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United StatesSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

_____________________________________

FORM 10-Q

|      |  |                                                                                        
|----- |  | ---------------------------------------------------------------------------------------
|[ X ] |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ending March 31, 2001

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:XXX | NO: _______
|       

4,461,755 shares of common stock were outstanding
as of March 31, 2001





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TABLE OF CONTENTS



|                                                                                              |                                                                                                          |  |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|Part I. Financial Information                                                                
|Item 1. Financial Statements                                                                 
|                                                                                              | Independent Accountants' Report                                                                         
|                                                                                              | Condensed consolidated balance sheets as of March 31, 2001, December 31, 2000 and March 31, 2000        
|                                                                                              | Condensed consolidated statements of income for the three months ended March 31, 2001 and 2000          
|                                                                                              | Condensed consolidated statements of comprehensive income the three months ended March 31, 2001 and 2000
|                                                                                              | Condensed consolidated statements of cash flows for the three months ended March 31, 2001 and 2000      
|                                                                                              | Notes to condensed consolidated financial statements                                                    
|Item 2. Managements discussion and analysis of financial condition and results of operations
|Item 7A. Quantitative and qualitative disclosures about market risk                          
|Part II. Other Information                                                                   
|Signatures                                                                                   



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
March 31, 2001
INDEX



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| | PART I. FINANCIAL INFORMATION                                                                         
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| | Item 1. Financial Statements                                                                          
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2001, December 31, 2000 and March 31, 2000         |  |             | 3      | 
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months ended March 31, 2001 and 2000           |  |             | 4      | 
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the three months ended March 31, 2001 and 2000 |  |             | 5      | 
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the three months ended March 31, 2001 and 2000       |  |             | 6      | 
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| |                                                                                                        | Notes to condensed consolidated financial statements                                                     |  |             | 7 - 16 | 
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| | Item 2. Managements discussion and analysis of financial
         condition and results of operations |                                                                                                          |  | 17 - 23     |       
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| | Item 7A. Quantitative and qualitative disclosures
            about market risk                        |                                                                                                          |  | 23 - 25     |       
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| | PART II. OTHER INFORMATION                                                                            
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| |                                                                                                        | Signatures                                                                                               |  | 26          |       

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##### Table of Contents












NORTHERN STATES FINANCIAL CORPORATION
FORM 10-Q
March 31, 2001

INDEPENDENT ACCOUNTANTS REPORT

Board of Directors and Stockholders
Northern States Financial Corporation
Waukegan, Illinois

We have reviewed the condensed consolidated balance sheets of NORTHERN
STATES FINANCIAL CORPORATION as of March 31, 2001 and 2000 and the related
condensed consolidated statements of income, comprehensive income and cash flows
for the three-month periods ended March 31, 2001 and 2000. These financial
statements are the responsibility of the Companys management.

We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, 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 reviews, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.

/s/ Crowe, Chizek and Company
LLP

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Oak Brook, Illinois
May 2, 2001

2



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##### Table of Contents






NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2001, December 31, 2000 and March 31, 2000
(In thousands of dollars) (Unaudited)

|                                                                                   |                                 |        |                                            |         |           |         |         |              |   |         |           |         |   |         | 
|---------------------------------------------------------------------------------- | ------------------------------- | ------ | ------------------------------------------ | ------- | --------- | ------- | ------- | ------------ | - | ------- | --------- | ------- | - | ------- | 
|                                                                                   |                                 |        |                                            |         | March 31, |         |         | December 31, |   |         | March 31, |        
|                                                                                   |                                 |        |                                            |         | 2001      |         |         | 2000         |   |         | 2000      |        
|                                                                                   |                                 |        |                                            |         |           |         |         |              |   |         |           |        
|                                                                                   |                                 | Assets
|Cash and due from banks                                                            |                                 | $      | 11,024                                     |         |           | $       | 17,013  |              |   | $       | 12,933    |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Interest bearing deposits in financial institutions 
maturities less than 90 days |                                 |        | 187                                        |         |           |         | 174     |              |   |         | 111       |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Federal funds sold                                                                 |                                 |        | 33,000                                     |         |           |         | 14,000  |              |   |         | 12,500    |        
|                                                                                   |                                 |        |                                            |         |           |         |         |              |  
|                                                                                   | Total cash and cash equivalents |        |                                            | 44,211  |           |         |         | 31,187       |   |         |           | 25,544  |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Interest bearing deposits in financial institutions 
maturities over 90 days      |                                 |        | 0                                          |         |           |         | 0       |              |   |         | 100       |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Securities available for sale                                                      |                                 |        | 175,561                                    |         |           |         | 190,050 |              |   |         | 189,295   |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Loans                                                                              |                                 |        | 296,837                                    |         |           |         | 298,851 |              |   |         | 255,284   |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Less: Allowance for loan losses                                                    |                                 |        | (4,112                                     | )       |           |         | (4,689  | )            |   |         | (5,241    | )      
|                                                                                   |                                 |        |                                            |         |           |         |         |              |  
|                                                                                   | Loans, net                      |        |                                            | 292,725 |           |         |         | 294,162      |   |         |           | 250,043 |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Direct lease financing                                                             |                                 |        | 9,788                                      |         |           |         | 7,417   |              |   |         | 2,228     |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Office buildings and equipment, net                                                |                                 |        | 5,708                                      |         |           |         | 5,796   |              |   |         | 6,086     |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Other real estate owned                                                            |                                 |        | 2,022                                      |         |           |         | 2,022   |              |   |         | 2,702     |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Accrued interest receivable                                                        |                                 |        | 4,490                                      |         |           |         | 4,816   |              |   |         | 4,828     |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Other assets                                                                       |                                 |        | 2,148                                      |         |           |         | 2,806   |              |   |         | 5,626     |        
|                                                                                   |                                 |        |                                            |         |           |         |         |              |  
|                                                                                   | Total assets                    |        | $                                          | 536,653 |           |         | $       | 538,256      |   |         | $         | 486,452 |  
|                                                                                   |                                 |        |                                            |         |           |         |         |              |  
|Liabilities and Stockholders Equity                                              
|Liabilities
Deposits                                                              
|                                                                                   | Demand  noninterest bearing    |        | $                                          | 42,123  |           |         | $       | 44,567       |   |         | $         | 44,222  |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | NOW accounts                    |        |                                            | 43,711  |           |         |         | 44,197       |   |         |           | 43,696  |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Money market accounts           |        |                                            | 39,701  |           |         |         | 35,603       |   |         |           | 37,713  |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Savings                         |        |                                            | 43,773  |           |         |         | 43,910       |   |         |           | 46,549  |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Time, $100,000 and over         |        |                                            | 93,763  |           |         |         | 97,822       |   |         |           | 80,542  |  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Time, under $100,000            |        |                                            | 105,089 |           |         |         | 107,022      |   |         |           | 94,373  |  
|                                                                                   |                                 |        |                                            |         |           |         |         |              |  
|                                                                                   |                                 |        | Total deposits                             |         |           | 368,160 |         |              |   | 373,121 |           |         |   | 347,095 | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Securities sold under repurchase agreements
and other short-term borrowings        |                                 |        | 73,407                                     |         |           |         | 73,618  |              |   |         | 55,756    |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Federal Home Loan Bank advances                                                    |                                 |        | 10,000                                     |         |           |         | 10,000  |              |   |         | 10,000    |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Advances from borrowers for taxes and insurance                                    |                                 |        | 1,004                                      |         |           |         | 816     |              |   |         | 937       |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Accrued interest payable and other liabilities                                     |                                 |        | 8,976                                      |         |           |         | 8,262   |              |   |         | 6,315     |        
|                                                                                   |                                 |        |                                            |         |           |         |         |              |  
|                                                                                   |                                 |        | Total liabilities                          |         |           | 461,547 |         |              |   | 465,817 |           |         |   | 420,103 | 
|                                                                                  
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|Stockholders Equity                                                              
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock                                                                       |                                 |        | 1,785                                      |         |           |         | 1,784   |              |   |         | 1,784     |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Additional paid-in capital                                                         |                                 |        | 11,443                                     |         |           |         | 11,436  |              |   |         | 11,421    |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Retained earnings                                                                  |                                 |        | 61,473                                     |         |           |         | 59,817  |              |   |         | 57,949    |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Accumulated other comprehensive income (loss), net                                 |                                 |        | 405                                        |         |           |         | (598    | )            |   |         | (4,805    | )      
|                                                                                   |                                 |        |                                            |         |           |         |         |              |  
|                                                                                   | Total stockholders equity      |        |                                            | 75,106  |           |         |         | 72,439       |   |         |           | 66,349  |  
|                                                                                   |                                 |        |                                            |         |           |         |         |              |  
|                                                                                   |                                 |        | Total liabilities and stockholders equity |         | $         | 536,653 |         |              | $ | 538,256 |           |         | $ | 486,452 | 
|                                                                                   |                                 |        |                                            |         |           |         |         |              |  

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

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##### Table of Contents






NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2001 and 2000
(In thousands of dollars, except per share data) (Unaudited)

|                                                    |                                                     |                                |       |                    |       |   |           |       |       | 
|--------------------------------------------------- | --------------------------------------------------- | ------------------------------ | ----- | ------------------ | ----- | - | --------- | ----- | ----- | 
|                                                    |                                                     |                                |       | Three months ended |      
|                                                    |                                                     |                                |       |                    |      
|                                                    |                                                     |                                |       | March 31,          |       |   | March 31, |      
|                                                    |                                                     |                                |       | 2001               |       |   | 2000      |      
|                                                    |                                                     |                                |       |                    |       |   |           |      
|Interest income                                    
|                                                    | Loans (including fee income)                        |                                | $     | 6,680              |       |   | $         | 5,512 |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Securities                                         
|                                                    |                                                     | Taxable                        |       |                    | 2,528 |   |           |       | 2,738 | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                     | Exempt from federal income tax |       |                    | 169   |   |           |       | 240   | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Interest bearing deposits in financial institutions |                                |       | 2                  |       |   |           | 4     |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Federal funds sold                                  |                                |       | 304                |       |   |           | 45    |      
|                                                    |                                                     |                                |       |                    |       |  
|                                                    |                                                     | Total interest income          |       |                    | 9,683 |   |           |       | 8,539 | 
|                                                    |                                                     |                                |       |                    |       |  
|Interest expense                                   
|                                                    | Time deposits                                       |                                |       | 3,160              |       |   |           | 2,331 |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other deposits                                      |                                |       | 932                |       |   |           | 919   |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other borrowings                                    |                                |       | 1,245              |       |   |           | 821   |      
|                                                    |                                                     |                                |       |                    |       |  
|                                                    |                                                     | Total interest expense         |       |                    | 5,337 |   |           |       | 4,071 | 
|                                                    |                                                     |                                |       |                    |       |  
|Net interest income                                 |                                                     |                                | 4,346 |                    |       |   | 4,468     |      
|                                                   
|                                                   
|                                                   
|                                                   
|Provision for loan losses                           |                                                     |                                | 0     |                    |       |   | 0         |      
|                                                    |                                                     |                                |       |                    |       |  
|Net interest income after provision for
loan losses |                                                     |                                | 4,346 |                    |       |   | 4,468     |      
|                                                    |                                                     |                                |       |                    |       |  
|Noninterest income                                 
|                                                    | Service fees on deposits                            |                                |       | 340                |       |   |           | 342   |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Trust income                                        |                                |       | 169                |       |   |           | 192   |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Mortgage banking income                             |                                |       | 45                 |       |   |           | 21    |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other operating income                              |                                |       | 157                |       |   |           | 167   |      
|                                                    |                                                     |                                |       |                    |       |  
|                                                    |                                                     | Total noninterest income       |       |                    | 711   |   |           |       | 722   | 
|                                                    |                                                     |                                |       |                    |       |  
|Noninterest expense                                
|                                                    | Salaries and employee benefits                      |                                |       | 1,515              |       |   |           | 1,460 |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Occupancy and equipment, net                        |                                |       | 381                |       |   |           | 318   |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Data processing                                     |                                |       | 132                |       |   |           | 119   |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | FDIC deposit insurance                              |                                |       | 17                 |       |   |           | 20    |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other real estate owned                             |                                |       | 31                 |       |   |           | 12    |      
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other operating expenses                            |                                |       | 555                |       |   |           | 492   |      
|                                                    |                                                     |                                |       |                    |       |  
|                                                    |                                                     | Total noninterest expense      |       |                    | 2,631 |   |           |       | 2,421 | 
|                                                    |                                                     |                                |       |                    |       |  
|Income before income taxes                          |                                                     |                                | 2,426 |                    |       |   | 2,769     |      
|                                                   
|                                                   
|                                                   
|                                                   
|Provision for income taxes                          |                                                     |                                | 770   |                    |       |   | 718       |      
|                                                    |                                                     |                                |       |                    |       |  
|Net income                                          |                                                     | $                              | 1,656 |                    |       | $ | 2,051     |      
|                                                    |                                                     |                                |       |                    |       |  
|Basic earnings per share                            |                                                     | $                              | 0.37  |                    |       | $ | 0.46      |      
|                                                   
|                                                   
|                                                   
|                                                   
|Diluted earnings per share                          |                                                     | $                              | 0.37  |                    |       | $ | 0.46      |      

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

4



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##### Table of Contents






NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2001 and 2000
(In thousands of dollars) (Unaudited)

|                                   |                                                                                                                 |   |                    |       |  |           |       |        |  
|---------------------------------- | --------------------------------------------------------------------------------------------------------------- | - | ------------------ | ----- |  | --------- | ----- | ------ | -
|                                   |                                                                                                                 |   | Three months ended |      
|                                   |                                                                                                                 |   |                    |      
|                                   |                                                                                                                 |   | March 31,          |       |  | March 31, |      
|                                   |                                                                                                                 |   | 2001               |       |  | 2000      |      
|                                   |                                                                                                                 |   |                    |       |  |           |      
|Net income                         |                                                                                                                 | $ | 1,656              |       |  | $         | 2,051 |       
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss):
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized gains (losses) arising during period
on securities available for sale, net of tax
of $636 and ($791) |   |                    | 1,003 |  |           |       | (1,253 | )
|                                   |                                                                                                                 |   |                    |       |  |          
|Comprehensive income               |                                                                                                                 | $ | 2,659              |       |  | $         | 798   |       
|                                   |                                                                                                                 |   |                    |       |  |          

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

5



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##### Table of Contents






NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2001 and 2000
(In thousands of dollars) (Unaudited)

|                                                                                                         |                                                                            |                                                                                   |                                                                             |       |           |        |        |           |        |         |  
|-------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----- | --------- | ------ | ------ | --------- | ------ | ------- | -
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       | March 31, |        |        | March 31, |       
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       | 2001      |        |        | 2000      |       
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       |           |        |        |           |       
|Cash flows from operating activities                                                                    
|                                                                                                         | Net income                                                                 |                                                                                   | $                                                                           | 1,656 |           |        | $      | 2,051     |       
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         | Adjustments to reconcile net income to net cash from
operating activities:
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Depreciation                                                                      |                                                                             |       | 115       |        |        |           | 117    |        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Deferred loan fees                                                                |                                                                             |       | 12        |        |        |           | (32    | )      
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Amortization of mortgage servicing rights                                         |                                                                             |       | 11        |        |        |           | 14     |        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Net change in interest receivable                                                 |                                                                             |       | 326       |        |        |           | (467   | )      
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Net change in interest payable                                                    |                                                                             |       | 231       |        |        |           | 158    |        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Net change in other assets                                                        |                                                                             |       | 11        |        |        |           | 57     |        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Net change in other liabilities                                                   |                                                                             |       | 483       |        |        |           | 342    |        
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       |           |       
|                                                                                                         |                                                                            |                                                                                   | Net cash from operating activities                                          |       |           | 2,845  |        |           |        | 2,240   |  
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       |           |       
|Cash flows from investing activities
Proceeds from maturities and calls of securities available for sale |                                                                            |                                                                                   | 103,518                                                                     |       |           |        | 5,645  |          
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Purchases of securities available for sale                                        |                                                                             |       | (87,390   | )      |        |           | (300   | )      
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Change in loans made to customers                                                 |                                                                             |       | 1,425     |        |        |           | (7,297 | )      
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Property and equipment expenditures                                               |                                                                             |       | (27       | )      |        |           | (27    | )      
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Net change in direct lease financing                                              |                                                                             |       | (2,371    | )      |        |           | (90    | )      
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       |           |       
|                                                                                                         |                                                                            |                                                                                   | Net cash from investing activities                                          |       |           | 15,155 |        |           |        | (2,069  | )
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       |           |       
|Cash flows from financing activities Net increase (decrease) in:                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            |                                                                                   | Deposits                                                                    |       |           | (4,961 | )      |           |        | 12,844  |  
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            |                                                                                   | Securities sold under repurchase agreements
and other short-term borrowings |       |           | (211   | )      |           |        | (14,680 | )
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            |                                                                                   | Advances from borrowers for taxes and insurance                             |       |           | 188    |        |           |        | 292     |  
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Federal Home Loan Bank advance                                                    |                                                                             |       | 0         |        |        |           | 10,000 |        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Net proceeds from exercise of stock options                                       |                                                                             |       | 8         |        |        |           | 17     |        
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       |           |       
|                                                                                                         |                                                                            |                                                                                   | Net cash from financing activities                                          |       |           | (4,976 | )      |           |        | 8,473   |  
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       |           |       
|Net change in cash and cash equivalents                                                                  |                                                                            |                                                                                   | 13,024                                                                      |       |           |        | 8,644  |          
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|Cash and cash equivalents at beginning of period                                                         |                                                                            |                                                                                   | 31,187                                                                      |       |           |        | 16,900 |          
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       |           |       
|Cash and cash equivalents at end of period                                                               |                                                                            | $                                                                                 | 44,211                                                                      |       |           | $      | 25,544 |          
|                                                                                                         |                                                                            |                                                                                   |                                                                             |       |           |       
|Supplemental disclosures
Cash paid during the period for
Interest                                        |                                                                            | $                                                                                 | 5,106                                                                       |       |           | $      | 3,913  |          
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                        
|                                                                                                         |                                                                            | Noncash investing activities
Transfers made from loans to other real estate owned |                                                                             |       | 0         |        |        |           | 80     |        

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

6



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION






March 31, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Note 1  Basis of Presentation

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

The condensed consolidated balance sheets are as of March 31, 2001,
December 31, 2000 and March 31, 2000. The condensed consolidated statements of
income, comprehensive income and cash flows are for the three months ended March
31, 2001 and 2000.

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, 2000, 1999 and 1998.

The results of operations for the three month period ended March 31, 2001,
are not necessarily indicative of the results to be expected for the full year.

Basic earnings per share is based on weighted-average shares outstanding of
4,461,755 and 4,459,345 for the three months ended March 31, 2001 and 2000.
Diluted earnings per share further assumes issue of any dilutive potential
common shares. Common stock information is summarized as follows:

|                          |  |           |           |  |              |   |           |           |  |   |           | 
|------------------------- |  | --------- | --------- |  | ------------ | - | --------- | --------- |  | - | --------- | 
|                          |  | March 31, |           |  | December 31, |   |           | March 31, | 
|                          |  | 2001      |           |  | 2000         |   |           | 2000      | 
|                          |  |           |           |  |              |   |           |           | 
|Common shares authorized  |  |           | 6,500,000 |  |              |   | 6,500,000 |           |  |   | 6,500,000 | 
|                         
|                         
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|                         
|                         
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|                         
|Common shares outstanding |  |           | 4,461,755 |  |              |   | 4,460,845 |           |  |   | 4,460,345 | 
|                         
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|                         
|Par value per share       |  | $         | 0.40      |  |              | $ | 0.40      |           |  | $ | 0.40      | 

7



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Note 2  Securities

The amortized cost, gross unrealized gains and losses, and fair value of
securities available for sale as of March 31, 2001, December 31, 2000 and March
31, 2000 are as follows:

|                                          |       |   |           |         |  |                  |     |       |        |   |        |        |   |   |         |         | 
|----------------------------------------- | ----- | - | --------- | ------- |  | ---------------- | --- | ----- | ------ | - | ------ | ------ | - | - | ------- | ------- | 
|March 31, 2001                            |       |   | Amortized |         |  | Gross Unrealized |     |       | Fair   |  
|                                          |       |   |           |         |  |                  |     |       |        |  
|                                          |       |   | Cost      |         |  | Gains            |     |       | Losses |   |        | Value  |  
|                                          |       |   |           |         |  |                  |     |       |        |   |        |        |  
|U.S. Treasury                             |       | $ | 1,000     |         |  | $                | 13  |       |        | $ | 0      |        |   | $ | 1,013   |        
|                                         
|                                         
|                                         
|                                         
|U.S. Government agencies and corporations |       |   | 152,303   |         |  |                  | 463 |       |        |   | (692   | )      |   |   | 152,074 |        
|                                         
|                                         
|                                         
|                                         
|States and political subdivisions         |       |   | 14,444    |         |  |                  | 218 |       |        |   | (3     | )      |   |   | 14,659  |        
|                                         
|                                         
|                                         
|                                         
|Mortgage-backed securities                |       |   | 5,075     |         |  |                  | 56  |       |        |   | (5     | )      |   |   | 5,126   |        
|                                         
|                                         
|                                         
|                                         
|Equity securities                         |       |   | 2,077     |         |  |                  | 628 |       |        |   | (16    | )      |   |   | 2,689   |        
|                                          |       |   |           |         |  |                  |     |       |        |   |        |       
|                                          | Total |   | $         | 174,899 |  |                  | $   | 1,378 |        |   | $      | (716   | ) |   | $       | 175,561 | 
|                                          |       |   |           |         |  |                  |     |       |        |   |        |       
|                                         
|                                         
|                                         
|                                         
|                                         
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|December 31, 2000                         |       |   | Amortized |         |  | Gross Unrealized |     |       | Fair   |  
|                                          |       |   |           |         |  |                  |     |       |        |  
|                                          |       |   | Cost      |         |  | Gains            |     |       | Losses |   |        | Value  |  
|                                          |       |   |           |         |  |                  |     |       |        |   |        |        |  
|U.S. Treasury                             |       | $ | 1,000     |         |  | $                | 4   |       |        | $ | 0      |        |   | $ | 1,004   |        
|                                         
|                                         
|                                         
|                                         
|U.S. Government agencies and corporations |       |   | 167,065   |         |  |                  | 76  |       |        |   | (1,623 | )      |   |   | 165,518 |        
|                                         
|                                         
|                                         
|                                         
|States and political subdivisions         |       |   | 15,531    |         |  |                  | 123 |       |        |   | (58    | )      |   |   | 15,596  |        
|                                         
|                                         
|                                         
|                                         
|Mortgage-backed securities                |       |   | 5,384     |         |  |                  | 38  |       |        |   | (39    | )      |   |   | 5,383   |        
|                                         
|                                         
|                                         
|                                         
|Equity securities                         |       |   | 2,047     |         |  |                  | 502 |       |        |   | 0      |        |   |   | 2,549   |        
|                                          |       |   |           |         |  |                  |     |       |        |   |        |       
|                                          | Total |   | $         | 191,027 |  |                  | $   | 743   |        |   | $      | (1,720 | ) |   | $       | 190,050 | 
|                                          |       |   |           |         |  |                  |     |       |        |   |        |       
|                                         
|                                         
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|March 31, 2000                            |       |   | Amortized |         |  | Gross Unrealized |     |       | Fair   |  
|                                          |       |   |           |         |  |                  |     |       |        |  
|                                          |       |   | Cost      |         |  | Gains            |     |       | Losses |   |        | Value  |  
|                                          |       |   |           |         |  |                  |     |       |        |   |        |        |  
|U.S. Treasury                             |       | $ | 999       |         |  | $                | 0   |       |        | $ | (5     | )      |   | $ | 994     |        
|                                         
|                                         
|                                         
|                                         
|U.S. Government agencies and corporations |       |   | 168,021   |         |  |                  | 0   |       |        |   | (7,759 | )      |   |   | 160,262 |        
|                                         
|                                         
|                                         
|                                         
|States and political subdivisions         |       |   | 19,726    |         |  |                  | 92  |       |        |   | (249   | )      |   |   | 19,569  |        
|                                         
|                                         
|                                         
|                                         
|Mortgage-backed securities                |       |   | 6,426     |         |  |                  | 6   |       |        |   | (114   | )      |   |   | 6,318   |        
|                                         
|                                         
|                                         
|                                         
|Equity securities                         |       |   | 1,966     |         |  |                  | 186 |       |        |   | 0      |        |   |   | 2,152   |        
|                                          |       |   |           |         |  |                  |     |       |        |   |        |       
|                                          | Total |   | $         | 197,138 |  |                  | $   | 284   |        |   | $      | (8,127 | ) |   | $       | 189,295 | 
|                                          |       |   |           |         |  |                  |     |       |        |   |        |       

8



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Contractual maturities of securities available for sale at March 31, 2001
were as follows. Securities not due at a single maturity date, primarily
mortgage-backed securities and equity securities, are shown separately.

| |                                        |       |         |           |         |  |         |         |         | 
| | -------------------------------------- | ----- | ------- | --------- | ------- |  | ------- | ------- | ------- | 
| |                                        |       |         | Amortized |         |  | Fair    |        
| |                                        |       |         | Cost      |         |  | Value   |        
| |                                        |       |         |           |         |  |         |        
| | Due in one year of less                |       | $       | 27,024    |         |  | $       | 26,412  |        
|
|
|
|
| | Due after one year through five years  |       |         | 122,297   |         |  |         | 122,797 |        
|
|
|
|
| | Due after five years through ten years |       |         | 18,426    |         |  |         | 18,537  |        
| |                                        |       |         |           |         |  |        
| |                                        |       | 167,747 |           |         |  | 167,746 |        
|
|
|
|
| | Mortgage-backed securities             |       |         | 5,075     |         |  |         | 5,126   |        
|
|
|
|
| | Equity securities                      |       |         | 2,077     |         |  |         | 2,689   |        
| |                                        |       |         |           |         |  |        
| |                                        | Total |         | $         | 174,899 |  |         | $       | 175,561 | 
| |                                        |       |         |           |         |  |        

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

The fair value of agency securities with call options totaled $123,494 at
March 31, 2001. As of March 31, 2001, the Company held no structured notes.

There were no sales of securities during the three months ended March 31,
2001 and 2000.

Securities carried at $148,945, $158,129 and $139,910 at March 31, 2001,
December 31, 2000 and March 31, 2000 were pledged to secure public deposits,
repurchase agreements and for other purposes as required or permitted permitted
by law.

9



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Note 3 - Loans

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

Loans at March 31, 2001, December 31, 2000 and March 31, 2000 were as
follows:

|                           |                                                      |   |           |         |  |              |         |         |           |   |         |         | 
|-------------------------- | ---------------------------------------------------- | - | --------- | ------- |  | ------------ | ------- | ------- | --------- | - | ------- | ------- | 
|                           |                                                      |   | March 31, |         |  | December 31, |         |         | March 31, |  
|                           |                                                      |   | 2001      |         |  | 2000         |         |         | 2000      |  
|                           |                                                      |   |           |         |  |              |         |         |           |  
|Commercial                 |                                                      | $ | 89,955    |         |  | $            | 94,353  |         |           | $ | 63,447  |        
|                          
|                          
|                          
|                          
|Real estate - construction |                                                      |   | 29,496    |         |  |              | 25,538  |         |           |   | 23,507  |        
|                          
|                          
|                          
|                          
|Real estate - mortgage     |                                                      |   | 147,758   |         |  |              | 149,869 |         |           |   | 143,946 |        
|                          
|                          
|                          
|                          
|Home equity                |                                                      |   | 20,859    |         |  |              | 20,233  |         |           |   | 17,544  |        
|                          
|                          
|                          
|                          
|Installment                |                                                      |   | 9,280     |         |  |              | 9,361   |         |           |   | 7,242   |        
|                           |                                                      |   |           |         |  |              |         |         |          
|                           | Total loans                                          |   |           | 297,348 |  |              |         | 299,354 |           |   |         | 255,686 | 
|                          
|                          
|                          
|                          
|Unearned income            |                                                      |   | (12       | )       |  |              | (16     | )       |           |   | (50     | )      
|                          
|                          
|                          
|                          
|Deferred loan fees         |                                                      |   | (499      | )       |  |              | (487    | )       |           |   | (352    | )      
|                           |                                                      |   |           |         |  |              |         |         |          
|                           | Loans, net of unearned income
and deferred loan fees |   |           | 296,837 |  |              |         | 298,851 |           |   |         | 255,284 | 
|                          
|                          
|                          
|                          
|Allowance for loan losses  |                                                      |   | (4,112    | )       |  |              | (4,689  | )       |           |   | (5,241  | )      
|                           |                                                      |   |           |         |  |              |         |         |          
|                           | Loans, net                                           |   | $         | 292,725 |  |              | $       | 294,162 |           |   | $       | 250,043 | 
|                           |                                                      |   |           |         |  |              |         |         |          

There were no loans held for sale on March 31, 2001, December 31, 2000, or
March 31, 2000.

Real estate - mortgage loans with a carrying value of $21,147, $21,786 and
$17,973 were pledged to secure public deposits at March 31, 2001, December 31,
2000 and March 31, 2000. The Company has also pledged real estate - mortgage
loans on residential property in an amount equal to at least 167% of the
outstanding Federal Home Loan Bank advances.

Non-performing loans, which includes loans contractually past due ninety
days or more, loans accounted for on a nonaccrual basis, and loans whose terms
have been renegotiated to provide a reduction or deferral of interest or
principal because of deterioration in the financial position of the borrower,
amounted to $3,584 at March 31, 2001, $4,112 at December 31, 2000 and $1,047 at
March 31, 2000.

10



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Impaired loans were as follows for March 31, 2001, December 31, 2000 and
March 31, 2000:

|                                             |  |           |       |  |              |   |       |           |  |   |     | 
|-------------------------------------------- |  | --------- | ----- |  | ------------ | - | ----- | --------- |  | - | --- | 
|                                             |  | March 31, |       |  | December 31, |   |       | March 31, | 
|                                             |  | 2001      |       |  | 2000         |   |       | 2000      | 
|                                             |  |           |       |  |              |   |       |           | 
|Loans with no allowance
for losses allocated |  | $         | 0     |  |              | $ | 0     |           |  | $ | 0   | 
|                                            
|                                            
|                                            
|                                            
|Loans with allowance
for losses allocated    |  |           | 2,210 |  |              |   | 1,728 |           |  |   | 628 | 
|                                            
|                                            
|                                            
|                                            
|Amount of the allowance
allocated            |  |           | 540   |  |              |   | 446   |           |  |   | 94  | 

There was no income recognized on impaired loans for the three months ended
March 31, 2001 and 2000. The average balance of impaired loans were as follows
for the three months ended March 31, 2001 and 2000:

|                                            |  |                    |       |  |           |   |     | 
|------------------------------------------- |  | ------------------ | ----- |  | --------- | - | --- | 
|                                            |  | Three months ended |      
|                                            |  |                    |      
|                                            |  | March 31,          |       |  | March 31, |  
|                                            |  | 2001               |       |  | 2000      |  
|                                            |  |                    |       |  |           |  
|Average of impaired loans
during the period |  | $                  | 1,676 |  |           | $ | 422 | 

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

11



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

At March 31, 2001, December 31, 2000 and March 31, 2000, the contract
amount of the Companys off-balance sheet commitments was as follows:

|                                                      |               |       |       |           |         |   |              |        |        |           |       |        |         | 
|----------------------------------------------------- | ------------- | ----- | ----- | --------- | ------- | - | ------------ | ------ | ------ | --------- | ----- | ------ | ------- | 
|                                                      |               |       |       | March 31, |         |   | December 31, |        |        | March 31, |      
|                                                      |               |       |       | 2001      |         |   | 2000         |        |        | 2000      |      
|                                                      |               |       |       |           |         |   |              |        |        |           |      
|Unused lines of credit and commitments to make loans:
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Fixed rate    |       | $     | 22,364    |         |   | $            | 17,278 |        |           | $     | 15,359 |        
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Variable rate |       |       | 89,417    |         |   |              | 81,375 |        |           |       | 91,314 |        
|                                                      |               |       |       |           |         |   |              |        |        |          
|                                                      |               | Total |       | $         | 111,781 |   |              | $      | 98,653 |           |       | $      | 106,673 | 
|                                                      |               |       |       |           |         |   |              |        |        |          
|Standby letters of credit                             |               | $     | 4,241 |           |         | $ | 3,682        |        |        | $         | 5,284 |       

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

Note 4  Allowance for Loan Losses

Activity in the allowance for loan losses for the three months ended March
31, 2001, twelve months ended December 31, 2000 and three months ended March 31,
2000 is as follows:

|                                           |                          |   |           |       |  |              |       |       |           |   |       |       | 
|------------------------------------------ | ------------------------ | - | --------- | ----- |  | ------------ | ----- | ----- | --------- | - | ----- | ----- | 
|                                           |                          |   | March 31, |       |  | December 31, |       |       | March 31, |  
|                                           |                          |   | 2001      |       |  | 2000         |       |       | 2000      |  
|                                           |                          |   |           |       |  |              |       |       |           |  
|Balance at beginning of year               |                          | $ | 4,689     |       |  | $            | 5,368 |       |           | $ | 5,368 |      
|                                          
|                                          
|                                          
|                                          
|Provision charged to operating expense     |                          |   | 0         |       |  |              | 0     |       |           |   | 0     |      
|                                          
|                                          
|                                          
|                                          
|Loans charged off                          |                          |   | (604      | )     |  |              | (838  | )     |           |   | (155  | )    
|                                          
|                                          
|                                          
|                                          
|Recoveries on loans
previously charged off |                          |   | 27        |       |  |              | 159   |       |           |   | 28    |      
|                                           |                          |   |           |       |  |              |       |       |          
|                                           | Balance at end of period |   | $         | 4,112 |  |              | $     | 4,689 |           |   | $     | 5,241 | 
|                                           |                          |   |           |       |  |              |       |       |          

12



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Note 5  Provision for Income Tax

The provision for income taxes represents federal and state income tax
expense calculated using annualized rates on taxable income generated during the
respective periods. During the first quarter of 2000, the Company received
additional information to support a charitable contribution for real estate
owned sold during 1999 to a municipal entity. Accordingly, the Company recorded
a $153 tax benefit related to this sale in the first quarter of 2000.

Note 6  Stockholders Equity

For the three months ended March 31, 2001 total stockholders equity
increased $2,667. The increase is a result of net income of $1,656, plus the
change in the valuation allowance from December 31, 2000 for the fair value of
securities available for sale, net of tax, of $1,003, plus $8 due to the
exercise of 910 stock options pursuant to the Omnibus Incentive Plan.

For the three months ended March 31, 2000 total stockholders equity
increased $815. The increase was the result of net income of $2,051, less the
change in the valuation allowance from December 31, 1999 for the fair value of
securities available for sale, net of tax, of $1,253, plus $17 due to the
exercise of 2,000 stock options pursuant to the Omnibus Incentive Plan.

In October 2000, the Company adopted a Dividend Reinvestment and Stock
Purchase Plan (the Plan). The Plan provides holders of the Companys common
stock the opportunity to purchase additional shares of the Companys common
stock by reinvesting cash dividends, to purchase additional shares of common
stock, or do both. Stockholders who participate in the Plan will have the cash
dividends paid on their shares of common stock automatically reinvested in
shares of common stock. Participants may also make optional cash purchases of
not less than $50 per payment and not more than $3,000 per calendar quarter.

Note 7  Omnibus Incentive Plan Instruments

The 1992 Omnibus Incentive Plan (the Plan) authorizes the issuance of up
to 375,000 shares of the Companys common stock, including the granting of
non-qualified stock options, restricted stock and stock appreciation rights.

13



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Statement of Financial Accounting Standards No. 123 requires pro forma
disclosures for companies that do not adopt its fair value accounting method for
stock-based employee compensation. The Company did not grant any stock options
during the three months ended March 31, 2001 or during the entire year 2000.
Stock options may be used to reward directors and employees and provide them
with an additional equity interest in the Company. Options have been issued for
10 year periods and are fully vested when granted.

Information about option grants follow:

| |                                              |  |           |        |                |               |   |      | 
| | -------------------------------------------- |  | --------- | ------ | -------------- | ------------- | - | ---- | 
| |                                              |  | Number of |        |                | Weighted-Avg. |  
| |                                              |  | Options   |        | Exercise Price |              
| |                                              |  |           |        |                |              
| | Outstanding at January 1, 2000               |  |           | 13,910 |                |               | $ | 8.32 | 
|
|
|
|
| | Exercised during period ended
March 31, 2000 |  |           | (2,000 | )              |               |   | 8.32 | 
| |                                              |  |           |        |                |               |  
| | Outstanding at March 31, 2000                |  |           | 11,910 |                |               | $ | 8.32 | 
| |                                              |  |          
| | Outstanding at January 1, 2001               |  |           | 11,410 |                |               | $ | 8.32 | 
|
|
|
|
| | Exercised during period ended
March 31, 2001 |  |           | (910   | )              |               |   | 8.32 | 
| |                                              |  |           |        |                |               |  
| | Outstanding at March 31, 2001                |  |           | 10,500 |                |               | $ | 8.32 | 
| |                                              |  |          

At March 31, 2001, all remaining options had an exercise price of $8.32.
The options outstanding had a remaining life of nine months.

The Company at its discretion may grant stock appreciation rights under the
Plan. A stock appreciation right entitles the holder to receive from the Company
an amount equal to the excess, if any, of the aggregate fair market value of the
Companys common stock which is the subject of such a grant over the grant
price. During the three months ended March 31, 2001, no stock appreciation
rights were exercised. At both March 31, 2001 and 2000, 12,280 stock
appreciation rights were outstanding at the grant price $8.32 per share. The
Companys benefit was $21 and $48 for the three months ended March 31, 2001 and
2000. The stock appreciation rights will expire during 2002.

14



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Note 8  Other Comprehensive Income

Other comprehensive income components and related taxes for the three
months ended March 31, 2001 and 2000 follows:

|                                                                   |                                   |   |                    |       |  |           |        |        |  
|------------------------------------------------------------------ | --------------------------------- | - | ------------------ | ----- |  | --------- | ------ | ------ | -
|                                                                   |                                   |   | Three months ended |      
|                                                                   |                                   |   |                    |      
|                                                                   |                                   |   | March 31,          |       |  | March 31, |       
|                                                                   |                                   |   | 2001               |       |  | 2000      |       
|                                                                   |                                   |   |                    |       |  |           |       
|Unrealized holding gains (losses)
on securities available for sale |                                   | $ | 1,639              |       |  | $         | (2,044 | )     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Tax effect                                                         |                                   |   | 636                |       |  |           | (791   | )     
|                                                                   |                                   |   |                    |       |  |          
|                                                                   | Other comprehensive income (loss) |   | $                  | 1,003 |  |           | $      | (1,253 | )
|                                                                   |                                   |   |                    |       |  |          

Note 9  Segment Information

The operating segments are determined by the products and services offered,
primarily distinguished between banking, mortgage banking and trust operations.
Loans, securities and deposits provide the revenues in the banking operation,
servicing fees and loan sales provide the revenues in mortgage banking, and
trust fees provide the revenues in trust operations. All operations are
domestic.

Management began evaluating mortgage banking as a separate segment in
August, 1998. Mortgage banking and trust segment performance is evaluated using
fee income net of direct expenses. Income taxes are not allocated to these
segments and selected indirect expenses are allocated. There are no transactions
among segments. Substantially all assets are related to the banking segment.
Neither mortgage banking nor trust pre-tax revenues exceeded 10% of total
pre-tax income for the three months ended March 31, 2001 or 2000.

15



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Information reported internally for performance assessment of operating
segments for the three months ended March 31, 2001 and 2000 follows:

|                    |                       |   |                                   |       |  |                |     |    |       |   |       |       | 
|------------------- | --------------------- | - | --------------------------------- | ----- |  | -------------- | --- | -- | ----- | - | ----- | ----- | 
|                    |                       |   | Three months ended March 31, 2001 |      
|                    |                       |   |                                   |      
|                    |                       |   | Banking                           |       |  | Other Segments |     |    | Total |  
|                    |                       |   |                                   |       |  |                |     |    |       |  
|Net interest income |                       | $ | 4,346                             |       |  | $              | 0   |    |       | $ | 4,346 |      
|                   
|                   
|                   
|                   
|Other revenue       |                       |   | 470                               |       |  |                | 241 |    |       |   | 711   |      
|                   
|                   
|                   
|                   
|Other expenses      |                       |   | 2,401                             |       |  |                | 230 |    |       |   | 2,631 |      
|                    |                       |   |                                   |       |  |                |     |    |      
|                    | Segment profit (loss) |   | $                                 | 2,415 |  |                | $   | 11 |       |   | $     | 2,426 | 
|                    |                       |   |                                   |       |  |                |     |    |      

|                    |                       |   |                                   |       |  |                |     |    |       |   |       |       | 
|------------------- | --------------------- | - | --------------------------------- | ----- |  | -------------- | --- | -- | ----- | - | ----- | ----- | 
|                    |                       |   | Three months ended March 31, 2000 |      
|                    |                       |   |                                   |      
|                    |                       |   | Banking                           |       |  | Other Segments |     |    | Total |  
|                    |                       |   |                                   |       |  |                |     |    |       |  
|Net interest income |                       | $ | 4,468                             |       |  | $              | 0   |    |       | $ | 4,468 |      
|                   
|                   
|                   
|                   
|Other revenue       |                       |   | 479                               |       |  |                | 243 |    |       |   | 722   |      
|                   
|                   
|                   
|                   
|Other expenses      |                       |   | 2,171                             |       |  |                | 250 |    |       |   | 2,421 |      
|                    |                       |   |                                   |       |  |                |     |    |      
|                    | Segment profit (loss) |   | $                                 | 2,776 |  |                | $   | (7 | )     |   | $     | 2,769 | 
|                    |                       |   |                                   |       |  |                |     |    |      

16



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION






The following discussion focuses on the consolidated financial condition of
the Northern States Financial Corporation (the Company)
at March 31, 2001 and
the consolidated results of operations for the three month period ended March
31, 2001, compared to the same period of 2000. The purpose of this discussion is
to provide a better understanding of the condensed consolidated financial
statements and the operations of its subsidiary, the Bank of Waukegan (the
Bank). This discussion should be read in conjunction with the interim
condensed consolidated financial statements and notes thereto included herein.

The statements contained in this managements discussion and analysis that
are not historical facts are forward-looking statements subject to the safe
harbor created by the Private Securities Litigation Reform Act of 1995. The
Company cautions readers of this report that a number of important factors could
cause the Companys actual results subsequent to March 31, 2001 to differ
materially from those expressed in any such forward-looking statements.

FINANCIAL CONDITION

The consolidated total assets for the Company remained stable with balances
of $536.7 million at March 31, 2001, decreasing only $1.6 million from the
Companys year-end, December 31, 2000.

The Company had federal funds sold amounting to $33 million at March 31,
2001 compared to $14 million at December 31, 2000. The Companys federal funds
sold position has increased as securities have been called during the past three
months.

The fair value of securities available for sale was $175.6 million at March
31, 2001 decreasing by $14.5 million from the previous year-end. During the
three months ended March 31, 2001 $103.5 million in securities were called or
matured and the statement of cash flows shows that these were replaced with
purchases at amortized cost of only $87.4 million in securities. During this
period interest rates declined as evidenced by the prime rate that at March 31,
2001 was 8.00% decreasing from 9.50% at year-end. At year-end $156.4 million in
agency securities had call provisions that allowed the security issuer to pay
the bond off early. With the decline in rates $84.9 million in agency securities
were called during the first quarter of 2001. Compared to December 31, 2000, the
fair value of U.S. Treasury securities remained unchanged while the fair value
of securities to U.S. agencies and corporations declined $13.4 million primarily
as a result of the call provisions that were exercised. The fair value of the
Companys state and political subdivisions securities and its mortgage-backed
securities declined $.9 and $.3 million due to planned maturities.

The Companys loans decreased slightly by $2.0 million to $296.8 million at
March 31, 2001 from December 31, 2000. The commercial loan portfolio decreased
$4.4 million from year-end. Real estate construction loans, however, increased
$4.0 million indicating continued strength in the local building industry. Real
estate mortgages decreased slightly by $2.1 million while home equity loans
increased slightly by $.6 million. Installment consumer loans decreased slightly
from year-end by $.1 million. The Companys lease portfolio increased $2.4
million during the first three months of 2001 as a lease for $2.5 million was
purchased from an investment banking house. This purchased lease carries a
surety bond that guarantees payment performance.

17



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

During the first three months of 2001 deposits at the Company decreased
$5.0 million from December 31, 2000. Most of the decrease came from municipal
and other public entity depositors that typically draw down their balances for
operational purposes during the first half of the year until real estate tax
payments are received during the second half of the year. Time deposits
decreased $6.0 million from year-end while demand-noninterest bearing and NOW
account balances declined $2.4 and $.5 million. Despite declines in rates paid
on money market accounts, balances increased $4.0 million. Savings deposits
remained stable at March 31, 2001 with balances of $43.8 million declining only
slightly by $.1 million from year-end.

Securities sold under repurchase agreements and other short-term borrowings
at the Company declined $.2 million from December 31, 2000 to $73.4 million at
March 31, 2001. These funds mainly consist of securities sold under repurchase
agreement that are offered through an overnight repurchase agreement product and
a term product with maturities from 7 days to one year. Repurchase agreements
provide a source of funds to the Company that do not increase reserve
requirements with the Federal Reserve Bank or create an expense relating to FDIC
insurance and, therefore, are less costly to the Company.

At March 31, 2001 the Company had term advances from the Federal Home Loan
Bank in the amount of $10.0 million that remains unchanged from December 31,
2000.

Total stockholders equity increased $2,667,000 to $75,106,000 during the
three months ended March 31, 2001. The increase is the result of net income of
$1,656,000, plus the adjustment in the valuation allowance for the market value
of securities available for sale, net of tax, of $1,003,000, plus $8,000 due to
the exercise of 910 stock options pursuant to the Omnibus Incentive Plan.

The tier 1 capital to average asset ratio at March 31, 2001 was 14.73% and
the total tier 2 capital to asset ratio, on a risk adjusted basis, amounted to
20.94%, exceeding the minimum required to be capitalized under prompt corrective
action regulations, which minimums are 5.00% and 10.00%. Book value per share
was $16.83 at March 31, 2001 as compared to $16.24 at December 31, 2000. On
March 31, 2001, the Company and its subsidiary were in compliance with all
applicable regulatory capital requirements.

RESULTS OF OPERATIONS

NET INCOME

The consolidated net income for the quarter ended March 31, 2001 was
$1,656,000, a decrease of $395,000 or 19.26%, as compared to net income of
$2,051,000 for the same period the previous year. The annualized return on
average assets was 1.24% for the quarter, down from 1.73% for the quarter the
previous year.

During the first quarter of 2000, the Company received information
supporting a charitable contribution for real estate owned sold during 1999 to a
municipal entity. Accordingly, the Company recorded a $153,000 tax benefit
related to this sale in the first quarter of 2000. When discounting this
one-time factor from 2000, net income for the first three months of 2001 was
12.75% less than for the same period last year.

18



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

NET INTEREST INCOME

Net interest income, the difference between interest income earned on
average interest earning assets and interest expense on average interest bearing
liabilities, decreased $122,000 during the three months ended March 31, 2001,
compared to the same three months in 2000. One of the major factors affecting
net interest income is change to interest rates. Interest rates during the first
quarter of 2001 were comparable to the first quarter of 2000 as evidenced by the
average prime lending rate that was 8.64% for first quarter of 2001 compared to
8.68% for the same three months of 2000. The major difference being that during
the first quarter of 2001 interest rates were in a falling environment while
during the first quarter of 2000 interest rates were rising. In the first
quarter of 2001 the prime lending rate began the year at 9.50%, dropped to 9.00%
in January 2001, further dropped to 8.50% in February 2001 and ended the quarter
at 8.00% in March 2001. During the same period of 2000 the prime lending rate
began at 8.50%, increasing to 8.75 in February 2000 and in March 2000 increased
again to 9.00%.

Table 1, Analysis of Average Balance and Tax Equivalent Rates for the
Three Months ended March 31, 2001 and 2000, shows that yields earned on
interest earning assets increased slightly during the first quarter of 2001
compared to last year. During the first quarter of 2001 the yields on interest
earning assets were 7.68% and were comparable to those earned during the first
quarter of 2000 of 7.63%.

Table 1, however, shows that interest rates on interest bearing liabilities
were 72 basis points higher in the first quarter of 2001 at 5.23% compared to
4.51% for the same quarter of 2000. The major reason for this is that time
deposits and other borrowings consisting of repurchase agreements that were
issued in the third and fourth quarters of 2000 at higher interest rates for
terms of one year or greater were still outstanding during the first quarter of
2001. The average time deposit rate during the first quarter of 2001 was 6.25%
compared to 5.42% last year, an increase of 83 basis points. Interest rates on
other borrowings during the first quarter of 2001 were 6.20% compared to 5.18%
last year, increasing 102 basis points. If interest rates remain as they
currently are or continue to decline, these time deposits and repurchase
agreements will mature and reprice at lower interest rates during the third and
fourth quarters of 2001 and this should have a positive impact on future net
interest income. As interest rates declined during the first quarter of 2001
management has lowered interest rates on NOW, money market and savings deposit
rates. Table 1 shows evidence of this for NOW and Savings accounts as rates for
these deposits are less during the first quarter of 2001 compared to last year.
Although money market deposit rates for the first quarter of 2001 were 4.02%, 52
basis points over the same period last year, they have decreased 48 basis points
from the fourth quarter of 2000 where they had been 4.50%.

Another factor affecting net interest income is the average balance levels
of interest earning assets and interest bearing liabilities. As shown in Table
1, interest earning assets were $61.4 million over last year and interest
bearing liabilities were $47.3 million greater than last year. Generally growth
such as this has a positive impact on net interest income since interest earning
assets are growing at a faster pace than interest bearing liabilities.

Net interest income for the first quarter of 2001 was also affected by the
decision by management to consider loans to one creditor totaling $1.1 million
as being impaired and placing the loans on a nonaccrual status. This decision
made it necessary to reverse $70,000 of accrued interest income on the loans
lowering net interest income by that amount.

19



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

TABLE 1

NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Three Months Ended March 31, 2001 and 2000
($ 000s)

|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |         |   |         |          |         |   |       |       |       |  |      |      |       |  
|------------------------------------ | ------------------------------------- | ---------------------------------------- | -------------------------------------------- | ------- | ------- | ------- | - | -------- | ----- | ----- | ---- | ---- | ---- | ------- | - | ------- | -------- | ------- | - | ----- | ----- | ----- |  | ---- | ---- | ----- | -
|                                     |                                       |                                          |                                              |         | 2001    |         |   | 2000    
|                                     |                                       |                                          |                                              |         |         |         |   |         
|                                     |                                       |                                          |                                              |         | Average |         |   |          |       |       |      |      |      |         |   | Average |         
|                                     |                                       |                                          |                                              |         | Balance |         |   | Interest |       |       | Rate |      |      | Balance |   |         | Interest |         |   | Rate  |      
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |         |   |         |          |         |   |       |      
|Assets                              
|                                     | Loans (1)(2)(3)                       |                                          | $                                            | 305,802 |         |         | $ | 6,698    |       |       |      | 8.76 | %    |         | $ | 253,277 |          |         | $ | 5,534 |       |       |  | 8.74 | %   
|                                    
|                                    
|                                    
|                                    
|                                     | Taxable securities (4)                |                                          |                                              | 167,508 |         |         |   | 2,528    |       |       |      | 6.04 | %    |         |   | 172,844 |          |         |   | 2,738 |       |       |  | 6.09 | %   
|                                    
|                                    
|                                    
|                                    
|                                     | Tax-advantaged securities (2) (4)     |                                          |                                              | 14,157  |         |         |   | 257      |       |       |      | 7.33 | %    |         |   | 19,125  |          |         |   | 363   |       |       |  | 7.56 | %   
|                                    
|                                    
|                                    
|                                    
|                                     | Interest bearing deposits in banks    |                                          |                                              | 155     |         |         |   | 2        |       |       |      | 5.16 | %    |         |   | 270     |          |         |   | 4     |       |       |  | 5.93 | %   
|                                    
|                                    
|                                    
|                                    
|                                     | Federal funds sold                    |                                          |                                              | 22,390  |         |         |   | 304      |       |       |      | 5.43 | %    |         |   | 3,083   |          |         |   | 45    |       |       |  | 5.84 | %   
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |         |   |         |          |        
|                                     |                                       |                                          | Interest earning assets (4)                  |         |         | 510,012 |   |          |       | 9,789 |      |      |      | 7.68    | % |         |          | 448,599 |   |       |       | 8,684 |  |      |      | 7.63  | %
|                                    
|                                    
|                                    
|                                    
|                                     | Noninterest earning assets            |                                          |                                              | 23,566  |         |         |   |          |       |       |      |      |      |         |   | 26,372  |         
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |        
|                                     |                                       |                                          | Average assets                               |         | $       | 533,578 |   |          |       |       |      |      |      |         |   |         | $        | 474,971 |  
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |        
|Liabilities and stockholders equity
|                                     | NOW deposits                          |                                          | $                                            | 44,784  |         |         | $ | 283      |       |       |      | 2.53 | %    |         | $ | 42,952  |          |         | $ | 284   |       |       |  | 2.64 | %   
|                                    
|                                    
|                                    
|                                    
|                                     | Money market deposits                 |                                          |                                              | 37,650  |         |         |   | 378      |       |       |      | 4.02 | %    |         |   | 37,497  |          |         |   | 328   |       |       |  | 3.50 | %   
|                                    
|                                    
|                                    
|                                    
|                                     | Savings deposits                      |                                          |                                              | 43,297  |         |         |   | 271      |       |       |      | 2.50 | %    |         |   | 44,999  |          |         |   | 307   |       |       |  | 2.73 | %   
|                                    
|                                    
|                                    
|                                    
|                                     | Time deposits                         |                                          |                                              | 202,246 |         |         |   | 3,160    |       |       |      | 6.25 | %    |         |   | 172,164 |          |         |   | 2,331 |       |       |  | 5.42 | %   
|                                    
|                                    
|                                    
|                                    
|                                     | Other borrowings                      |                                          |                                              | 80,361  |         |         |   | 1,245    |       |       |      | 6.20 | %    |         |   | 63,380  |          |         |   | 821   |       |       |  | 5.18 | %   
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |         |   |         |          |        
|                                     |                                       |                                          | Total interest bearing liabilities           |         |         | 408,338 |   |          |       | 5,337 |      |      |      | 5.23    | % |         |          | 360,992 |   |       |       | 4,071 |  |      |      | 4.51  | %
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |         |   |         |          |         |   |      
|                                     | Demand deposits                       |                                          |                                              | 42,179  |         |         |   |          |       |       |      |      |      |         |   | 41,839  |         
|                                    
|                                    
|                                    
|                                    
|                                     | Other noninterest earning liabilities |                                          |                                              | 9,408   |         |         |   |          |       |       |      |      |      |         |   | 6,691   |         
|                                    
|                                    
|                                    
|                                    
|                                     | Stockholders equity                  |                                          |                                              | 73,653  |         |         |   |          |       |       |      |      |      |         |   | 65,449  |         
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |        
|                                     |                                       |                                          | Average liabilities and
Stockholders equity |         | $       | 533,578 |   |          |       |       |      |      |      |         |   |         | $        | 474,971 |  
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |        
|                                     |                                       | Net interest income                      |                                              |         |         |         |   | $        | 4,452 |       |      |      |      |         |   |         |          |         |   | $     | 4,613 |      
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |         |   |         |          |        
|                                     |                                       | Net yield on interest earning assets (4) |                                              |         |         |         |   |          |       |       |      |      | 3.49 | %       |   |         |          |         |   |       |       |       |  |      | 4.05 | %    
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |         |   |         |          |         |   |       |       |      
|                                     |                                       | Interest bearing liabilities            
|                                     |                                       |                                          | To earning assets ratio                      |         |         |         |   |          |       |       |      |      |      | 80.08   | % |         |          |         |   |       |       |       |  |      |      | 80.47 | %
|                                     |                                       |                                          |                                              |         |         |         |   |          |       |       |      |      |      |         |   |         |          |         |   |       |       |      



---

|(1) | - | Interest income on loans includes loan origination and other fees
of $85 and $83 for the three months ended March 31, 2001 and 2000.                                                                                                                                                              
|--- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) | - | Tax-exempt income is reflected on a fully tax equivalent basis
utilizing a 34% rate.                                                                                                                                                                                                              
|   
|   
|   
|   
|(3) | - | Non-accrual loans are included in average loans.                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|(4) | - | Rate information was calculated on the average amortized cost for securities. The three months ended
March 31, 2001 and 2000 average balance information includes an average unrealized gain (loss) for taxable
securities of ($40) and ($6,851) and for tax-advantaged securities $142 and ($86).

20



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

ASSET QUALITY AND THE PROVISION FOR LOAN LOSSES

There was no provision for loan losses during the three months ended March
31, 2001 or March 31, 2000. Management, with the concurrence of the Board of
Directors, after carefully reviewing the adequacy of the allowance for loan
losses and the levels of nonperforming and impaired loans, found that no
provision for loan losses was necessary during these periods.

At March 31, 2001, the allowance for loan losses was $4,112,000 or 1.39% of
loans as compared to 1.57% of loans at December 31, 2000. During the first
quarter of 2001 $604,000 in loans were charged off to the allowance compared to
$155,000 during the same period last year. Recoveries of loans previously
charged off were $27,000 during the first quarter of 2001 compared to $28,000
during the same period in 2000.

Nonperforming loans which includes nonaccrual loans and loans 90 days or
more past due, still accruing were $3,584,000 at March 31, 2001 or 1.21% of
loans. This is a decrease of $528,000 from December 31, 2000 when nonperforming
loans totaled $4,112,000 or 1.38% of loans. Of the $3,584,000 in nonperforming
loans, $3,075,000 of these loans are secured by real estate. Of the total
nonperforming loans, 68.53% or $2,456,000 consists of loans to four separate
creditors with borrowings ranging from $387,000 to $1,119,000. Impaired loans at
March 31, 2001 were $2,210,000 increasing from $1,728,000 at December 31, 2000.
The amount of the allowance for loan losses allocated for impaired loans was
$540,000 at March 31, 2001 increasing from $446,000 from year-end.

Other real estate owned, a non-performing asset, at March 31, 2001 was
$2,022,000 and remained unchanged from December 31, 2001.

Management and the Board of Directors analyze the adequacy of the
allowance for loan losses at least quarterly. Loans judged to be impaired, loans
with potential loss exposure, loans that are no longer accruing interest, and
historical net loan loss percentages are reviewed in the analysis of the
allowance for loan losses. Based on management and the Board of Directors
analysis, the allowance for loan losses at March 31, 2001 is adequate to cover
current loan-loss exposure. If the level of impaired and nonperforming loans
remains stable during the remainder of 2001, no additional loan loss provision
is anticipated during 2001.

NONINTEREST INCOME

Noninterest income for the three months ended March 31, 2001 was $711,000
as compared to $722,000 for the three months ended March 31, 2000, a decrease of
$11,000. Service fees on deposits decreased slightly by $2,000 as compared to
the same quarter last year because of decreased overdraft fee income. Trust fee
income decreased by $23,000 during the quarter ended March 31, 2001 as compared
to the same quarter last year. Mortgage banking income increased by $24,000 as
lower home mortgage rates

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

caused the levels of mortgage banking activity to increase. During the first
three months of 2001 $2.3 million in table funded loan applications were
processed and disbursed by the mortgage banking area compared to $1.1 million
last year. Miscellaneous operating income during the first quarter of 2001 was
$10,000 less than the same period last year as miscellaneous loan fees declined
as the volume of loans made to customers decreased from the previous year. The
cash flow statement shows that in the first quarter of 2001 there were net
incoming cash flows of $1.5 million due to loan payoffs while during the first
quarter of 2000 there were net outgoing cash flows of $7.3 million in new loans
booked.

NONINTEREST EXPENSES

Noninterest expenses for the quarter ended March 31, 2001 were $2,631,000
increasing $210,000 from the same quarter last year. The Companys efficiency
ratio, noninterest expenses divided by the sum of net interest income and
noninterest income, was 52.03% for the first quarter of 2001 as compared to
46.65% for the same quarter of 2000. The efficiency ratio is frequently used as
an indicator as to how well a financial institution manages its noninterest
expenses with a decreasing ratio preferred.

Increases in salary and employee benefit expenses of $55,000 occurred
during the first quarter of 2001 compared to the same period last year. Regular
salary expense was 3.8% or $43,000 greater during the first quarter of 2001 as a
result of yearly merit increases. Compensation expense relating to stock
appreciation rights were $27,000 more during the three months ended March 31,
2001 than for the same three months last year due to changes in the price of the
Companys stock. Group insurance expense decreased $15,000 during the first
quarter of 2001 compared to last year due to changes to the insurance carrier
and coverage.

Occupancy expenses for the first quarter of 2001 were $381,000, which was
an increase of $63,000 from the first quarter of 2000. There were increases for
utilities that were $22,000 greater than last year as utility rates increased.
Rental income that is used as a reduction to occupancy expense declined $20,000
compared to last year as one of the Companys major tenants at one of the branch
offices relocated due to a business consolidation. Occupancy expenses also
increased $27,000 over the same period last year due to increased maintenance
expenses. There were also increase maintenance costs
for repairs to the buildings heating systems that were $6,000 over last year.
Maintenance expenses relating to equipment increased by $16,000 in part from
maintenance contracts placed on security systems installed in 2000 as the
warranty period ended.

Data processing expense increased $13,000 during the three months ended
March 31, 2001 to $132,000 compared to $119,000 last year. The increased data
processing expense is the result of costs relating to the Companys Internet
banking product that was introduced during the fourth quarter of 2000.

FDIC insurance expense was $17,000 during the three months ended March 31,
2001 decreasing slightly from $20,000 during the same period last year.

Other real estate owned expenses increased during the first quarter of 2001
by $19,000 to $31,000. This increase in part was because the Company did not
receive any rents from any of its other real estate owned as it did the previous
year as the rent earning property had been sold later in 2000.

22



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION

Miscellaneous other operating expenses for the first quarter of 2001
increased $63,000 to $555,000 compared to the same quarter last year. Operating
losses due to forged check losses were $22,000 greater in 2001 than last year.
Marketing expenses increased over the previous year by $17,000 in part from
increased product development costs and increased cable television advertising.
Audit fees increased $12,000 compared to the same period last year as the
Company contracted to increase the auditing of its data systems especially in
the area of its new Internet banking product. Printing expenses increased
$12,000 from last year due to increased prices as well as for the design of
forms needed to comply with the new consumer privacy regulations.

FEDERAL AND STATE INCOME TAXES

For the three months ended March 31, 2001 and 2000, the Companys
provisions for federal and state income taxes were $770,000 and $718,000, which
as a percentage of pretax earnings was 31.74% and 25.93%. During the first
quarter of 2000, the Company received information to support a charitable
contribution on real estate owned sold during 1999 to a municipal entity and the
Company recorded a $153,000 tax benefit related to this sale. When discounting
this one-time factor, income taxes as a percentage of pretax earning during the
first three months of 2000 would have been 31.46%.

RECENT ACCOUNTING PRONOUNCEMENTS

Beginning January 1, 2001, a new accounting standard required all
derivatives to be recorded at fair value. Unless designated as hedges, changes
in these fair values will be recorded in the income statement. Fair value
changes involving hedges will generally be recorded by offsetting gains and
losses on the hedge and on the hedged item, even if the fair value of the hedged
item is not otherwise recorded. Adoption of this standard on January 1, 2001 did
not have a material effect, as the Company held no derivatives.

NORTHERN STATES FINANCIAL CORPORATION






The Companys primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. Interest-rate risk (IRR) is the exposure of a
banking organizations financial condition to adverse movements in interest
rates. Accepting this risk can be an important source of profitability and
stockholder value, however excessive levels of IRR can pose a significant threat
to the Companys earnings and capital base. Accordingly, effective risk
management that maintains IRR at prudent levels is essential to the Companys
safety and soundness.

Evaluating a financial institutions exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
IRR and the organizations quantitative level of exposure. When assessing the
IRR management process, the Company seeks to ensure that appropriate policies,
procedures, management information systems and internal controls are in place to
maintain IRR

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

at prudent levels with consistency and continuity. Evaluating the quantitative
level of IRR 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 Federal Reserve Board, together with the Office of the Comptroller of
the Currency and the Federal Deposit Insurance Corporation, adopted a Joint
Agency Policy Statement on Interest-Rate Risk, effective June 26, 1996. The
policy statement provides guidance to examiners and bankers on sound practices
for managing IRR, which will form the basis for ongoing evaluation of the
adequacy of IRR management at supervised institutions. The policy statement also
outlines fundamental elements of sound management that have been identified in
prior Federal Reserve guidance and discusses the importance of these elements in
the context of managing IRR. Specifically, the guidance emphasizes the need for
active board of director and management oversight and a comprehensive
risk-management process that effectively identifies, measures, and controls IRR.
One approach used by management is to minimize IRR is to periodically shock the
balance sheet by decreasing rates 2% and increasing rates 2% using computer
simulation to show the effect of rate changes on the fair value of the Companys
financial instruments. This approach falls under the broad definition of
asset/liability management. The Companys primary asset/liability management
technique is the interest rate shock.

Several ways an institution can manage IRR include: selling existing assets
or repaying certain liabilities; matching repricing periods for new assets and
liabilities for example, by shortening terms of new loans or investments.
Financial institutions are also subject to prepayment risk in falling rate
environments. For example, a debtor may prepay other financial assets so that
the debtor may refinance their obligations at new, lower rates. Prepayments of
assets carrying higher rates reduce the Companys interest income and overall
asset yields. 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 long-term loans or
investments. Accordingly, the Company seeks to have in place sources of cash to
meet short-term demands. Increasing deposits, borrowing, or selling assets can
obtain these funds.

The following Table 2, Effect of Interest Shocks on Financial Instruments
as of December 31, 2000 and December 31, 1999, shows how interest rate shocks
of decreasing rates 2% and increasing rates 2% effect the fair value of the
Companys financial instruments. The data shown in Table 2 is as of December 31,
2000 as it is the most current period available from the computer simulation
model. The computer simulation model used to do the interest rate shocks and
calculate the effect on the fair value of the Companys financial instruments
takes into consideration maturity and repricing schedules of the various assets
and liabilities. At December 31, 2000 the fair value of securities available for
sale increases $3.2 million when rates are shocked downward 2% while the fair
value decreases $8.1 million for a 2% upwards rate shock. The change in fair
value of securities is smaller when rates are shocked down because there were
call provisions on $156.4 million of the U.S. Government agency securities at
December 31, 2000. As rates decline the probability that a security with call
provisions will be called increase because the security issuer has the
opportunity to reduce their interest expense by paying off the called security.
Events during the first quarter of 2001 have shown rate decreases in the prime
lending rate of 150 basis points from 9.50% on January 1, 2001 to 8.00% on March
31, 2001 and during this time period $84.9 million in U.S. Government agency
securities have been called. At December 31, 2000 the fair value of the
Companys financial asset instruments was $537.2 million compared to the book or
carrying value on the Companys financial asset instruments at December 31, 2000
of $532.3 million.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

TABLE 2

NORTHERN STATES FINANCIAL CORPORATION
EFFECT OF INTEREST SHOCKS ON FINANCIAL INSTRUMENTS
as of December 31, 2000 and 1999
($ 000s)

|                                 |                                                                               |   |        |                                 |         |   |         |         |         |       |        |         |         | 
|-------------------------------- | ----------------------------------------------------------------------------- | - | ------ | ------------------------------- | ------- | - | ------- | ------- | ------- | ----- | ------ | ------- | ------- | 
|                                 |                                                                               |   |        | Fair Value at December 31, 2000 |        
|                                 |                                                                               |   |        |                                 |        
|                                 |                                                                               |   |        | Down 2%                         |         |   | Current |         |         | Up 2% |       
|                                 |                                                                               |   |        |                                 |         |   |         |         |         |       |       
|Assets                           |                                                                               |   |       
|                                 | Cash and cash equivalents                                                     |   | $      | 31,189                          |         |   | $       | 31,187  |         |       | $      | 31,185  |        
|                                
|                                
|                                
|                                
|                                 | Securities available for sale                                                 |   |        |                                 | 193,250 |   |         |         | 190,050 |       |        |         | 181,994 | 
|                                
|                                
|                                
|                                
|                                 | Loans                                                                         |   |        |                                 | 313,509 |   |         |         | 303,309 |       |        |         | 293,677 | 
|                                
|                                
|                                
|                                
|                                 | Direct lease financing                                                        |   |        |                                 | 8,284   |   |         |         | 7,871   |       |        |         | 7,499   | 
|                                
|                                
|                                
|                                
|                                 | Accrued interest receivable                                                   |   |        |                                 | 4,816   |   |         |         | 4,816   |       |        |         | 4,816   | 
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|Financial liabilities            |                                                                               |   |       
|                                 | Deposits                                                                      |   | $      | 383,023                         |         |   | $       | 374,677 |         |       | $      | 367,758 |        
|                                
|                                
|                                
|                                
|                                 | Securities sold under repurchase agreements
and other short-term borrowings   |   |        |                                 | 74,467  |   |         |         | 73,618  |       |        |         | 72,787  | 
|                                
|                                
|                                
|                                
|                                 | Federal Home Loan Bank term advances                                          |   |        |                                 | 10,001  |   |         |         | 10,000  |       |        |         | 9,999   | 
|                                
|                                
|                                
|                                
|                                 | Advances from borrowers for taxes and insurance                               |   |        |                                 | 816     |   |         |         | 816     |       |        |         | 816     | 
|                                
|                                
|                                
|                                
|                                 | Accrued interest payable                                                      |   |        |                                 | 6,208   |   |         |         | 6,208   |       |        |         | 6,208   | 
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                 |                                                                               |   |        | Fair Value at December 31, 1999 |        
|                                 |                                                                               |   |        |                                 |        
|                                 |                                                                               |   |        | Down 2%                         |         |   | Current |         |         | Up 2% |       
|                                 |                                                                               |   |        |                                 |         |   |         |         |         |       |       
|Assets
Cash and cash equivalents |                                                                               | $ | 16,900 |                                 |         | $ | 16,900  |         |         | $     | 16,900 |        
|                                
|                                
|                                
|                                
|                                 | Interest bearing deposits in financial
institutions  maturities over 90 days |   |        |                                 | 101     |   |         |         | 100     |       |        |         | 99      | 
|                                
|                                
|                                
|                                
|                                 | Securities available for sale                                                 |   |        |                                 | 204,914 |   |         |         | 196,684 |       |        |         | 185,041 | 
|                                
|                                
|                                
|                                
|                                 | Loans                                                                         |   |        |                                 | 255,395 |   |         |         | 245,838 |       |        |         | 236,915 | 
|                                
|                                
|                                
|                                
|                                 | Direct lease financing                                                        |   |        |                                 | 2,211   |   |         |         | 2,175   |       |        |         | 2,142   | 
|                                
|                                
|                                
|                                
|                                 | Accrued interest receivable                                                   |   |        |                                 | 4,361   |   |         |         | 4,361   |       |        |         | 4,361   | 
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|                                
|Financial liabilities           
|                                 | Deposits                                                                      |   |        | $                               | 341,331 |   |         | $       | 333,547 |       |        | $       | 327,593 | 
|                                
|                                
|                                
|                                
|                                 | Securities sold under repurchase agreements and other short-term borrowings   |   |        |                                 | 70,440  |   |         |         | 70,436  |       |        |         | 70,432  | 
|                                
|                                
|                                
|                                
|                                 | Advances from borrowers for taxes and insurance                               |   |        |                                 | 645     |   |         |         | 645     |       |        |         | 645     | 
|                                
|                                
|                                
|                                
|                                 | Accrued interest payable                                                      |   |        |                                 | 3,640   |   |         |         | 3,640   |       |        |         | 3,640   | 

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##### Table of Contents











Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to sign on its behalf by the undersigned
hereunto duly authorized, on this 11th day of May 2001.

|                                                                                 |  |              |  |     |  |                                                                             
|-------------------------------------------------------------------------------- |  | ------------ |  | --- |  | ----------------------------------------------------------------------------
|NORTHERN STATES FINANCIAL CORPORATION
                              (Registrant)
|                                                                                 |  |              | 
|Date:                                                                            |  | May 11, 2001 |  | By: |  | /s/ Fred Abdula
Fred Abdula
Chairman of the Board of
Directors and President
|                                                                                 |  |              | 
|Date:                                                                            |  | May 11, 2001 |  | By: |  | /s/ Thomas M. Nemeth
Thomas M. Nemeth
Vice President and Treasurer          

26