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
allowance for loan losses, 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 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, are carried at cost.
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. Securities are written down to
fair value when a decline in fair value is not temporary.
Loans
Held for Sale: Loans held for sale are
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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: The allowance for loan losses is
a valuation allowance for probable incurred credit losses, increased
by the provision for loan losses and decreased by charge-offs less
recoveries. Management estimates the allowance balance required using
past loan 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, but the entire allowance
is available for any loan that, in management's judgment, should be
charged-off. Loan losses are charged against the allowance when management
believes the uncollectibility of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms
is not expected. Impairment is evaluated in total for smaller-balance
loans of similar nature such as residential mortgage, consumer, and
credit card loans, and on an individual loan basis for other loans.
If a loan is impaired, a portion of the allowance is allocated so
that the loan is reported, net, at the present value of estimated
future cash flows using the loan's existing rate or at the fair value
of collateral if repayment is expected solely from the collateral.
Office
Buildings and Equipment: Landis carried at cost. Office
buildings and equipment are carried at cost 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
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