** **

**U.S.SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-QSB**

 

| **ý**                                            |   | **QUARTERLY  REPORT UNDER SECTION 13 OF 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|
|                                                  |   |                                                                                    |
| **For the quarterly period ended December 31,  2002** |
|                                                  |   |                                                                                    |
| **OR**                                                |
|                                                  |   |                                                                                    |
| **o**                                                 |   | **TRANSITION  REPORT UNDER SECTION 13 OF 15 (D) OF THE SECURTIES EXCHANGE ACT**         |

 

**For thetransition 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 PrincipalExecutive Offices)

 

**507-387-2265**

(Issuer’s TelephoneNumber, 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 the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

Yes         X        No ______.

 

State the number ofshares outstanding of each of the issuer’s classes of common equity as of

the latest practicabledate.

 

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

## **Outstandingshares at February 13, 2003: 494,506**

 

----

 

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

 

**Index to Form 10-QSB**

**December 31, 2002**

 
| PART I.    | FINANCIAL INFORMATION |                                                                                                           |
|------------|-----------------------|----------------------------------------------------------------------------------------------------------------|
|       | Item 1.               | Financial Statements                                                                                           |   |
|       |                  |                                                                                                           |   |
|       |                  | Consolidated  Statements of Financial Condition at December 31, 2002 (unaudited) and June  30, 2002 (audited)  |   |
|       |                  |                                                                                                           |   |
|       |                  | Unaudited  Consolidated Statements of Operation for the three and six months ended  December 31, 2002 and 2001 |   |
|       |                  |                                                                                                           |   |
|       |                  | Unaudited  Consolidated Statement of Cash Flows for the three and six months ended  December 31, 2002 and 2001 |   |
|       |                  |                                                                                                           |   |
|       |                  | Notes  to Condensed Consolidated Financial Statements (unaudited)                                              |   |
|       |                  |                                                                                                           |   |
|       | Item  2.              | Management’s  Discussion and Analysis or Plan of Operation                                                |   |
|       |                  |                                                                                                           |   |
|       | Item 3.               | Controls and  Procedures                                                                                       |   |
|       |                  |                                                                                                           |   |
| 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 |                  |

 

 

2

----

### **ITEM 1.  FINANCIALSTATEMENTS**

 

**Northern Star Financial,Inc. Summary of Financial Data**

 

The following table summarizes certain historicalfinancial data of Northern Star Financial, Inc. and its subsidiary on aconsolidated basis as of and for the three and six months ended December 31,2002 and 2001.  You should read thistable in conjunction with our financial statements and related notes appearingelsewhere in this document.
| ** **                                                         |   | **For the  Three Months**

**Ended  December 31,** |    | **As of or  for the Six Months**

**Ended  December 31,** |   |
|--------------------------------------------------------------------|--------|----------------------------------------------------|---------|-----------------------------------------------------------|--------|
|                                                               |   | **2002**                                           |    | **2001**                                                  |   | **2002** |   | **2001** |   |
| Statement of Income:                                               |   |                                               |    |                                                      |   |   |   |   |   |
| Interest income                                                    |   | $                                                  | 705,009 |                                                      | $      | 705,167 |   | $ | 1,448,546 |   | $ | 1,391,955 |   |
| Interest expense                                                   |   | 371,333                                            |    | 478,117                                                   |   | 775,819 |   | 985,682 |   |
| Net interest income                                                |   | 333,676                                            |    | 227,050                                                   |   | 672,727 |   | 406,273 |   |
| Provision for loan losses                                          |   | 7,700                                              |    | 38,900                                                    |   | 28,700 |   | 333,300 |   |
| Other non-interest income                                          |   | 319,605                                            |    | 205,708                                                   |   | 472,841 |   | 267,736 |   |
| Non-interest expense                                               |   | 650,226                                            |    | 455,557                                                   |   | 1,160,739 |   | 798,213 |   |
| Loss before income tax expense                                     |   | (4,645                                             | )       | (61,699                                                   | )      | (43,871 | ) | (457,504 | ) |
| Income tax expense (benefit)                                       |   | —                                             |    | —                                                    |   | — |   | — |   |
| Net loss                                                           |   | $                                                  | (4,645  | )                                                         | $      | (61,699 | ) | $ | (43,871 | ) | $ | (457,504 | ) |
| Balance Sheet:                                                     |   |                                               |    |                                                      |   |   |   |   |   |
| Assets                                                             |   |                                               |    |                                                      |   | 50,142,410 |   | 45,032,649 |   |
| Allowance for loan losses                                          |   |                                               |    |                                                      |   | 688,519 |   | 557,353 |   |
| Deposits                                                           |   |                                               |    |                                                      |   | 41,216,867 |   | 35,904,204 |   |
| Shareholders’ equity                                          |   |                                               |    |                                                      |   | 1,947,028 |   | 2,471,826 |   |
| Per Share Data:                                                    |   |                                               |    |                                                      |   |   |   |   |   |
| Net income (loss) — basic                                     |   | $                                                  | (0.01   | )                                                         | $      | (0.13 | ) | $ | (0.09 | ) | $ | (0.95 | ) |
| Net income (loss) — diluted                                   |   | $                                                  | (0.01   | )                                                         | $      | (0.13 | ) | $ | (0.09 | ) | $ | (0.95 | ) |
| Book value                                                         |   |                                               |    |                                                      |   | 3.94 |   | 5.15 |   |
| Other Data                                                         |   |                                               |    |                                                      |   |   |   |   |   |
| Weighted average shares outstanding — basic                   |   | 488,310                                            |    | 479,506                                                   |   | 483,908 |   | 479,506 |   |
| Weighted average shares outstanding — diluted                 |   | 488,310                                            |    | 479,506                                                   |   | 483,908 |   | 479,506 |   |
|                                                               |   |                                               |    |                                                      |   |   |   |   |   |
| Financial Ratios:                                                  |   |                                               |    |                                                      |   |   |   |   |   |
| Equity to assets                                                   |   |                                               |    |                                                      |   | 3.92 | % | 5.49 |   |
| Return on average assets                                           |   |                                               |    |                                                      |   | (0.09 | )% | (1.07 | ) |
| Return on average stockholders’ equity                        |   |                                               |    |                                                      |   | (2.27 | )% | (1.84 | ) |
| Net interest margin                                                |   |                                               |    |                                                      |   | 3.02 | % | 1.98 |   |
| Tier 1 leverage ratio                                              |   |                                               |    |                                                      |   | 8.35 | % | 8.39 |   |
| Tier 1 capital to risk-weighted assets                             |   |                                               |    |                                                      |   | 10.81 | % | 11.03 |   |
| Total capital to risk-weighted assets                              |   |                                               |    |                                                      |   | 12.07 | % | 12.29 |   |
| Asset Quality Ratios:                                              |   |                                               |    |                                                      |   |   |   |   |   |
| Nonperforming assets to total assets                               |   |                                               |    |                                                      |   | 3.99 | % | 1.70 |   |
| Nonperforming assets to total loans andand other real estate owned |   |                                               |    |                                                      |   | 5.49 | % | 2.39 |   |
| Allowance for loan losses to total loans                           |   |                                               |    |                                                      |   | 1.89 | % | 1.79 |   |
|                                                                    |        |                                                    |         |                                                           |        |  |  |  |  |  |  |  |  |  |

 

 

3

----

 

## **NorthernStar Financial, Inc. and Subsidiary**

Consolidated Statementsof Financial Condition

 
|                                                                                           |   | **December  31,2002** |       | **June 30,  2002** |   |
|------------------------------------------------------------------------------------------------|--------|-----------------------|------------|--------------------|--------|
|                                                                                           |   | **(Unaudited)**       |       | **(Audited)**      |   |
| **ASSETS**                                                                                     |   |                  |       |               |   |
|                                                                                           |   |                  |       |               |   |
| Cash and due  from banks                                                                       |   | $                     | 2,812,574  |               | $      | 2,348,081 |   |
| Federal funds  sold                                                                            |   | 4,112,000             |       | 1,037,000          |   |
| Securities  available for sale, at fair value                                                  |   | 4,612,252             |       | 9,598,520          |   |
| FHLB and UBB  stock, at cost                                                                   |   | 283,800               |       | 238,800            |   |
| Loans held for  sale                                                                           |   | 1,661,090             |       | 625,735            |   |
| Loans receivable,  net of allowance for loan andlease losses of $688,519 and $661,170          |   | 35,761,972            |       | 33,836,692         |   |
| Property and  equipment, net of depreciation                                                   |   | 525,696               |       | 535,938            |   |
| Accrued interest  receivable and other assets                                                  |   | 373,026               |       | 351,771            |   |
| **Total Assets**                                                                               |   | $                     | 50,142,410 |               | $      | 48,572,537 |   |
|                                                                                           |   |                  |       |               |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                 |   |                  |       |               |   |
| **Liabilities:**                                                                               |   |                  |       |               |   |
| Demand deposits                                                                                |   | $                     | 5,335,077  |               | $      | 4,574,282 |   |
| NOW and money  market                                                                          |   | 8,466,849             |       | 7,718,574          |   |
| Savings                                                                                        |   | 4,663,910             |       | 4,533,290          |   |
| Time deposits                                                                                  |   | 22,751,031            |       | 22,763,583         |   |
| Total deposits                                                                                 |   | 41,216,867            |       | 39,589,729         |   |
| Notes payable  and other borrowings                                                            |   | 4,975,000             |       | 5,275,000          |   |
| Convertible  subordinated notes payable                                                        |   | 1,500,000             |       | 1,400,000          |   |
| Accrued interest  payable and other                                                            |   | 503,515               |       | 384,144            |   |
| Total  Liabilities                                                                             |   | 48,195,382            |       | 46,648,873         |   |
|                                                                                           |   |                  |       |               |   |
| **Shareholders’ Equity:**                                                                 |   |                  |       |               |   |
| Common Stock,  $.01 par value, 15,000,000 sharesauthorized; 494,506 and 479,506 shares  issued |   | 4,945                 |       | 4,795              |   |
| Undesignated  stock, par value $.01 per share; 5,000,000shares authorized, no shares issued    |   | —                |       | —             |   |
| Additional paid  in capital                                                                    |   | 4,240,854             |       | 4,158,504          |   |
| Accumulated  deficit                                                                           |   | (2,324,230            | )          | (2,280,359         | )      |
| Unearned stock  compensation                                                                   |   | (10,006               | )          | (12,004            | )      |
| Accumulated  other comprehensive income                                                        |   | 35,465                |       | 52,728             |   |
| **Total Shareholders’ Equity**                                                            |   | 1,947,028             |       | 1,923,664          |   |
| **Total Liabilities and Shareholders’  Equity**                                           |   | $                     | 50,142,410 |               | $      | 48,572,537 |   |

 

See Notes to ConsolidatedFinancial Statements

 

 

4

----

 

## **NorthernStar Financial, Inc. and Subsidiary**

Unaudited ConsolidatedStatements of Operations

 
| ** **                                        |   | **For the  Three Months**

**Ended  December 31,** |    | **For the  Six Months**

**Ended  December 31,** |   |
|---------------------------------------------------|--------|----------------------------------------------------|---------|--------------------------------------------------|--------|
|                                              |   | **2002**                                           |    | **2001**                                         |   | **2002** |   | **2001** |   |
| **Interest income**                               |   |                                               |    |                                             |   |   |   |   |   |
| Loans receivable                                  |   | $                                                  | 626,252 |                                             | $      | 535,534 |   | $ | 1,261,408 |   | $ | 1,033,660 |   |
| Securities  available for sale                    |   | 70,883                                             |    | 152,858                                          |   | 168,159 |   | 301,151 |   |
| Federal funds  sold                               |   | 7,874                                              |    | 16,775                                           |   | 18,979 |   | 57,144 |   |
| Total interest  income                            |   | 705,009                                            |    | 705,167                                          |   | 1,448,546 |   | 1,391,955 |   |
|                                              |   |                                               |    |                                             |   |   |   |   |   |
| **Interest expense**                              |   |                                               |    |                                             |   |   |   |   |   |
| Deposits                                          |   | 297,359                                            |    | 398,770                                          |   | 620,662 |   | 842,781 |   |
| Borrowed funds                                    |   | 73,974                                             |    | 79,347                                           |   | 155,157 |   | 142,901 |   |
| Total interest  expense                           |   | 371,333                                            |    | 478,117                                          |   | 775,819 |   | 985,682 |   |
|                                              |   |                                               |    |                                             |   |   |   |   |   |
| Net interest  income                              |   | 333,676                                            |    | 227,050                                          |   | 672,727 |   | 406,273 |   |
| Provision for  loan losses                        |   | 7,700                                              |    | 38,900                                           |   | 28,700 |   | 333,300 |   |
|                                              |   |                                               |    |                                             |   |   |   |   |   |
| Net interest  income afterprovision for loan loss |   | 325,976                                            |    | 188,150                                          |   | 644,027 |   | 72,973 |   |
|                                              |   |                                               |    |                                             |   |   |   |   |   |
| **Non-interest income**                           |   |                                               |    |                                             |   |   |   |   |   |
| Other fees and  service charges                   |   | 43,509                                             |    | 40,135                                           |   | 87,934 |   | 68,448 |   |
| Gain on sale of  securities                       |   | 379                                                |    | 53,534                                           |   | 3,504 |   | 58,042 |   |
| Gain on sale of  loans                            |   | 275,717                                            |    | 112,039                                          |   | 381,403 |   | 141,246 |   |
| Total  non-interest income                        |   | 319,605                                            |    | 205,708                                          |   | 472,841 |   | 267,736 |   |
|                                              |   |                                               |    |                                             |   |   |   |   |   |
| **Non-interest expense**                          |   |                                               |    |                                             |   |   |   |   |   |
| Compensation and  employee benefits               |   | 293,294                                            |    | 202,817                                          |   | 514,999 |   | 362,186 |   |
| Board fees                                        |   | 31,500                                             |    | 27,250                                           |   | 54,500 |   | 47,250 |   |
| Occupancy                                         |   | 44,983                                             |    | 39,379                                           |   | 84,856 |   | 74,849 |   |
| Legal and  accounting                             |   | 60,498                                             |    | 27,600                                           |   | 136,056 |   | 34,138 |   |
| Printing &  supplies                          |   | 23,142                                             |    | 21,492                                           |   | 44,644 |   | 42,439 |   |
| Property and  equipment depreciation              |   | 18,981                                             |    | 19,768                                           |   | 36,854 |   | 36,459 |   |
| Data processing                                   |   | 43,577                                             |    | 22,374                                           |   | 75,516 |   | 41,912 |   |
| Other                                             |   | 134,251                                            |    | 94,877                                           |   | 213,314 |   | 158,980 |   |
| Total  non-interest expense                       |   | 650,226                                            |    | 455,557                                          |   | 1,160,739 |   | 798,213 |   |
|                                              |   |                                               |    |                                             |   |   |   |   |   |
| **Loss before income tax benefit**                |   | (4,645                                             | )       | (61,699                                          | )      | (43,871 | ) | (457,504 | ) |
| Income  tax benefit                          |   | —                                             |    | —                                           |   | — |   | — |   |
|                                              |   |                                               |    |                                             |   |   |   |   |   |
| **Net loss**                                      |   | $                                                  | (4,645  | )                                                | $      | (61,699 | ) | $ | (43,871 | ) | $ | (457,504 | ) |
|                                              |   |                                               |    |                                             |   |   |   |   |   |
| **Net loss per common share**                     |   |                                               |    |                                             |   |   |   |   |   |
|                                              |   |                                               |    |                                             |   |   |   |   |   |
| Basic loss per  share of common stock             |   | $                                                  | (0.01   | )                                                | $      | (0.13 | ) | $ | (0.09 | ) | $ | (0.95 | ) |

 

See Notes to ConsolidatedFinancial Statements

## ** **

 

5

----

 

## **NorthernStar Financial, Inc. and Subsidiary**

Unaudited ConsolidatedStatements of Cash Flows

 
| ** **                                                                                |   | **For the  Three Months**

**Ended  December 31,** |      | **For the  Six Months**

**Ended  December 31,** |   |
|-------------------------------------------------------------------------------------------|--------|----------------------------------------------------|-----------|--------------------------------------------------|--------|
|                                                                                      |   | **2002**                                           |      | **2001**                                         |   | **2002** |   | **2001** |   |
| Cash flows from  operating activities:                                                    |   |                                               |      |                                             |   |   |   |   |   |
| Net loss                                                                                  |   | $                                                  | (4,645    | )                                                | $      | (61,699 | ) | $ | (43,871 | ) | $ | (457,504 | ) |
| Adjustments to  reconcile net loss to net cash providedby (used in) operating activities: |   |                                               |      |                                             |   |   |   |   |   |
| Depreciation                                                                              |   | 22,122                                             |      | 24,976                                           |   | 43,120 |   | 44,385 |   |
| Provision for  loan losses                                                                |   | 7,700                                              |      | 38,900                                           |   | 28,700 |   | 333,300 |   |
| Net amortization  and accretion of premium and discounts                                  |   | 650                                                |      | (3,296                                           | )      | 1,155 |   | (3,198 | ) |
| Deferred loan  fees and costs, net                                                        |   | 19,502                                             |      | (23,660                                          | )      | 40,812 |   | (40,376 | ) |
| Earned stock  compensation                                                                |   | 998                                                |      | 1,000                                            |   | 1,998 |   | 2,000 |   |
| Gain on sale of  available for sale securities                                            |   | (379                                               | )         | (53,534                                          | )      | (3,504 | ) | (58,042 | ) |
| (Increase)  decrease in:                                                                  |   |                                               |      |                                             |   |   |   |   |   |
| Loans held for  sale                                                                      |   | 161,180                                            |      | 176,275                                          |   | (1,035,355 | ) | (5,773 | ) |
| Accrued interest  receivable                                                              |   | 1,876                                              |      | 6,485                                            |   | (570 | ) | (10,170 | ) |
| Other assets                                                                              |   | (4,501                                             | )         | 9,082                                            |   | 11,132 |   | 4,755 |   |
| Increase  (decrease) in:                                                                  |   |                                               |      |                                             |   |   |   |   |   |
| Accrued interest  payable and other liabilities                                           |   | 80,172                                             |      | (110,780                                         | )      | 130,880 |   | (79,467 | ) |
| Net cash  provided by (used in) operating activities                                      |   | 284,675                                            |      | 3,749                                            |   | (825,503 | ) | (270,090 | ) |
|                                                                                      |   |                                               |      |                                             |   |   |   |   |   |
| Cash flows from  investing activities:                                                    |   |                                               |      |                                             |   |   |   |   |   |
| Purchases of  available-for-sale securities                                               |   | (509,375                                           | )         | (3,220,073                                       | )      | (1,509,375 | ) | (5,747,748 | ) |
| Proceeds from  maturities of available-for-sale securities                                |   | —                                             |      | 1,130,056                                        |   | 500,000 |   | 347,824 |   |
| Proceeds from  sales of available-for-sale securities                                     |   | 2,146,839                                          |      | 5,014,146                                        |   | 5,969,220 |   | 7,607,840 |   |
| Purchase of FHLB  & UBB stock                                                         |   | —                                             |      | (80,000                                          | )      | (45,000 | ) | (100,000 | ) |
| Net (increase)  decrease in Federal Funds Sold                                            |   | (782,000                                           | )         | —                                           |   | (3,075,000 | ) | — |   |
| Loan  origination’s and principal payments on loans, net                             |   | (1,313,982                                         | )         | (5,366,817                                       | )      | (2,026,609 | ) | (7,626,520 | ) |
| Purchase of  property and equipment                                                       |   | (9,922                                             | )         | (42,228                                          | )      | (32,878 | ) | (250,554 | ) |
| Net cash used in  investing activities                                                    |   | (468,440                                           | )         | (2,564,916                                       | )      | (219,642 | ) | (5,769,158 | ) |
|                                                                                      |   |                                               |      |                                             |   |   |   |   |   |
| Cash flows from  financing activities:                                                    |   |                                               |      |                                             |   |   |   |   |   |
| Proceeds from  issuance of common stock, net                                              |   | 82,500                                             |      | —                                           |   | 82,500 |   | — |   |
| Net increase in  non-interest bearing demandand savings deposit accounts                  |   | 1,125,449                                          |      | 1,533,347                                        |   | 1,639,690 |   | 3,700,715 |   |
| Net (decrease)  increase in time deposits                                                 |   | 88,568                                             |      | (265,656                                         | )      | (12,552 | ) | (613,575 | ) |
| Proceeds from  borrowings                                                                 |   | —                                             |      | 1,500,000                                        |   | 100,000 |   | 3,400,000 |   |
| Payment on  borrowings                                                                    |   | —                                             |      | —                                           |   | (300,000 | ) | — |   |
| Net cash  provided by financing activities                                                |   | 1,296,517                                          |      | 2,767,691                                        |   | 1,509,638 |   | 6,487,140 |   |
| Net increase in  cash and cash equivalents                                                |   | 1,112,752                                          |      | 206,524                                          |   | 464,493 |   | 447,892 |   |
| Cash and cash  equivalents, beginning                                                     |   | 1,699,822                                          |      | 1,111,501                                        |   | 2,348,081 |   | 870,133 |   |
| Cash and cash  equivalents, ending                                                        |   | $                                                  | 2,812,574 |                                             | $      | 1,318,025 |   | $ | 2,812,574 |   | $ | 1,318,025 |   |
|                                                                                      |   |                                               |      |                                             |   |   |   |   |   |
| Supplemental  disclosure of cash flow information:                                        |   |                                               |      |                                             |   |   |   |   |   |
| Cash paid for  interest                                                                   |   | $                                                  | 437,842   |                                             | $      | 552,557 |   | $ | 802,968 |   | $ | 1,065,149 |   |

 

See Notes to ConsolidatedFinancial Statements

 

6

----

 

**NORTHERN STAR FINANCIAL, INC. AND SUBSIDIARY**

## **NOTES TO CONDENSEDCONDOLIDATED FINANCIAL STATEMENTS**

**December 31, 2002 (Unaudited)**

 

Note 1:  PRINCIPLES OFCONSOLIDATION

 

                The unauditedconsolidated financial statements as of and for the three and six month periodended December 31, 2002 include the accounts of Northern Star Financial, Inc.(the “Company”) and its wholly owned subsidiary Northern Star Bank (the“Bank”).  All significant inter-companyaccounts and transactions have been eliminated in consolidation.

 

Note 2:  BASIS OF PRESENTATION

 

                The accompanyingunaudited interim consolidated financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesof America for interim financial information. Accordingly, they do not include all information and disclosuresrequired by generally accepted accounting principles for complete financialstatements.  The accompanyingconsolidated financial statements do not purport to contain all the necessaryfinancial disclosures required by generally accepted accounting principles thatmight otherwise by necessary in the circumstances and should be read with thefiscal 2002 consolidated financial statements and notes of Northern StarFinancial, Inc. and Subsidiary included in their annual report as of and forthe year ended June 30, 2002.

 

                In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)  considered necessary for fair presentationshave been included.  The results ofoperations for the three and six month periods ended December 31, 2002 and2001, are not necessarily indicative of the results that may be expected forthe entire fiscal 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 and six month periods ended December 31, 2002 and 2001 theweighted average number of shares outstanding for basic and diluted earningsper share computation were 488,310 and 483,908 respectively.  The potential common shares of 300,894 and222,838 related to stock options, warrants, and convertible subordinated notespayable were not included in the calculation of diluted earnings per sharebecause they were anti-dilutive at December 31, 2002 and 2001.

 

                During the quarterended December 31, 2002, the Company issued 21,000 stock options with anexercise price of $6.50 and an expiration date of December 21, 2012.  These stock options are included in the totalsindicated in the prior paragraph.

 

 

7

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Note 4:  COMPREHENSIVE (LOSS)

 

 

| ** **                                                      |   | **For the  Six Months********Ended  December 31,** |    |
|-----------------------------------------------------------------|--------|----------------------------------------------------|---------|
|                                                            |   | **2002**                                           |    | **2001** |   |
| Accumulated  comprehensive (loss)is composed of the  following: |   |                                               |    |   |   |
| Unrealized Gains  (Losses) on Securities                        |   |                                               |    |   |   |
| Beginning  balance                                              |   | $                                                  | 52,728  |   | $ | 26,328 |   |
| Current-period  change net of tax                               |   | (17,263                                            | )       | (54,251 | ) |
| Ending balance                                                  |   | 35,465                                             |    | $ | (27,923 | ) |
|                                                            |   |                                               |    |   |   |
| Comprehensive  (Loss) consists of the following:                |   |                                               |    |   |   |
| Net loss                                                        |   | $                                                  | (43,871 | ) | $ | (457,504 | ) |
| Other  comprehensive income                                     |   | (17,263                                            | )       | (54,251 | ) |
| Comprehensive  (loss)                                           |   | $                                                  | (61,134 | ) | $ | (511,755 | ) |

 

**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION.**

 

**FORWARD LOOKING STATEMENTS**

 

Northern Star Financial, Inc. is the bank holdingcompany of Northern Star Bank. Since the principal business of the Company isthe 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.  Thesestatements are based on management’s beliefs, assumptions, currentexpectations, estimates and projections about the financial services industry,the economy, and about the Company itself. Words such as “anticipate,” “believe,” “determine,” “estimate,”“expect,” “forecast,” “intend,” “is likely,” “plan,” “project,” “opinion,”variations of such terms, and similar expressions are intended to identify suchforward-looking statements. The presentations and discussions of the provisionand allowance for loan losses, and determinations as to the need for otherallowances presented in this report are inherently forward-looking statementsin that they involve judgments and statements of belief as to the outcome offuture events. These statements are not guarantees of future performance andinvolve certain risks, uncertainties, and assumptions that are difficult topredict with regard to timing, extent, likelihood, and degree of occurrence.Therefore, actual results and outcomes may materially differ from what may beexpressed or forecasted in such forward-looking statements. Internal andexternal factors that may cause such a difference include changes in interestrates and interest rate relationships; demand for products and services; thedegree of competition by 

 

 

8

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traditional and non-traditional competitors; changesin banking regulations; changes in tax laws; changes in prices, levies, andassessments; the impact of technological advances; governmental and regulatorypolicy changes; the outcomes of pending and future litigation andcontingencies; trends in customer behavior and customer ability to repay loans;software failure, errors or miscalculations; and unexpected changes in the  national economy including war and acts ofterrorism. The Company undertakes no obligation to update, amend or clarifyforward-looking statements, whether as a result of new information, futureevents, or otherwise.

 

#### **Financial Condition**

Total assets increased $1.5 million during the firstsix months of the fiscal year ending June 30, 2003 or 3.2%, when compared toJune 30, 2002. During the same six-month period cash and cash equivalentsincreased $464,493, or 19.8%. Other borrowings in the form of Federal Home LoanBank advances decreased $300,000, or 5.7%, while securities available for saledeclined approximately $5 million, or 51.9%, and loans held for sale increased165%, or $1.04 million.

 

Total loans receivable, net of the allowance for loanlosses, increased $1.9 million, or 5.7%, during the first half of fiscal year2003, the real estate — construction loan portfolio grew by $1.0 million, or44.3%, and the real estate — mortgages portfolio by $2.9 million, or 21.8%.Growth in both the real estate portfolio’s was offset by a decrease incommercial loans of $1.0 million, or 15.6%. The increase in mortgage loans waslargely attributable to re-finance activity.

 

Net charge-offs of loans was $1,351 for the first sixmonths of fiscal year 2003 compared to $358,894 for the same period in fiscalyear 2002. The ratio of net charge-offs of loans to average loans decreased to0.00% in the first half of fiscal year 2003 compared to 1.22% in the first halfof fiscal year 2002. The increase in provision for loan losses in the firsthalf of fiscal year 2003, at $28,700, exceeded net charge-offs by $27,349, andresulted in an increase in the allowance for loan loss of 4.1% during the firstsix months of fiscal year 2003. At December 31, 2002, the allowance as a percentof outstanding loans was 1.89%. Management continues to maintain the allowancefor loan losses at a level considered appropriate to absorb losses in theportfolio. The allowance balance is established after considering past loanloss experience, current economic conditions, volume, growth and composition ofthe loan portfolio, delinquencies, and other relevant factors, as detailedfurther under “Results of Operations.”

 

Total deposits increased $1.63 million, or 4.1%,during the first six months of the fiscal year ending June 30, 2003 to $41.22million. NOW and money market deposits increased by 748,275, or 9.69%

 

Total shareholders’ equity increased $23,364, or 1.2%,during the first six months of fiscal year 2003. A net loss of $43,871, stockissuances of 15,000 shares for $82,500, and a net decrease in the unrealizedappreciation on securities available for sale of $17,263 resulted in the netincrease in shareholders’ equity. In addition, there was a decrease of $1,998in the unearned stock compensation during the first six months of fiscal year2003.  Book value was $3.94 per share atDecember 31, 2002, a decrease from $5.15 at fiscal year end June 30, 2002. Theboard of directors authorized the sale of up to 40,000 shares of the Company’scommon stock. The proceeds of which will be utilized to support on-goingoperations and to pay expenses incurred in connection with the Company’spending litigation (see Part II - “Other Information — Legal 

 

 

9

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Proceedings”). The Company anticipates that it may offer for sale additional shares ofits common stock from time to time in keeping with the Company’s capital needs,including retention of adequate capital to support growth opportunities, andthe Company’s desire to maintain a “well capitalized” regulatory capitalrating.

 

The bank regulatory agencies require financialinstitutions to maintain capital at adequate levels based on a percentage ofassets and off-balance sheet exposures, adjusted for risk weights ranging from0% to 100%.  Under the risk-basedstandard, capital is classified into two tiers.  Tier 1 capital consists of common stockholders’ equity, excludingthe unrealized gain (loss) on available-for-sale securities, minus certainintangible assets.  Tier 2 consists ofthe general allowance for credit losses subject to certain limitations.  An institution’s qualifying capital base forpurposes of its total risk-based capital ration consists of the sum of its Tier1 and Tier 2 capital.  The regulatoryminimum requirements are 4% for Tier 1 and 8% for total risk-basedcapital.  Banks are also required tomaintain capital at a minimum level based on total assets, which is known asthe 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.

 

Northern Star Bank exceeded its minimum regulatorycapital ratios.  As of December 31,2002, the capital ratios were as follows:

 
|                                            |   | **Actual** |   | **For  Capital Adequacy Purposes** |   | **To Be Well  Capitalized Under Prompt Corrective Action Provision** |   |
|-------------------------------------------------|--------|------------|--------|------------------------------------|--------|----------------------------------------------------------------------|--------|
| Total Capital(to Risk Weighted  Assets)         |   | 12.07      | %      | 8.00                               | %      | 10.00                                                                | %      |
| Tier 1 Capital(to Risk Weighted  Assets)        |   | 10.81      | %      | 4.00                               | %      | 6.00                                                                 | %      |
| Leverage RatioTier 1 Capital(to Average Assets) |   | 8.35       | %      | 4.00                               | %      | 5.00                                                                 | %      |

 

### **Liquidityand 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.  Liquidity represents the ability of acompany to convert assets into cash or cash equivalents without significantloss and to raise additional funds by increasing liabilities.  Liquidity management is made morecomplicated because different balance sheet components are subject to varyingdegrees of management control.  Forexample, the timing of maturities of the investment portfolio is verypredictable and subject to a high degree of control at the time investmentdecisions are made.  However, netdeposit inflows and outflows are far less predictable and are not subject tothe same degree of control.  Cash andassets which are readily marketable, which can be pledged, or which will maturein the near future provide asset liquidity. Liability liquidity is provided by access to core funding sources,principally the ability to generate customer deposits in The Bank’s marketarea.  In addition, liability liquidityis provided through the ability to borrow against approved lines of credit fromcorrespondent banks and to borrow on a secured basis through securities soldunder agreements to repurchase. Management expects to meet its 

 

 

10

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liquidity needs with available cash and federal funds sold, includingboth interest and non-interest-bearing balances; maturities of investmentsecurities in the 12 months following December 31, 2002; the repayment ofloans; growth in deposits; and, borrowing against approved lines of credit.

 

                Short-terminvestments, which consist of federal funds sold and mutual funds, andinterest-bearing deposits, were approximately $40 million atDecember 31, 2002, as compared to $36.05 million at June 30, 2002.  These funds are a primary source of theBank’s liquidity and are generally invested in an interest earning capacity onan overnight basis.

 

                In addition todeposits, the sources of funds available for lending and other businesspurposes include loan repayments, loan sales, and securities sold underagreements to repurchase.  Loanrepayments are a relatively stable source of funds, while deposit inflows andoutflows are influenced significantly by general interest rates and moneymarket conditions.  Borrowings may beused on a short-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 consolidatedfinancial statements and related data presented herein have been prepared inaccordance with generally accepted accounting principles, which require themeasurements of financial position and operating results in terms of historicaldollars, without considering changes in the relative purchasing power of moneyover time due to inflation.  Unlike mostindustrial companies, substantially all of the assets and liabilities of theBank are monetary in nature.  As aresult, interest rates have a more significant impact on the Bank’s performancethan the effects of general levels of inflation.  Interest rates do not necessarily move in the same direction orin the same magnitude as the prices of goods and services, since such pricesare affected by inflation to a larger extent than interest rates.  Management seeks to manage the relationshipsbetween interest-sensitive assets and liabilities in order to protect againstwide interest rate fluctuations, including those resulting from inflation.

 

#### **Results of Operations**

The results of operations for the first half of fiscalyear 2003, was a loss of $43,871 or $(0.09) per weighted average shareoutstanding.  This compares favorably toa loss of $457,504 or $(0.95) in the first half of fiscal year 2002.  The net loss for six-month period endedfiscal year 2002 included a charge of $271,000 associated with loans subject tolitigation discussed in previous disclosures. Basic losses per weighted averageshare outstanding was increased by $0.56 per share in the first half of fiscalyear 2002 due to the one-time charge.

 

Average earning assets increased $3.6 million, or8.7%, during the first half of fiscal year 2003 as compared to the same periodof fiscal year 2002. During the first half of fiscal year 2003, the yield onearning assets decreased 29 basis points to 6.50% as compared to 6.79% at theend of the first half of fiscal year 2002. The cost of funding relatedliabilities decreased 154 basis points when comparing the six month periodsended December 31, from 5.21% of earning assets in fiscal year 2002 to 3.67% infiscal year 2003.

 

Since the decrease in the cost of funds relative toearning assets was greater than the 

 

 

11

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decrease in yield on earning assets, the net interestmargin increased 104 basis points from 1.98% in fiscal year 2002 to 3.02% infiscal year 2003. Net interest income increased $266,454, or 65.58%, in thefirst six months of fiscal year 2003 compared to the same period in fiscal year2002.

 

#### **Provision and Allowance for Loan Losses**

                We have developedpolicies and procedures for evaluating the overall quality of our creditportfolio and the timely identification of potential problem loans.  Our judgment as to the adequacy of theallowance is based upon a number of assumptions about future events that webelieve to be reasonable, but which may or may not be valid.  Thus, there can be no assurance thatcharge-offs in future periods will not exceed the allowance for credit lossesor that additional increases in the credit loss allowance will not be required.

 

                Therisk of loss varies depending on the type of loan granted and thecreditworthiness of the borrower over the term of the loan. The Bank maintainsa program of systematic review of its existing loans. Loans are graded fortheir overall quality. Those loans that management determines require furthermonitoring and supervision are segregated and reviewed on a periodic basis.Significant problem loans are periodically reviewed by the Bank’s LoanCommittee.

 

A loan is considered impaired when, based on currentinformation and events; it is probable that the Bank will be unable to collectthe scheduled payments of principal or interest under the contractual terms ofthe loan agreement. Factors considered by management in determining impairmentinclude payment status, collateral value, and the probability of collectingscheduled principal and interest payments. Loans that experience insignificantpayment delays or payment shortfalls generally are not classified as impaired.Management determines the significance of payment delays and payment shortfallson a case-by-case basis. When determining the possibility of impairment,management considers the circumstances surrounding the loan and the borrower,including the length of the delay, the reasons for the delay, the borrower’s priorpayment record and the amount of the shortfall in relation to the principal andinterest owed. The Bank uses the fair value of collateral method to measureimpairment. Impairment is measured on a loan by loan basis for all loans in theportfolio.   We had $2.0 million ofloans considered impaired as of December 31, 2002.

 

The accrual of interest is discontinued whensubstantial doubt exists as to collectibility of the loan, generally at thetime the loan is 90 days delinquent, unless the credit is well secured and inprocess of collection. Any unpaid but accrued interest is reversed at thattime. Thereafter, interest income is no longer recognized on the loan. As such,interest income may be recognized on impaired loans to the extent they are notpast due by 90 days or more. Interest on non-accrual loans is accounted for onthe cash-basis or cost-recovery method, until qualifying for return to accrual.Loans are returned to accrual status when all of the principal and interestamounts contractually due are brought current and future payments arereasonably assured.

 

                The allowance forcredit losses is established through a provision for credit losses chargedagainst income.  Loans are chargedagainst the provision when management believes that the collectibility of theprincipal is unlikely.  The allowance isan estimated amount that management believes will be adequate to absorb lossesinherent in the loan portfolio based on evaluations of its collectibility.  The evaluations take into consideration suchfactors as changes 

 

 

12

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in the nature and volume of the portfolio, overall portfolio quality,specific problem loans and commitments, and current anticipated economicconditions that may affect the borrower’s ability to pay.  While management uses the best informationavailable to recognize losses on loans, future additions to the allowance maybe necessary based on changes in economic conditions.

 

The provision for loan losses increased $28,700 to$688,519 for the first half of fiscal year 2003 compared to $661,170 in thefirst half of fiscal year 2002. Net charge-offs of loans decreased $357,543 asdetailed above in the discussion under “Financial Condition.” During fiscalyear 2003, management developed and implemented a more comprehensivequantitative and qualitative methodology for analyzing factors, which couldimpact the allowance for loan loss reserves. The process involves assigning a rating to various identified risksassociated with each loan application that the Bank grants and subsequentlyassigning a grade to each loan based upon the perceived risks associated withthe individual loans.  The allowance forloan losses is subject to further adjustments for historical charge-offs anddelinquency experience, portfolio segment growth rates, and industry andregional factors and trends as they affect our banks’ portfolios. Thedevelopment and change in the analysis process during the first quarter offiscal year 2003, the consideration of exposures to industries potentially mostaffected by current risks in the economic and political environment, and thereview of potential risks in certain credits that are not considered part ofthe non-performing loan category contributed to the establishment of the currentlevel of the allowance for loan losses at the Bank. Maintaining the levelmanagement believes to be appropriate required a $28,700 increased provisionexpense for the first half of fiscal year 2003 compared to the year earlierlevel. (See discussion under “Financial Condition” for additional comments onthe level of allowance for loan losses.)

 

**NonInterest Income and Expense**

Total non-interest incomeincreased $205,105 or 76.60%, during the first six months of fiscal year 2003when compared to the same six-month period in fiscal year 2002. Strong mortgagerefinance activity has continued into the first half of fiscal year 2003 andresulted in an increase of $240,157, or 170%, in gain on sale of mortgage loanswhen compared to the first half of fiscal year 2002.  Other fees and service charges on deposit and loan accounts forthe first six months of fiscal year 2003 posted an increase of $19,486, or28.5%, over the same period of the prior fiscal year.  The increase in fees and service charges is attributed to anincrease in the number of deposit and loan accounts. Total non-interest incomealso showed a $3,504 gain from the sale of securities during the first sixmonths of fiscal year 2003.  Thisrepresented a $54,538, or 93.6%, reduction in gain on sale of securities whencompared to the first six months of fiscal year 2002.

 

Total non-interest expense increased to $362,526, or45.4% during the first six months of fiscal year 2003 when compared to thefirst six-month period of fiscal year 2002. Excluding the charge of $271,000relating to loans in litigation posted in the first six months of fiscal year2002, the total of non-interest expense and provision for loan losses increased$328,926, or 38.2%, during the first six months of fiscal year 2003 as comparedto the first six months of fiscal year 2003. The increase in non-interest expenses is largely attributable to ourexpansion into the St. Cloud market during the first quarter of fiscal year2002.  In addition, the increase innon-interest expenses is due to the increase in legal fees associated with theon-going litigation involving the Company and the Bank (see Part II “OtherInformation — Legal Proceedings”).

 

 

13

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Of the increase in non-interest expenses, compensationand employee benefits increased by $152,813, or 42.2%, during the first sixmonths of fiscal year 2003. The hiring of staff for the St. Cloud bankingfacility, an increase in the cost of employee health care coverage and yearlymerit raises accounted for all of the increase in salaries and employeebenefits.  Professional fees in the formof legal and accounting expenses increased $101,918, or 298.5%, during thefirst six months of fiscal year 2003 due to litigation as compared to the firstsix months of fiscal year 2002.  Dataprocessing expenses increased $33,604, or 80.2%, during the first six months offiscal year 2003 as compared to the same period of fiscal year 2002.  The increase in data processing expenses isassociated with our expansion into the St. Cloud market and to an over allincrease in the number of loan and deposit accounts.

 

#### **Provision for Income Taxes**

Our effective tax rate was 0% for the three monthperiods ended December 31, 2002, and 2001 because the expected future taxbenefit of the net operating loss is reduced by a deferred tax asset valuationallowance in accordance with generally accepted accounting principles.

 

#### **Stock Option Agreement**

                The Companyaccounts for stock options under the recognition and measurement principles ofAPB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related interpretations.  Nostock-based employee compensation cost is reflected in operations, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant.  Statement of Financial Accounting StandardsNo. 148, *Accountingfor Stock-Based Compensation-Transition and Disclosure,*is effectivefor the interim period beginning after December 15, 2002 and requires pro formaoperating and earnings per share disclosures on a quarterly basis.  Management will adopt the new standard forthe quarter ended March 31, 2003.

 

#### **Convertible Subordinated Unsecured Notes**

                In July and August2001, we raised $1 million through the sale of convertible subordinatedunsecured notes, and from June to August, 2002 the Company raised an additional$500,000 through the sale of similar notes. The notes were issued for a three-year term and bear interest at therate of eight percent per annum (as to the 2001 notes) and seven percent perannum (as to the 2002 notes), payable quarterly.  Investors in the notes were granted the right to convert theirinvestment into shares of Northern Star Financial, Inc, common stock any timeprior to maturity at the rate of $10.50 per share (as to the 2001 notes) and$9.00 per share (as to the 2002 notes). Related parties (directors) purchased $600,000 of these notes.

 

 

14

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**AVERAGE BALANCES, YIELDS AND RATES**

                The followingtable sets forth, for the three and six months ended December 31, 2002 and2001, the weighted average yields earned, the weighted average rates paid, theinterest rate spread and the net yield on earning assets and interest-bearingliabilities, on an annualized basis.

** **
|                                                                                   |   | **For  the  Three Months Ended** |       |
|----------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                                   |   | **December  31, 2002**                |       | **December  31, 2001** |   |
|                                                                                   |   | **Average********Balance**            |       | **Interest** |   | **Average********Yield or********Rates** |   | **Average********Balance** |   | **Interest** |   | **Average********Yield or********Rates** |   |
| **Assets**                                                                             |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                                                                       |   | $                                     | 35,348,062 |   | $ | 626,252 |   | 7.09 | % | $ | 29,890,574 |   | $ | 535,534 |   | 7.17 | % |
| Investment securities                                                                  |   | 5,516,189                             |       | 70,883 |   | 5.14 | % | 11,058,998 |   | 152,858 |   | 5.42 | % |
| Federal funds sold                                                                     |   | 2,603,647                             |       | 7,874 |   | 1.21 | % | 1,783,344 |   | 16,775 |   | 3.76 | % |
| Total interest-earning assets                                                          |   | 43,467,898                            |       | 705,009 |   | 6.49 | % | 42,732,916 |   | 705,167 |   | 6.57 | % |
| Non-interest-earning assets                                                            |   | 5,027,482                             |       |   |   |   |   | 1,774,517 |   |   |   |   |   |
| Total assets                                                                           |   | $                                     | 48,495,380 |   |   |   |   |   | $ | 44,507,433 |   |   |   |   |   |
| **Liabilities  and Stockholders’ Equity**                                         |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing deposits                                                              |   | $                                     | 35,510,650 |   | 297,359 |   | 3.35 | % | $ | 33,332,860 |   | 398,770 |   | 4.79 | % |
| Other liabilities                                                                      |   | 6,468,178                             |       | 73,974 |   | 4.57 | % | 5,806,843 |   | 79,347 |   | 5.47 | % |
| Total interest-bearing liabilities                                                     |   | 41,978,828                            |       | 371,333 |   | 3.54 | % | 39,139,703 |   | 478,117 |   | 4.89 | % |
| Non-interest-bearing liabilities                                                       |   | 4,528,182                             |       |   |   |   |   | 2,782,117 |   |   |   |   |   |
| Total liabilities                                                                      |   | 46,507,010                            |       |   |   |   |   | 41,921,820 |   |   |   |   |   |
| Stockholders’ equity                                                              |   | 1,988,370                             |       |   |   |   |   | 2,585,613 |   |   |   |   |   |
| Total liabilities and stockholders’equity                                         |   | $                                     | 48,495,380 |   |   |   |   |   | $ | 44,507,433 |   |   |   |   |   |
| Net interest spread                                                                    |   |                                  |       |   |   | 2.95 | % |   |   |   |   | 1.68 | % |
| Net  interest income/margin                                                       |   |                                  |       | $ | 333,676 |   | 3.07 | % |   |   | $ | 227,050 |   | 2.11 | % |
| Ratio of average interest-earning assetsassets to average interest-bearing liabilities |   | 1.04x                                 |       |   |   |   |   | 1.09x |   |   |   |   |   |
|                                                                                   |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
|                                                                                   |   | **For the  Six  Months Ended**   |       |
|                                                                                   |   | **December 31, 2002**                 |       | **December 31, 2001** |   |
|                                                                                   |   | **Average********Balance**            |       | **Interest** |   | **Average**

**Yield or**

**Rates** |   | **Average**

**Balance** |   | **Interest** |   | **Average**

**Yield or**

**Rates** |   |
| **Assets**                                                                             |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                                                                       |   | $                                     | 35,219,784 |   | $ | 1,261,408 |   | 7.16 | % | $ | 27,271,463 |   | $ | 1,033,660 |   | 7.58 | % |
| Investment securities                                                                  |   | 6,754,917                             |       | 168,159 |   | 4.98 | % | 10,569,423 |   | 301,151 |   | 5.70 | % |
| Federal funds sold                                                                     |   | 2,590,946                             |       | 18,979 |   | 1.47 | % | 3,151,378 |   | 57,144 |   | 3.63 | % |
| Total interest-earning assets                                                          |   | 44,565,647                            |       | 1,448,546 |   | 6.50 | % | 40,992,264 |   | 1,391,955 |   | 6.79 | % |
| Non-interest-earning assets                                                            |   | 4,201,312                             |       |   |   |   |   | 1,694,583 |   |   |   |   |   |
| Total assets                                                                           |   | $                                     | 48,766,959 |   |   |   |   |   | $ | 42,686,847 |   |   |   |   |   |
| **Liabilities  and Stockholders’ Equity**                                         |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest bearing deposits                                                              |   | $                                     | 35,688,392 |   | 620,662 |   | 3.48 | % | $ | 32,764,084 |   | 842,781 |   | 5.15 | % |
| Other liabilities                                                                      |   | 6,600,519                             |       | 155,157 |   | 4.70 | % | 4,849,811 |   | 142,901 |   | 5.60 | % |
| Total interest-bearing liabilities                                                     |   | 42,288,911                            |       | 775,819 |   | 3.67 | % | 37,613,895 |   | 985,682 |   | 5.21 | % |
| Non-interest-bearing liabilities                                                       |   | 4,534,278                             |       |   |   |   |   | 2,368,815 |   |   |   |   |   |
| Total liabilities                                                                      |   | 46,823,189                            |       |   |   |   |   | 39,982,710 |   |   |   |   |   |
| Stockholders’ equity                                                              |   | 1,943,770                             |       |   |   |   |   | 2,704,137 |   |   |   |   |   |
| Total liabilities and stockholders’equity                                         |   | $                                     | 48,766,959 |   |   |   |   |   | $ | 42,686,847 |   |   |   |   |   |
| Net interest spread                                                                    |   |                                  |       |   |   | 2.83 | % |   |   |   |   | 1.55 | % |
| Net interest income/margin                                                             |   |                                  |       | $ | 672,727 |   | 3.02 | % |   |   | $ | 406,273 |   | 1.98 | % |
| Ratio of average interest-earning assetsassets to average interest-bearing liabilities |   | 1.05x                                 |       |   |   |   |   | 1.08x |   |   |   |   |   |
|                                                                                        |        |                                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

 

15

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**INVESTMENTPORTFOLIO**

**               **Contractual maturities and yields on the Company’sinvestments (all available for sale) are summarized in the followingtable.  Expected maturities may differfrom contractual maturities because issuers may have the right to call orprepay obligations with or without call or prepayment penalties.

 
|                     |   | **December  31, 2002**    |   |
|--------------------------|--------|---------------------------|--------|
| ** **               |   | **One Year**

**or Less** |   | **Yield** |   | **After one**

**year thru**

**five years** |   | **Yield** |   | **After five**

**years thru**

**ten years** |   | **Yield** |   | **After 10**

**years** |   | **Yield** |   | **Total** |   | **Yield** |   |
|                     |   |                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S. Agencies            |   | $                         | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % | $ | — |   | 0.00 | % |
| Mortgage-back securities |   | 1,250                     |   | 7.01 | % | — |   | 0.00 | % | 880,145 |   | 4.86 | % | 3,231,748 |   | 5.86 | % | 4,113,143 |   | 5.65 | % |
| Corporate bonds          |   | —                    |   | 0.00 | % | 499,109 |   | 6.06 | % | — |   | 0.00 | % | — |   | 0.00 | % | 499,109 |   | 6.06 | % |
|                     |   | $                         | 1,250  |   | 7.01 | % | $ | 499,109 |   | 6.06 | % | $ | 880,145 |   | 4.86 | % | $ | 3,231,748 |   | 5.86 | % | $ | 4,612,252 |   | 5.69 | % |
|                          |        |                           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

#### **LOAN PORTFOLIO**

 

                Thefollowing table summarizes the composition of the loan portfolio. Total grossloans including net of deferred loan fees and costs outstanding at December 31,2002 and June 30, 2002 were $36,450,491 and $34,497,862, respectively.  This table excludes loans held for sale asof December 31, 2002 and June 30, 2002 of $1,661,090 and $625,735 respectively. Loans held for sale are comprised ofreal estate mortgages.

 

 
|                             |   | **December  31,  2002** |       | **June 30,  2002** |   |
|----------------------------------|--------|------------------------------|------------|--------------------|--------|
|                             |   | **Amount**                   |       | **%****of Total**  |   | **Amount** |   | **%****of Total** |   |
|                             |   |                         |       |               |   |   |   |   |   |
| Commercial &  agricultural   |   | $                            | 5,583,377  |               | 15.36  | % | $ | 6,616,193 |   | 19.28 | % |
| Real estate —  construction |   | 3,428,323                    |       | 9.43               | %      | 2,375,318 |   | 6.92 | % |
| Real estate —  mortgages    |   | 16,241,944                   |       | 44.69              | %      | 13,336,761 |   | 38.86 | % |
| Consumer loans                   |   | 10,968,950                   |       | 30.18              | %      | 11,809,464 |   | 34.41 | % |
| Lease financing                  |   | 120,395                      |       | 0.34               | %      | 179,995 |   | 0.53 | % |
| Total loans                      |   | $                            | 36,342,989 |               | 100.00 | % | $ | 34,317,731 |   | 100.00 | % |
| Net deferred  loans fees/(costs) |   | 107,502                      |       |               |   | 180,131 |   |   |   |
| Less: allowance  for loan loss   |   | (688,519                     | )          |               |   | (661,170 | ) |   |   |
| Total net loans                  |   | $                            | 35,761,972 |               |   |   | $ | 33,836,692 |   |   |   |

 

 

16

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**MATURITIESAND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES**

                Theinformation in the following table is based on the contractual maturities ofindividual loans, including loans, which may be subject to renewal at theircontractual maturity.  Renewal of suchloans is subject to review and credit approval as well as modification of termsupon maturity.  Actual repayments ofloans may differ from maturities reflected below because borrowers have theright to repay obligations with or without prepayment penalties.  The following table summarizes loanmaturities, by type at December 31, 2002 and June 30, 2002.

 
|                                |   | **As of  December 31,  2002** |       |
|-------------------------------------|--------|------------------------------------|------------|
| ** **                          |   | **One Year**

**or Less**          |       | **After One  but**

**within  Five Years** |   | **After**

**Five Years** |   | **Total** |   |
|                                |   |                               |       |   |   |   |   |   |   |
| Commercial &  agricultural      |   | $                                  | 1,872,272  |   | $ | 2,136,884 |   | $ | 1,574,221 |   | $ | 5,583,377 |   |
| Real estate —  construction    |   | 2,075,534                          |       | 1,352,789 |   | — |   | $ | 3,428,323 |   |
| Real estate —  mortgages       |   | 1,582,009                          |       | 11,960,813 |   | 2,699,122 |   | $ | 16,241,944 |   |
| Consumer loans                      |   | 3,361,876                          |       | 7,023,303 |   | 583,771 |   | $ | 10,968,950 |   |
| Lease financing                     |   | 19,307                             |       | 101,088 |   | — |   | $ | 120,395 |   |
| Total                               |   | $                                  | 8,910,998  |   | $ | 22,574,877 |   | $ | 4,857,114 |   | $ | 36,342,989 |   |
|                                |   |                               |       |   |   |   |   |   |   |
| Loans maturing  after one year with |   |                               |       |   |   |   |   |   |   |
| Fixed interest  rate                |   | $                                  | 22,431,347 |   |   |   |   |   |   |   |
| Floating interest  rates            |   | $                                  | 5,000,644  |   |   |   |   |   |   |   |
|                                |   |                               |       |   |   |   |   |   |   |
|                                |   | **As of June  30, 2002**           |       |
| ** **                          |   | **One Year**

**or Less**          |       | **After One  but**

**within  Five Years** |   | **After**

**Five Years** |   | **Total** |   |
|                                |   |                               |       |   |   |   |   |   |   |
| Commercial  agricultural            |   | $                                  | 2,728,795  |   | $ | 2,252,871 |   | $ | 1,634,527 |   | $ | 6,616,193 |   |
| Real estate —  construction    |   | 2,108,064                          |       | 267,254 |   | — |   | 2,375,318 |   |
| Real estate —  mortgages       |   | 2,295,594                          |       | 9,126,974 |   | 1,914,193 |   | 13,336,761 |   |
| Consumer loans                      |   | 3,169,551                          |       | 7,367,969 |   | 1,271,944 |   | 11,809,464 |   |
| Lease financing                     |   | 51,438                             |       | 128,557 |   | — |   | 179,995 |   |
| Total                               |   | $                                  | 10,353,442 |   | $ | 19,143,625 |   | $ | 4,820,664 |   | $ | 34,317,731 |   |
|                                |   |                               |       |   |   |   |   |   |   |
| Loans maturing  after one year with |   |                               |       |   |   |   |   |   |   |
| Fixed interest  rate                |   | $                                  | 19,929,853 |   |   |   |   |   |   |   |
| Floating  interest rates            |   | $                                  | 4,034,436  |   |   |   |   |   |   |   |
|                                     |        |                                    |            |  |  |  |  |  |  |  |  |  |  |  |

 

 

17

----

 

 

#### **PROVISION AND ALLOWANCE FOR LOAN LOSSES**

                Wehave developed policies and procedures for evaluating the overall quality ofits credit portfolio and the timely identification of potential creditproblems.  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.

 

                AtDecember 31, 2002, the allowance for loan losses was $688,519, or 1.89%, of$36,450,491 in loan receivables (net of loans held for sale).  The provision for loan losses was madeprimarily as a result of management’s assessment of impaired loans and generalloan loss risk as our loan portfolio increases.

 

| ** **                                                                                 |   | **Six Months  Ended**

**December  31, 2002** |    | **Year Ended**

**June 30,  2002** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|------------------------------------|--------|
|                                                                                       |   |                                          |    |                               |   |
| Balance at  beginning of period                                                            |   | $                                             | 661,170 |                               | $      | 234,989 |   |
| Charge-offs                                                                                |   | (6,937                                        | )       | (359,751                           | )      |
| Recoveries                                                                                 |   | 5,586                                         |    | 857                                |   |
| Net charge offs                                                                            |   | (1,351                                        | )       | (358,894                           | )      |
| Provision  charged to operations                                                           |   | 28,700                                        |    | 785,075                            |   |
|                                                                                       |   |                                          |    |                               |   |
| Balance at end  of period                                                                  |   | $                                             | 688,519 |                               | $      | 661,170 |   |
|                                                                                       |   |                                          |    |                               |   |
| Ratio of net  charge-offs during the periodto average loans outstanding during the  period |   | 0.00                                          | %       | 1.22                               | %      |

 

At December 31, 2002 and June 30, 2002 the allowancewas allocated as follows:

 
| ** **                       |   | **For the  Six Months Ended********December  31, 2002** |    | **For the  Year Ended********June 30,  2002**                     |   |
|----------------------------------|--------|---------------------------------------------------------|---------|-------------------------------------------------------------------|--------|
| ** **                       |   | **Amount**                                              |    | **Percent of  Loans**

**in Each  Category**

**of Total  Loans** |   | **Amount** |   | **Percent of  Loans**

**in Each  Category**

**of Total  Loans** |   |
| Commercial &  agricultural   |   | $                                                       | 38,575  |                                                              | 15.36  | % | $ | 42,318 |   | 19.28 | % |
| Real Estate —  construction |   | 25,230                                                  |    | 9.43                                                              | %      | 17,815 |   | 6.92 | % |
| Real Estate —  mortgages    |   | 113,717                                                 |    | 44.69                                                             | %      | 85,373 |   | 38.86 | % |
| Consumer loans                   |   | 510,044                                                 |    | 30.18                                                             | %      | 514,123 |   | 34.41 | % |
| Lease financing                  |   | 953                                                     |    | 0.34                                                              | %      | 1,541 |   | 0.53 | % |
| Total                            |   | $                                                       | 688,519 |                                                              | 100.00 | % | $ | 661,170 |   | 100.00 | % |
|                             |   |                                                    |    |                                                              |   |   |   |   |   |

 

 

18

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**DEPOSITS**

The following is a table of deposits by category atDecember 31, 2002 and June 30, 2002.

 
|                               |   | **As of  December 31, 2002** |       |
|------------------------------------|--------|------------------------------|------------|
| ** **                         |   | **Ending**

**Balance**      |       | **Percentage**

**of Total**

**Deposits** |   | **Average**

**Balance** |   | **Percentage**

**of Total**

**Average**

**Deposits** |   | **Average**

**Rate**

**Paid** |   |
|                               |   |                         |       |   |   |   |   |   |   |   |   |
| Demand deposit                     |   | $                            | 5,335,077  |   | 12.94 | % | $ | 4,064,846 |   | 10.23 | % | 0.00 | % |
| Now and money  market              |   | 8,466,849                    |       | 20.54 | % | 8,421,886 |   | 21.19 | % | 1.98 | % |
| Savings                            |   | 4,663,910                    |       | 11.32 | % | 4,583,018 |   | 11.53 | % | 1.93 | % |
| Time accounts  less than $100,000  |   | 18,160,213                   |       | 44.06 | % | 18,302,088 |   | 46.04 | % | 4.31 | % |
| Time accounts of  $100,000 or more |   | 4,590,818                    |       | 11.14 | % | 4,381,400 |   | 11.01 | % | 4.51 | % |
| Total deposits                     |   | $                            | 41,216,867 |   | 100.00 | % | $ | 39,753,238 |   | 100.00 | % |   |   |
|                               |   |                         |       |   |   |   |   |   |   |   |   |
|                               |   | **As of June  30, 2002**     |       |
| ** **                         |   | **Ending**

**Balance**      |       | **Percentage**

**of Total**

**Deposits** |   | **Average**

**Balance** |   | **Percentage**

**of Total**

**Average**

**Deposits** |   | **Average**

**Rate**

**Paid** |   |
|                               |   |                         |       |   |   |   |   |   |   |   |   |
| Demand deposit                     |   | $                            | 4,574,282  |   | 11.55 | % | $ | 2,395,080 |   | 6.81 | % | 0.00 | % |
| Now and money  market              |   | 7,718,574                    |       | 19.50 | % | 5,734,695 |   | 16.31 | % | 2.67 | % |
| Savings                            |   | 4,533,290                    |       | 11.45 | % | 4,620,632 |   | 13.14 | % | 2.41 | % |
| Time accounts  less than $100,000  |   | 18,622,280                   |       | 47.04 | % | 18,763,158 |   | 53.37 | % | 5.48 | % |
| Time accounts of  $100,000 or more |   | 4,141,303                    |       | 10.46 | % | 3,641,798 |   | 10.37 | % | 5.80 | % |
| Total deposits                     |   | $                            | 39,589,729 |   | 100.00 | % | $ | 35,155,363 |   | 100.00 | % |   |   |
|                                    |        |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

Maturity distribution of time deposits of $100,000.00and over.

 
|                               |       | **As of  December 31, 2002** |   |
|------------------------------------|------------|------------------------------|--------|
| ** **                         | ** ** | **3 months  or less**        |   | **Over 3  months**

**thru 6 months** |   | **Over 6  months**

**thru 12  months** |   | **Over**

**12 months** |   | **Total** |   |
| Time Accounts of  $100,000 or more |       | $100,000                     |   | $1,136,543 |   | $1,646,239 |   | $1,708,036 |   | 4,590,818 |   |

 

**ITEM 3.  CONTROLS AND PROCEDURES****.**

 

                The Company’s Chief ExecutiveOfficer and Chief Financial Officer have concluded that the Company’s controlsand other procedures designed to ensure that information required to bedisclosed by the Company in the reports that it files or submits under theSecurities Exchange Act of 1934, as amended is recorded, processed, summarizedand reported within the time periods specified in the Commission’s rules andforms are effective, based upon their evaluation of these controls andprocedures as of a date within 90 days of the filing date of this Form 10QSB.

 

                There were no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect those controls subsequent to the date of this evaluation,including any corrective actions with regards to significant deficiencies andweaknesses.

 

 

19

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## **PARTII**

**OTHERINFORMATION**

 

Item1.    LegalProceedings:  

 

The Company andits wholly owned subsidiary bank, Northern Star Bank, are defendants in civilactions.

 

The Company is adefendant and third party plaintiff in a complaint originally filed onMarch 22, 2002 in the United States District Court for the WesternDistrict of Wisconsin by Catalytic Combustion Corporation 401(k) Profit SharingPlan and Catalytic Combustion Corporation (“Plaintiffs”).  According to the original complaint,Plaintiffs seek to rescind its purchase of 30,000 shares of Company commonstock it purchased in connection with the Company’s initial public offering in1998 and 1999.  Plaintiffs allege thatthe Company sold the shares to Catalytic Combustion Corporation 401(k) ProfitSharing Plan in violation of Wisconsin securities laws, and therefore,Plaintiffs are entitled to rescind the purchase according to Wisconsinsecurities laws.  The Plaintiffs seekdamages in the amount of approximately $210,714, plus interest fromMarch 23, 1999 and all actual and reasonable attorney’s fees.  The Company denies the allegations in thecomplaint.

 

On June 17, 2002the Company filed a Third Party Summons and Complaint against Diamond HillSecurities, Inc. f/k/a Banc Stock Financial Services, Inc. (the “Agent”), theagent of the Company’s initial public offering, seeking indemnification and/orcontribution pursuant to the Agency Agreement dated October 9, 1998 for anylosses the Company may incur as a result of the Plaintiff’s originalcomplaint.  On October 29, 2002,Plaintiff’s amended their complaint to add Frank L. Gazzola as a defendant.

 

The Company,Plaintiffs and Agent have participated in settlement discussions.  As of February 13, 2003, the parties havenot entered into a final and binding settlement agreement.

 

Northern Star Bankis a defendant in a complaint filed on February 23, 2002 in United StatesDistrict Court, District of South Dakota Southern Division by Bridge Lenders,LLC; Jim Perry; Larry Ticknor; Doug English; Rollyn H. Samp; Courtney Anderson;Henry Carlson, Jr.; Michael M. Samp; Ernest Olson; Don Davis; JerryLanderville; Allen Lewis; Gary Viger; Glen Jamtgaard and Steve Herman(“Plaintiffs”).  The complaint arose outof a series of loans that Northern Star Bank made to Plaintiffs in 2000.  Plaintiffs used the proceeds of the loans tomake an investment in Bridge Lenders, LLC, and Bridge Lenders, LLC in turn usedthe funds to make an investment in Phenix Biocomposites, which has defaulted inits obligations to Plaintiffs.  NorthernStar Bank is a defendant in this action due to the fact that its formerdirector, Frank Gazzola, was also a director of Phenix Biocomposites.  The Plaintiffs allege that Mr. Gazzolafailed to inform the Plaintiffs that their investment in Phenix Biocompositeswas not secured.  The Plaintiffs claim 

 

 

20

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that Northern StarBank had a fiduciary duty to the Plaintiffs because of Mr. Gazzola’s dual roleas a director of both Northern Star Bank and Phenix Biocomposites, thatNorthern Star Bank violated this fiduciary duty and a separate implied covenantof good faith and fair dealing when Mr. Gazzola allegedly provided falseinformation to Plaintiffs, and that the false information allegedly provided byMr. Gazzola constituted intentional or unintentional fraud by Northern StarBank.  Plaintiffs seek compensatory,general, special and punitive damages. Northern Star Bank denied the Plaintiffs’ allegations and has brought amotion to dismiss all claims for lack of personal jurisdiction. The Company isawaiting a response from the court.

 

The Company madecertain loans to the Former CFO during his tenure at the Company.  These loans are collateralized by securitiesowned by the Former CFO.  The Former CFOsubsequently filed for bankruptcy.  TheBankruptcy court claims that since certain of the collateral was conveyed tothe Bank within one year of the Former CFO’s filing for bankruptcy and theFormer CFO was an insider, they are preferential transfers and must bereversed.  The effect of a successfuloutcome by the Bankruptcy court would increase the risk of loss to the Companyon the loans to the Former CFO.  As ofDecember 31, 2002, the principal balance of loans outstanding approximates$475,000.  These loans are considered bymanagement to be impaired, and a specific reserve relating to these loansapproximating $237,000 has been included in the allowance for loan losses

 

Item2.    Changesin Securities

 

The board of directorsauthorized the sale of up to 40,000 shares of the Company’s common stock. Theproceeds will be utilized to support our on-going operations and to payexpenses incurred in connection with our pending litigation (see Part II —“Other Information—Legal Proceedings”). We anticipate that they  may offer for sale additional shares of theCompany’s common stock from time to time in keeping with the Company’s capitalneeds, including retention of adequate capital to support growth opportunities,and the Company’s desire to maintain a “well capitalized” regulatory capitalrating.

 

During the quarter endedDecember 31, 2002, the Company issued 15,000 shares of common stock for$82,500.

 

Item3.    DefaultUpon Senior Securities: 

 

None

 

Item 4.  Submissions of Matters to a Vote ofSecurity Holders:  

 

(a)             The Annual Meeting of the Company’s shareholders washeld on October 21, 2002.

 

(b)             At the Annual Meeting a proposal to set the number ofdirectors at eight was adopted by a vote of 327,089 shares in favor, with 0shares against, 0 shares abstaining and 0 shares represented by brokernonvotes.

 

 

21

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(c)             Proxies for the Annual Meeting were solicited pursuantto Regulation A under the Securities Exchange Act of 1934, there was nosolicitation in opposition to management’s nominees, and the following personswere elected Class II directors of the Company to serve for a period of threeyears and until their successors shall have been duly elected and qualified:

 
| **Nominee**      |   | **Number of Votes For** |   | **Number of Votes Withheld** |   |
|------------------|--------|-------------------------|--------|------------------------------|--------|
|             |   |                    |   |                         |   |
| Michael Reynolds |   | 327,089                 |   | 0                            |   |
| Steve Loehr      |   | 327,089                 |   | 0                            |   |

 

The terms of office of the following directors continuedafter the Annual Meeting:

 

Robert H. Dittrich

Dean M. Doyscher

Gerald W. Eick

James H. Illies

Thomas J. Reynolds

Thomas P. Stienessen

 

Item 5.    Other Information

 

None

 

Item 6.    Exhibits and Reports on Form 8-K

 

a)         Exhibits

 

See exhibit index immediately following certifications

 

b)  Reports onform 8-K:

 

During the quarter endedDecember 31, 2002, the Company filed three forms 8-K as follows:

10/09/02 — Press release announcing dismissal ofaccountants

10/16/02 — Pressrelease with First Quarter results of Northern Star Financial, Inc.

10/29/02 — Press release announcing selection ofaccountants

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|   |               | Northern  Star Financial, Inc. |                                   |
|--------|--------------------|--------------------------------|----------------------------------------|
|   |               |                           |                                   |   |
| Date:  | February  13, 2003 | By                             | /s/  Thomas Stienessen                 |   |
|   |               |                           | Thomas  Stienessen                     |   |
|   |               |                           | President  and Chief Executive Officer |   |
|   |               |                           |                                   |   |
| Date:  | February  13, 2003 | By                             | /s/ Gerald W. Eick                     |   |
|   |               |                           | Gerald  W. Eick, Treasurer             |   |

 

 

22

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## **CERTIFICATIONS**

 

I,Thomas Stienessen, certify that:

 

1.I have reviewed this quarterly report on Form 10-QSB of Northern StarFinancial, Inc.;

 

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3.Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4.The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5.The registrant’s other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant’s internal controls; and

 

6.The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:  | February  13, 2003 | By     | /s/ Thomas Stienessen                                      |
|--------|--------------------|--------|------------------------------------------------------------|
|   |               |   | Thomas  Stienessen, President and  Chief Executive Officer |

** **

 

23

----

 

**CERTIFICATIONS**

 

I,Gerald W. Eick, certify that:

 

1.I have reviewed this quarterly report on Form 10-QSB of Northern StarFinancial, Inc.;

 

2.Based on my knowledge, this quarterly report does not contain any untruestatement of a material fact or omit to state a material fact necessary to makethe statements made, in light of the circumstances under which such statementswere made, not misleading with respect to the period covered by this quarterlyreport;

 

3.Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4.The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a)designed such disclosure controls and procedures to ensure that materialinformation relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b)evaluated the effectiveness of the registrant’s disclosure controls andprocedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c)presented in this quarterly report our conclusions about the effectiveness ofthe disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5.The registrant’s other certifying officers and I have disclosed, based on ourmost recent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)all significant deficiencies in the design or operation of internal controlswhich could adversely affect the registrant’s ability to record, process,summarize and report financial data and have identified for the registrant’sauditors any material weaknesses in internal controls; and

 

b)any fraud, whether or not material, that involves management or other employeeswho have a significant role in the registrant’s internal controls; and

 

6.The registrant’s other certifying officers and I have indicated in thisquarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:  | February  13, 2003 | By     | /s/ Gerald W. Eick         |
|--------|--------------------|--------|----------------------------|
|   |               |   | Gerald  W. Eick, Treasurer |

## ** **

## ** **

## **24**

## ****

## **EXHIBITINDEX**

**NORTHERN STARFINANCIAL, INC.**

**FORM 10-QSB FORQUARTER ENDED DECEMBER 31, 2002**

 
| **EXHIBIT** |   | **DESCRIPTION**                                                             |
|-------------|--------|-----------------------------------------------------------------------------|
|        |   |                                                                        |
| 99.1        |   | Certification  of CFO Pursuant to Sec 906 of The Sarbanes-Oxley Act Of 2002 |
|        |   |                                                                        |
| 99.2        |   | Certification  of CEO Pursuant to Sec 906 of The Sarbanes-Oxley Act Of 2002 |

 

 

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