Once again, we are pleased to report that Northern States Financial Corporation’s net income set another record in 1999. Profits for the fourth quarter also reached the highest level for any single quarter in the Bank of Waukegan’s 37-year history. The cash dividend was increased for the 17th consecutive year.

      Earnings rose 7.9% over 1998 as the interest rate spread increased in 1999 to 3.26% from 3.06% in 1998. The Company also experienced higher non-interest income from service fees and trust services. Non-interest expense, primarily general and administrative costs, was a smaller proportion of total income than a year ago, affirming our reputation as an area leader in controlling overhead.
      Total assets declined $9 million as rising interest rates in the second half of the year dampened demand for loans. Deposits also fell, by $22 million or 6%, primarily reflecting a shift by large depositors ($100,000 or more) from certificates of deposits to repurchase agreements, which offer greater security.      Interest income is the primary source of revenue for the Company. It comprised 90.4% of the Company’s total revenues in 1999. Net interest income, the difference between interest income earned and interest paid, rose 2.7%. The principal reason why net interest income rose in 1999 was an increase in the interest rate spread, which saw rates on interest earning assets decline by 30 basis points, or 30/100 of 1% (.30%), while rates on interest bearing liabilities decreased 50 basis points.
      Several factors affect net interest income. One is changes in interest rates, generally expressed by the prime lending rate. The prime rate was stable during the first half of 1999, but rose gradually in the second half. Overall, the average weighted prime rate in 1999 was 8.02%, a

decrease of 34 basis points from 1998. Another factor was that rates earned on average loans in 1999 decreased, not only because of the decline in the prime rate but because of competitive pressures. A third factor is the percentage of our assets that earn interest. This percentage declined slightly during 1999 to 94.44%. This decline was caused by the upswing in interest rates in the second half that lowered the carrying value of the Bank’s securities, which move opposite to the direction of interest rates, as well as potential customer Y2K concerns that caused us to keep higher amounts of cash on hand.
      Another factor influencing net interest income is how many cents of each dollar of assets are funded by an interest bearing liability. This relationship increased nominally to 80 percent in 1999 from 79 percent in 1998, which had a slightly negative effect on net interest income for 1999.
      Average loans as a percent of earning assets (loans plus securities) increased in 1999. This has a positive impact on our earnings because loans normally earn higher yields than securities.
      Average interest bearing deposits decreased during 1999. This occurred primarily in time deposits when some of the Bank’s customers transferred their time deposits into repurchase agreements, which provide the customer with the added security of an investment security pledged by the Bank. Some of the decrease was also caused by the Bank’s decision not to meet higher competitive rates on time deposits, rates that would have undermined our profit margins. Rates on average time deposits were lower in 1999 than 1998 by 51 basis points because many were opened in late 1998 and early 1999 when rates were lower. Interest rates paid on deposits and charged for loans by the Company were competitive with other local financial institutions during 1999.