United
States
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C.   20549
 _________________________________________________________
 
 FORM
10-Q
 
 ý     QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)
 OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the
quarterly period ended March 31, 2008
 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
                (State
      of Incorporation)
              0-19300
                (Commission
                File
      Number)
              36-3449727
                (I.R.S.
      Employer
                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 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: ý             NO:
 ̈
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See definition of “large accelerated filer”, “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.  (Check one):
 Large
Accelerated Filer  ̈    Accelerated
Filer ý    Non-accelerated
Filer  ̈    Smaller
reporting company  ̈
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).      YES:   ̈         NO:  ý
 
 4,072,255
shares of common stock were outstanding
 at May 8,
2008
   Table of Contents
 
 NORTHERN STATES FINANCIAL
CORPORATION AND SUBSIDIARY
 FORM
10-Q
 For the Quarter Ended March
31, 2008
 INDEX
 
 PART I.   FINANCIAL
      INFORMATIONItem 1.  Financial Statements
              Page
      NumberReport of  Independent Registered Public
      Accounting Firm
              2Condensed Consolidated Financial Statements and
      Notes
              3Item 2.  Management’s Discussion and Analysis of
      Financial Condition and Results of Operations
              9Item 3. Quantitative and Qualitative Disclosures About
      Market Risk
              21Item 4. Controls and Procedures
              23PART II.   OTHER
    INFORMATIONItem 1.  Legal
Proceedings
              23Item 1A.  Risk Factors
              23Item 2.  Unregistered Sales of Equity
      Securities and Use of Proceeds
              24Item 3.  Defaults upon Senior
      Securities
              24Item 4.  Submission of Matters to a Vote
      of Security Holders
              24Item 5.  Other
Information
              24Item 6.  Exhibits
              25Signatures
              26EXHIBIT INDEX
              27
 
  1
 Table of Contents
  PART I.
FINANCIAL INFORMATION
 
 ITEM 1.
FINANCIAL STATEMENTS
 
 
 
 
 
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
 
 
 Board of
Directors and Stockholders
 Northern
States Financial Corporation
 Waukegan,
Illinois
 
 We have
reviewed the accompanying interim condensed consolidated balance sheet of
NORTHERN STATES FINANCIAL CORPORATION as of March 31, 2008, the condensed
consolidated statements of income for the three month periods ended March 31,
2008 and 2007 and the condensed statements of cash flows and stockholders equity
for the three month periods ended March 31, 2008 and 2007.  These
interim financial statements are the responsibility of the company's
management.
 
 We
conducted our review in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
 
 Based on
our review, we are not aware of any material modifications that should be made
to the accompanying interim condensed financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
 
  /s/Plante
      & Moran, PLLCChicago,
      IllinoisMay
      8, 2008
  
 2
 Table of Contents
  NORTHERN STATES FINANCIAL
CORPORATION


CONDENSEDCONSOLIDATED BALANCE SHEETS
 March 31,
2008 and December 31, 2007
 (In
thousands of dollars) (Unaudited)
  March
      31,
                  
                  
                  December
      31,Assets
                  
                  2008
                  
                  
                  2007Cash
      and due from banks
                  
                  $
                  12,106
                  
                  
                  $
                  14,273Interest
      bearing deposits in financial institutions -maturities less than
      90 days
                  
                  
                  119
                  
                  
                  
                  180Federal
      funds sold
                  
                  
                  2,512
                  
                  
                  
                  9,181Total
      cash and cash equivalents
                  
                  
                  14,737
                  
                  
                  
                  23,634Securities
      available for sale
                  
                  
                  139,536
                  
                  
                  
                  153,277Loans
      and leases
                  
                  
                  465,396
                  
                  
                  
                  435,734Less:
      Allowance for loan and lease losses
                  
                  
                  (4,829
                  )
                  
                  
                  (4,606
                  )Loans
      and leases, net
                  
                  
                  460,567
                  
                  
                  
                  431,128Federal
      Home Loan Bank stock
                  
                  
                  1,445
                  
                  
                  
                  1,445Office
      buildings and equipment, net
                  
                  
                  9,175
                  
                  
                  
                  9,198Other
      real estate owned
                  
                  
                  2,857
                  
                  
                  
                  2,857Goodwill
                  
                  
                  9,522
                  
                  
                  
                  9,522Core
      deposit intangible asset
                  
                  
                  1,274
                  
                  
                  
                  1,390Accrued
      interest receivable and other assets
                  
                  
                  5,721
                  
                  
                  
                  5,705Total
      assets
                  
                  $
                  644,834
                  
                  
                  $
                  638,156Liabilities
      and Stockholders' EquityLiabilitiesDepositsDemand
      - noninterest bearing
                  
                  $
                  58,671
                  
                  
                  $
                  60,015Interest
      bearing
                  
                  
                  430,339
                  
                  
                  
                  420,944Total
      deposits
                  
                  
                  489,010
                  
                  
                  
                  480,959Securities
      sold under repurchase agreements
                  
                  
                  47,013
                  
                  
                  
                  66,797Federal
      funds purchased
                  
                  
                  16,900
                  
                  
                  
                  0Subordinated
      debentures
                  
                  
                  10,000
                  
                  
                  
                  10,000Advances
      from borrowers for taxes and insurance
                  
                  
                  1,238
                  
                  
                  
                  1,066Accrued
      interest payable and other liabilities
                  
                  
                  6,854
                  
                  
                  
                  5,880Total
      liabilities
                  
                  
                  571,015
                  
                  
                  
                  564,702Stockholders'
      EquityCommon
      stock (Par value $40 per share, 6,500,000
      authorized,4,472,255
      shares issued at March 31, 2008 and December 31, 2007)
                  
                  
                  1,789
                  
                  
                  
                  1,789Additional
      paid-in capital
                  
                  
                  11,584
                  
                  
                  
                  11,584Retained
      earnings
                  
                  
                  68,184
                  
                  
                  
                  66,983Treasury
      stock, at cost (344,150 shares at March 31, 2008and 294,150 at
      December 31, 2007)
                  
                  
                  (8,195
                  )
                  
                  
                  (7,202
                  )Accumulated
      other comprehensive income
                  
                  
                  457
                  
                  
                  
                  300Total
      stockholders' equity
                  
                  
                  73,819
                  
                  
                  
                  73,454Total
      liabilities and stockholders' equity
                  
                  $
                  644,834
                  
                  
                  $
                  638,156
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
   3
 Table of Contents
  NORTHERN STATES FINANCIAL
CORPORATION
 CONDENSED CONSOLIDATED
STATEMENTS OF INCOME
 Three
months ended March 31, 2008 and 2007
 (In
thousands of dollars, except per share data) (Unaudited)
 
 Three
      months endedMarch
      31,
                
                
                March
      31,2008
                
                
                2007Interest
      incomeLoans
      (including fee income)
                
                $
                7,246
                
                
                $
                6,583SecuritiesTaxable
                
                
                1,888
                
                
                
                2,622Exempt
      from federal income tax
                
                
                115
                
                
                
                71Federal
      funds sold and other
                
                
                70
                
                
                
                90Total
      interest income
                
                
                9,319
                
                
                
                9,366Interest
      expenseTime
      deposits
                
                
                2,826
                
                
                
                3,118Other
      deposits
                
                
                479
                
                
                
                991Repurchase
      agreements and federal funds purchased
                
                
                410
                
                
                
                994Federal
      Home Loan Bank advances
                
                
                62
                
                
                
                113Subordinated
      debentures
                
                
                159
                
                
                
                166Total
      interest expense
                
                
                3,936
                
                
                
                5,382Net
      interest income
                
                
                5,383
                
                
                
                3,984Provision
      for loan and lease losses
                
                
                263
                
                
                
                (1,425
                )Net
      interest income after provision for loan and lease losses
                
                
                5,120
                
                
                
                5,409Noninterest
      incomeService
      fees on deposits
                
                
                634
                
                
                
                656Trust
      income
                
                
                213
                
                
                
                211Other
      operating income
                
                
                293
                
                
                
                299Total
      noninterest income
                
                
                1,140
                
                
                
                1,166Noninterest
      expenseSalaries
      and employee benefits
                
                
                2,216
                
                
                
                2,301Occupancy
      and equipment, net
                
                
                634
                
                
                
                598Data
      processing
                
                
                439
                
                
                
                379Legal
                
                
                84
                
                
                
                139Audit
      and other professional
                
                
                352
                
                
                
                297Amortization
      of core deposit intangible asset
                
                
                116
                
                
                
                116Other
      operating expenses
                
                
                589
                
                
                
                490Total
      noninterest expense
                
                
                4,430
                
                
                
                4,320Income
      before income taxes
                
                
                1,830
                
                
                
                2,255Income
      tax expense
                
                
                629
                
                
                
                726Net
      income
                
                $
                1,201
                
                
                $
                1,529Earnings
      per share
                
                $
                0.29
                
                
                $
                0.36Comprehensive
      income (loss)
                
                $
                1,358
                
                
                $
                2,315
  The
accompanying notes are an integral part of these condensed consolidated
financial statements.
   4
 Table of Contents
  NORTHERN STATES FINANCIAL
CORPORATION
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Three
months ended March 31, 2008 and 2007
 (In
thousands of dollars) (Unaudited)
 
 
 Three
      months endedMarch
      31,
                
                
                March
      31,2008
                
                
                2007Cash
      flows from operating activitiesNet
      income
                
                $
                1,201
                
                
                $
                1,529Adjustments
      to reconcile net income to net cash from operating
    activities:Depreciation
                
                
                125
                
                
                
                145Amortization
      of other intangible assets
                
                
                116
                
                
                
                116Provision
      for loan and lease losses
                
                
                263
                
                
                
                0Reversal
      of provision for loan and lease losses
                
                
                0
                
                
                
                (1,425
                )Loss
      on sale of other real estate owned
                
                
                0
                
                
                
                8Net
      change in accrued interest receivable and other assets
                
                
                25
                
                
                
                465Net
      change in accrued interest payable and other liabilities
                
                
                (19
                )
                
                
                (98
                )Net
      cash from operating activities
                
                
                1,711
                
                
                
                740Cash
      flows from investing activitiesProceeds
      from maturities and calls of securities available for sale
                
                
                59,526
                
                
                
                53,753Purchases
      of securities available for sale
                
                
                (45,528
                )
                
                
                (29,954
                )Change
      in loans made to customers
                
                
                (29,843
                )
                
                
                351Property
      and equipment expenditures
                
                
                (102
                )
                
                
                (152
                )Proceeds
      from sales of other real estate owned
                
                
                0
                
                
                
                118Net
      cash from investing activities
                
                
                (15,947
                )
                
                
                24,116Cash
      flows from financing activitiesNet
      increase (decrease) in:Deposits
                
                
                8,051
                
                
                
                (14,971
                )Securities
      sold under repurchase agreements and federal funds
    purchased
                
                
                (2,884
                )
                
                
                (5,663
                )Advances
      from borrowers for taxes and insurance
                
                
                172
                
                
                
                361Federal
      Home Loan Bank advances
                
                
                25,000
                
                
                
                10,000Repayment
      of Federal Home Loan Bank advances
                
                
                (25,000
                )
                
                
                (15,000
                )Purchases
      of treasury stock
                
                
                0
                
                
                
                (650
                )Net
      cash from financing activities
                
                
                5,339
                
                
                
                (25,923
                )Net
      change in cash and cash equivalents
                
                
                (8,897
                )
                
                
                (1,067
                )Cash
      and cash equivalents at beginning of period
                
                
                23,634
                
                
                
                29,986Cash
      and cash equivalents at end of period
                
                $
                14,737
                
                
                $
                28,919
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
   5
 Table of Contents
  NORTHERN STATES FINANCIAL
CORPORATION
 CONDENSED CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY
 Three
months ended March 31, 2008 and 2007
 (In
thousands of dollars, except for per share data) (Unaudited)
 
 AccumulatedAdditional
                
                
                
                
                
                
                
                
                Other
                
                
                TotalCommon
                
                
                Paid-In
                
                
                Retained
                
                
                Treasury
                
                
                Comprehensive
                
                
                Stockholders'Stock
                
                
                Capital
                
                
                Earnings
                
                
                Stock,
      at Cost
                
                
                Income
      (Loss)
                
                
                EquityBalance,
      December 31, 2006
                
                $
                1,789
                
                
                $
                11,584
                
                
                $
                65,603
                
                
                $
                (5,961
                )
                
                $
                (1,552
                )
                
                $
                71,463Net
      income
                
                
                
                
                
                
                
                
                
                
                1,529
                
                
                
                
                
                
                
                
                
                
                
                1,529Purchase
      of 30,000 shares of common stock as treasury stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (650
                )
                
                
                
                
                
                
                (650
                )Unrealized
      gain on securities available for sale, net of deferred tax
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                786
                
                
                
                786Balance,
      March 31, 2007
                
                $
                1,789
                
                
                $
                11,584
                
                
                $
                67,132
                
                
                $
                (6,611
                )
                
                $
                (766
                )
                
                $
                73,128Balance,
      December 31, 2007
                
                $
                1,789
                
                
                $
                11,584
                
                
                $
                66,983
                
                
                $
                (7,202
                )
                
                $
                300
                
                
                $
                73,454Net
      income
                
                
                
                
                
                
                
                
                
                
                1,201
                
                
                
                
                
                
                
                
                
                
                
                1,201Purchase
      of 50,000 shares of common stock as treasury stock
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                (993
                )
                
                
                
                
                
                
                (993
                )Unrealized
      gain on securities available for sale, net of deferred tax
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                157
                
                
                
                157Balance,
      March 31, 2008
                
                $
                1,789
                
                
                $
                11,584
                
                
                $
                68,184
                
                
                $
                (8,195
                )
                
                $
                457
                
                
                $
                73,819
 
 The
accompanying notes are an integral part of these condensed consolidated
financial statements.
   6
 Table of Contents




NORTHERN STATES FINANCIAL
CORPORATION
 
 NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 
 March 31,
2008
 
 (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 accounting principles generally accepted in the United States of
America. The interim financial statements do not purport to contain all the
necessary financial disclosures covered by accounting principles generally
accepted in the United States of America that might otherwise be necessary for
complete financial statements.
 
 To
prepare financial statements in conformity with accounting principles generally
accepted in the United States of America, management makes estimates and
assumptions based on available information.  These estimates and
assumptions affect the amounts reported in the financial statements and the
disclosures provided, and future results could differ.  The allowance
for loan and lease losses and status of contingencies are particularly subject
to change.
 
 The
interim condensed 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, 2007 and 2006.  The results
of operations for the three month period ended March 31, 2008, are not
necessarily indicative of the results to be expected for the full
year.
 
 Net
income was utilized to calculate earnings per share for all periods
presented.   The Company had no common stock equivalents during
the first three months of 2008 and the entire year of 2007.  The
average outstanding common shares used for earnings per share
follows:
   Three
      months endedMarch
      31, 2008
                
                
                March
      31, 2007Average
      outstanding common shares
                
                
                4,175,907
                
                
                
                4,211,105
   On April
17, 2002, the Company announced that its Board of Directors had approved a stock
repurchase program that allows the Company to purchase up to 200,000 shares of
Northern States Financial Corporation stock either in open market or private
transactions.   On February 19, 2003, the Company announced that
its Board of Directors had approved an additional repurchase program to purchase
200,000 additional shares of its stock.  During the three months ended
March 31, 2008, 50,000 shares of stock were repurchased for
$993,000.  At March 31, 2008, the Company had a total of 344,150
shares of treasury stock that it repurchased under these
programs.  Treasury stock is carried at cost.  Subsequent to
March 31, 2008, the Company repurchased 55,850 shares of treasury stock for
$1,085,000, completing the stock repurchase programs.
  
 7
 Table of Contents
  NORTHERN STATES FINANCIAL
CORPORATION
 
 NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
 
 March 31,
2008
 
 (Unaudited)
  Information
related to common stock was as follows:
 
 March
31,
                  
                  
                  December
    31,2008
                  
                  
                  2007Par
      value per share
                  
                  $
                  0.40
                  
                  
                  $
                  0.40Authorized
      shares
                  
                  
                  6,500,000
                  
                  
                  
                  6,500,000Issued
      shares
                  
                  
                  4,472,255
                  
                  
                  
                  4,472,255Treasury
      shares
                  
                  
                  344,150
                  
                  
                  
                  294,150Outstanding
      shares
                  
                  
                  4,128,105
                  
                  
                  
                  4,178,105
 Note 2 –
Subordinated Debentures
 
 During
September 2005, the Company issued $10 million of trust preferred securities
through Northern States Statutory Trust I, a wholly-owned grantor
trust.  The Company issued $10 million of subordinated debentures to
Northern States Statutory Trust I, which in turn issued $10 million of trust
preferred securities.  The subordinated debentures mature in September
2035.  From December 2005 until September 15, 2010, the subordinated
debentures bear interest at a rate equal to the sum of the product of 50% times
the 3-month LIBOR plus 1.80%, plus the product of 50% times 6.186%, and
thereafter at a rate equal to the 3-month LIBOR plus 1.80%.  The rate
on the subordinated debentures was 5.393% at March 31, 2008 and is the effective
rate from March 17, 2008 through June 15, 2008.  For the three months
ended March 31, 2008, interest expense on the subordinated debentures was
$159,000.  For the three months ended March 31, 2007, interest expense
on the subordinated debentures was $166,000.
 
 The
Company has guaranteed the payment of distributions and payments upon
liquidation or redemption of the trust preferred securities, in each case to the
extent of funds held by the Trust. The Company and the Trust believe that, taken
together, the obligations of the Company under the guarantee, the subordinated
debentures, and other related agreements provide, in the aggregate, a full,
irrevocable and unconditional guarantee, on a subordinated basis, of all of the
obligations of the Trust under the trust preferred securities. Subject to
certain limitations, the Company has the right to defer the payment of interest
on the subordinated debentures at any time, or from time to time, for a period
not to exceed 20 consecutive quarters. The trust preferred securities are
subject to mandatory redemption, in whole or in part, upon repayment of the
subordinated debentures at maturity or their earlier redemption. The
subordinated debentures are callable at par beginning in 2010, and earlier at
the discretion of the Company if certain conditions are met, and, in any event,
only after the Company has obtained Federal Reserve approval, if then required
under applicable guidelines or regulations.
 
 
 8
 Table of Contents
 
 NORTHERN
STATES FINANCIAL CORPORATION
   ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
 AND RESULTS OF
OPERATIONS
 
 
 The following discussion focuses on the
consolidated financial condition of Northern States Financial Corporation (the
“Company”) at March 31, 2008 and the consolidated results of operations for the
three month period ended March 31, 2008, compared with the same period of
2007.  The purpose of this discussion is to provide a better
understanding of the condensed consolidated financial statements of Northern
States Financial Corporation and the operations of its wholly owned subsidiary,
NorStates Bank (the “Bank”) and the Bank’s wholly owned subsidiary, Northern
States Community Development Corporation (“NSCDC”). This discussion should be
read in conjunction with the interim condensed consolidated unaudited financial
statements and notes thereto included herein.
 
 Statements
contained in this report that are not historical facts may constitute
forward-looking statements (within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended), which involve significant risks and
uncertainties.  The Company intends such forward-looking statements to
be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Litigation Reform Act of 1995, and is
including this statement for purposes of invoking these safe harbor
provisions.  Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies and expectations of the
Company, are generally identifiable by the use of the words "believe," "expect,"
"intend," "anticipate," "estimate," "project," "plan," or similar
expressions.  The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain and actual results
may differ from those predicted.  The Company undertakes no obligation
to update these forward-looking statements in the future.  The Company
cautions readers of this report that a number of important factors could cause
the Company’s actual results subsequent to March 31, 2008 to differ materially
from those expressed in forward-looking statements.  Factors that
could cause actual results to differ from those predicted and could have a
material adverse effect on the operations of the Company and its subsidiaries
include, but are not limited to, the potential for further deterioration in the
credit quality of the Company’s loan and lease portfolios, uncertainty regarding
the Company’s ability to ultimately recover on loans currently on nonaccrual
status, unanticipated changes in interest rates, general economic conditions,
increasing regulatory compliance burdens or potential legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the Company’s loan or investment portfolios, deposit flows, competition,
demand for loan products and financial services in the Company’s market area,
and changes in accounting principles, policies and guidelines.  These
risks and uncertainties should be considered in evaluating forward-looking
statements.
 
 
 OVERVIEW
 
 Total
assets at March 31, 2008 were $644.8 million, an increase of $6.7 million or 1.0
percent from total assets of $638.1 million at December 31,
2007.  Loans totaled $465.4 million at March 31, 2008, increasing
$29.7 million, or 6.8 percent, from loans of $435.7 million at December 31,
2007.  The increase in loans was primarily due to the marketing
efforts of the Company’s loan officers and the higher borrowing demands of its
customers.  Deposits increased $8.1 million, or 1.7 percent, compared
to December 31, 2007.  Securities sold under repurchase agreements
declined $19.8 million from December 31, 2007, which the Company replaced with
borrowings of federal funds purchased that totaled $16.9 million at March 31,
2008.
 
 Earnings
for the first quarter of 2008 were $1,201,000, or $.29 per share, compared with
$1,529,000, or $.36 per share, for the like quarter of 2007. The comparable
period of 2007 benefited from an addition to net income from a reduction of $1.4
million to the Company’s allowance for loan and lease losses and the
corresponding reduction of $1.4 million to the provision for loan loss
expense.  This reduction caused after-tax income to increase by
$872,000, or $.21 per share, raising the reported net income for the first
quarter of 2007 to $1,529,000, or $.36 per share.
   9
 Table of Contents
  NORTHERN
STATES FINANCIAL CORPORATION
 The
Company’s net interest income, the difference from interest earned on loans and
investments and interest paid on deposits and borrowings, increased 35 percent
to $5.4 million for the first three months of 2008, an increase of $1.4 million
as compared with $4.0 million for the same quarter of 2007.  The
growth in net interest income was attributable to increased interest income from
loan growth while the Company significantly decreased interest expense by
lowering rates paid on deposits and borrowings.  The net interest
spread increased to 3.11 percent during the first quarter of 2008 as compared
with 1.90 percent during the same quarter of 2007.
 
 CRITICAL ACCOUNTING
POLICIES
 
 Certain
critical accounting policies involve estimates and assumptions by
management.  To prepare financial statements in conformity with
accounting principles generally accepted in the United States of America,
management makes estimates and assumptions based on available
information.  These estimates and assumptions affect the amounts
reported in the financial statements and the disclosures provided, and future
results could differ. The allowance for loan and lease losses is a critical
accounting policy for the Company because management must make estimates of
losses and these estimates are subject to change.
 
 The
allowance for loan and lease losses is a valuation allowance for probable
incurred credit losses, increased by the provision for loan and lease losses and
decreased by charge-offs less recoveries.  Management estimates the
allowance balance required using past loan and lease loss experience, the
nature  and volume of the portfolio, information about specific
borrower situations, estimated collateral values, economic conditions and other
factors.  Allocations of the allowance may be made for specific loans
and leases, but the entire allowance is available for any loan or lease that,
based on management’s judgment, should be charged-off.
 
 Management analyzes the adequacy of the
allowance for loan and lease losses at least quarterly.  Loans and
leases judged to be impaired, with probable incurred loss exposure, that are no
longer accruing interest, and historical net loss percentages are reviewed in
the analysis of the allowance for loan and lease losses.  Factors
consid­ered in assessing the adequacy of the allowance include: changes in
the type and volume of the loan and lease portfolio; review of the larger
credits within the Bank; historical loss experi­ence; current economic
trends and conditions; review of the present value of expected cash flows or
fair value of collateral on impaired loans and leases; portfolio growth; and
other factors management deems appropriate.  Based on management’s
analysis, the allowance for loan and lease losses at March 31, 2008 is adequate
to cover probable incurred credit losses.
 
 One of
the components of the allowance for loan losses is historical loss
experience.  Different loan classifications within the portfolio have
different loss experience ratios.  For example, loans secured by real
estate generally have a better loss experience than loans secured by other
assets.  Changes in the classification between periods can impact the
allocation for historical losses.  At March 31, 2008 approximately 86
percent of the Bank’s loans were secured by real estate as compared with 85
percent at December 31, 2007.
 
 Management
specifically analyzes its nonperforming loans for probable
losses.  The change in the volume of nonperforming loans may
significantly impact the amount of estimated losses specifically allocated to
these loans depending on the adequacy of the loan collateral and the borrowers’
ability to repay the loans.  As specific allocations are done on a
loan-by-loan basis, the amount of the specific allocation is more likely subject
to fluctuation than an allocation for a pool of loans based on historical loss
trends. The amount of the allocations on nonperforming loans may fluctuate in
future periods due to changes in conditions of underlying collateral and changes
in the borrowers’ ability to repay.
 
 
 10
 Table of Contents
  NORTHERN
STATES FINANCIAL CORPORATION
 Goodwill
results from business acquisitions and represents the excess of the purchase
price over the fair value of acquired tangible assets and liabilities and
identifiable intangible assets.  Goodwill is assessed for impairment
annually and more often if warranted by circumstances.  Any such
impairment will be recognized in the period identified.
 
 Other intangible assets consist of core
deposit and acquired customer relationship intangible assets arising from whole
bank and branch acquisitions, which is periodically evaluated for
impairment.  They are initially measured at fair value and then are
amortized on the straight-line method over their estimated useful life of seven
years.
 
 FINANCIAL
CONDITION
 
 The
Company’s federal funds sold at March 31, 2008 decreased $6.6 million to $2.5
million compared with $9.1 million at December 31, 2007.  The
Company’s federal funds sold position declined as this source of liquidity was
used to assist in the funding of the loan growth that occurred during the first
quarter of 2008. Federal funds sold are excess funds above what is necessary to
maintain at the Federal Reserve that the Company lends/sells to other financial
institutions on an overnight basis.  Rather than lend/sell these
excess funds, the Company may use the funds for its liquidity
needs.
 
 The
Company’s securities available for sale declined $13.8 million to $139.5 million
at March 31, 2008 from $153.3 million at year-end 2007.  The liquidity
provided by the maturities and calls to the Company’s securities available for
sale during the first quarter of 2008 was used to fund loan growth.
 
 Loans and
leases, the largest earning asset of the Company, totaled $465.4 million at
March 31, 2008, increasing $29.7 million from $435.7 million at December 31,
2007.  The increase mainly came from increases in loans to the hotel
industry secured by commercial real estate.   The Company’s loans
to the hotel industry increased $29.6 million during the first quarter of 2008
to $49.1 million at March 31, 2008 from $19.5 million at December 31,
2007.  Approximately 86 percent of the Bank’s loan portfolio at March
31, 2008 was secured by real estate.  Loan commitments have decreased
$8.8 million to $127.9 million at March 31, 2008 compared with $136.7 million at
December 31, 2007 as loans were funded during the first quarter of
2008.  Letters of credit also decreased during the quarter to $9.6
million from $10.7 million at year-end.  At March 31, 2008, loans to
related parties totaled $1.2 million and loan commitments and letters of credit
issued to related parties were $1.9 million.  Loans, loan commitments
and letters of credit to related parties are made on the same terms and
conditions that are available to the public.
 
 Deposits
increased $8.1 million, or 1.7 percent, from year-end 2007.  The
increase in deposits came mainly from growth in time deposits, which increased
$8.6 million from December 31, 2007.  A majority of the deposit growth
in time deposits came from increases to brokered time deposits, which increased
$4.9 million to $48.7 million at March 31, 2008 from $43.8 million at December
31, 2007.  Time deposit growth was also assisted by a CD promotion
where the Company offered a rate of 5.00 percent for a 5-month term during
January 2008.
 
 Securities
sold under repurchase agreements decreased by $19.8 million to $47.0 million at
March 31, 2008 from $66.8 million at December 31, 2007.  The decline
during the quarter ended March 31, 2008 was due to one customer who closed their
$20.0 million repurchase agreement relationship. As the repurchase agreements
decreased the Company replaced the funds with short-term borrowings of federal
funds purchased that totaled $16.9 million at March 31, 2008.
 
 As previously disclosed, included in
other liabilities at March 31, 2008 is $304,000 related to estimated
environmental clean-up expenses of a parcel of other real estate sold in
previous years.  The Company intends to seek reimbursement of these
expenses from the State of Illinois that has a fund for this type of
cleanup.  However, there can be no assurance that the Company will be
successful in obtaining any such reimbursement.
 
 11
 Table of Contents
 NORTHERN
STATES FINANCIAL CORPORATION
 FAIR VALUE
MEASUREMENTS
  The following tables present
information about the Company’s securities that were measured at fair value on a
recurring basis at March 31, 2008, and the valuation techniques used by the
Company to determine the fair values.
  In
general, fair values determined by Level 1 inputs use quoted prices in active
markets for identical securities that the Company has the ability to
access.
  Fair
values determined by Level 2 inputs use other inputs that are observable, either
directly or indirectly.  These Level 2 inputs include quoted prices
for similar securities in active markets, and other inputs such as interest
rates and yield curves that are observable at commonly quoted
intervals.
  Level 3
inputs are unobservable inputs, including inputs that are available in
situations where there is little, if any, market activity for the related
securities.
  In
instances where inputs used to measure fair value fall into different levels in
the above fair value hierarchy, fair value measurements in their entirety are
categorized based on the lowest level input that is significant to the
valuation. The Company’s assessment of the significance of particular inputs to
these fair value measurements requires judgment and considers factors specific
to each security.
  On an
annual basis the Company validates the measurement of the fair values of its
securities by sending a listing of its securities to an independent securities
valuation firm.  This independent securities valuation firm determines
the fair values of the Company’s securities portfolio that is then compared to
the fair value using the methods outlined.  When this validation was
last done at September 30, 2007, the difference between the fair value reported
and the fair value determined by the independent securities valuation firm was
considered immaterial.
  Disclosures
concerning securities measured at fair value are as follows:
   TABLE
1
 
 NORTHERN
STATE FINANCIAL CORPORATION
 ASSETS
MEASURED AT FAIR VALUE ON A RECURRING BASIS
 As of
March 31, 2008
 ($
000s)
 Fair
      Value Measurements at Reporting Date UsingQuoted
      Pricesin
      Active
                    
                    SignificantMarkets
      for
                    
                    Other
                    
                    SignificantIdentical
                    
                    Observable
                    
                    UnobservableAssets
                    
                    Inputs
                    
                    InputsDescription
                    
                    03/31/08
                    
                    (Level
      1)
                    
                    (Level
      2)
                    
                    (Level
      3)Securities
      available for sale
                    
                    $    139,536
                    
                    $                -
                    
                    $    139,536
                    
                    $                  -
  The
Company also has assets that under certain conditions are subject to measurement
at fair value on a non-recurring basis. These assets are held to maturity loans
that are considered impaired per Financial Accounting Standard
114.  The Company has estimated the fair values of the impaired loans
using Level 3 inputs, specifically discounted cash flow projections. At March
31, 2008, the Company recognized a non-cash impairment charge of $530,000 that
represents the amount of the allowance for loan and lease losses that is
allocated to these impaired loans to adjust these assets to their estimated fair
values.
 
 
 12
 Table of Contents
  NORTHERN
STATES FINANCIAL CORPORATION
   TABLE
2
 
 NORTHERN
STATE FINANCIAL CORPORATION
 ASSETS
MEASURED AT FAIR VALUE ON A NON-RECURRING BASIS
 As of
March 31, 2008
 ($
000s)
 Fair
      Value Measurements at Reporting Date UsingQuoted
      Pricesin
      Active
                    
                    SignificantMarkets
      for
                    
                    Other
                    
                    SignificantIdentical
                    
                    Observable
                    
                    Unobservable
                    
                    Total
      LossesAssets
                    
                    Inputs
                    
                    Inputs
                    
                    for
      the periodDescription
                    03/31/08
                    
                    (Level
      1)
                    
                    (Level
      2)
                    
                    (Level
      3)
                    
                    ended
      03/31/08Impaired
      loans accounted
                        for
      under FAS 114
                    $        6,728
                    
                    $                -
                    
                    $                -
                    
                    $        6,728
                    
                    $            (530)
 Impaired
loans that are accounted for under FAS 114 are categorized as Level 3 for fair
value measurement.  The Company estimates the fair value of the loans
are based on the present value of expected future cash flows using management’s
best estimate of key assumptions.  These assumptions include future
payment ability, timing of payment streams, and estimated realizable values of
available collateral (typically based on outside appraisals).
 
 Other
assets, including goodwill, intangible assets and other assets acquired in
business combinations, are also subject to periodic impairment assessments under
other accounting principles generally accepted in the United States of America.
These assets are not considered financial instruments.  Effective
February 12, 2008, the FASB issued a staff position, FSP FAS 157-2, which
delayed the applicability of FAS 157 to non-financial
instruments.  Accordingly, these assets have been omitted from the
above disclosures.
 
 
 CAPITAL
 
 Total
stockholders’ equity increased $365,000 to $73.8 million during the three months
ended March 31, 2008, primarily as a result of net income of $1,201,000 and from
a $157,000 adjustment for the unrealized gain on securities available for sale,
net of deferred tax.  The increase in stockholders’ equity during the
quarter was offset by the purchase of 50,000 shares of treasury stock for
$993,000.  The book value of the Company’s common stock at March 31,
2008 was $17.88 per share.
 
 On a
consolidated basis, the Company’s Tier 1 to total assets ratio and total capital
to assets ratio, on a risk adjusted basis, were 11.48 percent and 14.18 percent,
respectively, as of March 31, 2008 and exceed the regulatory minimum for
capital adequacy purposes.  Management believes that the capital
position of both the Company and the Bank are appropriate for current projected
needs.
 
 13
 Table of Contents
 
 NORTHERN
STATES FINANCIAL CORPORATION
  LIQUIDITY
 
 The
Company’s liquidity is measured by the ability to raise funds through deposits,
borrowed funds, capital or cash flow from the repayment or maturities of loans
and securities and net profits.   Liquidity is primarily managed through
the growth of deposits and by liquid assets such as cash and due from banks less
any reserve requirements, securities available for sale less any pledged
securities and federal funds sold.  Asset and liability management is the
process of managing the balance sheet to achieve a mix of earning assets and
liabilities in such a way that achieves an interest rate risk profile acceptable
to management and assists in achieving a desired level of profitability.
 An important part of the overall asset and liability management process is
providing adequate liquidity.  Liquid assets at the Bank consist of
cash and equivalents less any Federal Reserve Bank deposit requirements plus
unpledged securities available for sale.  The Bank’s liquid assets
totaled $59.5 million at March 31, 2008 as compared with $46.5 million at
December 31, 2007.
 
 Management
reviews the liquidity ratio and as well as its sources and uses of funds
weekly.  The liquidity ratio is the net liquid assets divided by net
deposits and short-term liabilities.  At March 31, 2008, this ratio at
the Bank was 12.7 percent and was within management’s internal policy
guidelines.
 
 Liquidity
management involves the Company’s ability to meet the cash flow requirements of
customers.  The Company needs to have sufficient cash flow to meet
borrowers needs to fund loans or the requirements of depositors wanting to
withdraw funds.  The statements of cash flows shows that for the three
months ended March 31, 2008 cash and cash equivalents decreased by $8.9 million
to $14.7 million.
 
 Federal
funds sold, interest bearing deposits in banks and available for sale
securities, particularly those of shorter maturities, are principal sources of
liquidity.  Federal funds sold at March 31, 2008 were $2.5 million as
compared with $9.2 million at December 31, 2007.  The Company
classifies all of its securities as available for sale, which increases the
Company's flexibility in that the Company can use its unpledged securities to
meet liquidity requirements by increasing its repurchase agreement
balances.  Securities available for sale totaled $139.5 million at
March 31, 2008 of which $89.8 million were pledged to secure public deposits and
repurchase agreements as compared with pledged securities of  $125.3
million at December 31, 2007.
 
 The
Company can sell unpledged securities for liquidity purposes prior to their
maturity date.  At March 31, 2008, the Company has $32.6 million in
securities issued by U.S. government-sponsored entities that will either mature
or are expected to be called during the remaining nine months of
2008.  It is expected that liquidity will be made available in this
way during the balance of 2008.
 
 During
the first three months of 2008, the Company had incoming cash flows from
maturities and calls of securities available for sale of $59.5 million while it
had cash outflows for purchases of securities of $45.5 million.  These
securities activities during the first quarter of 2008 provided liquidity of
$14.0 million, which was used to help meet the cash flows for funding loans of
$29.8 million.
 
 An
important source of liquidity to the Company is deposits.  The Company
may use brokered deposits as a source of liquidity.  During the
quarter ended March 31, 2008 the addition of $4.9 million in brokered time
deposits assisted with the Company’s liquidity needs.  The increased
brokered time deposits and time deposit growth from CD promotions together
contributed to incoming cash flows of $8.1 million from deposits during the
three months ended March 31, 2008.
 
 Another important source of liquidity
to the Company is borrowings.  During the first quarter of 2008,
borrowings through repurchase agreements decreased $19.8 million as one
repurchase agreement relationship of $20.0 million was closed.  The
Company drew on its line of credit with the Federal Home Loan Bank when this
occurred in the amount of $25.0 million and later paid off this borrowing during
the quarter.  At March 31, 2008, the Company had a line of credit
available at the Federal Home Loan Bank of
 
 14
 Table of Contents
  NORTHERN
STATES FINANCIAL CORPORATION
  $28.4 million and subsequent to
March 31, 2008 drew $10.0 million on this line.  Subsequent to March
31, 2008, the Company also increased its ownership of Federal Home Loan Bank
stock by $312,000 to $1,757,000.  At March 31, 2008, the Company had
overnight borrowings of federal funds purchased of $16.9 million from
independent banks.  Additional funds available from these independent
banks at March 31, 2008 totaled $18.1 million and help ensure the Company’s
ability to meet any funding needs, including any unexpected strain on
liquidity.
   RESULTS OF
OPERATIONS
 
 NET
INCOME
 
 Consolidated
net income for the quarter ended March 31, 2008 was $1,201,000 compared with
$1,529,000, for the same quarter of 2007.  Net income in the first
quarter of 2007 benefited as a result of a reduction of $1.4 million to the
Company’s allowance for loan and lease losses and the corresponding $1.4 million
reduction to the provision for loan loss expense, which caused after-tax income
to increase by $872,000.  For the three months ended March 31, 2008,
the annualized return on average assets was .75% as compared with .89% for the
same time period the previous year.
 
 NET
INTEREST INCOME
 
 Net
interest income, the difference between interest income on earning assets and
interest expense on interest bearing liabilities, increased 35 percent to $5.4
million for the first three months of 2008, an increase of $1.4 million as
compared with $4.0 million for the same quarter of 2007.  The growth
to net interest income was attributable to increased interest income from loan
growth while the Company significantly decreased interest expense by lowering
rates paid on deposits and borrowings.
 
 Interest
income from earning assets during the first quarter of 2008 was substantially
the same as it was during the same quarter last year while average assets during
first quarter of 2008 declined as compared to the same period last year. Table 3
shows that interest income on a fully tax equivalent basis was $9.4 million for
the first quarter of 2008, only $20,000 less as compared with the same quarter
of 2007.  Average interest earning assets were $606.0 million during
the first quarter of 2008, $44.4 million less as compared with $650.4 million
during the first quarter of 2007.  One major reason that interest
income remained substantially the same during the first quarter of 2008 compared
with the same quarter last year was due to the increased volume of
loans.  Average loans were $72.6 million greater in the first quarter
of 2008 than for the same quarter of 2007 and corresponding loan interest income
was $668,000 greater during the first quarter of 2008 than for the same quarter
last year.  Table 3 shows that yields earned on average interest
earning assets increased 45 basis points to 6.22 percent during the first
quarter of 2008 as compared with 5.77 percent for the like quarter of
2007.  This growth in interest earning asset yields occurred as the
yields rose on taxable securities during the first quarter of 2008 as compared
with the same quarter last year as  many lower yielding taxable
securities matured during 2007.
 
 Interest
expense declined $1.4 million in the first quarter of 2008 as compared with the
same quarter of 2007.  Interest expense declined as the volume of
average interest bearing liabilities decreased during the first three months of
2008 by $49.8 million to $506.0 million from $555.8 million during the same
period of 2007.  During 2007 the Company began to lower its interest
expense and began offering lower rates on its deposit products even though it
meant that deposit balances would decline.  This strategy has been
realized as the rates paid on interest bearing liabilities declined 76 basis
points to 3.11 percent during the quarter ended March 31, 2008 as compared with
the same quarter of 2007.
 
 The net
interest rate spread increased 121 basis points to 3.11 percent for the first
quarter of 2008 compared to 1.90 percent for the same quarter of
2007.  The increased net interest spread is indicative of the growth
in the yields earned on interest earning assets as well as decreases to rates
paid on interest bearing liabilities.  The net yield on earning assets
ratio increased 114 basis points to 3.61 percent for the first quarter 2008 as
compared with 2.47 percent for the same quarter 2007.
   15
 Table of Contents
  NORTHERN
STATES FINANCIAL CORPORATION
   TABLE
3
 
 NORTHERN
STATES FINANCIAL CORPORATION
 ANALYSIS
OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
 For the
Three Months Ended  March 31, 2008 and 2007 - Rates are
Annualized
 ($
000s)
  2008
                    
                    
                    2007Average
                    
                    
                    
                    
                    
                    
                    
                    
                    AverageBalance
                    
                    
                    Interest
                    
                    
                    Rate
                    
                    
                    Balance
                    
                    
                    Interest
                    
                    
                    RateAssetsLoans
      (1)(2)(3)
                    
                    $
                    446,247
                    
                    
                    $
                    7,268
                    
                    
                    
                    6.51
                    %
                    
                    $
                    373,673
                    
                    
                    $
                    6,600
                    
                    
                    
                    7.07
                    %Taxable
      securities (4)
                    
                    
                    139,266
                    
                    
                    
                    1,888
                    
                    
                    
                    5.47
                    %
                    
                    
                    262,386
                    
                    
                    
                    2,622
                    
                    
                    
                    3.96
                    %Tax
      advantaged securities (2) (4)
                    
                    
                    11,239
                    
                    
                    
                    174
                    
                    
                    
                    6.20
                    %
                    
                    
                    7,768
                    
                    
                    
                    108
                    
                    
                    
                    5.56
                    %Federal
      funds sold
                    
                    
                    9,227
                    
                    
                    
                    70
                    
                    
                    
                    3.03
                    %
                    
                    
                    6,569
                    
                    
                    
                    90
                    
                    
                    
                    5.48
                    %Interest
      earning assets
                    
                    
                    605,979
                    
                    
                    
                    9,400
                    
                    
                    
                    6.22
                    %
                    
                    
                    650,396
                    
                    
                    
                    9,420
                    
                    
                    
                    5.77
                    %Noninterest
      earning assets
                    
                    
                    36,648
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    39,452Average
      assets
                    
                    $
                    642,627
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    689,848Liabilities
      and stockholders' equityNOW
      deposits
                    
                    $
                    43,564
                    
                    
                    $
                    39
                    
                    
                    
                    0.36
                    %
                    
                    $
                    49,565
                    
                    
                    $
                    97
                    
                    
                    
                    0.78
                    %Money
      market deposits
                    
                    
                    70,172
                    
                    
                    
                    350
                    
                    
                    
                    2.00
                    %
                    
                    
                    77,555
                    
                    
                    
                    769
                    
                    
                    
                    3.97
                    %Savings
      deposits
                    
                    
                    61,531
                    
                    
                    
                    90
                    
                    
                    
                    0.59
                    %
                    
                    
                    67,642
                    
                    
                    
                    126
                    
                    
                    
                    0.75
                    %Time
      deposits
                    
                    
                    251,545
                    
                    
                    
                    2,826
                    
                    
                    
                    4.49
                    %
                    
                    
                    260,562
                    
                    
                    
                    3,118
                    
                    
                    
                    4.79
                    %Other
      borrowings
                    
                    
                    79,230
                    
                    
                    
                    631
                    
                    
                    
                    3.19
                    %
                    
                    
                    100,530
                    
                    
                    
                    1,272
                    
                    
                    
                    5.06
                    %Interest
      bearing liabilities
                    
                    
                    506,042
                    
                    
                    
                    3,936
                    
                    
                    
                    3.11
                    %
                    
                    
                    555,854
                    
                    
                    
                    5,382
                    
                    
                    
                    3.87
                    %Demand
      deposits
                    
                    
                    55,507
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    55,364Other
      noninterest bearing liabilities
                    
                    
                    6,963
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    7,436Stockholders'
      equity
                    
                    
                    74,115
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    71,194Average
      liabilities and stockholders' equity
                    
                    $
                    642,627
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    689,848Net
      interest income
                    
                    
                    
                    
                    
                    $
                    5,464
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    $
                    4,038Net
      interest spread
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.11
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    1.90
                    %Net
      yield on interest earning assets (4)
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    3.61
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    2.47
                    %Interest-bearing
      liabilities to earning
                      assets ratio
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    83.51
                    %
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    85.46
                    %
 (1) -
                    Interest
      income on loans includes loan origination and other fees of $32,000 and
      $60,000 for the three months ended March 31, 2008 and
  2007.
 
 (2) -
                    Tax-exempt
      income is reflected on a fully tax equivalent basis utilizing a 34 percent
      tax rate. The tax equivalent adjustment reflected in the above table for
      municipal loans is approximately $22,000 and $17,000 for the three months
      ended March 31, 2008 and 2007. The tax equivalent adjustment reflected in
      the above table for municipal securities is approximately $59,000 and
      $37,000 for the three months ended March 31, 2008 and
  2007.
 
 (3) -
                    Non-accrual
      loans are included in average
loans.
 
 (4) -
                    Rate
      information was calculated on the average amortized cost for securities.
      The three months ended March 31, 2008 and 2007 average balance information
      includes an average unrealized gain (loss) for taxable securities of
      $1,148,000 and ($2,298,000) and for tax-advantaged securities of $9,000
      and $2,000.
  
 16
 Table of Contents
  NORTHERN
STATES FINANCIAL CORPORATION
 Interest
rates dropped during the first quarter of 2008 as compared with the same quarter
of 2007 as indicated by the prime lending rate.  During the first
quarter of 2008 the prime rate dropped 200 basis points from 7.25 percent at the
beginning of the year to 5.25 percent at March 31, 2008.  Although the
prime lending rate has decreased during the first quarter of 2008 and is
expected to decline further, management believes that it will be able to
maintain its net interest spread.  A majority of its loans are at
fixed rates and the Company believes that it will maintain the yields earned on
these loans as prepayment penalties will deter borrowers from refinancing many
of these loans.  A sizable amount of the Company’s variable rate loans
have interest rate floors that do not allow the loan yield to decrease any
further.  On the deposit side of the balance sheet, the Company has
significantly lowered rates offered on time deposits during the first quarter of
2008.  Management believes that its cost of funds will decline as time
deposits mature and reprice at the lower rates in 2008.  The Company
constantly reviews its net interest income and implements strategies to increase
its net yield on interest earning assets.
 
 
 ASSET
QUALITY AND THE PROVISION FOR LOAN AND LEASE LOSSES
 
 At March 31, 2008, management, with the
concurrence of the Board of Directors, after carefully reviewing the adequacy of
the allowance for loan and lease losses and the levels of nonperforming and
impaired loans and leases, determined that an allowance of $4.8 million was
adequate to cover probable incurred loan and lease losses as compared with $4.6
million at year-end 2007.  During the first three months of 2008,
$74,000 in loans and leases were charged off against the allowance compared with
charge offs of $2.0 million during the same period last
year.  Recoveries of loans previously charged off during the three
months ended March 31, 2008 totaled $34,000 as compared with $35,000 in
recoveries during the same period in 2007.  During the first quarter
of 2008, the provision for loan and lease losses was $263,000 as compared with a
reduction of $1.4 million during the same quarter of 2007.
 
 Nonperforming
loans and leases, which includes loans and leases on nonaccrual status in
addition to loans and leases 90 days or more past due and still accruing
interest, were $12.6 million at March 31, 2008, or 2.70 percent of total loans
and leases, as compared with $12.0 million at December 31, 2007, or 2.75 percent
of loans and leases.   Although the dollar amount of
nonperforming loans and leases increased at March 31, 2008 as compared with
year-end 2007, nonaccrual loans declined $4.1 million to $6.7 million at March
31, 2008 as compared with $10.8 million at December 31, 2007.  Payoffs
on two major loans that the Company had been carrying on nonaccrual status at
December 31, 2007 occurred during the first quarter of 2008 reducing nonaccrual
loans.
 
 The
Company received payment in full during the three months ended March 31, 2008 on
a nonaccrual construction loan that had been carried at $2.9 million at year-end
2007.
 
 Also
during the first quarter, the Company reached a settlement agreement with RLI
Insurance Company on its remaining nonaccrual lease pools that had been
purchased from Commercial Money Center in 2000 and 2001 and partially insured by
RLI.  As a result of the settlement between the Company and RLI, the
$2.0 million in these lease pools carried on the Company’s books were paid off
in full with no net effect occurring to income from receipt of the
proceeds.
 
 During
the period ending March 31, 2008, the Company placed a $2.2 million home equity
loan on nonaccrual status.  The borrower had drawn on his home equity
line of credit for business purposes and inadequate cash flows have affected the
customer’s ability to make payments.  The Company is fully secured and
expects to collect the loan balance.
 
 Remaining
on nonaccrual status at March 31, 2008 were loans totaling $1.1 million to
borrowers owning a landscaping/nursery business secured by commercial real
estate that had been placed on nonaccrual status in 2007.  The
borrowers have experienced deterioration in their financial condition and cash
flow problems and are unable to make their contractual loan
payments.  The Company is well secured and expects to collect the loan
balance due from sale of the commercial property.
   17
 Table of Contents
  NORTHERN
STATES FINANCIAL CORPORATION
 The
Company has a loan totaling $897,000 secured by commercial property that had
been placed on nonaccrual status during 2007.  There has been
deterioration in the value of the real estate and the borrower has not met the
terms and conditions of the loan.  The borrower has been unable to
show support for the necessary cash flow in order to make the remaining loan
payments. The Company has allocated $424,000 of the allowance for loan and lease
losses to this loan.
 
 The
Company has nonaccrual loans totaling $679,000 at March 31, 2008 to a heavy
equipment contractor that is well secured by real estate.  During the
quarter ended March 31, 2008, the borrower made a $330,000 reduction to the
year-end nonaccrual loan balance of $1.0 million as the borrower received
proceeds from a settlement of a mechanics lien on a project that the borrower
had worked.  The borrower is attempting to sell the properties
securing the loan and the Company believes full payment will be received through
these efforts.
 
 During
the first quarter of 2008 a $924,000 reduction was made to a nonaccrual loan
bringing the remaining balance to $603,000 at March 31, 2008 from $1.5 million
at year-end 2007.  This loan is for a 90-unit condominium construction
project, which has been classified as a nonaccrual loan since December 31,
2003.  The Company participated in this 90-unit condominium
construction project with other financial institutions and only has a portion of
the total loan.  The construction project borrowers declared
bankruptcy and the units were completed and sold, with the bankruptcy trustee
holding the sale proceeds in escrow.  There are disputed mechanic
liens of which the majority are insured by a title company.  The
bankruptcy trustee during the first quarter of 2008 released $924,000 of funds
held in the escrow to the Company reducing the loan balance.  Prior to
this, the bankruptcy trustee had released $2.7 million, in 2006, that had
reduced the original loan balance.  The bankruptcy trustee is still
holding funds in escrow until the disputed mechanic liens are
resolved.  Management expects to collect all of the remaining $603,000
loan balance from the bankruptcy trustee.
 
 The
Company is also carrying real estate construction loans to two borrowers on
nonaccrual status at March 31, 2008 that combined total $525,000. These loans
were placed on nonaccrual status during the fourth quarter of 2007 due to
theborrowers being
past due on their payments as they experienced difficulties in selling the
completed properties. The Company has $35,000 of its allowance for loan and
lease losses allocated to these loans.
 
 There are
loans to a borrower totaling $464,000 at March 31, 2008 that had been placed on
nonaccrual status in 2007 as the borrower had experienced decreased cash flows
and deterioration to their financial condition.  The loans are secured
by a commercial building consisting of a restaurant/bar and the borrower’s
personal residence.  The borrower is attempting to sell the
properties. The Company has $50,000 of its allowance for loan and lease losses
allocated to these loans.
 
 Loans and
leases 90 days or more past due and still accruing interest increased to $5.9
million at March 31, 2008 compared with $1.2 million at December 31,
2007.  These loans are well secured and in the process of
collection.  Since March 31, 2008, payments were received bringing a
$3.1 million loan relationship that was 90 days past due back to up-to-date
status and reducing the loan balances by $1.1 million.   Also, a
$1.6 million loan that had been 90 days past due was also brought up-to-date
subsequent to March 31, 2008.
 
 Impaired
loans and leases at March 31, 2008 totaled $6.7 million as compared with $10.7
million at December 31, 2007.  The Company considers a loan or lease
impaired if full principal and interest will not be collected under the
contractual terms of the note.  Nonaccrual loans and leases are
classified as impaired.  Impaired loans and leases are carried at the
present value of expected cash flows discounted at the loan's effective interest
rate or at the fair value of the collateral, if the loan or lease is collateral
dependent.
 
 
 18
 Table of Contents
 
 NORTHERN
STATES FINANCIAL CORPORATION
 
 Another
component of nonperforming assets is other real estate owned, consisting of
assets acquired through loan foreclosure and repossession. At March 31, 2008,
other real estate owned totaled $2.9 million, unchanged from December 31, 2007
and consists of two separate properties.  The fair value of other real
estate owned is reviewed by management at least quarterly to help ensure the
reasonableness of its carrying value, which is lower of cost or the fair value
less estimated selling costs.
 
 Other
real estate owned includes a property acquired in 1987 through the receipt of
deed in lieu of foreclosure.  This property is a former
commercial/industrial site located overlooking Lake Michigan in Waukegan,
Illinois, with a carrying value of $1,710,000 at March 31, 2008.  The
Company is attempting to sell this property through the Bank’s subsidiary,
Northern States Community Development Corporation as part of the City of
Waukegan’s lakefront development plans.  A problem with the
development of this real estate is the need to move railroad tracks that are
adjacent to the property.  The City of Waukegan has been in
negotiations with the railroad to move these tracks as part of the city’s
Lakefront Downtown Master Plan.
 
 This
property is a former commercial/industrial site and environmental remediation
costs may be incurred in disposing of this property.  During the
quarter ending December 31, 2007, the Company hired an independent environmental
consultant to provide an opinion as to estimated environmental remediation costs
with this property.  The report estimated that the costs involved
would be approximately $1,600,000 to achieve acceptable levels of contaminants
for commercial/industrial or residential land use and to prevent migration of
contaminants to adjoining off-site properties and Lake Michigan.  No
determination has yet been made as to the ultimate end use of the property,
which would need to be approved by the City of Waukegan as part of its Lakefront
Downtown Master Plan. The appraised value of the property supports the Company’s
carrying value plus the estimated remediation costs and as such, at this time no
liability has been recorded for these estimated environmental remediation
costs.
 
 At March 31, 2008, the Company is also
carrying $1.2 million as other real estate owned on a property consisting of a
two-story office building in Waukegan, Illinois that had been transferred to
other real estate owned in 2004.  A contract to lease/purchase this
property that had been in effect was allowed to lapse by the purchaser during
the third quarter of 2007.  The Company is actively attempting to sell
the property.
 
 NONINTEREST
INCOME
 
 Noninterest
income for the three months ended March 31, 2008 was $1,140,000, decreasing
$26,000 as compared with $1,166,000 for the three months ended March 31,
2007.  The decrease was primarily from a $40,000 decrease in mortgage
banking income during the first quarter of 2008 as compared with the same
quarter of 2007as home mortgage activities declined due to the general slump in
home sales.
 
 NONINTEREST
EXPENSE
 
 Noninterest
expense for the quarter ended March 31, 2008 was $4,430,000, increasing $110,000
from $4,320,000 for same quarter last year.  The Company’s efficiency
ratio, noninterest expense divided by the sum of net interest income and
noninterest income, was 67.9 percent for the first quarter of 2008 as compared
with 83.9 percent for the same quarter of 2007 and was positively affected by
the increased net interest income.
 
 
 19
 Table of Contents
 
 NORTHERN
STATES FINANCIAL CORPORATION
  In
comparing noninterest expenses for the first quarter of 2008 to the same quarter
of 2007, increases to occupancy and equipment, data processing, and auditing and
other professional expenses were largely offset by decreases to salaries and
employee benefits and legal expenses.   It is expected that
occupancy and equipment expenses, which were $36,000 greater during the first
quarter of 2008 as compared to last year, will continue to increase as the Bank
is updating and repairing its branch offices.
 
 Most of
the $110,000 increase for the first quarter of 2008 to noninterest expense is
attributable to increases of $99,000 to other operating expenses as compared
with the same quarter last year.   Included as other operating
expenses are costs relating to the selling and maintenance of foreclosed
properties that increased $40,000 from the same time period last
year.  The Company did not have any rental income generated from its
other real estate owned during the first quarter of 2008 to offset this expense
as opposed to $23,000 received during the first quarter of 2007 through the
lease/purchase agreement in effect at that time.  The Company’s loan
and collection expense increased $28,000 during the first quarter as loan growth
caused expenses for loan generation to increase and growth in loans 90 days or
more past due and still accruing interest caused collection related expenses to
increase.  During the first quarter of 2008, the Company had increased
FDIC insurance expense of $26,000 as the FDIC changed its billing from in
advance to in arrears.  The Company expects FDIC insurance expense
will continue to rise during the remainder of 2008.
 
 
 FEDERAL
AND STATE INCOME TAXES
 
 For
the three months ended March 31, 2008, the Company had a tax expense of $629,000
as compared with $726,000 for the same three months last year.  As a
percentage of pre-tax income, tax expense was 34.4 percent for the three months
ended March 31, 2008 and 32.2 percent for the same period of 2007.
 
 The Company earned interest income from
U.S. Treasury and U.S. government-sponsored entity securities not subject to
state income tax of $608,000 during the first quarter of 2008 as compared with
$2.3 million during the first quarter of 2007.  During the first
quarter of 2008, state income tax expense was $89,000 while for the first
quarter of 2007 a tax credit of $7,000 was recognized due to the large amount of
interest income not subject to state income taxes.  The Company needs
to generate taxable income for state tax return purposes within 11 years that
will use up these tax credits or the Company will need to reverse these
credits.  The increased state tax expense due to the decline in
interest income exempt from state income taxes during the first quarter of 2008
accounts for much of the increase in tax rate for the first quarter of 2008
compared with the same quarter of 2007.
 
 
 CONTRACTUAL OBLIGATIONS AND
OFF-BALANCE SHEET ARRANGEMENTS
 
 The
Company has contractual obligations that may not appear on the balance
sheet.  Table 3 presents the Company’s significant fixed and
determinable contractual obligations as of March 31, 2008, by payment date. The
payment amounts in Table 2 represent those amounts contractually due to the
recipient and do not include any unamortized premiums or discounts or similar
carrying amount adjustments.
 
 
 20
 Table of Contents
 
 NORTHERN
STATES FINANCIAL CORPORATION
   TABLE
4
 
 NORTHERN
STATE FINANCIAL CORPORATION
 CONTRACTUAL
OBLIGATIONS
 As of
March 31, 2008
 ($
000s)
  Greater
      than
                  
                  
                  Greater
      than1
      yr. and less
                  
                  
                  3
      yrs. and lessOne
      year
                  
                  
                  than
      or equal
                  
                  
                  than
      or equal
                  
                  
                  Greater
      thanContractual
      obligations
                  
                  or
      less
                  
                  
                  to
      3 yrs.
                  
                  
                  to
      5 yrs.
                  
                  
                  5
      yrs.
                  
                  
                  TotalLong-term
      debtSubordinated
      debentures
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  0
                  
                  
                  $
                  10,000
                  
                  
                  $
                  10,000Time
      deposits
                  
                  
                  210,735
                  
                  
                  
                  41,014
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  251,749Other
      contractual obligationsStandby
      letters of credit
                  
                  
                  9,599
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  9,599Community
      Reinvestment ActInvestment
      commitment
                  
                  
                  51
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  0
                  
                  
                  
                  51
 
 
 
 ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 The
Company’s primary market risk exposure is interest rate risk and, to a lesser
extent, liquidity risk. Interest rate risk is the exposure of a banking
organization’s financial condition to adverse movements in interest
rates.  The Company seeks to achieve consistent growth in net interest
income and net income while managing volatility that arises from shifts in
interest rates.   The Company’s Asset and Liability Management
Committee (“ALCO”) oversees interest rate risk programs instituted by management
and measurements of interest rate risk to determine that they are within
authorized limits set by the Company’s Board of Directors.
 
 Evaluating
a financial institution’s exposure to changes in interest rates includes
assessing both the adequacy of the management process used to control interest
rate risk and the organization’s quantitative level of exposure.  When
assessing the interest rate risk management process, the Company seeks to ensure
that appropriate policies, procedures, management information systems and
internal controls are in place to maintain interest rate risk at prudent levels
with consistency and continuity.  Evaluating the quantitative level of
interest rate risk exposure requires the Company to assess the existing and
potential future effects of changes in interest rates on its consolidated
financial condition, including capital adequacy, earnings, liquidity, and, where
appropriate, asset quality.
 
 The
primary approach used by management to analyze interest rate risk is to
periodically evaluate the “shock” to net interest income of an assumed
instantaneous decrease and increase in rates of 1% and 2% using computer
simulation to show the effect of rate changes on the base 12 month projected net
interest income.  This approach falls under the broad definition of
asset/liability management.
 
 Several
ways the Company can manage interest rate risk include: selling existing assets
or repaying certain liabilities and matching repricing periods for new assets
and liabilities, for example, by shortening terms of new loans or
securities.  Financial institutions are also subject to prepayment
risk in a falling rate environment.  For example, a debtor may prepay
financial assets so that the debtor may refinance obligations at new, lower
rates.  Prepayments of assets carrying higher rates reduce the
Company’s interest income and overall asset yields.  The Company
attempts to lessen prepayment risk by having prepayment penalties on commercial
purpose loans.  A large portion of an institution’s liabilities may be
short term or due on demand, while most of its assets may be invested in
longer-term loans or securities. Accordingly, the
   21
 Table of Contents
  NORTHERN
STATES FINANCIAL CORPORATION
 Company
seeks to have in place sources of cash to meet short-term
demands.  These funds can be obtained by increasing deposits,
borrowing, or selling assets.
 
 Financial
institutions are also subject to interest rate risk in a rising rate
environment.  Call features on securities may not be exercised and
lower yielding securities may remain in the Company’s securities portfolio until
maturity.
 
 Table
4 shows how interest rate shocks of decreasing rates 1% and 2% and increasing
rates 1% and 2% affect projected 12 month projected net interest income at March
31, 2008 and December 31, 2007.  The computer simulation model used to
do the interest rate shocks and calculate the effect on projected net interest
income takes into consideration maturity and repricing schedules of the various
assets and liabilities as well as call provisions on the Company’s
securities.
 
 At March
31, 2008 the projected net interest income decreases $157,000 when rates are
shocked upward 2% while projected net interest income increases $113,000 for a
2% downward rate shock.   At December 31, 2007 projected net
interest income increased $418,000 when rates were shocked upward 2% while
projected net interest income decreased by $222,000, for a 2% downward rate
shock.  This indicates that the balance sheet had become more
liability sensitive during the first quarter of 2008.
 
 At both
March 31, 2008 and December 31, 2007, the percentage changes from the base
forecasted 12-month net interest income are within policy guidelines and shows
that interest rate risk was minimal at March 31, 2008.
 
 TABLE
5
 
 NORTHERN
STATES FINANCIAL CORPORATION
 EFFECT OF
INTEREST SHOCKS ON NET INTEREST INCOME
 as of
March 31, 2008 and December 31, 2007
 ($000s)
  Immediate
      Change in Rates-2.00%
                  -1.00%
                  +1.00%
                  +2.00%March
      31, 2008:Dollar
      Change from Base Forecast
                  $113
                  $9
                  ($135)
                  ($157)Percent
      Change from Base Forecast
                  0.50%
                  0.04%
                  -0.60%
                  -0.69%December
      31, 2007:Dollar
      Change from Base Forecast
                  ($222)
                  ($137)
                  $334
                  $418Percent
      Change from Base Forecast
                  -1.10%
                  -0.68%
                  1.66%
                  2.08%
 
 
 22
 Table of Contents
  NORTHERN STATES FINANCIAL
CORPORATION
 
 
 ITEM 4.
CONTROLS AND PROCEDURES
 
 The
Company’s management has evaluated, with the participation of the Chairman of
the Board and President, and Vice President and Treasurer, the Company’s
disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report.  Based on that evaluation, the Chairman of the Board and
President, and Vice President and Treasurer have concluded that these controls
and procedures were effective as of such date.  There were no changes
in internal control over financial reporting (as such term is defined in Rule
13a-15(f)
under the Securities Exchange Act of 1934) that occurred during the first
quarter of 2008 that materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
 
 
 
 PART II.
OTHER INFORMATION
 
 
 ITEM
1.  LEGAL PROCEEDINGS
 
 From time
to time, due to the nature of its business, the Company and its subsidiaries are
often subject to various legal actions.  These legal actions, whether
pending or threatened, arise through the normal course of business and neither
the Company nor any of its subsidiaries are currently involved in any
proceedings that would, in management’s judgement, have a material adverse
effect on the Company’s business, results of operation, financial condition or
cash flows.
 
 Between November 2000 and
August 2001, the Company purchased commercial lease pools from Commercial
Money Center, a now bankrupt equipment leasing company.  At year-end
2007, the Company carried $2.0 million of these lease pools as impaired loans
and leases. A large part of Company’s underwriting decision on these leases was
based on the guarantees of the underlying sureties.  These lease pools
were included as impaired loans and leases at December 31, 2005, 2006 and
2007.  Upon default of these lease pools, the Company made demand for
payment from RLI Insurance Company (“RLI”) under the relevant surety
bonds.  RLI (the “Surety”) failed to make the payments required under
the surety bonds.  As a result, in April 2002, the Company filed
suit against the Surety.  The Company’s complaints alleged that the
Surety is liable for payment due to the Company under the terms of the
bonds.  On March 25, 2008, the Company reached a settlement agreement
with RLI Insurance Company on the remaining nonaccrual lease
pools.  As a result of the settlement between the Company and RLI, the
$2.0 million in these lease pools carried on the Company’s books were paid off
in full prior to March 31, 2008 with no net effect occurring to income from
receipt of the proceeds.
 
 
 ITEM
1A.  RISK FACTORS
 
 There have been no material changes to
the risk factors relating to the Company from those risk factors previously
disclosed in the Company’s Annual Report on Form 10-K for its fiscal year ended
December 31, 2007 in response to Item 1A. to Part I of Form 10-K.
 
 
 23
 Table of Contents
  NORTHERN STATES FINANCIAL
CORPORATION
 
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND
USE OF PROCEEDS
 
 Issuer
Purchases of Equity Securities
  The following table sets forth
information in connection with purchases made by, or on behalf of, the Company
of shares of the Company’s common stock during the quarterly period ended March
31, 2008.
 
 Total
      Number
                  
                  
                  Maximum
      NumberTotal
      Number
                  
                  
                  Average
                  
                  
                  of
      Shares Purchased
                  
                  
                  of
      Shares that Mayof
      Shares
                  
                  
                  Price
      Paid
                  
                  
                  as
      Part of Publicly
                  
                  
                  Yet
      be PurchasedPeriod
                  
                  Purchased
      (1)
                  
                  
                  per
      Share
                  
                  
                  Announced
      Plans
                  
                  
                  under
      the PlansJanuary
      1, 2008 through January 31, 2008
                  
                  
                  0
                  
                  
                  $
                  0.00
                  
                  
                  
                  0
                  
                  
                  
                  105,850February
      1, 2008 through February 29, 2008
                  
                  
                  0
                  
                  
                  $
                  0.00
                  
                  
                  
                  0
                  
                  
                  
                  105,850March
      1, 2008 through March 31, 2008
                  
                  
                  50,000
                  
                  
                  $
                  19.85
                  
                  
                  
                  0
                  
                  
                  
                  55,850Total
                  
                  
                  50,000
                  
                  
                  $
                  19.85
                  
                  
                  
                  0
                  
                  
                  
                  55,850
 
 (1)
                  On
      April 17, 2002, the Company's Board of Directors authorized the repurchase
      of up to 200,000 shares of the Company's common stock either in open
      market or private transactions.  On February 19, 2003, the
      Company's Board of Directors authorized the repurchase of an additional
      200,000 shares. (No time limit has been set for the completion of the
      repurchase programs.)
  
 ITEM
3.  DEFAULTS UPON SENIOR SECURITIES
 
 None
 
 
 ITEM
4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 None
 
 
 ITEM
5.  OTHER INFORMATION
 
 None
 
 
 24
 Table of Contents
 
 NORTHERN
STATES FINANCIAL CORPORATION
 
 
 ITEM
6.  EXHIBITS
 
 (a)
                  Exhibits.
 
 Exhibit
3.1 Articles of Incorporation of the Company, as amended to date. (Filed with
Company’s annual report on Form 10-K for the year ended December 31, 1994
(Commission File 0-19300) and incorporated herein by reference.)
 
 Exhibit
3.2 By-Laws of the Company, as amended and restated to date. (Filed with
Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2004
(Commission File 0-19300) and incorporated herein by reference.)
 
 Exhibit
4.1 Certain instruments defining the rights of holders of long-term debt of the
Company and certain of its subsidiaries, none of which authorize a total amount
of indebtedness in excess of 10% of the total assets of the Company and its
subsidiaries on a consolidated basis, have not been filed as
exhibits.  The Company hereby agrees to furnish a copy of any of these
agreements to the SEC upon request.
 
 Exhibit
31.1 Section 302 Certification of Chairman of the Board and
President.
 
 Exhibit
31.2 Section 302 Certification of Vice President and Treasurer.
 
 Exhibit
32.1 Section 906 Certification.
 
 
 25
 Table of Contents
 NORTHERN STATES FINANCIAL
CORPORATION
 FORM
10-Q
 March 31,
2008
 
 
 
 
 
 SIGNATURES
 
 
 
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report on Form 10-Q to be signed on its behalf by the
undersigned hereunto duly authorized, on this 9th day of May 2008.
 
 
 
 NORTHERN
STATES FINANCIAL CORPORATION
 (Registrant)
 
 
 Date:May 9,
      2008
                    By:
                    /s/
      Fred AbdulaFred
      AbdulaChairman
      of the Board of Directors and President
 Date:May 9,
      2008
                    By:
                    /s/
      Thomas M. NemethThomas M.
      NemethVice President and
    Treasurer
 26
 Table of Contents
  NORTHERN STATES FINANCIAL
CORPORATION
 FORM
10-Q
 March 31,
2008
 
 
 
 
 EXHIBIT INDEX
 
 
 Exhibits
 
 
 Exhibit
3.1 Articles of Incorporation of the Company, as amended to date. (Filed with
Company’s annual report on Form 10-K for the year ended December 31, 1994
(Commission File 0-19300) and incorporated herein by reference.)
 
 Exhibit
3.2 By-Laws of the Company, as amended and restated to date. (Filed with
Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2004
(Commission File 0-19300) and incorporated herein by reference.)
 
 Exhibit
4.1 Certain instruments defining the rights of holders of long-term debt of the
Company and certain of its subsidiaries, none of which authorize a total amount
of indebtedness in excess of 10% of the total assets of the Company and its
subsidiaries on a consolidated basis, have not been filed as
exhibits.  The Company hereby agrees to furnish a copy of any of these
agreements to the SEC upon request.
 
 Exhibit
31.1 Section 302 Certification of Chairman of the Board and
President.
 
 Exhibit
31.2 Section 302 Certification of Vice President and Treasurer.
 
 Exhibit
32.1 Section 906 Certification.
 
 
 27