| Principles of
Consolidation: |
The consolidated |
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| 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. During 1998, the Company received approval from all
applicable regulatory agencies to merge First Federal Bank, fsb (the "Thrift")
into the Bank. The merger was completed in 1998 and was accounted for as an internal
reorganization. Accordingly, the notes to the consolidated financial statements where
Bank-only information is presented have been restated to reflect the internal
reorganization as if it had occurred on January 1, 1996. |
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| Nature of Operations: |
The Company's and the |
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| 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
state- |
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| ments 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 equival- |
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| ents 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. |
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| 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. |
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.. |
| 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 |
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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. |
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| Allowance for Loan
Losses: |
Because some loans |
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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 possible 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 nonaccrual status and other selected watch list
loans are considered impaired. Impaired loans or portions thereof |
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