<PAGE>

                                           
=============================================================================
                                    UNITED STATES
                          SECURITIES AND EXCHANGE COMMISSION
                               Washington, D.C.   20549
                           -------------------------------
                                           
                                      FORM 10-Q
                                           
   [ X ]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
                OF THE SECURITIES EXCHANGE ACT OF 1934
                                           
                    For the quarterly period ending June 30, 1997
                                                    
                                          OR

   [   ]    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
                OF THE SECURITIES EXCHANGE ACT OF 1934
                                           
                 For the transition period from ______ to ______     

                           -------------------------------


                        NORTHERN STATES FINANCIAL CORPORATION
                (Exact name of Registrant as specified in its charter)



      Delaware                   0-19300                  36-3449727 
(State of incorporation)       (Commission            (I.R.S. Employer 
                               File Number)          Identification No.)

                                           
                               1601 North Lewis Avenue
                              Waukegan, Illinois   60085
                                    (847) 244-6000
            (Address, including zip code, and telephone number, including
                      area code, of principal executive office)


                          -------------------------------
     
Indicate by check mark whether the registrant (1) has filed all reports 
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 
1934 during the preceding 12 months, (or for 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:   XXX           NO:                   
                         ---------           --------

                   889,273 shares of common stock were outstanding 
                              as of June 30, 1997.     
=============================================================================

<PAGE>



                NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARIES

                                      FORM 10-Q

                                    JUNE 30, 1997

                                        INDEX
                                           


PART I.    FINANCIAL INFORMATION

  Item 1.   Financial Statements

    Condensed consolidated balance sheets at June 30,     
    1997, December 31, 1996, and June 30, 1996................2 


    Condensed consolidated statements of income for the three 
    and six months ended June 30, 1997 and 1996...............3


    Condensed consolidated statements of cash flows 
    for the six months ended June 30, 1997 and 1996...........4 


    Notes to condensed consolidated financial 
    statements...........................................5 - 15


   Item 2.  Management's discussion and analysis of
            financial condition and results of
            operations..................................16 - 25




PART II.   OTHER INFORMATION


     Signatures..............................................26

<PAGE>
NORTHERN STATES FINANCIAL CORPORATION
-------------------------------------
CONSOLIDATED BALANCE SHEETS
-------------------------------------
June 30, 1997, December 31, 1996,
and June 30, 1996
(In thousands of dollars, except per share data)


<TABLE>
<CAPTION>
                                                                           June 30,   December 31,   June 30,
      Assets                                                                 1997         1996         1996
                                                                           --------     --------     --------
<S>                                                                        <C>          <C>          <C>
Cash and due from banks..............................................       $15,816      $15,247      $17,419
Interest-bearing deposits in financial institutions..................           240        1,235           93
Federal funds sold...................................................        13,900       15,500       11,300
                                                                           --------     --------     --------
   Total cash and cash equivalents...................................        29,956       31,982       28,812
Interest-bearing deposits in financial institutions -
    maturities over 90 days..........................................           100          100          100
Securities available-for-sale........................................       146,195      149,750      143,816
Loans................................................................       240,845      232,653      230,034
Less: Allowance for loan losses......................................         5,389        4,839        4,497
                                                                           --------     --------     --------
   Loans, net........................................................       235,456      227,814      225,537
Direct lease financing...............................................           959          999          605
Office buildings and equipment, net..................................         6,120        6,250        6,398
Other real estate owned, net of allowance for losses
   of $535, $532 and $521............................................         2,672        2,846        3,322
Accrued interest receivable..........................................         4,037        3,955        4,723
Other assets.........................................................         2,495        2,868        4,042
                                                                           --------     --------     --------
   Total assets......................................................      $427,990     $426,564     $417,355
                                                                           --------     --------     --------
                                                                           --------     --------     --------
      Liabilities and Stockholders' Equity

Liabilities

Deposits
   Demand - noninterest-bearing......................................       $38,218      $43,223      $39,150
   NOW accounts......................................................        36,378       38,159       36,866
   Money market accounts.............................................        44,877       44,426       46,769
   Savings...........................................................        45,285       44,843       47,608
   Time, $100,000 and over...........................................        76,330       69,052       66,983
   Time, under $100,000..............................................        92,220       89,092       89,334
                                                                           --------     --------     --------
      Total deposits.................................................       333,308      328,795      326,710
                                                                           --------     --------     --------

Securities sold under repurchase agreements
   and other short-term borrowings...................................        31,389       36,758       34,176
Advances from borrowers for taxes and insurance......................           911        1,021        1,018
Accrued interest payable and other liabilities.......................         5,307        5,155        4,505
                                                                           --------     --------     --------
      Total liabilities..............................................       370,915      371,729      366,409
                                                                           --------     --------     --------
Stockholders' Equity

Common stock - $2 par value: 1,750,000 shares authorized;
   889,273, 889,273, and 888,973 shares issued and outstanding.......         1,779        1,779        1,778
Additional paid-in capital...........................................        11,216       11,216       11,184
Retained earnings....................................................        44,038       41,849       39,385
Unrealized gain (loss) on securities available-for-sale, net.........            42           (9)      (1,401)
                                                                           --------     --------     --------
   Total stockholders' equity........................................        57,075       54, 835      50,946
                                                                           --------     --------     --------
   Total liabilities and stockholders' equity........................      $427,990      $426,564    $417,355
                                                                           --------     --------     --------
                                                                           --------     --------     --------

    The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>
                                                         2

<PAGE>

NORTHERN STATES FINANCIAL CORPORATION
--------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------
Three months and six months
ended June 30, 1997 and 1996
(In thousands of dollars, except per share data)

<TABLE>
<CAPTION>

                                               Three months ended   Six months ended
                                               June 30,  June 30,   June 30,   June 30,
                                                 1997      1996       1997       1996
                                               --------  --------   --------   --------
<S>                                            <C>       <C>        <C>        <C>
Interest income
   Loans (including fee income)................  $5,552    $5,629    $10,834    $10,816
   Securities
      Taxable..................................   2,027     1,926      3,995      3,926
      Exempt from federal income tax...........     290       276        586        541
   Interest-bearing deposits in financial
      institutions.............................       8         7         16         14
   Federal funds sold..........................     126        99        355        270
                                               --------  --------   --------   --------
      Total interest income....................   8,003     7,937     15,786     15,567
                                               --------  --------   --------   --------
Interest expense
   Time deposits...............................   2,284     2,141      4,516      4,391
   Other deposits..............................   1,010     1,081      2,032      2,188
   Other borrowings............................     414       415        818        881
                                               --------  --------   --------   --------
      Total interest expense...................   3,708     3,637      7,366      7,460
                                               --------  --------   --------   --------
Net interest income............................   4,295     4,300      8,420      8,107
Provision for loan losses......................     180       360        360        720
                                               --------  --------   --------   --------
Net interest income after provision for
   loan losses.................................   4,115     3,940      8,060      7,387
                                               --------  --------   --------   --------
Other income
   Service fees on deposits....................     309       314        643        648
   Trust income................................     154       132        298        245
   Net security gains..........................       0         0          0          5
   Net gains on sales of loans.................      25        17         60         72
   Other operating income......................     140       160        375        283
                                               --------  --------   --------   --------
      Total other income.......................     628       623      1,376      1,253
                                               --------  --------   --------   --------
Other expenses
   Salaries and employee benefits..............   1,344     1,451      2,666      2,860
   Occupancy and equipment expenses, net.......     337       367        670        670
   Data processing expense.....................     125       140        265        272
   FDIC deposit insurance expense..............      22        54         44        108
   Other real estate owned expenses............      58        64        126        112
   Other operating expenses....................     492       555      1,016      1,028
                                               --------  --------   --------   --------
      Total other expenses.....................   2,378     2,631      4,787      5,050
                                               --------  --------   --------   --------
Income before income taxes.....................   2,365     1,932      4,649      3,590
Provision for income taxes.....................     735       543      1,437        977
                                               --------  --------   --------   --------
Net income.....................................  $1,630    $1,389     $3,212     $2,613
                                               --------  --------   --------   --------
                                               --------  --------   --------   --------

Earnings per common share......................   $1.83     $1.56      $3.61      $2.94
                                               --------  --------   --------   --------
                                               --------  --------   --------   --------

Weighted average common shares outstanding..... 889,273   888,806    889,273    888,553
                                               --------  --------   --------   --------
                                               --------  --------   --------   --------
</TABLE>

The accompanying notes are an integral part of these condensed consolidated
   financial statements.
                                       3

<PAGE>


NORTHERN STATES FINANCIAL CORPORATION
-----------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------------
Six months ended June 30, 1997 and 1996
(In thousands of dollars)

<TABLE>
<CAPTION>
                                                                    Six months ended
                                                                   June 30,   June 30,
                                                                     1997       1996
                                                                   --------   --------
<S>                                                                <C>        <C>
Cash flows from operating activities
   Net income.....................................................   $3,212     $2,613
   Adjustments to reconcile net income to cash from
    operating activities:
      Depreciation................................................      269        291
      Provision for loan losses...................................      360        720
      Provision for losses on other real estate owned.............        3         11
      Deferred loan fees..........................................      (55)       (89)
      Net gains on sales of securities............................        0         (5)
      Proceeds from sales of loans................................    4,586      6,075
      Loans originated for sale...................................   (4,680)    (5,646)
      Net gains on sales of loans.................................      (47)       (72)
      Net gains on sales of other real estate owned...............     (142)         0
      Net change in interest receivable...........................      (82)      (357)
      Net change in interest payable..............................       89         34
      Net change in other assets..................................      323        796
      Net change in other liabilities.............................       63        (52)
                                                                   --------   --------
         Net cash from operating activities.......................    3,899      4,319
                                                                   --------   --------
Cash flows from investing activities
      Proceeds from sales of securities available-for-sale........        0      2,675
      Proceeds from maturities of securities available-for-sale...   21,082     58,238
      Purchases of securities available-for-sale..................  (17,426)   (52,636)
      Change in loans made to customers...........................   (7,972)    (6,844)
      Property and equipment expenditures.........................     (139)      (102)
      Net change in direct lease financing........................       40         17
      Proceeds from sales of other real estate owned..............      479        162
                                                                   --------   --------
         Net cash from investing activities.......................   (3,936)     1,510
                                                                   --------   --------
Cash flows from financing activities
      Net change in:
        Deposits..................................................    4,513       (845)
        Securities sold under repurchase agreements
          and other short-term borrowings.........................   (5,369)    (9,102)
        Advances from borrowers for taxes and insurance...........     (110)      (263)
      Net proceeds from exercise of stock options.................        0         64
      Dividends paid..............................................   (1,023)      (845)
                                                                   --------   --------
Net cash from financing activities................................   (1,989)   (10,991)
                                                                   --------   --------
Net change in cash and cash equivalents...........................   (2,026)    (5,162)
Cash and cash equivalents at beginning of period..................   31,982     33,974
                                                                   --------   --------
Cash and cash equivalents at end of period........................  $29,956    $28,812
                                                                   --------   --------
                                                                   --------   --------
Supplemental disclosures
      Cash paid during the period for
         Interest.................................................   $7,277     $7,426
         Income taxes.............................................    1,665      1,075
      Noncash investing activities
         Transfers made from loans to other real estate owned.....      166      1,184
</TABLE>


The accompanying notes are an integral part of these condensed consolidated
   financial statements.
                                       4


<PAGE>


                        NORTHERN STATES FINANCIAL CORPORATION

                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)

                                    (Unaudited)   




Note 1 - BASIS OF PRESENTATION

    The accompanying interim condensed consolidated financial statements are 
prepared without audit and reflect all adjustments which are of a normal and 
recurring nature and, in the opinion of management, are necessary to present 
interim financial statements of Northern States Financial Corporation (the 
"Company") in accordance with generally accepted accounting principles.  The 
interim financial statements do not purport to contain all the necessary 
financial disclosures covered by generally accepted accounting principles 
that might otherwise be necessary for complete financial statements.

    The condensed consolidated statements of income are for the three and six 
months ended June 30, 1997 and 1996.  The condensed consolidated statements 
of cash flows are for the six months ended June 30, 1997 and 1996.  The 
condensed consolidated balance sheets are as of June 30, 1997, December 31, 
1996 and June 30, 1996.

    The interim condensed consolidated financial statements should be read in 
conjunction with the audited financial statements and accompanying notes (or 
"notes thereto") of the Company for the years ended December 31, 1996, 1995, 
and 1994.

    The results of operations for the six-month period ended June 30, 1997, 
are not necessarily indicative of the results to be expected for the full 
year.

    Earnings per Share - Earnings per share are computed by dividing net 
income by the weighted-average shares during the period.  The effect of stock 
options was not material to earnings per share for any periods presented.

                                     5

<PAGE>

                         NORTHERN STATES FINANCIAL CORPORATION

                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)
                                     (Unaudited)




Note 2 - SECURITIES

     The amortized cost, gross unrealized gains and losses, and fair values 
of securities available-for-sale as of June 30, 1997, December 31, 1996, and 
June 30, 1996 are as follows:

                           ---------------  June 30, 1997  ---------------
                                           Gross Unrealized
Securities                  Amortized    -------------------       Fair
available-for-sale            Cost        Gains      Losses        Value 
-------------------        -----------   --------   ---------  ------------
 U.S. Treasury              $ 11,070    $    15    $    (4)      $ 11,081
 U.S. Government             
   agencies and
   corporations               94,359         30       (643)        93,746
 States and political
   subdivisions               23,907        583        (43)        24,447
 Mortgage-backed
   securities and
   collateralized
   mortgage obligations       14,722        151       (116)        14,757
Equity securities              2,069        181        (86)         2,164
                            --------    -------    --------      --------
   Total                    $146,127     $  960    $  (892)      $146,195
                            --------    -------    --------      --------
                            --------    -------    --------      --------


                                     6

<PAGE>


                        NORTHERN STATES FINANCIAL CORPORATION

                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)
                                     (Unaudited)




                           -------------  December 31, 1996  -------------
                                           Gross Unrealized
Securities                  Amortized    --------------------      Fair
available-for-sale            Cost        Gains      Losses        Value 
-------------------        -----------   --------   ---------  ------------


 U.S. Treasury              $ 16,098    $    25     $    (9)      $ 16,114
 U.S. Government
   agencies and
   corporations               90,359         32        (787)       89,604
 States and political 
   subdivisions               24,827        699         (44)       25,482
 Mortgage-backed
   securities and
   collateralized
   mortgage obligations       16,408        131        (109)       16,430
Equity securities              2,091        128         (99)        2,120
                            --------    -------    --------      --------
   Total                    $149,783    $ 1,015     $(1,048)     $149,750
                            --------    -------    --------      --------
                            --------    -------    --------      --------


                           ---------------   June 30, 1996  ---------------
                                           Gross Unrealized
Securities                  Amortized    --------------------      Fair
available-for-sale            Cost        Gains      Losses        Value 
-------------------        -----------   --------   ---------  ------------
 U.S. Treasury              $ 24,410    $    26     $   (41)     $ 24,395
 U.S. Government
   agencies and
   corporations               75,840          2      (2,212)       73,630
 States and political
   subdivisions               26,583        389        (167)       26,805
 Mortgage-backed
   securities and
   collateralized
   mortgage obligations       18,103         77        (337)       17,843
Equity securities              1,157        102        (116)        1,143
                            --------    -------    --------      --------
   Total                    $146,093     $  596     $(2,873)     $143,816
                            --------    -------    --------      --------
                            --------    -------    --------      --------

                                     7

<PAGE>

                        NORTHERN STATES FINANCIAL CORPORATION

                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)
                                    (Unaudited)   



     Contractual maturity of debt securities at June 30 1997 were as follows. 
Securities not due at a single maturity date, primarily mortgage-backed 
securities, are shown separately.

                                          Amortized        Fair
Securities available-for-sale                Cost          Value
-------------------------------------    -----------    -----------
Due in one year or less                   $ 17,021       $ 17,024     
Due after one year through five years      101,830        101,528 
Due after five years through ten years      10,485         10,722   
                                         -----------    -----------
                                           129,336        129,274     

Mortgage-backed securities                  14,722         14,757
Equity securities                            2,069          2,164
                                         -----------    -----------
     Total                                $146,127       $146,195 
                                         -----------    -----------
                                         -----------    -----------

     Mortgage-backed securities are comprised of investments in pools of 
residential mortgages.  The mortgage pools are issued and guaranteed by the 
Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage 
Association (FNMA), and the Goverment National Mortgage Association (GNMA).

     As of June 30, 1997, the Company held structured notes with an amortized 
cost of $3,100 and fair value of $3,083.  These securities are issued by the 
Federal Home Loan Bank (FHLB).  The structured notes are comprised primarily 
of securities that have coupon interest rates which "step up" periodically 
during the term to maturity.

     There were no sales of securities during the three months ended or six 
months ended June 30, 1997.

     There were no sales of securities during the three months ended June 30, 
1996.  There were two sales of equity securities during the six months ended 
June 30, 1996 which resulted in proceeds of $2,675 and a gain of $5.

     Securities carried at fair values of $96,822 and $90,503 at June 30, 
1997 and 1996 were pledged to secure public deposits, repurchase agreements 
and for other purposes as required or permitted by law. 

                                     8

<PAGE>

                        NORTHERN STATES FINANCIAL CORPORATION

                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)
                                    (Unaudited)   



Note 3 - LOANS

     The Company makes loans to, and obtains deposits from, customers 
primarily in Lake County, Illinois and surrounding areas.  Most loans are 
secured by specific items of collateral, including commercial and residential 
real estate and other business and consumer assets.

     Loans consisted of the following at June 30, 1997, December 31, 1996, 
and June 30, 1996:

                                   June 30,  December 31,   June 30,
                                     1997         1996         1996
                               ------------ ------------ ------------
Commercial                         $ 54,426     $ 50,762     $ 51,943
Real estate - construction           26,795       26,905       27,710
Real estate - mortgage              151,309      146,552      141,200
Installment                           8,962        9,203       10,116
                               ------------ ------------ ------------
   Total loans                      241,492      233,422      230,969
Unearned income                        (173)        (240)        (324)
Deferred loan fees                     (474)        (529)        (611)
                               ------------ ------------ ------------
   Loans, net of unearned 
    income and deferred 
    loan fees                       240,845      232,653      230,034
Allowance for loan losses            (5,389)      (4,839)      (4,497)
                                ------------ ------------ ------------
   Loans, net                      $235,456     $227,814     $225,537
                                ------------ ------------ ------------
                                ------------ ------------ ------------

     Loans held for sale on June 30, 1997, December 31, 1996 and June 30, 
1996 were approximately $1,034, $893 and $2,104, and are classified as real 
estate mortgage loans.

     Non-performing loans, which include loans contractually past due ninety 
days or more, loans accounted for on a nonaccrual basis, and loans whose 
terms have been renegotiated to provide a reduction or deferral of interest 
or principal because of deterioration in the financial position of the 
borrower, amounted to $1,528 at June 30, 1997, $1,166 at December 31, 1996, 
and  $3,455 at June 30, 1996.   

                                     9

<PAGE>

                        NORTHERN STATES FINANCIAL CORPORATION

                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)
                                     (Unaudited)



    Impaired loans were as follows for June 30, 1997, December 31, 1996 and 
June 30, 1996:

                                   June 30,     December 31,     June 30,
                                     1997           1996           1996
                                ------------   ------------   ------------
Loans with no allowance
   for losses allocated             $      0       $      0       $      0
Loans with allowance 
   for losses allocated                  739            828          2,560
Amount of the allowance
   allocated                             100            146            368


    Average balance information and income recognized on impaired loans were 
as follows for the three and six months ended June 30, 1997 and June 30, 1996:

                                  Three months ended      Six months ended
                                  ------------------     ----------------- 
                                 June 30,   June 30,    June 30,   June 30,
                                   1997       1996        1997       1996
                                 --------   --------    --------   -------- 
Average of impaired
   loans during the period       $   778     $ 3,104     $   902    $ 3,770
Interest income recognized 
   during the period                  13          83          16         93
Cash-basis income recognized
   during the period                  13          83          16         93 


     The Company is a party to financial instruments with off-balance sheet 
risk in the normal course of business to meet financing needs of its 
customers. These financial instruments include commitments to make loans, 
standby letters of credit, and unused lines of credit.  The Company's 
exposure to credit loss in the event of non-performance by the other parties 
to these financial instruments is represented by the contractual amount of 
the instruments.  The Company uses the same credit policy to make such 
commitments as it uses for on-balance-sheet items.

                                     10

<PAGE>

                        NORTHERN STATES FINANCIAL CORPORATION

                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)
                                     (Unaudited)


     At June 30, 1997, December 31, 1996, and June 30, 1996, the contract 
amount of the Company's off-balance sheet commitments was as follows:

                                June 30,   December 31,   June 30,
                                  1997         1996         1996
                             ----------- ------------- ------------   
Unused lines of credit 
and commitments to 
make loans:
      Fixed rate                  $17,795      $17,696      $15,793
      Variable rate                53,022       57,979       48,683
                             ------------ ------------ ------------
         Total                    $70,817      $75,675      $64,476
                             ------------ ------------ ------------
                             ------------ ------------ ------------

Standby letters of credit         $ 6,237      $ 6,250      $ 4,333
                             ------------ ------------ ------------
                             ------------ ------------ ------------


     Since many commitments to make loans expire without being used, the 
amounts above do not necessarily represent future cash commitments.  
Collateral obtained upon exercise of the commitments is determined using 
management's credit evaluation of the borrower, and may include commercial 
and residential real estate and other business and consumer assets.

                                     11

<PAGE>

                        NORTHERN STATES FINANCIAL CORPORATION

                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)
                                     (Unaudited)


Note 4 - ALLOWANCES FOR LOAN LOSSES AND 
         OTHER REAL ESTATE OWNED LOSSES

     Activity in the allowance for loan losses for the six months ended June 
30, 1997, twelve months ended December 31, 1996, and six months ended June 
30, 1996, is as follows:

                                    June 30,  December 31,   June 30,
                                      1997        1996         1996
                                   ---------  ------------  ---------
Balance at beginning of year         $4,839      $4,514       $4,514
Provision charged to 
   operating expense                    360       1,190          720
Loans charged off                       (79)     (1,141)        (774)
Recoveries on loans 
   previously charged off               269         276           37
                                 ------------ ------------ ------------
Balance at end of period             $5,389      $4,839       $4,497
                                 ------------ ------------ ------------
                                 ------------ ------------ ------------



     Activity in the allowance for other real estate owned losses for the six 
months ended June 30, 1997, twelve months ended December 31, 1996, and six 
months ended June 30, 1996, is as follows:

                                   June 30,  December 31,   June 30,
                                     1997        1996         1996
                                  ---------  ------------  ---------
Balance at beginning of year        $  532      $  510       $  510
Provision charged to 
   operating expense                    11          22           11
Losses on other real 
   estate owned                         (8)         -0-          -0-
                                  ---------  ------------  ---------
Balance at end of period            $  535      $  532       $  521
                                  ---------  ------------  ---------
                                  ---------  ------------  ---------

                                     12

<PAGE>

                        NORTHERN STATES FINANCIAL CORPORATION
 
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)
                                     (Unaudited)




Note 5 - PROVISION FOR INCOME TAXES


    The provision for income taxes represents federal and state income tax 
expense calculated using annualized rates on taxable income generated during 
the respective periods.

Note 6 - STOCKHOLDERS' EQUITY

    For the six months ended June 30, 1997 total stockholders' equity 
increased $2,240.  The increase is a result of net income of $3,212, plus the 
change in the valuation allowance from December 31, 1996 for the fair value 
of securities available-for-sale, net of tax, of $51, less cash dividends 
paid of $1,023.

    For the six monnths ended June 30, 1996 total stockholders' equity 
decreased $59.  The decrease is a result of net income of $2,613, less the 
change in the valuation allowance from December 31, 1995 for the fair value 
of securities available-for-sale, net of tax, of $1,891, plus $64 due to 
1,542 stock options being exercised pursuant to the Omnibus Incentive Plan, 
less the dividend payment of $845.

                                     13

<PAGE>

 
                        NORTHERN STATES FINANCIAL CORPORATION
 
                NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)
                                     (Unaudited)




Note 7 - OMNIBUS INCENTIVE PLAN INSTRUMENTS


    The 1992 Omnibus Incentive Plan (the "Plan") authorizes the issuance of 
up to 75,000 shares of the Company's common stock, including the granting of 
non-qualified stock options, restricted stock and stock appreciation rights. 

    Statement of Financial Accounting Standards No. 123 which became 
effective for 1996, requires pro forma disclosures for companies that do not 
adopt its fair value accounting method for stock-based employee compensation. 
The Company did not grant any stock options during the six months ended June 
30, 1997 or during the entire year, 1996.

    Stock options may be used to reward directors and employees and provide 
them with an additional equity interest in the Company.  Options have been 
issued for 10 year periods and are fully vested when granted.  Information 
about option grants follow:

                                       Number of  Weighted-Avg.
                                        Options   Exercise Price   
                                     ------------ -------------- 
     Outstanding at
       January 1, 1996                    7,020       $ 41.63 
     Exercised during period 
        ended June 30, 1996               1,542         41.65 
                                     ------------ -------------- 
     Outstanding at
       June 30, 1996                      5,478       $ 41.62  
                                     ------------
                                     ------------

     Outstanding at
       January 1, 1997                    5,178       $ 41.62 
     Exercised during period 
        ended June 30, 1997                   0             0 
                                    ------------ -------------- 
     Outstanding at
       June 30, 1997                      5,178       $ 41.62  
                                     ------------
                                     ------------

                                     14

<PAGE>

                        NORTHERN STATES FINANCIAL CORPORATION

                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                                    June 30, 1997

                 (Dollar Amounts in thousands, except per share data)
                                     (Unaudited)



    At June 30, 1997, options outstanding ranged in exercise price from 
$41.60 to $42.00 and had a weighted average remaining option life of 4.6 
years.  

    The Company at its discretion may grant stock appreciation rights under 
the Plan.  A stock appreciation right entitles the holder to receive from the 
Company an amount equal to the excess, if any, of the aggregate fair market 
value of the Company's common stock which is the subject of such grant over 
the grant price. During the six months ended June 30, 1997 and 1996, 656 and 
2,908 stock appreciations rights were exercised and payment made to the 
holders.  As of June 30, 1997 and 1996, 3,248 and 3,904 stock appreciation 
rights were outstanding that had been awarded at $41.60.  The Company's 
expense was $(3) and $8 for the three months ended June 30, 1997 and 1996 and 
$16 and $23 for the six months ended June 30, 1997 and 1996.  The stock 
appreciation rights will expire on April 30, 2002. 

                                     15


<PAGE>

              NORTHERN STATES FINANCIAL CORPORATION

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                    AND RESULTS OF OPERATIONS


     The following discussion focuses on the consolidated finan-
cial condition of the Northern States Financial Corporation at
June 30, 1997 and the consolidated results of operations for the
three and six month periods ending June 30, 1997, compared to the
same periods in 1996.  The purpose of this discussion is to pro-
vide a better understanding of the condensed consolidated finan-
cial statements and the operations of its subsidiaries, the Bank
of Waukegan ("The Bank") and First Federal Bank, fsb ("First
Federal" or "The Thrift").  This discussion should be read in
conjunction with the interim condensed consolidated financial
statements and notes thereto included herein.


FINANCIAL CONDITION

     The consolidated total assets were $428.0 million at the end
of the current period, increasing slightly by $1.4 million from
the Company's fiscal year-end, December 31, 1996.

     Securities in total decreased $3.6 million or 2.37% from
year-end.  The statement of cash flows shows that $3.6 million
more in securities matured than were purchased. These matured
securities were used to fund loan growth.  Federal funds sold
decreased $1.6 million from December 31, 1996.

     The loan porfolio for the Company increased $8.2 million or
3.52% from December 31, 1996.  Loan growth occurred primarily at
the Bank where total loans increased $8.5 million.  The Bank
experienced growth in commercial loans and real estate mortgage
loans of $3.1 million and $5.9 million while real estate con-
struction loans and installment loans declined slightly by $.2
and $.3 million.  At the Thrift total loans decreased $.3 million
which was mainly in real estate mortgages.  Due to higher home
mortgage rates, loans originated for sale by First Federal for
sale on the secondary market through the Federal Home Loan Mort-
gage Corporation (FHLMC) and the Federal National Mortgage Asso-
ciation (FNMA) programs during the first six months of 1997 were
$4.7 million as compared to $5.6 million during the same six
month period in 1996. The Company's levels of non-performing
loans increased $.3 million to $1.5 million from December 31,
1996 resulting from increased past due mortgage loans at First
Federal.

     During the first six months of 1997 deposits at the Company
increased $4.5 million.  Total time deposits increased $10.4
million while money market and savings increased $.5 million and
$.4 million.  Noninterest-bearing demand accounts declined $5.0
million and NOW accounts declined $1.8 million.  

                                      16

<PAGE>

              NORTHERN STATES FINANCIAL CORPORATION

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                    AND RESULTS OF OPERATIONS


     At the Bank of Waukegan total deposits increased $10.4
million or 4.39%. The Bank experienced increases in money market
deposits of $1.9 million, in savings of $.4 million, in time
deposits of $100,000 and over of $10.4 million and in time depos-
its of under $100,000 of $2.7 million.  The Bank had declines of
$4.0 million, and $1.0 million in the area of noninterest-bearing
demand deposits and NOW account deposits.  The decline in check-
ing and NOW accounts at the Bank is attributable to decreased
commercial deposits as business customers made capital expendi-
tures due to the healthy local econmy.

     Deposit totals at First Federal declined $5.8 million or
6.35% from December 31, 1996.  Noninterest-bearing demand bal-
ances decreased $.9 million, NOW accounts declined $.8 million,
money market accounts were $1.4 million lower, and time deposits
of all types decreased $2.7 million.  These decreases are  at-
tributable to customers shifting funds to other savings and loan
institutions which traditionally have offered higher interest
rates and lower account balance requirements.  First Federal
offers the same rates and terms as the Bank and as a result, some
clients have withdrawn their funds to achieve the higher rates at
competing savings associations.

     Securities sold under repurchase agreements and other
short-term borrowing at the Company decreased $5.4 million from
December 31, 1996 to $31.4 million at June 30, 1997.  These funds
consist of securities sold under repurchase agreements by the
Bank of Waukegan that are offered through an overnight repurchase
agreement product and a term product with maturities from 7 days
to one year.  Repurchase agreements  provide a source of funds to
the Company that do not increase the reserve requirements with
the Federal Reserve Bank or create an expense relating to FDIC
insurance and, therefore, are less costly to the Company.  The
decrease in repurchase agreement funds was a result of commercial
customers drawing down their balances to make capital expendi-
tures which is indicative of the expansion in the local economy.

     Total stockholders' equity increased $2,240,000 during the
first six months of 1997.  The increase is a result of net income
of $3,212,000 plus the adjustment in the valuation allowance for
the market value of securities available-for-sale, net of tax, of
$51,000, less cash dividends paid of $1023,000.

     The tangible equity capital-to-asset ratio at June 30, 1997
was 13.30% and the total capital-to-asset ratio, on a risk ad-
justed basis, amounted to 21.65% compared to the minimum required
levels to be well capitalized under prompt corrective action
regulations of 5.00% and 10.00%.  Book value per share was $64.18 

                                      17

<PAGE>

              NORTHERN STATES FINANCIAL CORPORATION

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                    AND RESULTS OF OPERATIONS


at June 30, 1997 compared to $61.66 at December 31, 1996.  On
June 30, 1997, the Company and its subsidiaries were in compli-
ance with all applicable regulatory capital requirements.


RESULTS OF OPERATIONS


NET INCOME

     The consolidated net income  was $1,630,000 for the quarter
ended June 30, 1997, an increase of $241,000 or 17.35%, as com-
pared to net income of $1,389,000 for the same period the previ-
ous year.  The annualized return on average assets was 1.54% for
the quarter as compared to 1.33% for the previous year.  The net
consolidated income for the six months ended June 30, 1997 was
$3,212,000, an increase of $599,000 or 22.92% over the first half
of 1996.  The annualized return on average assets for the first
half of 1997 was 1.52% as compared to 1.25% for same period the
previous year.


NET INTEREST INCOME

     Net interest income, the difference between interest income
earned on average interest-earning assets and interest expense on
average interest-bearing liabilities, declined $5,000 for the
three months ended June 30, 1997, compared to the same three
months in 1996.  This decrease in net interest margin can in part
be explained by the receipt at the Bank during the second quarter
of 1996 of a payment in full on an impaired loan on nonaccrual
status with a corresponding recognization of $80,000 in interest
and fees.  This one-time collection of loan interest is evidenced
in Table 1, "Analysis of Average Balance and Tax Equivalent Rates
for the Three Months Ended June 30, 1997 and 1996", which shows
that the yield on loans for the quarter ended June 30, 1997 was
9.22% compared to 9.61% during 1996.

      Net interest income for the first six months of 1997 in-creased 
$313,000 or 3.86% compared to the first half of 1996. Table 2, "Analysis of 
Average Balance and Tax Equivalent Rates for the Six Months Ended June 30, 
1997 and 1996", indicates that the Company's net yield on interest earning 
assets increased to 4.41% for the first six months of 1997 as compared to 
4.34% for the same period last year.  The primary reason for this increase is 
that the interest-bearing liabilities to earning assets ratio has declined to 
79.87% for the six months ended June 30, 1997 as compared to 81.62% for the 
same period last year because of the Company's strong capital position.  In 
1997 it took less interest-bearing liabilities to fund interest earning 
assets than in 1996 which consequently increased net interest income. 

                                      18

<PAGE>

                        NORTHERN STATES FINANCIAL CORPORATION

              MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION
                              AND RESULTS OF OPERATIONS

                                      TABLE 1

<TABLE>
<CAPTION>

                                                                  NORTHERN STATES FINANCIAL CORPORATION
                                                           ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
                                                            For the Three Months Ended June 30, 1997 and 1996
                                                                            ($  000s)

                                                           1997                                       1996
                                           ----------------------------------       --------------------------------------
                                           Average                                   Average
                                           Balance       Interest       Rate         Balance       Interest          Rate
                                           --------      -------      -------       ---------      -------         -------
<S>                                        <C>           <C>          <C>           <C>            <C>             <C>
Assets
   Loans (1)(2)(3).....................    $242,576       $5,591        9.22%        $237,791       $5,712          9.61%
   Taxable securities..................     125,873        2,027        6.38%         125,256        1,926          6.09%
   Securities exempt from taxes (2)....      21,415          439        8.33%          20,529          418          8.34%
   Interest bearing deposits in banks..         468            8        6.84%             543            7          5.16%
   Federal funds sold..................       8,731          126        5.77%           7,814           99          5.07%
                                           --------       ------                     --------       ------
    Interest earning assets............     399,063        8,191        8.19%         391,933        8,162          8.31%
                                                          -------                                   ------
   Noninterest earning assets..........      22,093                                    25,829
                                           --------                                  --------
    Average assets.....................    $421,156                                  $417,762
                                           --------                                  --------
                                           --------                                  --------

Liabilities and stockholders' equity
   NOW deposits........................     $37,305         $279        2.99%         $42,108         $322          3.06%
   Money market deposits...............      39,883          396        3.97%          41,317          409          3.96%
   Savings deposits....................      45,332          335        2.96%          47,496          350          2.95%
   Time deposits.......................     161,678        2,284        5.65%         154,135        2,141          5.56%
   Other borrowings....................      32,548          414        5.09%          34,156          415          4.86%
                                           --------       ------                     --------       ------
      Interest bearing liabilities.....     316,746        3,708        4.68%         319,212        3,637          4.56%
                                                          -------                                   ------
   Demand deposits                           40,601                                    40,187
   Other noninterest bearing 
     liabilities.......................       7,991                                     7,184
   Stockholders' equity................      55,818                                    51,179
                                           --------                                  --------
    Average liabilities and
     stockholders' equity..............    $421,156                                  $417,762
                                           --------                                  --------
                                           --------                                  --------
    Net interest income................                    $4,483                                   $4,525
                                                          -------                                   ------
                                                          -------                                   ------
    Net yield on interest
     earning assets....................                                 4.48%                                       4.61%
                                                                      -------                                     -------
                                                                      -------                                     -------
    Interest-bearing liabilities to 
     earning assets ratio..............                                79.37%                                      81.45%
                                                                      -------                                     -------
                                                                      -------                                     -------

       (1) - Interest income on loans includes loan origination fees of $  115 and $  124
             for the three months ended June 30, 1997 and June 30, 1996.

       (2) - Tax-exempt income is reflected on a fully tax equivalent basis utilizing
             a 34% rate.

       (3) - Non-accrual loans are included in average loans.

</TABLE>

                                                 19

<PAGE>

                        NORTHERN STATES FINANCIAL CORPORATION

              MANAGEMENT'S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION
                              AND RESULTS OF OPERATIONS

                                      TABLE 2

<TABLE>
<CAPTION>

                                                                  NORTHERN STATES FINANCIAL CORPORATION
                                                           ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
                                                            For the Six Months Ended June 30, 1997 and 1996
                                                                            ($  000s)

                                                           1997                                       1996
                                           ----------------------------------       --------------------------------------
                                           Average                                   Average
                                           Balance       Interest       Rate         Balance       Interest          Rate
                                           --------      -------      -------       ---------      -------         -------
<S>                                        <C>           <C>          <C>           <C>            <C>             <C>
Assets
   Loans (1)(2)(3).....................    $238,036      $10,904        9.16%        $233,789      $10,993          9.40%
   Taxable securities..................     124,788        3,995        6.35%         129,490        3,926          6.04%
   Securities exempt from federal 
    income taxes (2)...................      21,711          888        8.36%          20,266          819          8.33%
   Interest bearing deposits in banks..         569           16        5.62%             495           14          5.66%
   Federal funds sold..................      13,172          355        5.39%          10,345          270          5.22%
                                           --------       ------                     --------       ------
    Interest earning assets............     398,276       16,158        8.10%         394,385       16,022          8.13%
                                                          -------                                   ------
   Noninterest earning assets..........      22,684                                    25,484
                                           --------                                  --------
    Average assets.....................    $420,960                                  $419,869
                                           --------                                  --------
                                           --------                                  --------

Liabilities and stockholders' equity
   NOW deposits........................     $37,242         $549        2.95%         $41,559         $632          3.04%
   Money market deposits...............      41,627          823        3.95%          42,011          857          4.08%
   Savings deposits....................      44,783          660        2.95%          47,206          699          2.96%
   Time deposits.......................     161,403        4,516        5.60%         155,593        4,391          5.64%
   Other borrowings....................      33,036          818        4.95%          35,538          881          4.96%
                                           --------       ------                     --------       ------
      Interest bearing liabilities.....     318,091        7,366        4.63%         321,907        7,460          4.63%
                                                          -------                                   ------
   Demand deposits                           39,986                                    39,573
   Other noninterest bearing 
     liabilities.......................       7,288                                     6,983
   Stockholders' equity................      55,595                                    51,406
                                           --------                                  --------
    Average liabilities and
     stockholders' equity..............    $420,960                                  $419,869
                                           --------                                  --------
                                           --------                                  --------
    Net interest income................                    $8,792                                   $8,562
                                                          -------                                   ------
                                                          -------                                   ------
    Net yield on interest
     earning assets....................                                 4.41%                                       4.34%
                                                                      -------                                     -------
                                                                      -------                                     -------
    Interest-bearing liabilities to 
     earning assets ratio..............                                79.87%                                      81.62%
                                                                      -------                                     -------
                                                                      -------                                     -------

       (1) - Interest income on loans includes loan origination fees of $  203 and $  217
             for the six months ended June 30, 1997 and June 30, 1996.

       (2) - Tax-exempt income is reflected on a fully tax equivalent basis utilizing
             a 34% rate.

       (3) - Non-accrual loans are included in average loans.

</TABLE>

                                                 20

<PAGE>

              NORTHERN STATES FINANCIAL CORPORATION

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                    AND RESULTS OF OPERATIONS


PROVISION FOR LOAN LOSSES

     The provision for loan losses was $180,000 during the quar-
ter ended June 30, 1997 compared to $360,000 for the same period
the previous year.  For the first six months of 1997 the provi-
sion for loan losses was $360,000 which was half of the the
provision of $720,000 for the same period of 1996.  Management
with the concurrance of the Board of Directors lowered the provi-
sion for loan losses after careful review of the adequacy of the
loan loss allowance and the levels of non-performing loans and
impaired loans.  At June 30, 1997 non-performing loans were
$1,528,000 or .35% of total assets, a decrease of $1,927,000 from
$3,455,000 at June 30, 1996.  Impaired loans averaged $902,000
for the six months ended June 30, 1997 as compared to $3,770,000
for the same period last year. 

     The allowance for loan losses on June 30, 1997, was
$5,389,000 or 2.23% of total loans. The allowance for loan losses
as of June 30, 1997 was 3.5 times the level of nonperforming
assets. During the first six months of 1997 the Bank had recover-
ies of previously charged off loans totalling $269,000 and
charged off $73,000 to the allowance for loan losses. The recov-
eries at the Bank consisted primarily of two credits that were
charged off real estate loans on which $159,000 was collected. 
The Thrift experienced charge offs of $6,000 during the six
months ended June 30, 1997 and no recoveries.  The adequacy of
the allowance is analyzed by both management and the Board of
Directors at each subsidiary at least quarterly.  Loans judged to
be impaired, loans with potential loss exposure, loans that are
no longer accruing interest, and historical net loan loss per-
centages are reviewed in the analysis of the loan loss allowance
adequacy.  Based upon management and the Board of Directors'
analysis, the allowance for loan losses and the monthly provision
at June 30, 1997, is adequate to cover future possible loan
losses. 


NONINTEREST INCOME

     Noninterest income for the three months ended June 30, 1997,
was $628,000 as compared to $623,000 for the three months ended
June 30, 1996, an increase of $5,000.  Service fees on deposits  

                                      21

<PAGE>

              NORTHERN STATES FINANCIAL CORPORATION

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                    AND RESULTS OF OPERATIONS


for the Company decreased $5,000 as compared to the same quarter
last year because of a slowdown in overdraft volume. Trust income
increased $22,000 during the three months ended June 30, 1997 as
compared to the three months ended June 30, 1996 due to increased
trust business.  Other income from gain on sales of loans in-
creased $8,000 during the second quarter of 1997.  Miscellaneous
other operating income declined $20,000 due to decreased other
loan fee income during the quarter.

     For the first half of 1997 noninterest income was $1,376,000
as compared to $1,253,000 for the same period in 1996, a increase
of 9.82%.  Service fee income on deposits was $5,000 less during
the first six months of 1997 because of decreased overdraft fee
income as compared to the same period last year. Trust income for
the six months ended June 30, 1997 increased by $53,000 as result
of increased fiduciary activities.  Gains on sales of loans were
$12,000 less during the six months ended June 30, 1997 than
during the same period last year as there was a lower volume of
loan sales during 1997.  Other operating income increased $92,000
during the first half of 1997 as the result of one-time gains on
sales of other real estate owned of $142,000.  


NONINTEREST EXPENSES

     Noninterest expenses decreased $253,000 or 9.62% to
$2,378,000 for the three months ended June 30, 1997.  There was a
decrease in salaries and employee benefits expenses of $107,000
for the second quarter of 1997 compared to the same period of
1996.  As employees left or retired their responsibilities were
closely examined by management and delegated to others if possi-
ble. 

     Occupancy expenses for the second quarter of 1997 decreased
$30,000 over last year.  During the second quarter of 1996 the
Bank had necessary repairs and maintenance expenditures that were
not repeated in 1997. 

     Data processing expenses declined $15,000 during the three
months ended June 30, 1997 as compared to the same period of
1996.  This decrease is the result of new processing agreements
for the automated teller machines and resulting economies. 

      FDIC deposit insurance decreased $32,000 during the three
months ended June 30, 1997 as compared to the same period of 1996
as the Thrift's FDIC insurance expense declined due to the FDIC
Savings Association Insurance Fund (SAIF) being fully funded as a
result of the one-time assessment which occurred during the third
quarter of 1996. 

                                      22

<PAGE>

              NORTHERN STATES FINANCIAL CORPORATION

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                    AND RESULTS OF OPERATIONS


     Other real estate owned expenses decreased $6,000 during the
quarter compared to last year as the other real estate portfolio
decreased to $2,672,000 at June 30, 1997 from $3,322,000 at June
30, 1996. 

     Miscellaneous other operating expenses decreased $63,000
compared to the same quarter last year.  Professional fees de-
creased $28,000 during the second quarter of 1997 as the level of
professional fees was lower in 1997 as compared to previous
years.  Printing expenses declined $18,000 as the loan and cus-
tomer service areas continued to be automated so that forms are
printed by laser printers when needed reducing the inventory of
forms.  Business development expenses were $16,000 less during
the second quarter of 1997 compared to last year as less adver-
tising was done.

     Noninterest expenses were $4,787,000 for the six months
ended June 30, 1997, a decrease of $263,000 or 5.21% from the
prior year.  Salaries and employee benefits were $194,000 lower
when compared to the same six months last year.  Management con-
tinued to examine the duties and responsibilities of employees
who left or retired and delegated the related tasks to others
whenever possible. 

     During the six months ended June 30, 1997 occupancy expenses
were unchanged from the first half of 1996 at $670,000.

     Data processing expense was $7,000 lower during the first
half of 1997 as compared to the same period last year in part
from new contracts pertaining to processing the automated teller
machines.

     FDIC deposit insurance decreased $64,000 during the six
months ended June 30, 1997 as compared to the same period of 1996
as the Thrift's FDIC insurance expense declined significantly due
to the FDIC Savingds Association Insurance Fund (SAIF) being
fully funded. 

     Other real estate owned expenses increased $14,000 during
the six months ended June 30, 1997 as compared to same period
last year as the result of expenditures pertaining to the selling
of properties in the Company's other real estate owned portfolio
which occurred early in 1997.

     Miscellaneous other operating expenses were $12,000 lower
compared to the same period last year as the result of reduced
professional fees. 

                                      23

<PAGE>

              NORTHERN STATES FINANCIAL CORPORATION

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                    AND RESULTS OF OPERATIONS


FEDERAL AND STATE INCOME TAXES

     For the three months ended June 30, 1997 and 1996, the
Company's provision for federal and state income taxes was
$735,000 and $543,000 which as a percentage of pretax earnings
were 31.07% and 28.10%.  The increased tax rate is attributed to
the increase in 1997 earnings that are not sheltered for federal
or state income tax purposes.  For the six months ended June 30,
1997 the Company's provision for federal and state taxes was
$1,437,000 or $460,000 greater than for the same period last
year.  


ACCOUNTING CHANGES, RECENT PRONOUNCEMENTS, AND REGULATORY ISSUES


SFAS 125

     Statement of Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities" revises the accounting for transfers of financial
assets such as loans and securities, and for distinguishing be-
tween sales and secured borrowings.  Portions of this statement
have become effective for some transactions in 1997 while other
transactions will be effected by this statement in 1998. The
effect on this statement on the June 30, 1997 financial state-
ments was not material.


SFAS 128

     Statement of Accounting Standards No. 128, "Earnings Per
Share" became effective on March 3, 1997.  This statement simpli-
fies the calculation of earnings per share by replacing primary
Earnings Per Share with basic Earnings Per Share.  The effect of
this statement on the June 30, 1997 financial statements was not
material.


SFAS 130

     The Financial Accounting Standards Board issued Statement of
Accounting Standards No. 130, "Reporting Comprehensive Income"
which will become effective for fiscal years beginning after
December 15, 1997.  The statement established standards for the
reporting and display of comprehensive income and its components
in a full set of general purpose financial statements.  The
statement does not address when transactions are recorded, how  

                                      24

<PAGE>

              NORTHERN STATES FINANCIAL CORPORATION

   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 
                    AND RESULTS OF OPERATIONS


they are measured in the financial statements, or whether they
should be included in net income or other comprehensive income. 
Management has not assessed the effect that this statement will
have on its financial statement presentation.


SFAS 131

     The Financial Accounting Standards Board issued Statement of
Accounting Standards No. 131, "Disclosure about Segments of an
Enterprise and Related Information" which will become effective
for fiscal years beginning after December 15, 1997.  The state-
ment established standards for the way public companies report
information about operating segments in annual financial state-
ments and requires that those enterprises report selected finan-
cial information about operating segments in interim financial
reports issued to shareholders.  It also establishes standards
for related disclosures about products and services, geographic
areas, and major customers.  Management has not assessed the
effect that this statement will have on its financial reprting
practices.














                                      25

<PAGE>

                            SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to signed on
its behalf by the undersigned hereunto duly authorized, on this
7th day of August, 1997.



NORTHERN STATES FINANCIAL CORPORATION
            (Registrant)





Date:    August 7, 1997           By:   /s/  Fred Abdula       
     -----------------------         --------------------------
                                       Fred Abdula
                                       Chairman of the Board of
                                       Directors and President






Date:    August 7, 1997           By:   /s/  Thomas M. Nemeth  
     -----------------------         --------------------------
                                       Thomas M. Nemeth
                                       Assistant Vice President