previously expensed for collection efforts on nonaccrual loans.
FEDERAL AND STATE INCOME TAXES
For the three months ended March 31, 2005, the Company's income tax
expense was $453,000 compared with income tax expense of $826,000 for the same
three months last year. As a percentage of pre-tax income, tax expense was 30.7%
for the first quarter of 2005 and 33.2% for the first quarter of 2004. The tax
rate declined during the first quarter of 2005, as a larger percentage of
pre-tax income was not taxable for state purposes due to interest earned on the
Company's U.S. agency securities portfolio.
CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS
- ----------------------------------------------------------
The Company has contractual obligations that may not appear on the
balance sheet. The largest of these obligations are commitments to make loans or
extend credit through stand-by letters of credit. Many of the commitments expire
without being used. Table 2 presents the Company's significant fixed and
determinable contractual obligations as of March 31, 2005, by payment date. The
payment amounts in Table 2 represent those amounts contractually due to the
recipient and do not include any unamortized premiums or discounts or similar
carrying amount adjustments.
TABLE 2
NORTHERN STATE FINANCIAL CORPORATION
CONTRACTUAL OBLIGATIONS, COMMITMENTS, CONTINGENT
LIABILITIES AND OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2005
($ 000s)
Greater than Greater than
1 yr. and less 3 yrs. and less
One year than or equal than or equal Greater than
Contractual obligations or less to 3 yrs. to 5 yrs. 5 yrs. Total
-------- -------------- --------------- ------------ --------
Long-term debt
Federal Home Loan Bank advance $ 0 $ 6,500 $ 0 $0 $ 6,500
Time deposits 293,689 36,727 130 0 330,546
Other contractual obligations
Standby letters of credit 4,345 0 0 0 4,345
Community Reinvestment Act
Investment commitment 42 395 272 0 709
15
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
ITEM 3. 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.
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.
One approach used by management to analyze IRR is to periodically
evaluate the "shock" to the balance sheet of an assumed instantaneous decrease
and increase in rates of 2% using computer simulation to show the effect of rate
changes on the fair value of the Company's financial instruments. This approach
falls under the broad definition of asset/liability management. The Company's
primary asset/liability management technique is the interest rate shock.
Several ways the Company can manage IRR include: selling existing
assets or repaying certain liabilities and matching repricing periods for new
assets and liabilities, for example, by shortening terms of new loans or
securities. Financial institutions are also subject to prepayment risk in a
falling rate environment. For example, a debtor may prepay financial assets so
that the debtor may refinance 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 longer-term loans
or securities. 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.
Financial institutions are also subject to interest rate risk in a
rising rate environment. For example, call features on securities may not be
exercised and the lower yielding securities may remain in the Company's
securities portfolio until maturity.
Table 3 shows how interest rate shocks of decreasing rates 2% and
increasing rates 2% affect the fair value of the Company's financial instruments
at March 31, 2005 and December 31, 2004. The computer simulation model used to
do the interest rate shocks and calculate the effect on the fair value of the
Company's financial instruments takes into consideration maturity and repricing
schedules of the various assets and liabilities as well as call provisions on
the Company's securities. At March 31, 2005 the fair value of securities
available for sale increases $7.0 million when rates are shocked downward 2%
while the fair value decreases $9.2 million for a 2% upward rate shock. The
change in fair value of securities is smaller when rates are shocked down
because there were call provisions on $154.2 million of the U.S. Government
agency securities at March 31, 2005. At March 31, 2005 the fair value of the
Company's financial asset instruments was $702.8 million compared to the fair
value on the Company's financial asset instruments at December 31, 2004 of
$717.1 million.
16
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
TABLE 3
NORTHERN STATES FINANCIAL CORPORATION
EFFECT OF INTEREST SHOCKS ON FINANCIAL INSTRUMENTS
as of March 31, 2005
($000s)
Fair Value at March 31, 2005
---------------------------------------
Down 2% Current Up 2%
-------- -------- --------
Assets
Cash and cash equivalents $ 42,669 $ 42,667 $ 42,665
Securities available for sale 249,296 242,289 233,092
Loans and leases 425,343 413,671 402,680
Federal Home Loan Bank and Federal
Reserve Bank stock 2,015 2,015 2,015
Accrued interest receivable 3,947 3,947 3,947
Financial liabilities:
Deposits $596,153 $591,959 $588,165
Securities sold under repurchase agreements
and other short-term borrowings 58,067 58,044 58,022
Federal Home Loan Bank term advance 6,591 6,299 6,020
Advances from borrowers for taxes and insurance 1,350 1,350 1,350
Accrued interest payable 2,352 2,352 2,352
Fair Value at December 31, 2004
---------------------------------------
Down 2% Current Up 2%
-------- -------- --------
Assets
Cash and cash equivalents $ 29,300 $ 29,299 $ 29,298
Securities available for sale 257,458 250,929 239,934
Loans and leases 444,563 431,293 418,867
Federal Home Loan Bank and Federal
Reserve Bank stock 2,138 2,138 2,138
Accrued interest receivable 3,447 3,447 3,447
Financial liabilities:
Deposits $591,376 $587,529 $583,996
Securities sold under repurchase agreements
and other short-term borrowings 59,747 59,636 59,526
Federal funds purchased 15,000 15,000 15,000
Federal Home Loan Bank term advance 6,680 6,356 6,048
Advances from borrowers for taxes and insurance 906 906 906
Accrued interest payable 2,140 2,140 2,140
17
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
As of the end of the period covered by this report, an evaluation was
carried out under the supervision and with the participation of Northern States
Financial Corporation's management, including our Chairman of the Board and
President and Vice President and Treasurer, of the effectiveness of our
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934). Based on and as of the date of their
evaluation, our Chairman of the Board and President and Vice President and
Treasurer have concluded that the Company's disclosure controls and procedures
are effective to ensure that information required to be disclosed by Northern
States Financial Corporation in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and forms and are
effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Exchange Act is accumulated and
communicated to the Company's management, including our Chairman of the Board
and President and Vice President and Treasurer, to allow timely decisions
regarding required disclosure.
There was no change in the Company's internal control over financial
reporting that occurred during the first quarter of 2005, that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
Due to the nature of their business, the Company and its subsidiaries
are often subject to various legal actions. Other than as described below, these
legal actions, whether pending or threatened, arise through the normal course of
business and are not considered unusual or material.
As previously disclosed, on May 5, 2004, the bankruptcy trustee for
Commercial Money Center and its affiliate brought suit in the United States
Bankruptcy Court Southern District of California (San Diego) against financial
institutions owning the various lease pools, including the Company, in an
attempt to make the financial institutions unsecured creditors (Adversary
Proceeding 04-90139-JH), alleging, among other things, that the Bank of Waukegan
failed to timely file Form UCC-1 Financing Statements relating to the
acquisition of certain rights associated with individual lease pools and
property.
At March 31, 2005, the bankruptcy trustee continues to hold
approximately $1.5 million of payments on the Company's lease pools that the
Company had previously expected would be paid to the Company by the bankruptcy
trustee. In September 2004, the bankruptcy judge directed all parties to engage
in mediation, which occurred later that month. The parties are now attempting to
negotiate a settlement based on the mediation. A final resolution of these
matters is expected in the third quarter of 2005.
The Company is continuing its efforts to collect on these leases from
the sureties through litigation. The sureties have asserted certain defenses
against having to pay under the surety bonds, including fraud. No assurance can
be given as to the exact amounts that will be ultimately collected from the
bankruptcy trustee and the sureties.
18
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
ITEM 2. UNREGISTED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
- -----------------------------------------------------------------
ISSUER PURCHASES OF EQUITY SECURITIES
There were no purchases made by, or on behalf of, the Company of shares
of the Company's common stock during the quarterly period ended March 31, 2005.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ----------------------------------------
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None
ITEM 5. OTHER INFORMATION
- --------------------------
None
ITEM 6. EXHIBITS
- -----------------
(a) Exhibits.
Exhibit 3.1 Articles of Incorporation of the Company, as amended to date.
(Filed with Company's annual report on Form 10-K for the year ended
December 31, 1994 (Commission File 0-19300) and incorporated herein by
reference.)
Exhibit 3.2 By-Laws of the Company, as amended and restated to date. (Filed
with Company's quarterly report on Form 10-Q for the quarter ended March
31, 2004 (Commission File 0-19300) and incorporated herein by reference.)
Exhibit 31.1 Section 302 Certification of Chairman of the Board and
President.
Exhibit 31.2 Section 302 Certification of Vice President and Treasurer.
Exhibit 32.1 Section 906 Certification.
19
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
FORM 10-Q
---------
MARCH 31, 2005
--------------
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned hereunto duly authorized, on this 9th day of May, 2005.
NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
Date: May 9, 2005 By: /s/ Fred Abdula
------------------------- ------------------------------------
Fred Abdula
Chairman of the Board of
Directors and President
Date: May 9, 2005 By: /s/ Thomas M. Nemeth
------------------------- ------------------------------------
Thomas M. Nemeth
Vice President and Treasurer
20
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
FORM 10-Q
---------
MARCH 31, 2005
--------------
EXHIBIT INDEX
-------------
Exhibits
- --------
Exhibit 3.1 Articles of Incorporation of the Company, as amended to date.
(Filed with Company's annual report on Form 10-K for the year ended
December 31, 1994 (Commission File 0-19300) and incorporated herein by
reference.)
Exhibit 3.2 By-Laws of the Company, as amended and restated to date. (Filed
with Company's quarterly report on Form 10-Q for the quarter ended March
31, 2004 (Commission File 0-19300) and incorporated herein by reference.)
Exhibit 31.1 Section 302 Certification of Chairman of the Board and
President.
Exhibit 31.2 Section 302 Certification of Vice President and Treasurer.
Exhibit 32.1 Section 906 Certification.
21