**U.S. Securities and ExchangeCommission**

 

**Washington, D.C.20549**

 

### **FORM 10-QSB**

 

**ý****QUARTERLY REPORT UNDER SECTION 13 OF 15 (D) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

# **For thequarterly period ended September 30, 2002**

 

**OR**

 

**o****TRANSITION REPORT UNDERSECTION 13 OR 15 (D) OF THE SECURITIESEXCHANGE ACT**

 

**For the transition period from             to            .**

 

**Commission File No.000-25231**

 

**Northern Star Financial, Inc.**

(Exact name of registrant as specified in its charter)

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

 

Check whether the issuer (1) filed all reports required to be filed bySections 13 or 15(d) of the Exchange Act during the past 12 months (or suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.       Yes ý    No o.

 

State the number of shares outstanding of each of the issuer’s classesof common equity as of the latest practicable date.

 

#### **Class:  CommonStock, par value $.01 per share**

#### **Outstanding shares at November 7, 2002:  479,506**

 

 

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

 

**Index to Form 10-QSB**

**September 30, 2002**

 
| PART  I.   | FINANCIAL  INFORMATION |
|------------|------------------------|
|       |                   |   |
|       | Item 1.                | Summary Financial Data |
|       |                   |   |
|       |                   | Consolidated Statements of Financial  Condition at  September 30, 2002 (unaudited) and June 30,  2002 (audited) |
|       |                   |   |
|       |                   | Unaudited Consolidated Statements of  Operations for the  three months ended September 30, 2002 and 2001 |
|       |                   |   |
|       |                   | Unaudited Consolidated Statement of Cash  Flows for the  three months ended September 30, 2002 and 2001 |
|       |                   |   |
|       |                   | Notes to Condensed Consolidated Financial  Statements  (unaudited) |
|       |                   |   |
|       | Item 2.                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|       |                   |   |
|       | Item 3.                | Quantitative and Qualitative Disclosures  about Market Risk |
|       |                   |   |
|       | Item 4.                | 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

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**ITEM1****.**        **SUMMARY OFFINANCIAL DATA**

 

**Northern Star Financial, Inc. Summaryof 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 months ended September 30, 2002 and2001.  You should read this table inconjunction with our financial statements and related notes appearing elsewherein this document.

 
|                                                                  |   | **As  of or for the Three Months  Ended September 30,** |    |
|-----------------------------------------------------------------------|--------|---------------------------------------------------------|---------|
|                                                                  |   | **2002**                                                |    | **2001** |   |
| Statement of Income:                                                  |   |                                                    |    |   |   |
| Interest income                                                       |   | $                                                       | 743,537 |   | $ | 686,788 |   |
| Interest expense                                                      |   | 404,486                                                 |    | 507,565 |   |
| Net interest income                                                   |   | 339,051                                                 |    | 179,223 |   |
| Provision for loan losses                                             |   | 21,000                                                  |    | 294,400 |   |
| Other non-interest income                                             |   | 153,236                                                 |    | 62,028 |   |
| Non-interest expense                                                  |   | 510,513                                                 |    | 342,656 |   |
| Income (loss) before income  tax expense                              |   | (39,226                                                 | )       | (395,805 | ) |
| Income tax expense  (benefit)                                         |   | —                                                  |    | — |   |
| Net income (loss)                                                     |   | $                                                       | (39,226 | ) | $ | (395,805 | ) |
| Balance Sheet:                                                        |   |                                                    |    |   |   |
| Assets                                                                |   | 48,803,383                                              |    | 42,549,313 |   |
| Allowance for loan losses                                             |   | 680,786                                                 |    | 528,801 |   |
| Deposits                                                              |   | 40,002,850                                              |    | 34,636,513 |   |
| Shareholders’ equity                                             |   | 1,888,584                                               |    | 2,644,401 |   |
|                                                                  |   |                                                    |    |   |   |
| Per Share Data:                                                       |   |                                                    |    |   |   |
| Net income (loss) - basic                                             |   | $                                                       | (0.08   | ) | $ | (0.83 | ) |
| Net income (loss) - diluted                                           |   | $                                                       | (0.08   | ) | $ | (0.83 | ) |
| Book value                                                            |   | 3.94                                                    |    | 5.51 |   |
|                                                                  |   |                                                    |    |   |   |
| Other Data                                                            |   |                                                    |    |   |   |
| Average shares outstanding  - basic                                   |   | 479,506                                                 |    | 479,506 |   |
| Average shares outstanding  - diluted                                 |   | 479,506                                                 |    | 479,506 |   |
|                                                                  |   |                                                    |    |   |   |
| Financial Ratios:                                                     |   |                                                    |    |   |   |
| Average equity to average  assets                                     |   | 3.91                                                    | %       | 6.21 | % |
| Return on average assets                                              |   | (0.08                                                   | )%      | (0.97 | )% |
| Return on average  stockholders’ equity                          |   | (2.06                                                   | )%      | (14.04 | )% |
| Net interest margin                                                   |   | 2.97                                                    | %       | 1.83 | % |
| Tier 1 leverage ratio                                                 |   | 8.01                                                    | %       | 9.07 | % |
| Tier 1 capital to  risk-weighted assets                               |   | 10.91                                                   | %       | 12.21 | % |
| Total capital to  risk-weighted assets                                |   | 12.16                                                   | %       | 13.47 | % |
|                                                                  |   |                                                    |    |   |   |
| Asset Quality Ratios:                                                 |   |                                                    |    |   |   |
| Nonperforming assets to  total assets                                 |   | 4.10                                                    | %       | 0.36 | % |
| Nonperforming assets to  total loans and and other real estated owned |   | 5.69                                                    | %       | 0.36 | % |
| Allowance for loan losses  to total loans                             |   | 1.94                                                    | %       | 2.04 | % |

 

3

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**Northern StarFinancial, Inc. and Subsidiary**

Consolidated Statementsof Financial Condition

 
|                                                                                          |   | **September 30, 2002** |       | **June 30, 2002** |   |
|-----------------------------------------------------------------------------------------------|--------|------------------------|------------|-------------------|--------|
|                                                                                          |   | **(Unaudited)**        |       | **(Audited)**     |   |
| **ASSETS**                                                                                    |   |                   |       |              |   |
|                                                                                          |   |                   |       |              |   |
| Cash and due  from banks                                                                      |   | $                      | 1,699,822  |              | $      | 2,348,081 |   |
| Federal  funds sold                                                                           |   | 3,330,000              |       | 1,037,000         |   |
| Securities  available for sale, at fair value                                                 |   | 6,284,002              |       | 9,598,520         |   |
| FHLB and UBB  stock, as cost                                                                  |   | 283,800                |       | 238,800           |   |
| Loans held  for sale                                                                          |   | 1,822,270              |       | 625,735           |   |
| Loans  receivable, net of allowance for loan and lease losses of $680,786 and  $661,170       |   | 34,497,131             |       | 33,836,692        |   |
| Property and  equipment, net of depreciation                                                  |   | 537,896                |       | 535,938           |   |
| Accrued  interest receivable and other assets                                                 |   | 348,462                |       | 351,771           |   |
| **Total Assets**                                                                              |   | $                      | 48,803,383 |              | $      | 48,572,537 |   |
|                                                                                          |   |                   |       |              |   |
|                                                                                          |   |                   |       |              |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                 |   |                   |       |              |   |
| **Liabilities:**                                                                              |   |                   |       |              |   |
| Demand  deposits                                                                              |   | $                      | 4,485,823  |              | $      | 4,574,282 |   |
| NOW and  money market                                                                         |   | 8,431,163              |       | 7,718,574         |   |
| Savings                                                                                       |   | 4,423,401              |       | 4,533,290         |   |
| Time  deposits                                                                                |   | 22,662,463             |       | 22,763,583        |   |
| Total  deposits                                                                               |   | 40,002,850             |       | 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                                                           |   | 436,949                |       | 384,144           |   |
| Total  Liabilities                                                                            |   | 46,914,799             |       | 46,648,873        |   |
|                                                                                          |   |                   |       |              |   |
| **Shareholders’ Equity:**                                                                |   |                   |       |              |   |
| Common  Stock, $.01 par value, 15,000,000 shares authorized; 479,506 shares issued            |   | 4,795                  |       | 4,795             |   |
| Undesignated  stock, par value $.01 per share;  5,000,000 shares authorized, no shares issued |   | —                 |       | —            |   |
| Additional  paid in capital                                                                   |   | 4,158,504              |       | 4,158,504         |   |
| Accumulated  deficit                                                                          |   | (2,319,585             | )          | (2,280,359        | )      |
| Unearned  stock compensation                                                                  |   | (11,004                | )          | (12,004           | )      |
| Accumulated  other comprehensive income (loss)                                                |   | 55,874                 |       | 52,728            |   |
| **Total Shareholders’ Equity**                                                           |   | 1,888,584              |       | 1,923,664         |   |
| **Total Liabilities and Shareholders Equity**                                                 |   | $                      | 48,803,383 |              | $      | 48,572,537 |   |

 

See Notes to Consolidated Financial Statements

 

4

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

Unaudited ConsolidatedStatements of Operations

 
|                                         |   | **For  the Three Months  Ended September 30,** |    |
|----------------------------------------------|--------|------------------------------------------------|---------|
|                                         |   | **2002**                                       |    | **2001** |   |
| **Interest  income**                         |   |                                           |    |   |   |
| Loans receivable                             |   | $                                              | 635,156 |   | $ | 498,126 |   |
| Securities available for  sale               |   | 97,276                                         |    | 148,293 |   |
| Federal funds sold                           |   | 11,105                                         |    | 40,369 |   |
| Total interest income                        |   | 743,537                                        |    | 686,788 |   |
|                                         |   |                                           |    |   |   |
| **Interest  expense**                        |   |                                           |    |   |   |
| Deposits                                     |   | 323,303                                        |    | 444,011 |   |
| Borrowed funds                               |   | 81,183                                         |    | 63,554 |   |
| Total interest expense                       |   | 404,486                                        |    | 507,565 |   |
|                                         |   |                                           |    |   |   |
| Net interest income                          |   | 339,051                                        |    | 179,223 |   |
| Provision for loan losses                    |   | 21,000                                         |    | 294,400 |   |
|                                         |   |                                           |    |   |   |
| Net interest income after                    |   |                                           |    |   |   |
| provision for loan loss                      |   | 318,051                                        |    | (115,177 | ) |
|                                         |   |                                           |    |   |   |
|                                         |   |                                           |    |   |   |
| **Noninterest  income**                      |   |                                           |    |   |   |
| Other fees and service  charges              |   | 44,425                                         |    | 28,313 |   |
| Gain on sale of securities                   |   | 3,125                                          |    | 4,508 |   |
| Gain on sale of loans                        |   | 105,686                                        |    | 29,207 |   |
| Total noninterest income                     |   | 153,236                                        |    | 62,028 |   |
|                                         |   |                                           |    |   |   |
| **Noninterest  expense**                     |   |                                           |    |   |   |
| Compensation and employee  benefits          |   | 221,705                                        |    | 159,369 |   |
| Board fees                                   |   | 23,000                                         |    | 20,000 |   |
| Occupancy                                    |   | 39,873                                         |    | 35,470 |   |
| Legal and accounting                         |   | 75,558                                         |    | 6,538 |   |
| Printing & supplies                      |   | 21,502                                         |    | 20,947 |   |
| Property and equipment  depreciation         |   | 17,873                                         |    | 16,691 |   |
| Data processing                              |   | 31,939                                         |    | 19,538 |   |
| Other                                        |   | 79,063                                         |    | 64,103 |   |
| Total noninterest expense                    |   | 510,513                                        |    | 342,656 |   |
|                                         |   |                                           |    |   |   |
| **Loss  Before Income Tax Benefit**          |   | (39,226                                        | )       | (395,805 | ) |
| Income Tax Benefit                           |   | —                                         |    | — |   |
|                                         |   |                                           |    |   |   |
| **Operating  Loss**                          |   | (39,226                                        | )       | (395,805 | ) |
|                                         |   |                                           |    |   |   |
| **Net Loss**                                 |   | $                                              | (39,226 | ) | $ | (395,805 | ) |
|                                         |   |                                           |    |   |   |
| **Net Loss  per Common Share**               |   |                                           |    |   |   |
|                                         |   |                                           |    |   |   |
| Basic (loss) per share  of common stock |   | $                                              | (0.08   | ) | $ | (0.83 | ) |

 

See Notes to Consolidated Financial Statements

 

5

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

Unaudited Consolidated Statements of Cash Flows

 
|                                                                                       |   | **For  the Three Months  Ended September 30,** |      |
|--------------------------------------------------------------------------------------------|--------|------------------------------------------------|-----------|
|                                                                                       |   | **2002**                                       |      | **2001** |   |
| Cash flows from operating  activities:                                                     |   |                                           |      |   |   |
| Net (loss)                                                                                 |   | $                                              | (39,226   | ) | $ | (395,805 | ) |
| Adjustments to reconcile  net loss to net cash provided by (used in) operating activities: |   |                                           |      |   |   |
| Depreciation                                                                               |   | 20,998                                         |      | 19,409 |   |
| Provision for loan losses                                                                  |   | 21,000                                         |      | 294,400 |   |
| Net amortization and  accretion of premium and discounts                                   |   | 505                                            |      | 4,467 |   |
| Deferred loan fees and  costs, net                                                         |   | 21,310                                         |      | (16,636 | ) |
| Earned stock compensation                                                                  |   | 1,000                                          |      | 1,000 |   |
| Gain on sale of available  for sale securities                                             |   | (3,125                                         | )         | (4,508 | ) |
| (Increase) decrease in:                                                                    |   |                                           |      |   |   |
| Loans held for sale                                                                        |   | (1,196,535                                     | )         | (191,569 | ) |
| Accrued interest receivable                                                                |   | (2,446                                         | )         | (16,655 | ) |
| Other assets                                                                               |   | 15,633                                         |      | (4,327 | ) |
| Increase (decrease) in:                                                                    |   |                                           |      |   |   |
| Accrued interest payable  and other liabilities                                            |   | 50,708                                         |      | 4,420 |   |
| Net cash provided by (used  in) operating activities                                       |   | (1,110,178                                     | )         | (305,804 | ) |
|                                                                                       |   |                                           |      |   |   |
| Cash flows from investing  activities:                                                     |   |                                           |      |   |   |
| Purchases of  available-for-sale securities                                                |   | (1,000,000                                     | )         | (4,021,488 | ) |
| Proceeds from maturities of  available-for-sale securities                                 |   | 500,000                                        |      | 743,820 |   |
| Proceeds from sales of  available-for-sale securities                                      |   | 3,822,381                                      |      | 997,500 |   |
| Purchase of FHLB & UBB  stock                                                          |   | (45,000                                        | )         | (20,000 | ) |
| Net (increase) decrease in  Federal Funds Sold                                             |   | (2,293,000                                     | )         | — |   |
| Loan origination’s and  principal payments on loans, net                              |   | (712,627                                       | )         | (2,258,783 | ) |
| Purchase of property and  equipment                                                        |   | (22,956                                        | )         | (208,326 | ) |
| Net cash provided by (used  in) investing activities                                       |   | 248,798                                        |      | (4,767,277 | ) |
|                                                                                       |   |                                           |      |   |   |
| Cash flows from financing  activities:                                                     |   |                                           |      |   |   |
| Net increase in  non-interest bearing demand and savings deposit accounts                  |   | 514,241                                        |      | 2,123,516 |   |
| Net (decrease) increase in  time deposits                                                  |   | (101,120                                       | )         | (304,067 | ) |
| Proceeds from borrowings                                                                   |   | (200,000                                       | )         | 1,900,000 |   |
| Net cash provided by (used  in) financing activities                                       |   | 213,121                                        |      | 3,719,449 |   |
| Net increase (decrease) in  cash and cash equivalents                                      |   | (648,259                                       | )         | (1,353,632 | ) |
| Cash and cash equivalents,  beginning                                                      |   | 2,348,081                                      |      | 4,308,133 |   |
| Cash and cash equivalents,  ending                                                         |   | $                                              | 1,699,822 |   | $ | 2,954,501 |   |
|                                                                                       |   |                                           |      |   |   |
| Supplemental disclosure of  cash flow information:                                         |   |                                           |      |   |   |
| Cash paid for interest                                                                     |   | $                                              | 365,126   |   | $ | 512,592 |   |

 

See Notes to Consolidated Financial Statements

 

6

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**NORTHERN STARFINANCIAL, INC AND SUBSIDIARY**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

**September 30, 2002(Unaudited)**

 

 

## Note 1: PRINCIPLES OF CONSOLIDATION

 

The unauditedconsolidated financial statements as of and for the three month period endedSeptember 30, 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

 

Theaccompanying unaudited interim consolidated financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States of America for interim financial information.  Accordingly, they do not include allinformation and disclosures required by generally accepted accountingprinciples for complete financial statements. The accompanying consolidated financial statements do not purport tocontain all the necessary financial disclosures required by generally acceptedaccounting principles that might otherwise be necessary in the circumstancesand should be read with the fiscal 2002 consolidated financial statements andnotes of Northern Star Financial, Inc. and Subsidiary included in their annualreport as of and for the year ended June 30, 2002.

 

In the opinionof management, all adjustments (consisting of normal recurring accruals)considered necessary for fair presentations have been included.  The results of operations for the threemonth periods ended September 30, 2002 and 2001, are not necessarily indicativeof the results that may be expected for the entire fiscal year or any otherinterim period.

 

## Note 3: EARNINGS PER SHARE

 

The earningsper share amounts were computed using the weighted average number of sharesoutstanding during the periods presented. For the three month periods ended September 30, 2002 and 2001 theweighted average number of shares outstanding for basic and diluted earningsper share computation were 479,506. Potential common shares related to stockoptions, warrants, and convertible subordinated notes payable were not includedin the calculation of diluted earnings per share because they wereanti-dilutive.

 

7

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Note 4: COMPREHENSIVE (LOSS)

 
|                                                            |   | **For the Three Months  Ended September 30,** |    |
|-----------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                            |   | **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                               |   | 3,146                                         |    | 57,622 |   |
| Ending  balance                                                 |   | 55,874                                        |    | $ | 83,950 |   |
|                                                            |   |                                          |    |   |   |
|                                                            |   |                                          |    |   |   |
| Comprehensive  (Loss) consists of the following:                |   |                                          |    |   |   |
| Net loss                                                        |   | $                                             | (39,226 | ) | $ | (395,805 | ) |
| Other  comprehensive income                                     |   | 3,146                                         |    | 57,622 |   |
| Comprehensive  (loss)                                           |   | $                                             | (36,080 | ) | $ | (338,183 | ) |

 

8

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**ITEM 2.****  MANAGEMENT’S DISCUSSION AND ANALYSIS OF PLANOF OPERATIONS**

 

Northern StarFinancial, Inc. is the bank holding company of Northern Star Bank (the “Bank”).Since the principal business of the Company is the Bank, the followingdiscussion pertains mainly to the Bank.

 

This reportcontains “forward-looking statements” as defined in section 27A of theSecurities Act of 1933, as amended, and section 21E of the Securities ExchangeAct of 1934, as amended, which includes statements such as projections, plansand objectives and assumptions about the future, and such forward lookingstatements are subject to the safe harbor created by these sections. Many factorscould cause the actual results, amounts or events to differ materially fromthose we expect to achieve or occur, such as changes in competition, marketinterest rates, economic conditions and regulations. Although we have based ourplans and projections on certain assumptions, there can be no assurances thatits assumptions will be correct, or that its plans and projections can beachieved.

 

**FinancialCondition**

Our totalconsolidated assets at September 30, 2002 were $48.80 million compared to$48.57 million at June 30, 2002, an increase of $230,846.  Net loans receivable increased $660,439during the first three months of fiscal year 2003.  Real estate loans increased $2.87 million to $19.20 million atSeptember 30, 2002, and business and consumer loans decreased $922,695.Investment securities decreased $3.32 million, from $9.60 million at June 30,2002 to $6.28 million at September 30, 2002. Federal Funds sold increased $2.29 million to $3.33 million at September30, 2002.

 

Our total consolidated liabilities at September 30, 2002 were $46.91million compared to $46.65 million at June 30, 2002, a $265,926 increase.  Deposits at September 30, 2002 were $40.00million compared to $39.59 million at June 30, 2002, an increase of 1.04% or$413,121.  During the first three monthsof fiscal year 2003, non-interest bearing deposits decreased to $4.49 million,while interest bearing deposits increased $501,580 to $35.52 million.  Notes payable and other borrowings decreased$300,000 to $4.98 million at September 30, 2002 compared to $5.28 million atJune 30, 2002.

 

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

 

9

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maintainratios 100 to 200 basis points above the minimum.

 

Northern Star Bank exceeded its minimum regulatory capital ratios.  As of September 30, 2002 the capital ratioswere as follows:

 
|                                                |   | **Actual** |   | **For Capital  Adequacy  Purposes** |   | **To Be Well Capitalized  Under Prompt  Corrective  Action Provision** |   |
|-----------------------------------------------------|--------|------------|--------|-------------------------------------|--------|------------------------------------------------------------------------|--------|
| Total Capital  (to Risk Weighted Assets)            |   | 12.16      | %      | 8.00                                | %      | 10.0                                                                   | %      |
| Tier I Capital  (to Risk Weighted Assets)           |   | 10.91      | %      | 4.00                                | %      | 6.00                                                                   | %      |
| Leverage Ratio  Tier 1 Capital  (to Average Assets) |   | 8.01       | %      | 4.00                                | %      | 5.00                                                                   | %      |

 

**Liquidityand Capital Resources**

Liquidity management involves monitoring The Bank’s sources and uses offunds in order to meet its day-to-day cash flow requirements while maximizingprofits. Liquidity represents the ability of a company to convert assets intocash or cash equivalents without significant loss and to raise additional fundsby increasing liabilities. Liquidity management is made more complicated becausedifferent balance sheet components are subject to varying degrees of managementcontrol. For example, the timing of maturities of the investment portfolio isvery predictable and subject to a high degree of control at the time investmentdecisions are made. However, net deposit inflows and outflows are far lesspredictable and are not subject to the same degree of control. Cash and assetswhich are readily marketable, which can be pledged, or which will mature in thenear future provide asset liquidity. Liability liquidity is provided by accessto core funding sources, principally the ability to generate customer depositsin The Bank’s market area. In addition, liability liquidity is provided throughthe ability to borrow against approved lines of credit from correspondent banksand to borrow on a secured basis through securities sold under agreements torepurchase.  Management expects to meetits liquidity needs with available cash and federal funds sold, including bothinterest and noninterest-bearing balances; maturities of investment securitiesin the 12 months following September 30, 2002; the repayment of loans; growthin deposits; and, borrowing against approved lines of credit.

 

Short-term investments, which consist of federal funds sold and mutualfunds, and interest-bearing deposits, were $38.85 million at September 30,2002, as compared to $36.05 million at June 30, 2002. These funds are a primarysource of the Bank’s liquidity and are generally invested in an interestearning capacity on an overnight basis.

 

In addition to deposits, the sources of funds available for lending andother business purposes include loan repayments, loan sales, and securitiessold under agreements to repurchase. Loan repayments are a relatively stablesource of funds, while deposit inflows and outflows are influencedsignificantly by general interest rates and money market conditions. Borrowingsmay be used on a short-term basis to compensate for reductions in othersources, such as deposits at less than projected levels and are also used tofund the origination of mortgage loans designated to be sold

 

10

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in thesecondary markets.

 

**Impactof Inflation**

The consolidated financial statements and related data presented hereinhave been prepared in accordance with generally accepted accounting principles,which require the measurements of financial position and operating results interms of historical dollars, without considering changes in the relativepurchasing power of money over time due to inflation. Unlike most industrialcompanies, substantially all of the assets and liabilities of the Bank aremonetary in nature. As a result, interest rates have a more significant impacton the Bank’s performance than the effects of general levels of inflation.Interest rates do not necessarily move in the same direction or in the samemagnitude as the prices of goods and services, since such prices are affectedby inflation to a larger extent than interest rates. Management seeks to managethe relationships between interest-sensitive assets and liabilities in order toprotect against wide interest rate fluctuations, including those resulting frominflation.

 

**Resultsof Operations**

The net loss for the quarter ended September 30, 2002, was $39,266 ascompared with the $395,805 recorded in the same period of the fiscal yearending June 30, 2002.

 

**InterestIncome and Expense**

Interest income was$743,537 and $686,788 for the three months ended September 30, 2002 and 2001,respectively. The increase in interest income of $56,749, or 8.26%, in thefirst quarter of 2003 over the same period of 2002 is due to higher levels ofearning assets and the change in mix of assets.

 

Interest expense was$404,486 and $507,565 for the three months ended September 30, 2002 and 2001,respectively. The decrease in interest expense of $103,079, or 20.31%, in thefirst quarter of fiscal year 2003 over the same period of 2002 is due to thedecreased in interest rates.

 

Net interest income beforeprovision for credit losses was $339,051 and $179,223 for the three monthsended September 30, 2002 and 2001, respectively. The net interest margin forthe first quarter of 2003 was 2.97% as compared with the net interest margin in2002 of 1.83%, an increase of 114 basis points. The loan-to-deposit ratio forthe three months ended September 30, 2002, increased to approximately 92% from88% at June 30, 2002.

 

**Provisionand Allowance for Loan Losses**

We have developed policiesand procedures for evaluating the overall quality of its credit portfolio andthe timely identification of potential problem loans. Our judgment as to theadequacy of the allowance is based upon a number of assumptions about futureevents that it believes to be reasonable, but which may or may not be valid. Thus,there can be no assurance that charge-offs in future periods will not exceedthe allowance for credit losses or that additional increases in the credit lossallowance will not be required.

 

11

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Commercial banks arerequired to review and, when appropriate, classify their assets on a regularbasis. The State of Minnesota and the FDIC have the authority to identifyproblem assets and, if appropriate, require them to be classified. There arethree classifications for problem assets: substandard, doubtful and loss.Substandard assets have one or more defined weaknesses and are characterized bythe distinct possibility that the insured institution will sustain some loss ifthe deficiencies are not corrected. Doubtful assets have the weaknesses ofsubstandard assets with the additional characteristic that the weaknesses makecollection or liquidation in full on the basis of currently existing facts,condition, and values questionable, and there is a high possibility of loss.The full recovery of assets classified as loss is considered unlikely and ofsuch little value that continuance as an asset of the institution is notwarranted.  If an asset or portionthereof is classified as loss, the insured institution establishes a specificreserve for the full amount of the portion of the asset classified as loss.

 

At September 30, 2002, we had loans totalingapproximately $1,557,000 classified as substandard and approximately $475,000in loans classified as doubtful or loss. There was $2.00 million of impaired loans as of September 30, 2002.

 

The allowance for credit losses isestablished through a provision for credit losses charged against income. Loansare charged against the provision when management believes that thecollectibility of the principal is unlikely. The allowance is an estimatedamount that management believes will be adequate to absorb losses inherent inthe loan portfolio based on evaluations of its collectibility. The evaluationstake into consideration such factors as changes in the nature and volume of theportfolio, overall portfolio quality, specific problem loans and commitments,and current anticipated economic conditions that may affect the borrower’sability to pay. While management uses the best information available torecognize losses on loans, future additions to the allowance may be necessarybased on changes in economic conditions.

 

At September 30, 2002, the allowance forcredit losses amounted to $680,786, or 1.94% of outstanding loans receivable.  At September 30, 2001, the allowance forcredit losses amounted to $294,400, or 2.04% of outstanding loans. Ourprovision for credit losses was $21,000 and $294,400 for the three months endedSeptember 30, 2002 and 2001, respectively.

 

**NoninterestIncome and Expense**

Total other incomeincreased to $153,236 for the three months ended September 30, 2002, comparedto $62,028 for the three months ended September 30, 2001. The growth in theamount of residential mortgage loans originated and sold in the secondarymarket and in the number of deposit and loan accounts subject to service feeshas contributed to this favorable trend.

 

Total other expensesincreased to $510,513 for the three months ended September 30, 2002, comparedto $342,656 for the three months ended September 30, 2001. This increase of$167,857, or 48.99%, reflects the expansion of banking operations as well asthe overall growth of the Bank.

 

**Provisionfor Income Taxes**

Our effectivetax rate was 0% for the three month periods ended September 30,

 

12

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2002, and 2001 because theexpected future tax benefit of the net operating loss is reduced by a deferredtax asset valuation allowance in accordance with generally accepted accountingprinciples.

 

**ConvertibleSubordinated Unsecured Notes**

In July and August 2001, we raised $1 millionthrough the sale of convertible subordinated unsecured notes, and from June toAugust, 2002 the Company raised an additional $500,000 through the sale ofsimilar notes.  The notes were issuedfor a three-year term and bear interest at the rate of eight percent per annum(as to the 2001 notes) and seven percent per annum (as to the 2002 notes),payable quarterly.  Investors in thenotes were granted the right to convert their investment into shares ofNorthern Star Financial, Inc. common stock any time prior to maturity at therate of $10.50 per share (as to the 2001 notes) and $9.00 per share (as to the2002 notes). Related parties (directors) purchased $600,000 of these notes.

 

##### **AVERAGE BALANCES,YIELDS AND RATES**

The followingtable sets forth, for the three months ended September 30, 2002 and 2001, theweighted average yields earned, the weighted average rates paid, the interestrate spread and the net yield on earning assets and interest-bearingliabilities, on an annualized basis.

 
|                                                                                     |   | **For  the  Three Months Ended** |       |
|------------------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                                     |   | **September  30, 2002**               |       | **September  30, 2001** |   |
|                                                                                     |   | **Average  Balance**                  |       | **Interest** |   | **Average  Yield or  Rates** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield or  Rates** |   |
| **Assets**                                                                               |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Loans receivable                                                                         |   | $                                     | 35,091,506 |   | $ | 635,156 |   | 7.24 | % | $ | 24,404,877 |   | $ | 498,126 |   | 8.16 | % |
| Investment securities                                                                    |   | 7,993,644                             |       | 97,276 |   | 4.87 | % | 10,219,539 |   | 148,293 |   | 5.80 | % |
| Federal funds sold                                                                       |   | 2,578,245                             |       | 11,105 |   | 1.72 | % | 4,519,412 |   | 40,369 |   | 3.57 | % |
| Total interest-earning  assets                                                           |   | 45,663,395                            |       | 743,537 |   | 6.51 | % | 39,143,828 |   | 686,788 |   | 7.02 | % |
| Non-interest-earning assets                                                              |   | 3,375,144                             |       |   |   |   |   | 1,722,433 |   |   |   |   |   |
| Total assets                                                                             |   | $                                     | 49,038,539 |   |   |   |   |   | $ | 40,866,261 |   |   |   |   |   |
| **Liabilities  and Stockholders’ Equity**                                           |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Interest Bearing Deposits                                                                |   | $                                     | 35,866,133 |   | 323,303 |   | 3.61 | % | $ | 32,191,777 |   | 444,011 |   | 5.52 | % |
| Other liabilities                                                                        |   | 6,732,860                             |       | 81,183 |   | 4.82 | % | 3,892,778 |   | 63,554 |   | 6.53 | % |
| Total interest-bearing  liabilities                                                      |   | 42,598,993                            |       | 404,486 |   | 3.80 | % | 36,084,555 |   | 507,565 |   | 5.63 | % |
| Non-interest-bearing  liabilties                                                         |   | 4,540,375                             |       |   |   |   |   | 1,961,921 |   |   |   |   |   |
| Total liabilities                                                                        |   | 47,139,368                            |       |   |   |   |   | 38,046,476 |   |   |   |   |   |
| Stockholders’ Equity                                                                |   | 1,899,171                             |       |   |   |   |   | 2,819,785 |   |   |   |   |   |
| Total liabilites and  stockholders’  equity                                         |   | $                                     | 49,038,539 |   |   |   |   |   | $ | 40,866,261 |   |   |   |   |   |
| Net Interest Spread                                                                      |   |                                  |       |   |   | 2.71 | % |   |   |   |   | 1.39 | % |
| Net Interest Income/Margin                                                               |   |                                  |       | $ | 339,051 |   | 2.97 | % |   |   | $ | 179,223 |   | 1.83 | % |
|                                                                                     |   |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Ratio of average  interest-earning assets assets to average interest-bearing liabilities |   | 1.07                                  | x     |   |   |   |   | 1.08 | x  |   |   |   |   |

 

13

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**INVESTMENT PORTFOLIO**

 

Contractualmaturities and yields on our investments (all available for sale) aresummarized in the following table. Expected maturities may differ from contractual maturities becauseissuers may have the right to call or prepay obligations with or without callor prepayment penalties.

 
|                     |   | **September 30, 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 | % | $ | 250,573 |   | 4.63 | % | $ | 503,948 |   | 4.37 | % | $ | — |   | 0.00 | % | $ | 754,521 |   | 4.46 | % |
| Mortgage-back securities |   | 11,768                 |   | 7.01 | % | — |   | 0.00 | % | 487,551 |   | 5.78 | % | 4,524,107 |   | 5.95 | % | 5,023,426 |   | 5.94 | % |
| Corporate Bonds          |   | —                 |   | 0.00 | % | 506,055 |   | 6.06 | % | — |   | 0.00 | % | — |   | 0.00 | % | 506,055 |   | 6.06 | % |
|                     |   | $                      | 11,768 |   | 7.01 | % | $ | 756,628 |   | 5.59 | % | $ | 991,499 |   | 5.06 | % | $ | 4,524,107 |   | 5.95 | % | $ | 6,284,002 |   | 5.77 | % |

 

##### **LOAN PORTFOLIO**

Total grossloans outstanding at September 30, 2002 and June 30, 2002, including loans heldfor sale, was $36,851,244 and $34,943,466, respectively.

 

The followingtable summarizes the composition of the loan portfolio as of September 30, 2002and June 30, 2002:

 
|                             |   | **September 30, 2002** |       | **June 30, 2002** |   |
|----------------------------------|--------|------------------------|------------|-------------------|--------|
|                             |   | **Amount**             |       | **% of Total**    |   | **Amount** |   | **% of Total** |   |
|                             |   |                   |       |              |   |   |   |   |   |
| Commercial  & Agricultural   |   | $                      | 6,133,651  |              | 16.64  | % | $ | 6,616,193 |   | 18.93 | % |
| Real Estate  - construction      |   | 2,739,512              |       | 7.43              | %      | 2,375,318 |   | 6.80 | % |
| Real Estate  - mortgages         |   | 16,466,233             |       | 44.68             | %      | 13,962,496 |   | 39.96 | % |
| Consumer  Loans                  |   | 11,369,311             |       | 30.85             | %      | 11,809,464 |   | 33.80 | % |
| Lease  Financing                 |   | 142,537                |       | 0.40              | %      | 179,995 |   | 0.51 | % |
| Total loans                      |   | $                      | 36,851,244 |              | 100.00 | % | $ | 34,943,466 |   | 100.00 | % |
| Net Deferred  Loans fees/(costs) |   | 148,943                |       |              |   | 180,131 |   |   |   |
| Less:  Allowance for Loan Loss   |   | (680,786               | )          |              |   | (661,170 | ) |   |   |
| Total Net  Loans                 |   | $                      | 36,319,401 |              |   |   | $ | 34,462,427 |   |   |   |

 

14

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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 ofterms upon their maturity.  Actualrepayments of loans may differ from maturities reflected below becauseborrowers have the right to repay obligations with or without prepaymentpenalties.  The following tablesummarizes loan maturities, by type at September 30, 2002 and June 30, 2002.

 
|                                |   | **As  of September 30, 2002** |       |
|-------------------------------------|--------|-------------------------------|------------|
|                                |   | **One  Year  or Less**        |       | **After  One but  within Five Years** |   | **After  Five Years** |   | **Total** |   |
|                                |   |                          |       |   |   |   |   |   |   |
| Commercial &  Agricultural      |   | $                             | 2,350,751  |   | $ | 2,173,327 |   | $ | 1,609,573 |   | $ | 6,133,651 |   |
| Real Estate - construction          |   | 2,000,166                     |       | 739,346 |   | — |   | $ | 2,739,512 |   |
| Real Estate - mortgages             |   | 835,971                       |       | 11,617,143 |   | 4,013,119 |   | $ | 16,466,233 |   |
| Consumer  Loans                |   | 3,296,411                     |       | 7,243,218 |   | 829,682 |   | $ | 11,369,311 |   |
| Lease Financing                     |   | 33,514                        |       | 109,023 |   | — |   | $ | 142,537 |   |
| Total                               |   | $                             | 8,516,813  |   | $ | 21,882,057 |   | $ | 6,452,374 |   | $ | 36,851,244 |   |
|                                |   |                          |       |   |   |   |   |   |   |
| Loans maturing after one  year with |   |                          |       |   |   |   |   |   |   |
| Fixed Interest Rate                 |   | $                             | 23,515,518 |   |   |   |   |   |   |   |
| Floating Interest Rates             |   | $                             | 4,818,913  |   |   |   |   |   |   |   |

 
|                                |   | **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          |   | 2,295,594                |       | 9,126,974 |   | 2,539,928 |   | 13,962,496 |   |
| Real Estate - mortgages             |   | 2,108,064                |       | 267,254 |   | — |   | 2,375,318 |   |
| 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 |   | $ | 5,446,399 |   | $ | 34,943,466 |   |
|                                |   |                     |       |   |   |   |   |   |   |
| Loans maturing after one  year with |   |                     |       |   |   |   |   |   |   |
| Fixed Interest Rate                 |   | $                        | 20,555,588 |   |   |   |   |   |   |   |
| Floating Interest Rates             |   | $                        | 4,034,436  |   |   |   |   |   |   |   |

 

**PROVISION AND ALLOWANCE FOR LOAN LOSSES**

We havedeveloped policies and procedures for evaluating the overall quality of itscredit portfolio and the timely identification of potential creditproblems.  Additions to the allowancefor loan losses will be made periodically to maintain the allowance at an appropriatelevel based on management’s analysis of the potential risk in the loan

 

15

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portfolio.

 

                At September 30, 2002, the allowance for loanlosses was $680,786 or 1.94% of $35,177,917 in loan receivables (net of loansheld for sale). The provision for loan losses was made primarily as a result ofmanagement’s assessment of impaired loans and general loan loss risk as ourloan portfolio increases.

 
|                                            |   | **Three  Months Ended  September 30, 2002** |    | **Year  Ended  June 30, 2002** |   |
|-------------------------------------------------|--------|---------------------------------------------|---------|--------------------------------|--------|
|                                            |   |                                        |    |                           |   |
| Balance at Beginning of Period                  |   | $                                           | 661,170 |                           | $      | 234,989 |   |
| Charge-offs                                     |   | (1,384                                      | )       | (359,751                       | )      |
| Recoveries                                      |   | —                                      |    | 857                            |   |
| Net Charge Offs                                 |   | (1,384                                      | )       | (358,894                       | )      |
| Provision charged to  operations                |   | 21,000                                      |    | 785,075                        |   |
|                                            |   |                                        |    |                           |   |
| Balance at End of Period                        |   | $                                           | 680,786 |                           | $      | 661,170 |   |
|                                            |   |                                        |    |                           |   |
| Ratio of net charge-offs  during the period     |   |                                        |    |                           |   |
| to average loans  outstanding during the period |   | 0.00                                        | %       | 1.22                           | %      |

 

 

At September 30, 2002 and June30, 2002 the allowance was allocated as follows:

 

 
|                           |   | **For  the Three Months Ended  September 30, 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 |   | $                                                   | 42,995  |                                                    | 16.64  | % | $ | 42,318 |   | 18.93 | % |
| Real Estate - construction     |   | 20,546                                              |    | 7.43                                                    | %      | 17,815 |   | 6.80 | % |
| Real Estate - mortgages        |   | 99,802                                              |    | 44.68                                                   | %      | 85,373 |   | 39.96 | % |
| Consumer loans                 |   | 516,275                                             |    | 30.85                                                   | %      | 514,123 |   | 33.80 | % |
| Lease Financing                |   | 1,168                                               |    | 0.40                                                    | %      | 1,541 |   | 0.51 | % |
| Total                          |   | $                                                   | 680,786 |                                                    | 100.00 | % | $ | 661,170 |   | 100.00 | % |

 

16

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# **DEPOSITS**

The following is a table of deposits by category at September 30, 2002and June 30, 2002.

 

 
|                               |   | **As of September 30, 2002** |       |
|------------------------------------|--------|------------------------------|------------|
|                               |   | **Ending  Balance**          |       | **Percentage  of Total  Deposits** |   | **Average  Balance** |   | **Percentage  of Total  Average  Deposits** |   | **Effective  Cost** |   |
|                               |   |                         |       |   |   |   |   |   |   |   |   |
| Demand Deposit                     |   | $                            | 4,485,823  |   | 11.21 | % | $ | 4,130,319 |   | 10.33 | % | 0.00 | % |
| Now and money market               |   | 8,431,163                    |       | 21.08 | % | 8,546,959 |   | 21.37 | % | 2.04 | % |
| Savings                            |   | 4,423,401                    |       | 11.06 | % | 4,568,331 |   | 11.42 | % | 1.98 | % |
| Time Accounts less than  $100,000  |   | 18,291,766                   |       | 45.73 | % | 18,499,353 |   | 46.25 | % | 4.46 | % |
| Time Accounts of $100,000  or more |   | 4,370,697                    |       | 10.92 | % | 4,251,490 |   | 10.63 | % | 4.79 | % |
| Total Deposits                     |   | $                            | 40,002,850 |   | 99.99 | % | $ | 39,996,452 |   | 100.00 | % |   |   |

 

 
|                               |   | **As of June 30, 2002** | ** ** |
|------------------------------------|--------|-------------------------|------------|
|                               |   | **Ending  Balance**     |       | **Percentage  of Total  Deposits** |   | **Average  Balance** |   | **Percentage  of Total  Average  Deposits** |   | **Effective  Cost** | ** ** |
|                               |   |                    |       |   |   |   |   |   |   |   |   |
| 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 | % |   |   |

 

The following is a table ofdeposits by category at September 30, 2002 and June 30, 2002.

 

Maturitydistribution of time deposits of $100,000 and over.

 
|                             |   | **As of September 30, 2002** |      |
|----------------------------------|--------|------------------------------|-----------|
|                             |   | **3 months  or less**        |      | **Over 3 months  thru 6 months** |   | **Over 6 months  thu 12 months** |   | **Over  12 months** |   | **Total** |   |
| Time Accounts of $100,00 or more |   | $                            | 1,854,911 |   | $ | 100,000 |   | $ | 915,159 |   | $ | 1,500,627 |   | $ | 4,370,697 |   |
|                                  |        |                              |           |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

**ITEM 3.****QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Management considers interest rate risk to bea market risk that could have a significant effect on

 

17

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the financial condition of the Company. Therehave been no material changes in the reported market risks faced by the Companysince the end of the most recent fiscal year-end that have not been included inthis discussion.

 

**ITEM4.****CONTROLSAND PROCEDURES**

 

In the quarter ended September30, 2002, we did not make any significant changes in, nor take any correctiveactions regarding, our internal controls or other factors that couldsignificantly affect these controls.  Weperiodically review our internal controls for effectiveness, but did notconduct such a review during this period. In the future, we plan to conduct an evaluation of our disclosurecontrols and procedures each quarter.

 

18

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###### **PARTII**

**OTHER INFORMATION**

 

Item1.    Legal Proceedings

 

There are three assertedclaims currently outstanding against the Company.  They all relate to issues arising out of the tenure of one of theinitial investors, who also served as a Board member and was a former CFO ofthe Company.  A summary of the threeclaims is incorporated by reference to Form 10-KSB for the fiscal year endedJune 30, 2002 Part II., Item 7. Note17. Litigation Matters, Notes to Consolidated Financial Statements.  There were no material changes in thesematters during the quarter ended September 30, 2002.

 
| Item  2. | Changes in Securities                                       |
|----------|-------------------------------------------------------------|
|     | None                                                        |
|     |                                                        |
| Item  3. | Quantitative  and Qualitative Disclosures About Market Risk |
|     |                                                        |   |
| Item  4. | Controls  and Procedures                                    |
|     |                                                        |   |
| Item 5.  | Default Upon Senior  Securities                             |
|     | None                                                        |
|     |                                                        |   |
| Item 6.  | Submission of Matters to a  Vote of Security Holders.       |
|     | None                                                        |
|     |                                                        |   |
| Item 7.  | Other Information                                           |
|     | None                                                        |
|     |                                                        |   |
| Item 8.  | Exhibits and Reports on  Form 8-K                           |
|     | a)                                                          | Exhibits |
|     |                                                        | None |
|     | b)                                                          | Reports |
|     |                                                        |   | 8-K filed September 24,  2002 |
|     |                                                        |   | 8-K filed October 14, 2002 |
|     |                                                        |   | 8-K filed October 28, 2002 |
|          |                                                             |  |  |  |

 

 

 

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###### **SIGNATURES**

 

# In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   |              |   |   |   | NORTHERN STAR FINANCIAL,  INC. |
|--------|-------------------|--------|--------|--------|--------------------------------|
|   |              |   |   |   |                           |   |
| Date:  | November 14, 2002 |   |   |   | By                             |     /s/  Thomas P. Stienessen |   |
|   |              |   |   |   |                           |   Thomas P.  Stienessen, President and |
|   |              |   |   |   |                           | Chief Executive Officer |
|   |              |   |   |   |                           |   |
| Date:  | November 14, 2002 |   |   |   | By                             |     /s/ Gerald W. Eick |   |
|   |              |   |   |   |                           |   Gerald W. Eick, Tresurer |

 

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CERTIFICATIONS

 

I, Gerald Eick, certify that:

 

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

 

2.        Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made,  not misleadingwith respect to the period covered by this quarterly report;

 

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 operation 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 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 theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.        The registrant’s other certifying officers and I have disclosed, basedon our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent functions):

 

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

 

b)       any fraud, whether or not material, that involves management or otheremployees who 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: 11/14/02 |   |                            |
|----------------|--------|---------------------------------|
|           |   |   /s/ Gerald W.  Eick |   |
|           |   | Gerald W. Eick, Treasurer       |

 

21

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CERTIFICATIONS

 

I, Thomas P. Stienessen,certify that:

 

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

 

2.        Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made,  not misleadingwith respect to the period covered by this annual report;

 

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 operation and cash flows of theregistrant as of, and for, the periods presented in this annual 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 have:

 

a)        designed such disclosure controls and procedures to ensure thatmaterial information 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 theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5.        The registrant’s other certifying officers and I have disclosed, basedon our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent functions):

 

a)        all significant deficiencies in the design or operation of internalcontrols which 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 otheremployees who 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: 11/14/02 |   |                                     |
|----------------|--------|------------------------------------------|
|           |   |   /s/ Thomas P. Stienessen     |   |
|           |   | Thomas P. Stienessen,  President and CEO |

 

22

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**CERTIFICATIONPURSUANT TO**

**18 U.S.C.  1350,**

**AS ADOPTED PURSUANTTO**

**SECTION 906 OF THESARBANES-OXLEY ACT OF 2002**

 

 

In connection with theQuarterly Report of Northern Star Financial, Inc. and Subsidiary (the“Company”) on Form 10-QSB for the period ended September 30, 2002, as filedwith the Securities and Exchange Commission on the date hereof (the “Report”),I Gerald W. Eick, Treasurer, certify, pursuant to 18 U.S.C.  1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002, that:

 

1.             The Report fully complies with therequirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934;and

 

2.             The information contained in theReport fairly presents, in all material respects, the financial condition andresults of operations of the Company.

 

 
|   |   | Gerald W.  Eick, Treasurer     |
|--------|--------|--------------------------------|
|   |   | Northern  Star Financial, Inc. |
|   |   | November 14,  2002             |

 

23

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**CERTIFICATIONPURSUANT TO**

**18 U.S.C.  1350,**

**AS ADOPTED PURSUANTTO**

**SECTION 906 OF THESARBANES-OXLEY ACT OF 2002**

 

In connection with theQuarterly Report of Northern Star Financial, Inc. and Subsidiary (the“Company”) on Form 10-QSB for the period ended September 30, 2002, as filedwith the Securities and Exchange Commission on the date hereof (the “Report”),I Thomas Stienessen, President, certify, pursuant to 18 U.S.C.  1350, as adopted pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002, that:

 

1.             The Report fully complies with therequirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934;and

 

2.             The information contained in theReport fairly presents, in all material respects, the financial condition andresults of operations of the Company.

 

 
|   |   | Thomas  Stienessen, President and CEO |
|--------|--------|---------------------------------------|
|   |   | Northern  Star Financial, Inc.        |
|   |   | November 14,  2002                    |

 

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