#  

**U.S. Securities and ExchangeCommission**

**Washington, D.C. 20549**

** **

### **FORM 10-QSB**

 
| ý |   | **QUARTERLY REPORT  UNDER SECTION 13 OF 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------|--------|----------------------------------------------------------------------------------------|

** **

** **

# **Forthe quarterly period ended September 30, 2001**

** **

**OR**

** **
| o |   | **TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE  SECURITIES EXCHANGE ACT** |
|---|--------|---------------------------------------------------------------------------------|

** **

**For the transition period from ____________ to ____________**

** **

**Commission File No. 000-25231**

** **

**Northern Star Financial, Inc.**

(Exact name of registrantas specified in its charter)

 

| **Minnesota**                                          |   | **41-1912467**      |
|--------------------------------------------------------|--------|---------------------|
| (State of  Incorporation)                              |   | (IRS Employer ID #) |
|                                                   |   |                |
| **1650 Madison Avenue  Mankato, MN** **56001**    |
| (Address of Principal  Executive Offices)              |
|                                                   |   |                |
| **507-387-2265**                                       |
| (Issuer’s Telephone  Number, Including Area Code) |

 

Check whether the issuer(1) filed all reports required to be filed by Sections 13 or 15(d) of theExchange Act during the past 12 months (or such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   Yes ý    No o

 

State the number ofshares outstanding of each of the issuer’s classes of common equity as of thelatest practicable date.

 

**Class: Common Stock, par value $.01 per share**

**Outstanding shares at September 30, 2001: 479,506**

 

 

**Northern Star Financial, Inc. and Subsidiary**

 

**Northern Star Financial, Inc.**

**Index to Form 10-QSB**

**September 30, 2001**

 
| PART I.    |     | FINANCIAL INFORMATION                                                                                          |
|------------|----------|----------------------------------------------------------------------------------------------------------------|
|       |
|       | Item 1.  | Summary  Financial Data                                                                                        |
|       |     |                                                                                                           |
|       |     | Consolidated  Statements of Financial Condition at September 30, 2001 (unaudited) and June  30, 2001 (audited) |
|       |     |                                                                                                           |
|       |     | Unaudited  Consolidated Statements of Operations for the three months ended September  30, 2001 and 2000       |
|       |     |                                                                                                           |
|       |     | Unaudited  Consolidated Statement of Cash Flows for the three months ended September 30,  2001 and 2000        |
|       |     |                                                                                                           |
|       |     | Notes  to Condensed Consolidated Financial Statements (unaudited)                                              |
|       |     |                                                                                                           |
|       | Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                    |
|       |
| PART  II.  |     | OTHER INFORMATION                                                                                              |
|       |
|       | Item 1.  | Legal Proceedings                                                                                              |
|       |     |                                                                                                           |
|       | Item 2.  | Changes in Securities                                                                                          |
|       |     |                                                                                                           |
|       | Item 3.  | Default upon  Senior Securities                                                                                |
|       |     |                                                                                                           |
|       | Item  4. | Submission  of Matters to a Vote of Security Holders                                                           |
|       |     |                                                                                                           |
|       | Item 5.  | Other Information                                                                                              |
|       |     |                                                                                                           |
|       | Item 6.  | Exhibits and  Reports on Form 8-K                                                                              |
|       |
| SIGNATURES |
|            |          |                                                                                                                |  |  |

 

**Northern Star Financial Summary Financial Data**

 

The following tablesummarizes certain historical financial data of Northern Star Financial, Inc.and its subsidiary on a consolidated basis as of and for the three months endedSeptember 30, 2001 and 2000. You should read this table in conjunction with ourfinancial statements and related notes appearing elsewhere in this document.

** **
|                                                                 |   | **As of or for the Three Months** |     |
|----------------------------------------------------------------------|--------|-----------------------------------|----------|
|                                                                 |   | **Ended September 30,**           |     |
|                                                                 |   | **2001**                          |     | **2000** |   |
|                                                                 |   | **(unaudited)**                   |     | **(unaudited)** |   |
| Statement of Income:                                                 |   |                              |     |   |   |
| Interest income                                                      |   | $                                 | 686,788  |   | $ | 542,518 |   |
| Interest expense                                                     |   | 507,565                           |     | 329,935 |   |
| Net interest income                                                  |   | 179,223                           |     | 212,583 |   |
| Provision for loan losses                                            |   | (294,400                          | )        | (20,350 | ) |
| Other non-interest income                                            |   | 62,028                            |     | 29,519 |   |
| Non-interest expense                                                 |   | (342,656                          | )        | (267,605 | ) |
| Income (loss) before income tax expense                              |   | (395,805                          | )        | (45,853 | ) |
| Income tax expense (benefit)                                         |   | -                                 |     | - |   |
| Net income (loss)                                                    |   | $                                 | (395,805 | ) | $ | (45,853 | ) |
| Balance Sheet:                                                       |   |                              |     |   |   |
| Assets                                                               |   | 42,549,313                        |     | $ | 28,259,589 |   |
| Allowance for loan losses                                            |   | 528,801                           |     | 201,850 |   |
| Deposits                                                             |   | 34,636,513                        |     | 22,743,982 |   |
| Stockholders' equity                                                 |   | 2,644,401                         |     | 2,765,210 |   |
|                                                                 |   |                              |     |   |   |
| Per Share Data:                                                      |   |                              |     |   |   |
| Net income (loss) – basic                                       |   | $                                 | (0.83    | ) | $ | (0.11 | ) |
| Net income (loss) – diluted                                     |   | $                                 | (0.83    | ) | $ | (0.11 | ) |
| Book value                                                           |   | 5.51                              |     | 6.47 |   |
|                                                                 |   |                              |     |   |   |
| Other Data                                                           |   |                              |     |   |   |
| Average shares outstanding – basic                              |   | 479,506                           |     | 427,600 |   |
| Average shares outstanding – diluted                            |   | 479,506                           |     | 427,600 |   |
|                                                                 |   |                              |     |   |   |
| Financial Ratios:                                                    |   |                              |     |   |   |
| Equity to assets                                                     |   | 6.21                              | %        | 10.69 | % |
| Return on average assets                                             |   | (0.97                             | )%       | (0.18 | )% |
| Return on average stockholders' equity                               |   | (14.04                            | )%       | (1.65 | )% |
| Net interest margin                                                  |   | 1.83                              | %        | 3.47 | % |
|                                                                 |   |                              |     |   |   |
| Bank only Capital Ratios:                                            |   |                              |     |   |   |
| Tier 1 leverage ratio                                                |   | 9.07                              | %        | 9.90 | % |
| Tier 1 capital to risk-weighted assets                               |   | 12.21                             | %        | 12.09 | % |
| Total capital to risk-weighted assets                                |   | 13.47                             | %        | 13.05 | % |
|                                                                 |   |                              |     |   |   |
| Asset Quality Ratios:                                                |   |                              |     |   |   |
| Nonperforming assets to total assets                                 |   | .36                               | %        | 0.03 | % |
| Nonperforming assets to total loans and  and other real estate owned |   | .36                               | %        | 0.04 | % |
| Allowance for loan losses to total loans                             |   | 2.05                              | %        | 1.00 | % |
|                                                                      |        |                                   |          |  |  |  |  |  |

 

**NorthernStar Financial, Inc. and Subsidiary**

Consolidated Statements of Financial Condition

 
|                                                                                               |   | **September  30, 2001** |          | **June 30, 2001** |   |
|----------------------------------------------------------------------------------------------------|--------|-------------------------|---------------|-------------------|--------|
|                                                                                               |   | **(Unaudited)**         |          | **(Audited)**     |   |
| **ASSETS**                                                                                         |   |                    |          |              |   |
|                                                                                               |   |                    |          |              |   |
| Cash and cash equivalents:                                                                         |   |                    |          |              |   |
| Cash and due from banks                                                                            |   | $                       | 1,111,501     |              | $      | 870,133 |   |
| Federal funds sold                                                                                 |   | 1,843,000               |          | 3,438,000         |   |
| Total cash and cash equivalents                                                                    |   | 2,954,501               |          | 4,308,133         |   |
| Securities available for sale, at fair  value                                                      |   | 11,999,207              |          | 9,623,962         |   |
| Federal Home Loan Bank stock, at cost                                                              |   | 158,800                 |          | 138,800           |   |
| Loans held for sale                                                                                |   | 1,007,697               |          | 825,649           |   |
| Loans receivable, net of allowance for  loan and lease losses of $528,801 and $234,989             |   | 25,427,704              |          | 23,446,685        |   |
| Accrued interest receivable                                                                        |   | 373,956                 |          | 357,301           |   |
| Property and equipment, net of  depreciation                                                       |   | 570,444                 |          | 381,527           |   |
| Other assets                                                                                       |   | 57,004                  |          | 52,677            |   |
| **Total Assets**                                                                                   |   | $                       | 42,549,313    |              | $      | 39,134,734 |   |
|                                                                                               |   |                    |          |              |   |
|                                                                                               |   |                    |          |              |   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                           |   |                    |          |              |   |
| **Liabilities:**                                                                                   |   |                    |          |              |   |
| Demand deposits                                                                                    |   | $                       | 2,155,058     |              | $      | 1,468,846 |   |
| NOW accounts                                                                                       |   | 687,672                 |          | 657,420           |   |
| Savings and money market                                                                           |   | 9,054,644               |          | 7,603,740         |   |
| Time deposits                                                                                      |   | 22,739,139              |          | 23,087,058        |   |
| Total deposits                                                                                     |   | 34,636,513              |          | 32,817,064        |   |
| Notes Payable and other borrowings                                                                 |   | 3,775,000               |          | 2,875,000         |   |
| Convertible subordinated notes payable                                                             |   | 1,000,000               |          | -                 |   |
| Accrued interest payable and other                                                                 |   | 492,399                 |          | 461,086           |   |
| Total Liabilities                                                                                  |   | 39,904,912              |          | 36,163,150        |   |
|                                                                                               |   |                    |          |              |   |
| **Shareholders’ Equity:**                                                                     |   |                    |          |              |   |
| Common Stock, $.01 par value, 15,000,000  shares authorized; 479,506 shares issued and outstanding |   | 4,795                   |     | 4,795             |   |
| Undesignated stock, par value $.01per  share; 5,000,000 shares authorized, no shares issued        |   | -                       |     | -                 |   |
| Additional paid in capital                                                                         |   | 4,158,504               |          | 4,158,504         |   |
| Accumulated deficit                                                                                |   | (1,587,848              | )             | (1,192,043        | )      |
| Unearned stock compensation                                                                        |   | (15,000                 | )             | (16,000           | )      |
| Accumulated comprehensive income (loss)                                                            |   | 83,950                  |          | 26,328            |   |
| **Total Shareholders' Equity**                                                                     |   | 2,644,401               |          | 2,981,584         |   |
| **Total Liabilities and Shareholders’ Equity**                                                |   | $                       | 42,549,313    |              | $      | 39,134,734 |   |

 

See Notes to ConsolidatedFinancial Statements

 

**NorthernStar Financial, Inc. and Subsidiary**

Unaudited Consolidated Statements of Operations

 
|                                                            |   | **For the Three Months** |     |
|-----------------------------------------------------------------|--------|--------------------------|----------|
|                                                            |   | **Ended September 30,**  |     |
|                                                            |   | **2001**                 |     | **2000** |   |
| **Interest income**                                             |   |                     |     |   |   |
| Loans receivable                                                |   | $                        | 498,126  |   | $ | 439,925 |   |
| Securities available for sale                                   |   | 148,293                  |     | 77,487 |   |
| Federal funds sold                                              |   | 40,369                   |     | 25,406 |   |
| Total interest income                                           |   | 686,788                  |     | 542,818 |   |
|                                                            |   |                     |     |   |   |
| **Interest expense**                                            |   |                     |     |   |   |
| Deposits                                                        |   | 444,011                  |     | 284,135 |   |
| Borrowed funds                                                  |   | 63,554                   |     | 45,800 |   |
| Total interest expense                                          |   | 507,565                  |     | 329,935 |   |
|                                                            |   |                     |     |   |   |
| Net interest income                                             |   | 179,223                  |     | 212,583 |   |
| Provision for loan losses                                       |   | 294,400                  |     | 20,350 |   |
|                                                            |   |                     |     |   |   |
| Net interest income after provision for  loan losses            |   | (115,177                 | )        | 192,233 |   |
|                                                            |   |                     |     |   |   |
| **Noninterest income:**                                         |   |                     |     |   |   |
| Other fees and service charges                                  |   | 28,313                   |     | 19,423 |   |
| Gain on sale of securities                                      |   | 4,508                    |     | - |   |
| Gain on sale of loans                                           |   | 29,207                   |     | 10,096 |   |
| Total noninterest income                                        |   | 62,028                   |     | 29,519 |   |
|                                                            |   |                     |     |   |   |
| **Noninterest expense**                                         |   |                     |     |   |   |
| Compensation and employee benefits                              |   | 159,369                  |     | 108,053 |   |
| Board fees                                                      |   | 20,000                   |     | 19,500 |   |
| Occupancy                                                       |   | 35,470                   |     | 19,153 |   |
| Legal and accounting                                            |   | 6,538                    |     | 22,253 |   |
| Printing & supplies                                         |   | 20,947                   |     | 6,659 |   |
| Property and equipment depreciation                             |   | 16,691                   |     | 16,854 |   |
| Data processing                                                 |   | 19,538                   |     | 17,552 |   |
| Other                                                           |   | 64,103                   |     | 42,361 |   |
| Total noninterest expense                                       |   | 342,656                  |     | 252,385 |   |
|                                                            |   |                     |     |   |   |
| **Loss Before Income Tax Benefit and Discontinued  Operations** |   | (395,805                 | )        | (30,633 | ) |
| Income Tax Benefit                                              |   | -                        |     | - |   |
|                                                            |   |                     |     |   |   |
| **Loss from Continuing Operations**                             |   | (395,805                 | )        | (30,633 | ) |
| Loss from Discontinued Operations                               |   | -                        |     | (15,220 | ) |
|                                                            |   |                     |     |   |   |
| **Net Loss**                                                    |   | $                        | (395,805 | ) | $ | (45,853 | ) |
|                                                            |   |                     |     |   |   |
| **Net Loss per Common Share**                                   |   |                     |     |   |   |
| Basic from Continuing Operations                                |   | $                        | (0.83    | ) | $ | (0.07 | ) |
| Basic from Discontinued Operations                              |   | -                        |     | (0.04 | ) |
|                                                            |   |                     |     |   |   |
| Basic (loss) per share of common stock                          |   | $                        | (0.83    | ) | $ | (0.11 | ) |

 

See Notes to ConsolidatedFinancial Statements

**NorthernStar Financial, Inc. and Subsidiary**

###### **Unaudited Consolidated Statementsof Cash Flows**

 
|                                                                                       |   | **For the Three Months** |          |
|--------------------------------------------------------------------------------------------|--------|--------------------------|---------------|
|                                                                                       |   | **Ended September 30,**  |          |
|                                                                                       |   | **2001**                 |          | **2000** |   |
| Cash flows from operating activities:                                                      |   |                     |          |   |   |
| Net (loss)                                                                                 |   | $                        | (395,805      | ) | $ | (45,852 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |   |                     |          |   |   |
| Depreciation                                                                               |   | 19,409                   |          | 16,854 |   |
| Loss on disposition of joint venture                                                       |   | -                        |          | 15,220 |   |
| Provision for loan losses                                                                  |   | 294,400                  |          | 20,350 |   |
| Net amortization and accretion of bond  premiums and discounts                             |   | 4,467                    |          | (2,685 | ) |
| Deferred loan fees and costs, net                                                          |   | (16,636                  | )             | (4,249 | ) |
| Earned stock compensation                                                                  |   | 1,000                    |          | 1,003 |   |
| Gain on sale of available for sale  securities                                             |   | (4,508                   | )             | - |   |
| (Increase) decrease in:                                                                    |   |                     |          |   |   |
| Loans held for sale                                                                        |   | (182,048                 | )             | 266,600 |   |
| Accrued interest receivable                                                                |   | (16,655                  | )             | (38,616 | ) |
| Other assets                                                                               |   | (4,327                   | )             | 1,321 |   |
| Increase (decrease) in:                                                                    |   |                     |          |   |   |
| Accrued interest payable and other  liabilities                                            |   | 4,420                    |          | 198,867 |   |
| Net cash provided by (used in) operating  activities                                       |   | (305,804                 | )             | 428,813 |   |
|                                                                                       |   |                     |          |   |   |
| Cash flows from investing activities:                                                      |   |                     |          |   |   |
| Purchases of available-for-sale securities                                                 |   | (4,021,488               | )             | - |   |
| Proceeds from maturities of  available-for-sale securities                                 |   | 743,820                  |          | - |   |
| Proceeds from the sale of  available-for-sale securities                                   |   | 997,500                  |          | - |   |
| Purchases of FHLB stock                                                                    |   | (20,000                  | )             | (37,500 | ) |
| Investment in joint venture                                                                |   | -                        |          | 67,352 |   |
| Loan originations and principal payments  on loans, net                                    |   | (2,258,783               | )             | (3,538,934 | ) |
| Purchase of property and equipment                                                         |   | (208,326                 | )             | (856 | ) |
|                                                                                       |   |                     |          |   |   |
| Net cash used in investing activities                                                      |   | (4,767,277               | )             | (3,509,938 | ) |
|                                                                                       |   |                     |          |   |   |
| Cash flows from financing activities:                                                      |   |                     |          |   |   |
| Net increase (decrease) in non-interest  bearing demand and savings deposit accounts       |   | 2,123,516                |     | (164,921 | ) |
| Net (decrease) increase in time deposits                                                   |   | (304,067                 | )             | 4,500,666 |   |
| Principal payments on borrowings                                                           |   | -                        |          | (300,000 | ) |
| Proceeds from borrowings                                                                   |   | 1,900,000                |          | 1,050,000 |   |
| Net cash provided by financing activities                                                  |   | 3,719,449                |          | 5,085,745 |   |
|                                                                                       |   |                     |          |   |   |
| Net (decrease) increase in cash and cash  equivalents                                      |   | (1,353,632               | )             | 2,004,620 |   |
|                                                                                       |   |                     |          |   |   |
| Cash and cash equivalents, beginning                                                       |   | 4,308,133                |          | 689,204 |   |
|                                                                                       |   |                     |          |   |   |
| Cash and cash equivalents, ending                                                          |   | $                        | (2,954,501    | ) | $ | 2,693,824 |   |
|                                                                                       |   |                     |          |   |   |
| Supplemental disclosure of cash flow  information:                                         |   |                     |          |   |   |
| Cash paid for interest                                                                     |   | $                        | 512,592       |   | $ | 111,573 |   |
|                                                                                            |        |                          |               |  |  |  |  |  |

 

See Notes to ConsolidatedFinancial Statements

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2001 (Unaudited)**

 

Note 1: PRINCIPLES OF CONSOLIDATION

 

The unaudited consolidated financial statements as ofand for the three month period ended September 30, 2001 include the accounts ofNorthern Star Financial, Inc. (the “Company”) and its wholly owned subsidiaryNorthern Star Bank (the “Bank”). All significant inter-company accounts andtransactions have been eliminated in consolidation.

 

Note 2: BASIS OF PRESENTATION

 

The accompanying unaudited interim consolidatedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States of America for interimfinancial information. Accordingly, they do not include all information anddisclosures required by generally accepted accounting principles for completefinancial statements. The accompanying consolidated financial statements do notpurport to contain all the necessary financial disclosures required bygenerally accepted accounting principles that might otherwise be necessary inthe circumstances and should be read with the fiscal 2001 consolidatedfinancial statements and notes of Northern Star Financial, Inc. and Subsidiaryincluded in their annual report as of and for the year ended June 30, 2001.

 

                In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for fair presentations have been included. The results ofoperations for the three month periods ended September 30, 2001 and 2000, arenot necessarily indicative of the results that may be expected for the entirefiscal year or any other interim period.

 

Note 3: EARNINGS PER SHARE

 

                The earnings pershare amounts were computed using the weighted average number of sharesoutstanding during the periods presented. For the three month periods endedSeptember 30, 2001 and 2000 the weighted average number of shares outstandingfor basic and diluted earnings per share computation were 479,506 and 427,600respectively. Potential common shares related to stock options, warrants, andconvertible subordinated notes payable were not included in the calculation ofdiluted earnings per share because they were anti-dilutive.

 

Note 4: COMPREHENSIVE (LOSS)

 
|                                                           |   | **For the Three Months** |     |
|----------------------------------------------------------------|--------|--------------------------|----------|
|                                                           |   | **Ended September 30,**  |     |
|                                                           |   | **2001**                 |     | **2000** |   |
| Accumulated comprehensive (loss)is composed  of the following: |   |                     |     |   |   |
|                                                           |   |                     |     |   |   |
| Unrealized Gains (Losses) on Securities                        |   |                     |     |   |   |
| Beginning Balance                                              |   | $                        | 26,328   |   | $ | (34,401 | ) |
| Current-period change net of tax                               |   | 57,622                   |     | 21,666 |   |
| Ending Balance                                                 |   | $                        | 83,950   |   | $ | (12,745 | ) |
|                                                           |   |                     |     |   |   |
| Comprehensive (Loss) consists of the  following:               |   |                     |     |   |   |
| Net loss                                                       |   | $                        | (395,805 | ) | $ | (45,852 | ) |
| Other comprehensive income                                     |   | 57,622                   |     | 21,656 |   |
| Comprehensive (loss)                                           |   | $                        | (338,183 | ) | $ | (24,196 | ) |

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF PLAN OF OPERATIONS**

 

Northern Star Financial, Inc. is the bank holdingcompany of Northern Star Bank (the “Bank”). Since the principal business of theCompany is the Bank, the following discussion pertains mainly to the Bank.

 

This report contains “forward-looking statements” asdefined in section 27A of the Securities Act of 1933, as amended, and section21E of the Securities Exchange Act of 1934, as amended, which includesstatements such as projections, plans and objectives and assumptions about thefuture, and such forward looking statements are subject to the safe harborcreated by these sections. Many factors could cause the actual results, amountsor events to differ materially from those the Company expects to achieve oroccur, such as changes in competition, market interest rates, economicconditions and regulations. Although the Company has based its plans andprojections on certain assumptions, there can be no assurances that itsassumptions will be correct, or that its plans and projections can be achieved.

 

**Financial Condition**

Total consolidatedassets of Northern Star Financial, Inc. at September 30, 2001 were $42.5million compared to $39.1 million at June 30, 2001, an increase of $3.4million. Net loans increased $2.0 million during the first three months offiscal year 2002. Real estate loans increased $1.4 million to $9.8 million atSeptember 30, 2001, and business and consumer loans increased $1.1 million.Investment securities increased $2.4 million, from $9.6 million at June 30, 2001to $12.0 million at September 30, 2001. Federal Funds sold decreased $1.6million to $1.8 million at September 30, 2001.

 

The amount of impaired loans at September 30, 2001 andJune 30, 2001 were $764 thousand and zero, respectively.  The increase in this classification of loanassets was the result of the weakened financial condition of two largeborrowers. The Bank’s loans to the related borrowers are collateralized withthe securities of public and private companies. Uncertainties in the economyand in the equity markets have raised concerns about our ability to realize ourloan value in the near term.

 

Total liabilities at September30, 2001 were $39.9 million compared to $36.1 million at June 30, 2001, a $3.8million increase. Deposits at June 30, 2001 were $32.8 million compared to$34.6 million at September 30, 2001, an increase of 5.5% or $1.8 million.During the first three months of fiscal year 2002, non-interest bearingdeposits increased $686 thousand to $2.2 million, while interest bearing depositsincreased $1.1 million to $32.4 million. Long term-borrowings increased $1.9million to $4.8 million at September 30, 2001 compared to $2.9 million at June30, 2001.

 

Thebank regulatory agencies require financial institutions to maintain capital atadequate levels based on a percentage of assets and off-balance sheetexposures, adjusted for risk weights ranging from 0% to 100%. Under therisk-based standard, capital is classified into two tiers. Tier 1 capitalconsists of common stockholders’ equity, excluding the unrealized gain (loss)on available-for-sale securities, minus certain intangible assets. Tier 2capital consists of the general allowance for credit losses subject to certainlimitations. An institution’s qualifying capital base for purposes of its totalrisk-based capital ratio consists of the sum of its Tier 1 and Tier 2 capital.The regulatory minimum requirements are 4% for Tier 1 and 8% for totalrisk-based capital. Banks are also required to maintain capital at a minimumlevel based on total assets, which is known as the leverage ratio. The minimumrequirement for the leverage ratio is 3%, however all but the highest ratedinstitutions are required to maintain ratios 100 to 200 basis points above theminimum.

 

NorthernStar Bank exceeded its minimum regulatory capital ratios. As of September 30,2001 the capital ratios were as follows:

 
|                                              |   |       |   |            |   | **To Be Well  Capitalized** |   |
|---------------------------------------------------|--------|------------|--------|-----------------|--------|-----------------------------|--------|
|                                              |   |       |   | **For Capital** |   | **Under Prompt**            |   |
|                                              |   |       |   | **Adequacy**    |   | **Corrective**              |   |
|                                              |   | **Actual** |   | **Purposes**    |   | **Action  Provision**       |   |
| Total Capital(to Risk Weighted Assets)            |   | 13.47%     |   | 8.00%           |   | 10.0%                       |   |
| Tier I Capital(to Risk Weighted Assets)           |   | 12.21%     |   | 4.00%           |   | 6.00%                       |   |
| Leverage Ratio Tier I Capital (to Average Assets) |   | 9.07%      |   | 4.00%           |   | 5.00%                       |   |

 

**Liquidity and Capital Resources**

Liquiditymanagement involves monitoring The Bank’s sources and uses of funds in order tomeet its day-to-day cash flow requirements while maximizing profits. Liquidityrepresents the ability of a company to convert assets into cash or cashequivalents without significant loss and to raise additional funds byincreasing liabilities. Liquidity management is made more complicated becausedifferent balance sheet components are subject to varying degrees of managementcontrol. For example, the timing of maturities of the investment portfolio isvery predictable and subject to a high degree of control at the time investmentdecisions are made. However, net deposit inflows and outflows are far lesspredictable and are not subject to the same degree of control. Cash and assetswhich are readily marketable, which can be pledged, or which will mature in thenear future provide asset liquidity. Liability liquidity is provided by accessto core funding sources, principally the ability to generate customer depositsin The Bank’s market area. In addition, liability liquidity is provided throughthe ability to borrow against approved lines of credit from correspondent banksand to borrow on a secured basis through securities sold under agreements torepurchase. Management expects to meet its liquidity needs with available cashand federal funds sold, including both interest and noninterest-bearingbalances; maturities of investment securities in the 12 months followingSeptember 30, 2001; the repayment of loans; growth in deposits; and, borrowingagainst approved lines of credit.

 

Short-terminvestments, which consist of federal funds sold, mutual funds, andinterest-bearing deposits, were $3.9 million at September 30, 2001, as comparedto $3.4 million at June 30, 2001. These funds are a primary source of theBank’s liquidity and are generally invested in an interest earning capacity onan overnight basis.

 

Inaddition to deposits, the sources of funds available for lending and otherbusiness purposes include loan repayments, loan sales, and securities soldunder agreements to repurchase. Loan repayments are a relatively stable sourceof funds, while deposit inflows and outflows are influenced significantly bygeneral interest rates and money market conditions. Borrowings may be used on ashort-term basis to compensate for reductions in other sources, such asdeposits at less than projected levels and are also used to fund theorigination of mortgage loans designated to be sold in the secondary markets.

 

**Impact of Inflation**

The consolidated financialstatements and related data presented herein have been prepared in accordancewith generally accepted accounting principles, which require the measurementsof financial position and operating results in terms of historical dollars,without considering changes in the relative purchasing power of money over timedue to inflation. Unlike most industrial companies, substantially all of theassets and liabilities of The Bank are monetary in nature. As a result,interest rates have a more significant impact on The Bank’s performance thanthe effects of general levels of inflation. Interest rates do not necessarilymove in the same direction or in the same magnitude as the prices of goods andservices, since such prices are affected by inflation to a larger extent thaninterest rates. As discussed previously, management seeks to manage therelationships between interest-sensitive assets and liabilities in order toprotect against wide interest rate fluctuations, including those resulting frominflation.

 

**Results of Operations**

Netlosses for the quarter ended September 30, 2001, was $395,805 as compared withthe $45,853 recorded in the same period of fiscal year ending June 30, 2001.The first quarter results of fiscal year 2002 were lower than the levelsreported in the fourth quarter of fiscal year 2001. This was due primarily toadditional administrative and overhead costs associated with the expansion ofbanking operations into St. Cloud, Minnesota, additional provisions made to theBank's loan loss reserve, and a decline in net interest margin.

 

**Interest Income and Expense**

Interestincome was $686,788 and $542,818 for the three months ended September 30, 2001and 2000, respectively. The increase in interest income of $143,970, or 2.7%,in the first quarter of 2002 over the same period of 2001 is due to higherlevels of earning assets and the change in mix of assets. The change in mix(decrease in loans as a percentage of earning assets) along with decreases inthe average yield on loans produced a decrease in the yield on earning assets from8.84% at September 30, 2000 as compared to 7.02% at September 30, 2001.

 

Interestexpense was $329,935 and $507,565 for the three months ended September 30, 2000and 2001, respectively. The increase in interest expense of $177,630, or 53.8%,in the first quarter of fiscal year 2002 over the same period of 2001 is due tothe growth in deposits, the added cost of which more than offset decreases inthe average cost of funds occurring during the period.

 

Netinterest income before provision for credit losses was $212,583 and $179,223for the three months ended September 30, 2000 and 2001, respectively. The netinterest margin for the first quarter of 2002 was 1.83% as compared with thenet interest margin in 2001 of 3.47%, a decrease of 164 basis points. Theloan-to-deposit ratio for the three months ended September 30, 2001, decreasedto approximately 76% from 88% for the same period in 2001.  Delays in new loan funding associated withdelays in commercial real estate construction projects resulted in the lowerloan-to-deposit ratio and the shift in the mix to lower yielding assets fromhigher yielding loans contributed to the lower net interest margin. Loansrepresented approximately 62% of interest-earning assets in 2002 as comparedwith 75% in 2001.

 

**Provision and Allowance for Loan Losses**

NorthernStar Bank has developed policies and procedures for evaluating the overallquality of its credit portfolio and the timely identification of potentialproblem loans. Management’s judgment as to the adequacy of the allowance isbased upon a number of assumptions about future events that it believes to bereasonable, but which may or may not be valid. Thus, there can be no assurancethat charge-offs in future periods will not exceed the allowance for creditlosses or that additional increases in the credit loss allowance will not berequired.

 

Commercialbanks are required to review and, when appropriate, classify their assets on aregular basis. The State of Minnesota and the FDIC have the authority toidentify problem assets and, if appropriate, require them to be classified.There are three classifications for problem assets: substandard, doubtful andloss. Substandard assets have one or more defined weaknesses and arecharacterized by the distinct possibility that the insured institution willsustain some loss if the deficiencies are not corrected. Doubtful assets havethe weaknesses of substandard assets with the additional characteristic thatthe weaknesses make collection or liquidation in full on the basis of currentlyexisting facts, condition, and values questionable, and there is a highpossibility of loss. The full recovery of assets classified as loss isconsidered unlikely and of such little value that continuance as an asset ofthe institution is not warranted. If an asset or portion thereof is classifiedas loss, the insured institution establishes a specific reserve for the fullamount of the portion of the asset classified as loss.

 

AtSeptember 30, 2001, The Bank had six loans totaling approximately $469 thousandclassified as substandard and $295 thousand in loans classified as doubtful orloss. All of the substandard loans and $ 240 thousand of the loans classifiedas loss were performing. There was $764 thousand of impaired loans as ofSeptember 30, 2001.

 

Theallowance for credit losses is established through a provision for creditlosses charged against income. Loans are charged against the provision whenmanagement believes that the collectibility of the principal is unlikely. Theallowance is an estimated amount that management believes will be adequate toabsorb losses inherent in the loan portfolio based on evaluations of itscollectibility. The evaluations take into consideration such factors as changesin the nature and volume of the portfolio, overall portfolio quality, specificproblem loans and commitments, and current anticipated economic conditions thatmay affect the borrower’s ability to pay. While management uses the bestinformation available to recognize losses on loans, future additions to theallowance may be necessary based on changes in economic conditions.

 

AtSeptember 30, 2001, the allowance for credit losses amounted to $528,801, or2.07% of outstanding loans. At September 30, 2000, the allowance for creditlosses amounted to $234,989, or 1.0% of outstanding loans. The Bank’s provisionfor credit losses was $294,400 and $20,350 for the three months ended September30, 2001 and 2000, respectively. The primary reason for the increase in thisratio is specific reserves related to impaired loans at September 30, 2001.

 

**Noninterest Income and Expense**

Totalother income increased to $62,028 for the three months ended September 30,2001, compared to $29,519 for the three months ended September 30, 2000. Thegrowth in the amount of residential mortgage loans originated and sold in thesecondary market and in the number of deposit and loan accounts subject toservice fees has contributed to this favorable trend.

 

Totalother expenses increased to $342,656 for the three months ended September 30,2001, compared to $252,385 for the three months ended September 30, 2000. Thisincrease of $90,271, or 3.6%, reflects the expansion of banking operations aswell as the overall growth of Northern Star Bank. Personnel costs have grown$51,316, or 47.5%. Expenses of bank premises and fixed assets were $16,154higher in the first quarter of fiscal year 2002 than in the first quarter offiscal year 2001 due to the expansion of banking activities into St. Cloud,Minnesota. All other operating expenses have increased from $108,325 in thefirst quarter of fiscal year 2001 to $131,126 during the first quarter offiscal year 2002.  The increase in theseoperating costs is due to higher administrative costs such as audit and legal,networking communications for the two banking locations, travel, supplies,stationary, marketing as well as the result of the overall growth of the Bank.

 

**Provision for Income Taxes**

The effective tax rate for the Company and the Bankwas 0% for the three month period ended September 30, 2001 because the expectedfuture tax benefit of the net operating loss is reduced by a deferred tax assetvaluation allowance in accordance with generally accepted accountingprinciples.

 

**Convertible Subordinated UnsecuredNotes**

InSeptember 2001, the Company raised $1 million through the sale of convertiblesubordinated unsecured notes. The notes were issued for a three-year term andbear interest at the rate of eight percent per annum payable quarterly.Investors in the notes were granted the right to convert their investment intoshares of Northern Star Financial, Inc. common stock at the rate of $10.50 pershare at any time prior to maturity. Related parties (directors) purchased$600,000 of these notes.

 

**St. Cloud Expansion**

OnMay 29, 2001 Northern Star Bank received approval of its regulators toestablish a full-service office at 300 East St. Germain Street in St. Cloud,Minnesota. Northern Star Bank commenced operations at this location on August15, 2001.

 

**St. Cloud Lease**

The Company’s wholly-ownedsubsidiary, Northern Star Bank, has entered into a 10-year lease agreement withINH Property Management, Inc. to lease approximately 5,000 square feet of a twostory, multi-tenant office building. James Illies, a director and principalshareholder of the Company, is a partner of INH Property Management, Inc. TheBank invested approximately $275,000 for equipment and leasehold improvements,including the construction of walls, windows, and doors, paint, floor tile andcarpet, and electrical wiring and fixtures. The Company has obtained anindependent appraisal of market rents in the St. Cloud area. The Companybelieves that this transaction is on terms no less favorable to the Bank thancould be obtained from an unaffiliated third party.

 

**AVERAGE BALANCES, YIELDS AND RATES**

The following table setsforth, for the three months ended September 30, 2001 and 2000, the weightedaverage yields earned, the weighted average rates paid, the interest ratespread and the net yield on earning assets and interest-bearing liabilities, onan annualized basis.

 
|                                                                              |   | **For The Three Months Ended** |       |
|-----------------------------------------------------------------------------------|--------|--------------------------------|------------|
|                                                                              |   | **September 30, 2001**         |       | **September 30, 2000** |   |
|                                                                              |   |                           |       |   |   | **Average** |   |   |   |   |   | **Average** |   |
|                                                                              |   | **Average**                    |       |   |   | **Yield or** |   | **Average** |   |   |   | **Yield or** |   |
|                                                                              |   | **Balance**                    |       | **Interest** |   | **Rates** |   | **Balance** |   | **Interest** |   | **Rates** |   |
| **Assets**                                                                        |   |                           |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                                                                  |   | $                              | 24,404,877 |   | $ | 498,126 |   | 8.16 | % | $ | 18,579,152 |   | $ | 439,625 |   | 9.46 | % |
| Investment securities                                                             |   | 10,219,539                     |       | 148,293 |   | 5.80 | % | 4,350,593 |   | 77,487 |   | 7.13 | % |
| Federal funds sold                                                                |   | 4,519,412                      |       | 40,369 |   | 3.57 | % | 1,605,906 |   | 25,406 |   | 6.32 | % |
| Total interest-earning assets                                                     |   | 39,143,828                     |       | 686,788 |   | 7.02 | % | 24,535,651 |   | 542,518 |   | 8.84 | % |
| Non-interest-earning assets                                                       |   | 1,722,433                      |       |   |   |   |   | 1,427,310 |   |   |   |   |   |
| Total assets                                                                      |   | $                              | 40,866,261 |   |   |   |   |   | $ | 25,962,961 |   |   |   |   |   |
| **Liabilities and Stockholders' Equity**                                          |   |                           |       |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits                                                         |   | $                              | 32,191,777 |   | 444,011 |   | 5.52 | % | $ | 18,971,852 |   | 284,135 |   | 5.99 | % |
| Other liabilities                                                                 |   | 3,892,778                      |       | 63,554 |   | 6.53 | % | 2,665,759 |   | 45,800 |   | 6.87 | % |
| Total interest-bearing liabilities                                                |   | 36,084,555                     |       | 507,565 |   | 5.63 | % | 21,637,611 |   | 329,935 |   | 6.10 | % |
| Non-interest-bearing liabilities                                                  |   | 1,961,921                      |       |   |   |   |   | 1,550,572 |   |   |   |   |   |
| Total liabilities                                                                 |   | 38,046,476                     |       |   |   |   |   | 23,188,183 |   |   |   |   |   |
| Stockholders' Equity                                                              |   | 2,819,785                      |       |   |   |   |   | 2,774,778 |   |   |   |   |   |
| Total liabilities and stockholders' equity                                        |   | $                              | 40,866,261 |   |   |   |   |   | $ | 25,962,961 |   |   |   |   |   |
| Net Interest Spread                                                               |   |                           |       |   |   | 1.39 | % |   |   |   |   | 2.74 | % |
| Net Interest Income/Margin                                                        |   |                           |       | $ | 179,223 |   | 1.83 | % |   |   | $ | 212,583 |   | 3.47 | % |
|                                                                              |   |                           |       |   |   |   |   |   |   |   |   |   |   |
| Ratio of average interest-earning assets  to average interest-bearing liabilities |   | 1.08                           | x     |   |   |   |   | 1.13 | x  |   |   |   |   |

 

**INVESTMENTPORTFOLIO**

Contractual maturitiesand yields on our investments (all available for sale) are summarized in thefollowing table. Expected maturities may differ from contractual maturitiesbecause issuers may have the right to call or prepay obligations with orwithout call or prepayment penalties.

 
|                  |   | **September 30, 2001** |      |
|-----------------------|--------|------------------------|-----------|
|                  |   |                   |      |   |   | **After one** |   |   |   | **After five** |   |   |   |   |   |   |   |   |   |   |   |
|                  |   | **One Year**           |      |   |   | **years thru** |   |   |   | **year thru** |   |   |   | **After 10** |   |   |   |   |   |   |   |
|                  |   | **or Less**            |      | **Yield** |   | **five years** |   | **Yield** |   | **ten years** |   | **Yield** |   | **years** |   | **Yield** |   | **Total** |   | **Yield** |   |
| US Agencies & MBS |   | $                      | 600,656   |   | 6.27 | % | $ | 489,990 |   | 6.24 | % | $ | 2,244,292 |   | 5.91 | % | $ | 5,908,101 |   | 5.86 | % | $ | 9,243,039 |   | 5.92 | % |
| Corporate Bonds       |   | -                      |      | 0.00 | % | 502,451 |   | 6.08 | % | 250,717 |   | 6.57 | % | - |   | 0.00 | % | 753,168 |   | 6.24 | % |
| Mutual Funds          |   | 2,003,000              |      | 4.32 | % | - |   | 0.00 | % | - |   | 0.00 | % | – |   | 0.00 | % | 2,003,000 |   | 4.32 | % |
|                  |   | $                      | 2,603,656 |   | 4.77 | % | $ | 992,441 |   | 6.16 | % | $ | 2,495,009 |   | 5.98 | % | $ | 5,908,101 |   | 5.86 | % | $ | 11,999,207 |   | 5.67 | % |

 

**LOANPORTFOLIO**

Total gross loansoutstanding at September 30, 2001, including loans held for sale, was$26,786,321.

 

The following table summarizes the composition of the loan portfolio asof September 30, 2001 and June 30, 2001:

 
|                            |   | **September 30, 2001** |       | **June 30, 2001** |   |
|---------------------------------|--------|------------------------|------------|-------------------|--------|
|                            |   | **Amount**             |       | **% of Total**    |   | **Amount** |   | **% of Total** |   |
| Commercial & Agricultural   |   | $                      | 4,891,902  |              | 18.26  | % | $ | 4,903,794 |   | 20.14 | % |
| Real Estate – construction |   | 1,910,858              |       | 7.13              | %      | 2,307.476 |   | 9.48 | % |
| Real Estate - mortgages         |   | 7,937,555              |       | 29.63             | %      | 6,117,540 |   | 25.13 | % |
| Consumer Loans                  |   | 11,749,160             |       | 43.87             | %      | 10,588,900 |   | 43.49 | % |
| Lease Financing                 |   | 296,846                |       | 1.11              | %      | 428,447 |   | 1.76 | % |
| Total loans                     |   | $                      | 26,786,321 |              | 100.00 | % | $ | 24,346,157 |   | 100.00 | % |
| Net Deferred Loans fees/(costs) |   | 177,881                |       |              |   | 161,166 |   |   |   |
| Less: Allowance for Loan Loss   |   | (528,801               | )          |              |   | (234,989 | ) |   |   |
| Total Net Loans                 |   | $                      | 26,435,401 |              |   |   | $ | 24,272,334 |   |   |   |

 

**MATURITIES AND SENSITIVITY OF LOANSTO CHANGES IN INTEREST RATES**

The information in thefollowing table is based on the contractual maturities of individual loans,including loans which, may be subject to renewal at their contractual maturity.Renewal of such loans is subject to review and credit approval, as well asmodification of terms upon their maturity. Actual repayments of loans maydiffer from maturities reflected below because borrowers have the right torepay obligations with or without prepayment penalties. The following tablesummarizes loan maturities, by type at September 30, 2001 and June 30, 2001.

 
|                               |   | **As of September 30,2001** |       |
|------------------------------------|--------|-----------------------------|------------|
|                               |   | **One Year**                |       | **After One but** |   | **After** |   |   |   |
|                               |   | **or Less**                 |       | **within Five Years** |   | **Five Years** |   | **Total** |   |
| Commercial Agricultural            |   | $                           | 1,879,904  |   | $ | 2,282,455 |   | $ | 729,543 |   | $ | 4,891,902 |   |
| Real Estate – construction    |   | 1,465,386                   |       | 445,472 |   | - |   | 1,910,858 |   |
| Real Estate – mortgages       |   | 761,197                     |       | 3,531,824 |   | 3,644,534 |   | 7,937,555 |   |
| Consumer loans                     |   | 4,038,722                   |       | 5,857,948 |   | 1,852,490 |   | 11,749,160 |   |
| Lease Financing                    |   | 21,167                      |       | 275,679 |   | - |   | 296,846 |   |
| Total                              |   | $                           | 8,166,376  |   | $ | 12,393,378 |   | $ | 6,226,567 |   | $ | 26,786,321 |   |
|                               |   |                        |       |   |   |   |   |   |   |
| Loans maturing after one year with |   |                        |       |   |   |   |   |   |   |
| Fixed Interest Rate                |   | $                           | 16,812,038 |   |   |   |   |   |   |   |
| Floating Interest Rates            |   | $                           | 1,807,907  |   |   |   |   |   |   |   |

 
|                               |   | **As of June 30, 2001** |       |
|------------------------------------|--------|-------------------------|------------|
|                               |   | **One Year**            |       | **After One but** |   | **After** |   |   |   |
|                               |   | **or  Less**            |       | **Within Five Years** |   | **Five Years** |   | **Total** |   |
| Commercial & Agricultural      |   | $                       | 1,629,904  |   | $ | 1,195,930 |   | $ | 2,077,960 |   | $ | 4,903,794 |   |
| Real Estate – construction    |   | 1,944,702               |       | 180,133 |   | 182,642 |   | $ | 2,307,476 |   |
| Real Estate – mortgages       |   | 606,878                 |       | 1,680,620 |   | 3,830,042 |   | $ | 6,117,540 |   |
| Consumer Loans                     |   | 4,407,104               |       | 2,305,044 |   | 4,236,751 |   | $ | 10,588,900 |   |
| Lease Financing                    |   | 18,662                  |       | 361,425 |   | 48,360 |   | $ | 428,447 |   |
| Total                              |   | $                       | 8,247,250  |   | $ | 5,723,152 |   | $ | 10,375,755 |   | $ | 24,346,157 |   |
|                               |   |                    |       |   |   |   |   |   |   |
| Loans maturing after one year with |   |                    |       |   |   |   |   |   |   |
| Fixed Interest Rate                |   | $                       | 14,775,932 |   |   |   |   |   |   |   |
| Floating Interest Rates            |   | $                       | 1,322,975  |   |   |   |   |   |   |   |

 

**PROVISIONAND ALLOWANCE FOR LOAN LOSSES**

The Company has developed policies and procedures forevaluating the overall quality of its credit portfolio and the timelyidentification of potential credit problems. Additions to the allowance forloan losses will be made periodically to maintain the allowance at anappropriate level based on management’s analysis of the potential risk in theloan portfolio.

AtSeptember 30, 2001, the allowance for loan losses was $528,801 or 2.05% of$25,778,624 in loan receivables (net of loans held for sale). The provision forloan losses was made primarily as a result of management’s assessment ofimpaired loans and general loan loss risk as the Bank’s loan portfolioincrease.

 
|                                                                                      |   | **Three Months Ended** |    | **Year Ended**    |   |
|-------------------------------------------------------------------------------------------|--------|------------------------|---------|-------------------|--------|
|                                                                                      |   | **September 30, 2001** |    | **June 30, 2001** |   |
| Balance at Beginning of Period                                                            |   | $                      | 234,989 |              | $      | 181,500 |   |
| Charge-offs                                                                               |   | (766                   | )       | (8,615            | )      |
| Recoveries                                                                                |   | 178                    |    | 4,590             |   |
| Net Charge Offs                                                                           |   | (588                   | )       | (4,025            | )      |
| Provision charged to operations                                                           |   | 294,400                |    | 57,514            |   |
| Balance at End of Period                                                                  |   | $                      | 528,801 |              | $      | 234,989 |   |
|                                                                                      |   |                   |    |              |   |
| Ratio of net charge-offs during the periodto average  loans outstanding during the period |   | 0.00                   | %       | 0.02              | %      |

 

At September 30, 2001 and June 30, 2001 the allowance was allocated asfollows:

 
|                          |   | **September 30, 2001** |    | **June 30, 2001**    |   |
|-------------------------------|--------|------------------------|---------|----------------------|--------|
|                          |   |                   |    | **Percent of Loans** |   |   |   | **Percent of Loans** |   |
|                          |   |                   |    | **In Each Category** |   |   |   | **in Each Category** |   |
|                          |   | **Amount**             |    | **of Total Loans**   |   | **Amount** |   | **of Total Loans** |   |
| Commercial & Agricultural |   | $                      | 58,878  |                 | 18.26  | % | $ | 47,327 |   | 20.14 | % |
| Real Estate - individual      |   | 14,331                 |    | 7.13                 | %      | 22,277 |   | 9.48 | % |
| Real Estate - other           |   | 53,368                 |    | 29.63                | %      | 59,053 |   | 25.13 | % |
| Consumer loans                |   | 399,998                |    | 43.87                | %      | 102,197 |   | 43.49 | % |
| Lease Financing               |   | 2,226                  |    | 1.11                 | %      | 4,135 |   | 1.76 | % |
| Total                         |   | $                      | 528,801 |                 | 100.00 | % | $ | 234,989 |   | 100.00 | % |

 

**DEPOSITS**

The following is a table of deposits by category at September 30, 2001and June 30, 2001.

 
|                               |   | **As of September 30,  2001** |       |
|------------------------------------|--------|-------------------------------|------------|
|                               |   |                          |       |   |   |   |   | **Percentage** |   |   |   |
|                               |   |                          |       | **Percentage** |   |   |   | **of Total** |   |   |   |
|                               |   | **Ending**                    |       | **of Total** |   | **Average** |   | **Average** |   | **Effective** |   |
|                               |   | **Balance**                   |       | **Deposits** |   | **Balance** |   | **Deposits** |   | **Cost** |   |
| Demand deposit                     |   | $                             | 2,155,058  |   | 6.22 | % | $ | 1,488,894 |   | 4.42 | % | 0.00 | % |
| Now                                |   | 687,672                       |       | 1.99 | % | 682,084 |   | 2.02 | % | 2.51 | % |
| Savings                            |   | 9,054,644                     |       | 26.14 | % | 8,577,627 |   | 25.47 | % | 3.65 | % |
| Time accounts less  than $100,000  |   | 19,359,243                    |       | 55.89 | % | 19,331,335 |   | 57.40 | % | 6.04 | % |
| Time accounts of  $100,000 or more |   | 3,379,896                     |       | 9.76 | % | 3,600,731 |   | 10.69 | % | 6.34 | % |
| Total Deposits                     |   | $                             | 34,636,513 |   | 100.00 | % | $ | 33,680,671 |   | 100.00 | % |   |   |

 
|                              |   | **As of June 30, 2001** | ** ** |
|-----------------------------------|--------|-------------------------|------------|
|                              |   |                    |       |   |   |   |   | **Percentage** |   |   | ** ** |
|                              |   |                    |       | **Percentage** |   |   |   | **of Total** |   |   | ** ** |
|                              |   | **Ending**              |       | **of Total** |   | **Average** |   | **Average** |   | **Effective** | ** ** |
|                              |   | **Balance**             |       | **Deposits** |   | **Balance** |   | **Deposits** |   | **Cost** | ** ** |
| Demand deposit                    |   | $                       | 1,468,846  |   | 4.48 | % | $ | 1,339,955 |   | 5.16 | % | 0.00 | % |
| Now                               |   | 657,420                 |       | 2.00 | % | 639,505 |   | 2.46 | % | 2.59 | % |
| Savings                           |   | 7,603,740               |       | 23.17 | % | 5,979,834 |   | 23.04 | % | 4.04 | % |
| Time accounts less than $100,000  |   | 19,202,472              |       | 58.51 | % | 14,716,018 |   | 56.69 | % | 6.91 | % |
| Time accounts of $100,000 or more |   | 3,884,586               |       | 11.84 | % | 3,282,492 |   | 12.65 | % | 6.95 | % |
| Total Deposits                    |   | $                       | 32,817,064 |   | 100.00 | % | $ | 25,957,804 |   | 100.00 | % |   |   |

 

Maturity distribution of time deposits of $100,000 andover.

 
|                             |   | **As of September 30, 2001** |    |
|----------------------------------|--------|------------------------------|---------|
|                             |   | **3 months**                 |    | **Over 3 months** |   | **Over 6 months** |   | **Over** |   |   |   |
|                             |   | **or less**                  |    | **thru 6 months** |   | **thru 12 months** |   | **12 months** |   | **Total** |   |
| Time accounts of $100,00 or more |   | $                            | 527,500 |   | $ | 300,000 |   | $ | 1,426,300 |   | $ | 1,126,096 |   | $ | 3,379,896 |   |
|                                  |        |                              |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**PART II**

**OTHERINFORMATION**

 

Item 1.    Legal Proceedings

 

There are no pending legal proceedings to whichNorthern Star Financial, Inc. or its subsidiaries are parties in other thannonmaterial legal proceedings occurring in the ordinary course of business.

 

Item 2.    Changesin Securities

 

None

 

Item 3.    DefaultUpon Senior Securities

 

None

 

Item 4.    Submissionof Matters to a Vote of Security Holders.

 

None

 

Item 5.    Other Information

 

None

 

Item 6.    Exhibitsand Reports on Form 8-K

a)   Exhibits

Exhibit 99.1 PressRelease dated November 13, 2001

 

b)   Reports

8-K filed September 17,2001

 

**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|   |              | NORTHERN STAR FINANCIAL, INC. |
|--------|-------------------|-------------------------------|
|   |              |                          |   |
| Date:  | November 14, 2001 | By                            | /s/ Thomas P.  Stienessen |
|   |              |                          | Thomas P. Stienessen, President and Chief Executive  Officer |  
 

 

 

 

Date:

November 14, 2001

By

/s/ Dean M.  Doyscher

 

 

 

Dean M.Doyscher, Chief Financial Officer

  |