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Principles
of Consolidation: The consolidated financial
statements include the accounts of Northern States Financial
Corporation (“Company”) its wholly owned subsidiary,
NorStates Bank (“Bank”) and NorStates Bank’s majority-owned
subsidiary, Northern States Community Development Corporation
(“NSCDC”). NSCDC was formed in 2002 and the Bank contributed
a parcel of the other real estate owned and cash to
this entity.
On November 10, 2005, Bank
of Waukegan and First State Bank of Round Lake, both
wholly owned subsidiaries of the Company, were merged
together. Bank of Waukegan was the resulting Bank
from the merger, under the name NorStates Bank. As
discussed in Note 18, the Company acquired First State
Bank of Round Lake on January 5, 2004. Significant
intercompany transactions and balances are eliminated
in consolidation.
Nature
of Operations: The Company’s and the Bank’s
revenues, operating income and assets are primarily
derived from banking activities. 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 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 disclosure provided, and future results could
differ. The allowance for loan and lease losses, fair
value 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. Net cash flows
are reported for customer loan and deposit transactions,
securities sold under repurchase agreements and other
shortterm borrowings.
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. Restricted securities, such as
Federal Home Loan Bank of Chicago stock and Federal
Reserve Bank stock, are carried at cost.
Gains and losses on sales
are determined using the
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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.
Declines in fair value of securities
below their cost that are other than temporary are reflected
as realized losses. In estimating other-than-temporary
losses, management considers: (1) the length of time
and extent that fair value has been less than cost,
(2) the financial condition and near term prospects
of the issuer, and (3) the Company’s ability and intent
to hold the security for a period sufficient to allow
for any anticipated recovery in fair value.
Loans and Leases:
Loans and leases 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
deferred loan fees and costs over the loan term. Interest
income on mortgage and commercial loans is discontinued
at the time the loan is 90 days delinquent unless the
credit is well-secured and in process of collection.
Consumer loans are typically charged-off when they become
later than 180 days past due. In all cases, loans are
placed on nonaccrual or charged off if collection of
principal or interest is considered doubtful.
Interest received on nonaccrual
loans is accounted for on the cash-basis or cost-recovery
method, until qualifying for return to actual accrual.
Loans are returned to accrual status when all the principal
and interest amounts contractually due are brought current
and future payments are reasonably assured.
Allowance for Loan and
Lease Losses: 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 estimated 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, in the management’s judgement, should
be charged-off. Loan and lease losses are charged against
the allowance when management believes the uncollectibility
of a loan or lease balance is confirmed.
A loan or lease is impaired
when full payment under the loan or lease 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
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