##### Table of Contents



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



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FORM 10-Q



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

For the quarterly period ending June 30, 2001

OR



| |                                                                                           | 
| | ----------------------------------------------------------------------------------------- | 
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934 | 

For the transition period from _________ to __________



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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:       NO:

4,461,755 shares of common stock were outstanding
as of June 30, 2001





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TABLE OF CONTENTS



|                              |                                                                     |                                                           |  |  |  |  |  | 
|----------------------------- | ------------------------------------------------------------------- | --------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                       
|                              |                                                                     | INDEPENDENT ACCOUNTANTS' REPORT                          
|                              |                                                                     | CONDENSED CONSOLIDATED BALANCE SHEETS                    
|                              |                                                                     | CONDENSED CONSOLIDATED STATEMENTS OF INCOME              
|                              |                                                                     | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|                              |                                                                     | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                              |                                                                     | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS     
|                              | ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
|                              | 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
JUNE 30, 2001
INDEX

|                              |                                                                                                               |                                                                                                                      |  |             |        | 
|----------------------------- | ------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------- |  | ----------- | ------ | 
|                              |                                                                                                               |                                                                                                                      |  | Page Number |       
|                              |                                                                                                               |                                                                                                                      |  |             |       
|PART I. FINANCIAL INFORMATION
|                             
|                             
|                             
|                             
|                              | Item 1. Financial Statements                                                                                 
|                             
|                             
|                             
|                             
|                              |                                                                                                               | Independent Accountants Report                                                                                      |  |             | 2      | 
|                             
|                             
|                             
|                             
|                              |                                                                                                               | Condensed consolidated balance sheets as of June 30,
     2001 and December 31, 2000                                 |  |             | 3      | 
|                             
|                             
|                             
|                             
|                              |                                                                                                               | Condensed consolidated statements of income for the three and
     six months ended June 30, 2001 and 2000           |  |             | 4      | 
|                             
|                             
|                             
|                             
|                              |                                                                                                               | Condensed consolidated statements of comprehensive income
     the three and six months ended June 30, 2001 and 2000 |  |             | 5      | 
|                             
|                             
|                             
|                             
|                              |                                                                                                               | Condensed consolidated statements of cash flows for
     the six months ended June 30, 2001 and 2000                 |  |             | 6      | 
|                             
|                             
|                             
|                             
|                              |                                                                                                               | Notes to condensed consolidated financial statements                                                                 |  |             | 7 - 16 | 
|                             
|                             
|                             
|                             
|                              | Item 2. Managements discussion and analysis of financial
                condition and results of operations |                                                                                                                      |  | 17 - 25     |       
|                             
|                             
|                             
|                             
|                              | Item 7A. Quantitative and qualitative disclosures
                  about market risk                         |                                                                                                                      |  | 25 - 27     |       
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION   
|                             
|                             
|                             
|                             
|                              |                                                                                                               | Signatures                                                                                                           |  |             | 28     | 

1



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##### Table of Contents









NORTHERN STATES FINANCIAL CORPORATION
FORM 10-Q
JUNE 30, 2001




INDEPENDENT ACCOUNTANTS REPORT

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

We have reviewed the condensed consolidated balance sheet of NORTHERN
STATES FINANCIAL CORPORATION as of June 30, 2001 and the condensed consolidated
statements of income and comprehensive income for the three month and six month
periods ended June 30, 2001 and 2000 and the condensed consolidated statements
of cash flows for the six month periods ended June 30, 2001 and 2000. These
financial statements are the responsibility of the Companys management.

We conducted our review 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 review, 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

Oak Brook, Illinois
July 26, 2001

2



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION




|                                                                                   |                                 |                                            |         |          |         |   |              |         |         | 
|---------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------ | ------- | -------- | ------- | - | ------------ | ------- | ------- | 
|                                                                                   |                                 |                                            |         | June 30, |         |   | December 31, |        
|                                                                                   |                                 |                                            |         | 2001     |         |   | 2000         |        
|                                                                                   |                                 |                                            |         |          |         |   |              |        
|                                                                                   |                                 | Assets                                     |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Cash and due from banks                                                            |                                 | $                                          | 18,651  |          |         | $ | 17,013       |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Interest bearing deposits in financial institutions -
maturities less than 90 days |                                 |                                            | 243     |          |         |   | 174          |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Federal funds sold                                                                 |                                 |                                            | 15,500  |          |         |   | 14,000       |        
|                                                                                   |                                 |                                            |         |          |         |  
|                                                                                   | Total cash and cash equivalents |                                            |         | 34,394   |         |   |              | 31,187  |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Securities available for sale                                                      |                                 |                                            | 197,995 |          |         |   | 190,050      |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Loans                                                                              |                                 |                                            | 304,022 |          |         |   | 298,851      |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Less: Allowance for loan losses                                                    |                                 |                                            | (3,726  | )        |         |   | (4,689       | )      
|                                                                                   |                                 |                                            |         |          |         |  
|                                                                                   | Loans, net                      |                                            |         | 300,296  |         |   |              | 294,162 |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Direct lease financing                                                             |                                 |                                            | 11,956  |          |         |   | 7,417        |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Office buildings and equipment, net                                                |                                 |                                            | 5,614   |          |         |   | 5,796        |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Other real estate owned                                                            |                                 |                                            | 2,022   |          |         |   | 2,022        |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Accrued interest receivable                                                        |                                 |                                            | 4,010   |          |         |   | 4,816        |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Other assets                                                                       |                                 |                                            | 2,074   |          |         |   | 2,806        |        
|                                                                                   |                                 |                                            |         |          |         |  
|                                                                                   | Total assets                    |                                            | $       | 558,361  |         |   | $            | 538,256 |        
|                                                                                   |                                 |                                            |         |          |         |  
|                                                                                   |                                 | Liabilities and Stockholders Equity       |         |          |         |   |              |         |         | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Liabilities                                                                        |                                 |                                            |         |          |         |   |              |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Deposits                                                                           |                                 |                                            |         |          |         |   |              |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Demand - noninterest bearing    |                                            | $       | 46,336   |         |   | $            | 44,567  |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | NOW accounts                    |                                            |         | 46,286   |         |   |              | 44,197  |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Money market accounts           |                                            |         | 42,271   |         |   |              | 35,603  |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Savings                         |                                            |         | 43,606   |         |   |              | 43,910  |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Time, $100,000 and over         |                                            |         | 118,243  |         |   |              | 97,822  |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                   | Time, under $100,000            |                                            |         | 99,973   |         |   |              | 107,022 |        
|                                                                                   |                                 |                                            |         |          |         |  
|                                                                                   |                                 | Total deposits                             |         |          | 396,715 |   |              |         | 373,121 | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Securities sold under repurchase agreements
and other short-term borrowings        |                                 |                                            | 67,601  |          |         |   | 73,618       |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Federal Home Loan Bank advances                                                    |                                 |                                            | 10,000  |          |         |   | 10,000       |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Advances from borrowers for taxes and insurance                                    |                                 |                                            | 657     |          |         |   | 816          |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Accrued interest payable and other liabilities                                     |                                 |                                            | 8,209   |          |         |   | 8,262        |        
|                                                                                   |                                 |                                            |         |          |         |  
|                                                                                   |                                 | Total liabilities                          |         |          | 483,182 |   |              |         | 465,817 | 
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Stockholders Equity                                                               |                                 |                                            |         |          |         |   |              |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Common stock                                                                       |                                 |                                            | 1,785   |          |         |   | 1,784        |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Additional paid-in capital                                                         |                                 |                                            | 11,443  |          |         |   | 11,436       |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Retained earnings                                                                  |                                 |                                            | 61,312  |          |         |   | 59,817       |        
|                                                                                  
|                                                                                  
|                                                                                  
|                                                                                  
|Accumulated other comprehensive income (loss), net                                 |                                 |                                            | 639     |          |         |   | (598         | )      
|                                                                                   |                                 |                                            |         |          |         |  
|                                                                                   | Total stockholders equity      |                                            |         | 75,179   |         |   |              | 72,439  |        
|                                                                                   |                                 |                                            |         |          |         |  
|                                                                                   |                                 | Total liabilities and stockholders equity |         | $        | 558,361 |   |              | $       | 538,256 | 
|                                                                                   |                                 |                                            |         |          |         |  

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

3



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NORTHERN STATES FINANCIAL CORPORATION




|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |       |          |        |       |        |        | 
|--------------------------------------------------- | --------------------------------------------------- | ------------------------------ | ----- | ------------------ | ----- | -------- | ---------------- | ----- | -------- | ----- | -------- | ------ | ----- | ------ | ------ | 
|                                                    |                                                     |                                |       | Three months ended |       |          | Six months ended |      
|                                                    |                                                     |                                |       |                    |       |          |                  |      
|                                                    |                                                     |                                |       | June 30,           |       | June 30, |                  |       | June 30, |       | June 30, |       
|                                                    |                                                     |                                |       | 2001               |       | 2000     |                  |       | 2001     |       | 2000     |       
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |       |          |       
|Interest income                                     |                                                     |                                |       |                    |       |          |                  |       |          |       |          |        |       |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Loans (including fee income)                        |                                | $     | 6,420              |       | $        | 6,004            |       |          | $     | 13,100   |        | $     | 11,516 |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Securities                                          |                                |       |                    |       |          |                  |       |          |       |          |        |       |        |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                     | Taxable                        |       |                    | 2,529 |          |                  | 2,704 |          |       |          | 5,057  |       |        | 5,442  | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    |                                                     | Exempt from federal income tax |       |                    | 162   |          |                  | 230   |          |       |          | 331    |       |        | 470    | 
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Interest bearing deposits in financial institutions |                                |       | 1                  |       |          | 3                |       |          |       | 3        |        |       | 7      |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Federal funds sold                                  |                                |       | 226                |       |          | 76               |       |          |       | 530      |        |       | 121    |       
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|                                                    |                                                     | Total interest income          |       |                    | 9,338 |          |                  | 9,017 |          |       |          | 19,021 |       |        | 17,556 | 
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|Interest expense                                    |                                                     |                                |       |                    |       |          |                  |       |          |       |          |        |       |        |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Time deposits                                       |                                |       | 3,001              |       |          | 2,508            |       |          |       | 6,161    |        |       | 4,839  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other deposits                                      |                                |       | 804                |       |          | 930              |       |          |       | 1,736    |        |       | 1,849  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other borrowings                                    |                                |       | 1,095              |       |          | 980              |       |          |       | 2,340    |        |       | 1,801  |       
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|                                                    |                                                     | Total interest expense         |       |                    | 4,900 |          |                  | 4,418 |          |       |          | 10,237 |       |        | 8,489  | 
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|Net interest income                                 |                                                     |                                | 4,438 |                    |       | 4,599    |                  |       |          | 8,784 |          |        | 9,067 |       
|                                                   
|                                                   
|                                                   
|                                                   
|Provision for loan losses                           |                                                     |                                | 0     |                    |       | 0        |                  |       |          | 0     |          |        | 0     |       
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|Net interest income after provision for
loan losses |                                                     |                                | 4,438 |                    |       | 4,599    |                  |       |          | 8,784 |          |        | 9,067 |       
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|Noninterest income                                  |                                                     |                                |       |                    |       |          |                  |       |          |       |          |        |       |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Service fees on deposits                            |                                |       | 409                |       |          | 356              |       |          |       | 749      |        |       | 698    |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Trust income                                        |                                |       | 196                |       |          | 187              |       |          |       | 365      |        |       | 379    |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Mortgage banking income                             |                                |       | 48                 |       |          | 22               |       |          |       | 93       |        |       | 43     |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Gains on sales of securities                        |                                |       | 314                |       |          | 0                |       |          |       | 314      |        |       | 0      |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other operating income                              |                                |       | 163                |       |          | 182              |       |          |       | 320      |        |       | 349    |       
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|                                                    |                                                     | Total noninterest income       |       |                    | 1,130 |          |                  | 747   |          |       |          | 1,841  |       |        | 1,469  | 
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|Noninterest expense                                 |                                                     |                                |       |                    |       |          |                  |       |          |       |          |        |       |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Salaries and employee benefits                      |                                |       | 1,611              |       |          | 1,498            |       |          |       | 3,126    |        |       | 2,958  |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Occupancy and equipment, net                        |                                |       | 323                |       |          | 303              |       |          |       | 704      |        |       | 621    |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Data processing                                     |                                |       | 141                |       |          | 122              |       |          |       | 273      |        |       | 241    |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | FDIC deposit insurance                              |                                |       | 18                 |       |          | 15               |       |          |       | 35       |        |       | 35     |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other real estate owned                             |                                |       | 8                  |       |          | 20               |       |          |       | 39       |        |       | 32     |       
|                                                   
|                                                   
|                                                   
|                                                   
|                                                    | Other operating expenses                            |                                |       | 503                |       |          | 508              |       |          |       | 1,058    |        |       | 1,000  |       
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|                                                    |                                                     | Total noninterest expense      |       |                    | 2,604 |          |                  | 2,466 |          |       |          | 5,235  |       |        | 4,887  | 
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|Income before income taxes                          |                                                     |                                | 2,964 |                    |       | 2,880    |                  |       |          | 5,390 |          |        | 5,649 |       
|                                                   
|                                                   
|                                                   
|                                                   
|Provision for income taxes                          |                                                     |                                | 983   |                    |       | 918      |                  |       |          | 1,753 |          |        | 1,636 |       
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|Net income                                          |                                                     | $                              | 1,981 |                    | $     | 1,962    |                  |       | $        | 3,637 |          | $      | 4,013 |       
|                                                    |                                                     |                                |       |                    |       |          |                  |       |          |      
|Basic earnings per share                            |                                                     | $                              | 0.44  |                    | $     | 0.44     |                  |       | $        | 0.82  |          | $      | 0.90  |       
|                                                   
|                                                   
|                                                   
|                                                   
|Diluted earnings per share                          |                                                     | $                              | 0.44  |                    | $     | 0.44     |                  |       | $        | 0.81  |          | $      | 0.90  |       

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




|                                   |                                                                                                                            |   |                    |     |  |                  |       |     |          |   |       |          |  |   |       |        |  
|---------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | - | ------------------ | --- |  | ---------------- | ----- | --- | -------- | - | ----- | -------- |  | - | ----- | ------ | -
|                                   |                                                                                                                            |   | Three months ended |     |  | Six months ended |      
|                                   |                                                                                                                            |   |                    |     |  |                  |      
|                                   |                                                                                                                            |   | June 30,           |     |  | June 30,         |       |     | June 30, |   |       | June 30, | 
|                                   |                                                                                                                            |   | 2001               |     |  | 2000             |       |     | 2001     |   |       | 2000     | 
|                                   |                                                                                                                            |   |                    |     |  |                  |       |     |          |   |       |          | 
|Net income                         |                                                                                                                            | $ | 1,981              |     |  | $                | 1,962 |     |          | $ | 3,637 |          |  | $ | 4,013 |       
|                                  
|                                  
|                                  
|                                  
|Other comprehensive income (loss):
|                                  
|                                  
|                                  
|                                  
|                                   | Unrealized gains (losses) arising during period
on securities available for sale, net of tax
of $147, $64, $783 and ($727) |   |                    | 234 |  |                  |       | 103 |          |   |       | 1,237    |  |   |       | (1,150 | )
|                                   |                                                                                                                            |   |                    |     |  |                  |       |     |          |   |       |         
|Comprehensive income               |                                                                                                                            | $ | 2,215              |     |  | $                | 2,065 |     |          | $ | 4,874 |          |  | $ | 2,863 |       
|                                   |                                                                                                                            |   |                    |     |  |                  |       |     |          |   |       |         

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




|                                                 |                                                                            |                                                                     |                                                                             |       |          |         |        |          |         |         |  
|------------------------------------------------ | -------------------------------------------------------------------------- | ------------------------------------------------------------------- | --------------------------------------------------------------------------- | ----- | -------- | ------- | ------ | -------- | ------- | ------- | -
|                                                 |                                                                            |                                                                     |                                                                             |       | June 30, |         |        | June 30, |        
|                                                 |                                                                            |                                                                     |                                                                             |       | 2001     |         |        | 2000     |        
|                                                 |                                                                            |                                                                     |                                                                             |       |          |         |        |          |        
|Cash flows from operating activities             |                                                                            |                                                                     |                                                                             |       |          |         |        |         
|                                                
|                                                
|                                                
|                                                
|                                                 | Net income                                                                 |                                                                     | $                                                                           | 3,637 |          |         | $      | 4,013    |        
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments to reconcile net income to net cash from
operating activities:
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Depreciation                                                        |                                                                             |       | 230      |         |        |          | 233     |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Deferred loan fees                                                  |                                                                             |       | (4       | )       |        |          | 112     |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Net gain on sale of other real estate owned                         |                                                                             |       | 0        |         |        |          | (3      | )      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Net gain on sale of securities available for sale                   |                                                                             |       | (314     | )       |        |          | 0       |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Amortization of mortgage servicing rights                           |                                                                             |       | 20       |         |        |          | 27      |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Net change in interest receivable                                   |                                                                             |       | 806      |         |        |          | 3       |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Net change in interest payable                                      |                                                                             |       | (75      | )       |        |          | 529     |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Net change in other assets                                          |                                                                             |       | (71      | )       |        |          | 60      |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Net change in other liabilities                                     |                                                                             |       | 22       |         |        |          | (377    | )      
|                                                 |                                                                            |                                                                     |                                                                             |       |          |        
|                                                 |                                                                            |                                                                     | Net cash from operating activities                                          |       |          | 4,251   |        |          |         | 4,597   |  
|                                                 |                                                                            |                                                                     |                                                                             |       |          |        
|Cash flows from investing activities             |                                                                            |                                                                     |                                                                             |       |          |         |        |         
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Proceeds from maturities and calls of securities available for sale |                                                                             |       | 275,268  |         |        |          | 8,401   |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Proceeds from sales of securities available for sale                |                                                                             |       | 314      |         |        |          | 0       |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Purchases of securities available for sale                          |                                                                             |       | (281,193 | )       |        |          | (732    | )      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Change in loans made to customers                                   |                                                                             |       | (6,130   | )       |        |          | (34,559 | )      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Property and equipment expenditures                                 |                                                                             |       | (48      | )       |        |          | (35     | )      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Proceeds from sale of other real estate owned                       |                                                                             |       | 0        |         |        |          | 83      |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Net change in direct lease financing                                |                                                                             |       | (4,539   | )       |        |          | 28      |        
|                                                 |                                                                            |                                                                     |                                                                             |       |          |        
|                                                 |                                                                            |                                                                     | Net cash from investing activities                                          |       |          | (16,328 | )      |          |         | (26,814 | )
|                                                 |                                                                            |                                                                     |                                                                             |       |          |        
|Cash flows from financing activities            
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            |                                                                     | Net increase (decrease) in:                                                
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            |                                                                     | Deposits                                                                    |       |          | 23,594  |        |          |         | 12,692  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            |                                                                     | Securities sold under repurchase agreements
and other short-term borrowings |       |          | (6,017  | )      |          |         | 2,883   |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            |                                                                     | Advances from borrowers for taxes and insurance                             |       |          | (159    | )      |          |         | 20      |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Federal Home Loan Bank advance                                      |                                                                             |       | 0        |         |        |          | 10,000  |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Net proceeds from exercise of stock options                         |                                                                             |       | 8        |         |        |          | 20      |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Dividends paid                                                      |                                                                             |       | (2,142   | )       |        |          | (1,918  | )      
|                                                 |                                                                            |                                                                     |                                                                             |       |          |        
|                                                 |                                                                            |                                                                     | Net cash from financing activities                                          |       |          | 15,284  |        |          |         | 23,697  |  
|                                                 |                                                                            |                                                                     |                                                                             |       |          |        
|Net change in cash and cash equivalents          |                                                                            |                                                                     | 3,207                                                                       |       |          |         | 1,480  |         
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents at beginning of period |                                                                            |                                                                     | 31,187                                                                      |       |          |         | 16,900 |         
|                                                 |                                                                            |                                                                     |                                                                             |       |          |        
|Cash and cash equivalents at end of period       |                                                                            | $                                                                   | 34,394                                                                      |       |          | $       | 18,380 |         
|                                                 |                                                                            |                                                                     |                                                                             |       |          |        
|Supplemental disclosures                         |                                                                            |                                                                     |                                                                             |       |          |         |        |         
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | Cash paid during the period for                                     |                                                                             |       |          |         |        |          |         |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            |                                                                     | Interest                                                                    |       | $        | 10,312  |        |          | $       | 7,960   |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            |                                                                     | Income taxes                                                                |       |          | 1,705   |        |          |         | 1,771   |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                            | 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




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 2001 and December 31, 2000.
The condensed consolidated statements of income and the condensed consolidated statements
of comprehensive income are for the three and six months ended June 30, 2001 and 2000. The
condensed consolidated statements of cash flows are for the six months ended June 30, 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 and six month periods ended June 30, 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 4,460,678 for
the three months ended June 30, 2001 and 2000 and 4,461,755 and 4,460,012 for the six months ended June 30,
2001 and 2000. Diluted earnings per share further assumes issue of any dilutive potential common shares.
Common stock information is summarized as follows:

|                          |  |          |           |  |              |   |           |          |  |   |           | 
|------------------------- |  | -------- | --------- |  | ------------ | - | --------- | -------- |  | - | --------- | 
|                          |  | June 30, |           |  | December 31, |   |           | June 30, | 
|                          |  | 2001     |           |  | 2000         |   |           | 2000     | 
|                          |  |          |           |  |              |   |           |          | 
|Common shares authorized  |  |          | 6,500,000 |  |              |   | 6,500,000 |          |  |   | 6,500,000 | 
|                         
|                         
|                         
|                         
|Common shares outstanding |  |          | 4,461,755 |  |              |   | 4,460,845 |          |  |   | 4,460,845 | 
|                         
|                         
|                         
|                         
|Par value per share       |  | $        | 0.40      |  |              | $ | 0.40      |          |  | $ | 0.40      | 

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 2001 and December 31, 2000 were as follows:

|                                          |       |   |           |         |  |                  |     |       |        |   |     |       |   |   |         |         | 
|----------------------------------------- | ----- | - | --------- | ------- |  | ---------------- | --- | ----- | ------ | - | --- | ----- | - | - | ------- | ------- | 
|June 30, 2001                             |       |   | Amortized |         |  | Gross Unrealized |     |       | Fair   |  
|                                          |       |   | Cost      |         |  | Gains            |     |       | Losses |   |     | Value |  
|                                          |       |   |           |         |  |                  |     |       |        |   |     |       |  
|U.S. Treasury                             |       | $ | 1,000     |         |  | $                | 13  |       |        | $ | 0   |       |   | $ | 1,013   |        
|                                         
|                                         
|                                         
|                                         
|U.S. Government agencies and corporations |       |   | 173,912   |         |  |                  | 474 |       |        |   | (83 | )     |   |   | 174,303 |        
|                                         
|                                         
|                                         
|                                         
|States and political subdivisions         |       |   | 14,321    |         |  |                  | 206 |       |        |   | (5  | )     |   |   | 14,522  |        
|                                         
|                                         
|                                         
|                                         
|Mortgage-backed securities                |       |   | 4,610     |         |  |                  | 74  |       |        |   | (1  | )     |   |   | 4,683   |        
|                                         
|                                         
|                                         
|                                         
|Equity securities                         |       |   | 3,109     |         |  |                  | 386 |       |        |   | (21 | )     |   |   | 3,474   |        
|                                          |       |   |           |         |  |                  |     |       |        |   |     |      
|                                          | Total |   | $         | 196,952 |  |                  | $   | 1,153 |        |   | $   | (110  | ) |   | $       | 197,995 | 
|                                          |       |   |           |         |  |                  |     |       |        |   |     |      

|                                          |       |   |           |         |  |                  |     |     |        |   |        |        |   |   |         |         | 
|----------------------------------------- | ----- | - | --------- | ------- |  | ---------------- | --- | --- | ------ | - | ------ | ------ | - | - | ------- | ------- | 
|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 | 
|                                          |       |   |           |         |  |                  |     |     |        |   |        |       

8



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Contractual maturities of securities available for sale at June 30, 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                |       | $ | 49,501    |         |  | $     | 49,515  |        
|                                      
|                                      
|                                      
|                                      
|Due after one year through five years  |       |   | 110,633   |         |  |       | 111,178 |        
|                                      
|                                      
|                                      
|                                      
|Due after five years through ten years |       |   | 29,099    |         |  |       | 29,145  |        
|                                       |       |   |           |         |  |      
|                                       |       |   | 189,233   |         |  |       | 189,838 |        
|                                      
|                                      
|                                      
|                                      
|Mortgage-backed securities             |       |   | 4,610     |         |  |       | 4,683   |        
|                                      
|                                      
|                                      
|                                      
|Equity securities                      |       |   | 3,109     |         |  |       | 3,474   |        
|                                       |       |   |           |         |  |      
|                                       | Total |   | $         | 196,952 |  |       | $       | 197,995 | 
|                                       |       |   |           |         |  |      

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 $119,630 at June 30, 2001. As of June 30,
2001, the Company held no structured notes.

There was one sale of an equity security during the three months ended June 30, 2001 that resulted
in a gain of $314. There were no sales of securities during 2000.

Securities carried at $170,777 and $158,129 at June 30, 2001 and December 31, 2000 were pledged to
secure public deposits, repurchase agreements and for other purposes as required or permitted by law.

9



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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 June 30, 2001 and December 31, 2000 were as follows:

|                           |                                                      |   |          |         |  |              |         |         | 
|-------------------------- | ---------------------------------------------------- | - | -------- | ------- |  | ------------ | ------- | ------- | 
|                           |                                                      |   | June 30, |         |  | December 31, |        
|                           |                                                      |   | 2001     |         |  | 2000         |        
|                           |                                                      |   |          |         |  |              |        
|Commercial                 |                                                      | $ | 90,782   |         |  | $            | 94,353  |        
|                          
|                          
|                          
|                          
|Real estate - construction |                                                      |   | 34,295   |         |  |              | 25,538  |        
|                          
|                          
|                          
|                          
|Real estate - mortgage     |                                                      |   | 149,373  |         |  |              | 149,869 |        
|                          
|                          
|                          
|                          
|Home equity                |                                                      |   | 20,996   |         |  |              | 20,233  |        
|                          
|                          
|                          
|                          
|Installment                |                                                      |   | 9,068    |         |  |              | 9,361   |        
|                           |                                                      |   |          |         |  |             
|                           | Total loans                                          |   |          | 304,514 |  |              |         | 299,354 | 
|                          
|                          
|                          
|                          
|Unearned income            |                                                      |   | (9       | )       |  |              | (16     | )      
|                          
|                          
|                          
|                          
|Deferred loan fees         |                                                      |   | (483     | )       |  |              | (487    | )      
|                           |                                                      |   |          |         |  |             
|                           | Loans, net of unearned income
and deferred loan fees |   |          | 304,022 |  |              |         | 298,851 | 
|                          
|                          
|                          
|                          
|Allowance for loan losses  |                                                      |   | (3,726   | )       |  |              | (4,689  | )      
|                           |                                                      |   |          |         |  |             
|                           | Loans, net                                           |   | $        | 300,296 |  |              | $       | 294,162 | 
|                           |                                                      |   |          |         |  |             

There were no loans held for sale on June 30, 2001 and December 31, 2000.

Real estate - mortgage loans with a carrying value of $19,015 and $21,786 were pledged to secure public
deposits at June 30, 2001 and December 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 include loans contractually past due ninety days or more, loans accounted
for on a nonaccrual basis, and loans whose terms have been renegotiated to provide a reduction or deferral
of interest or principal because of deterioration in the financial position of the borrower, amounted to $5,109
at June 30, 2001 and $4,112 at December 31, 2000.

10



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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Impaired loans were as follows for June 30, 2001 and December 31, 2000:

|                                             |  |          |       |  |              |   |       | 
|-------------------------------------------- |  | -------- | ----- |  | ------------ | - | ----- | 
|                                             |  | June 30, |       |  | December 31, |  
|                                             |  | 2001     |       |  | 2000         |  
|                                             |  |          |       |  |              |  
|Loans with no allowance
for losses allocated |  | $        | 0     |  |              | $ | 0     | 
|                                            
|                                            
|                                            
|                                            
|Loans with allowance
for losses allocated    |  |          | 1,421 |  |              |   | 1,728 | 
|                                            
|                                            
|                                            
|                                            
|Amount of the allowance
allocated            |  |          | 230   |  |              |   | 446   | 

The average balances and income recognized on impaired loans were as follows for the three and six months
ended June 30, 2001 and 2000 are as follows:

|                                                                   |  |                    |       |  |                  |   |     |          |  |   |          |  |  |   |     | 
|------------------------------------------------------------------ |  | ------------------ | ----- |  | ---------------- | - | --- | -------- |  | - | -------- |  |  | - | --- | 
|                                                                   |  | Three months ended |       |  | Six months ended |  
|                                                                   |  |                    |       |  |                  |  
|                                                                   |  | June 30,           |       |  | June 30,         |   |     | June 30, |  |   | June 30, | 
|                                                                   |  | 2001               |       |  | 2000             |   |     | 2001     |  |   | 2000     | 
|                                                                   |  |                    |       |  |                  |   |     |          |  |   |          | 
|Average of impaired loans
during the period                        |  | $                  | 1,836 |  |                  | $ | 627 |          |  | $ | 1,758    |  |  | $ | 524 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Interest income recognized during
the impairment period            |  |                    | 10    |  |                  |   | 0   |          |  |   | 10       |  |  |   | 0   | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Cash-basis interest income recognized
during the impairment period |  |                    | 10    |  |                  |   | 0   |          |  |   | 10       |  |  |   | 0   | 

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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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

At June 30, 2001 and December 31, 2000, the contractual amounts of the Companys off-balance
sheet commitments were as follows:

|                                                      |               |       |       |          |         |   |              |        |        | 
|----------------------------------------------------- | ------------- | ----- | ----- | -------- | ------- | - | ------------ | ------ | ------ | 
|                                                      |               |       |       | June 30, |         |   | December 31, |       
|                                                      |               |       |       | 2001     |         |   | 2000         |       
|                                                      |               |       |       |          |         |   |              |       
|Unused lines of credit and
commitments to make loans:
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Fixed rate    |       | $     | 28,864   |         |   | $            | 17,278 |       
|                                                     
|                                                     
|                                                     
|                                                     
|                                                      | Variable rate |       |       | 94,632   |         |   |              | 81,375 |       
|                                                      |               |       |       |          |         |  
|                                                      |               | Total |       | $        | 123,496 |   |              | $      | 98,653 | 
|                                                      |               |       |       |          |         |  
|Standby letters of credit                             |               | $     | 4,528 |          |         | $ | 3,682        |       

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 six months ended June 30, 2001, twelve months
ended December 31, 2000 and six months ended June 30, 2000 were as follows:

|                                           |                          |   |          |       |  |              |       |       |          |   |       |       | 
|------------------------------------------ | ------------------------ | - | -------- | ----- |  | ------------ | ----- | ----- | -------- | - | ----- | ----- | 
|                                           |                          |   | June 30, |       |  | December 31, |       |       | June 30, |  
|                                           |                          |   | 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                          |                          |   | (1,025   | )     |  |              | (838  | )     |          |   | (163  | )    
|                                          
|                                          
|                                          
|                                          
|Recoveries on loans
previously charged off |                          |   | 62       |       |  |              | 159   |       |          |   | 70    |      
|                                           |                          |   |          |       |  |              |       |       |         
|                                           | Balance at end of period |   | $        | 3,726 |  |              | $     | 4,689 |          |   | $     | 5,275 | 
|                                           |                          |   |          |       |  |              |       |       |         

12



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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 six months ended June 30, 2001 total stockholders equity increased $2,740. The increase
is a result of net income of $3,637, plus the change in the valuation allowance from December 31, 2000
for the fair value of securities available for sale, net of tax, of $1,237, plus $8 due to the exercise of 910
stock options pursuant to the Omnibus Incentive Plan, less cash dividends paid of $2,142 or $.48 per share.

For the six months ended June 30, 2000 total stockholders equity increased $965. The increase was
the result of net income of $4,013, less the change in the valuation allowance from December 31, 1999 for the
fair value of securities available for sale, net of tax, of $1,150, plus $20 due to the exercise of 2,500 stock
options pursuant to the Omnibus Incentive Plan, less cash dividends paid of $1,918 or $ .43 per share.

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.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 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 six months ended June 30, 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
June 30, 2000 |  |           | (2,500 | ) |                |   | 8.32 | 
|                                            |  |           |        |   |                |  
|Outstanding at June 30, 2000                |  |           | 11,410 |   |                | $ | 8.32 | 
|                                            |  |           |       
|Outstanding at January 1, 2001              |  |           | 11,410 |   |                | $ | 8.32 | 
|                                           
|                                           
|                                           
|                                           
|Exercised during period ended
June 30, 2001 |  |           | (910   | ) |                |   | 8.32 | 
|                                            |  |           |        |   |                |  
|Outstanding at June 30, 2001                |  |           | 10,500 |   |                | $ | 8.32 | 
|                                            |  |           |       

At June 30, 2001, all remaining options had an exercise price of $8.32. The options outstanding had
a remaining life of six 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 six months ended June 30, 2001, no stock appreciation rights were exercised. At both
June 30, 2001 and 2000, 12,280 stock appreciation rights were outstanding at the grant price $8.32 per
share. The Companys expense (benefit) was $43 and $5 for the three months ended June 30, 2001 and
2000 and $22 and ($43) for the six months ended June 30, 2001 and 2000. The stock appreciation rights will
expire during 2002.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Note 8  Other Comprehensive Income (Loss)

Other comprehensive income (loss) components and related taxes for the three and six months ended June 30,
2001 and 2000 were as follows:

|                                                                   |                                    |   |                    |     |  |                  |     |     |          |   |       |          |  |   |        |        |  
|------------------------------------------------------------------ | ---------------------------------- | - | ------------------ | --- |  | ---------------- | --- | --- | -------- | - | ----- | -------- |  | - | ------ | ------ | -
|                                                                   |                                    |   | Three months ended |     |  | Six months ended |    
|                                                                   |                                    |   |                    |     |  |                  |    
|                                                                   |                                    |   | June 30,           |     |  | June 30,         |     |     | June 30, |   |       | June 30, | 
|                                                                   |                                    |   | 2001               |     |  | 2000             |     |     | 2001     |   |       | 2000     | 
|                                                                   |                                    |   |                    |     |  |                  |     |     |          |   |       |          | 
|Unrealized holding gains (losses)
on securities available for sale |                                    | $ | 381                |     |  | $                | 167 |     |          | $ | 2,020 |          |  | $ | (1,877 | )     
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Tax effect                                                         |                                    |   | 147                |     |  |                  | 64  |     |          |   | 783   |          |  |   | (727   | )     
|                                                                   |                                    |   |                    |     |  |                  |     |     |          |   |       |         
|                                                                   | Other comprehensive gains (losses) |   | $                  | 234 |  |                  | $   | 103 |          |   | $     | 1,237    |  |   | $      | (1,150 | )
|                                                                   |                                    |   |                    |     |  |                  |     |     |          |   |       |         

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 or six
months ended June 30, 2001 or 2000.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Information reported internally for performance assessment of operating segments for the three and six
months ended June 30, 2001 and 2000 follows:

|                    |                       |   |                                  |       |                |   |       |    |  |   |       |       | 
|------------------- | --------------------- | - | -------------------------------- | ----- | -------------- | - | ----- | -- |  | - | ----- | ----- | 
|                    |                       |   | Three months ended June 30, 2001 |      
|                    |                       |   |                                  |      
|                    |                       |   | Banking                          |       | Other Segments |   | Total |   
|                    |                       |   |                                  |       |                |   |       |   
|Net interest income |                       | $ | 4,438                            |       |                | $ | 0     |    |  | $ | 4,438 |      
|                   
|                   
|                   
|                   
|Other revenue       |                       |   | 862                              |       |                |   | 268   |    |  |   | 1,130 |      
|                   
|                   
|                   
|                   
|Other expenses      |                       |   | 2,357                            |       |                |   | 247   |    |  |   | 2,604 |      
|                    |                       |   |                                  |       |                |   |       |    | 
|                    | Segment profit (loss) |   | $                                | 2,943 |                |   | $     | 21 |  |   | $     | 2,964 | 
|                    |                       |   |                                  |       |                |   |       |    | 

|                    |                       |   |                                  |       |                |   |       |    |  |   |       |       | 
|------------------- | --------------------- | - | -------------------------------- | ----- | -------------- | - | ----- | -- |  | - | ----- | ----- | 
|                    |                       |   | Three months ended June 30, 2000 |      
|                    |                       |   |                                  |      
|                    |                       |   | Banking                          |       | Other Segments |   | Total |   
|                    |                       |   |                                  |       |                |   |       |   
|Net interest income |                       | $ | 4,599                            |       |                | $ | 0     |    |  | $ | 4,599 |      
|                   
|                   
|                   
|                   
|Other revenue       |                       |   | 508                              |       |                |   | 239   |    |  |   | 747   |      
|                   
|                   
|                   
|                   
|Other expenses      |                       |   | 2,241                            |       |                |   | 225   |    |  |   | 2,466 |      
|                    |                       |   |                                  |       |                |   |       |    | 
|                    | Segment profit (loss) |   | $                                | 2,866 |                |   | $     | 14 |  |   | $     | 2,880 | 
|                    |                       |   |                                  |       |                |   |       |    | 

|                    |                       |   |                                |       |                |   |       |    |  |   |       |       | 
|------------------- | --------------------- | - | ------------------------------ | ----- | -------------- | - | ----- | -- |  | - | ----- | ----- | 
|                    |                       |   | Six months ended June 30, 2001 |      
|                    |                       |   |                                |      
|                    |                       |   | Banking                        |       | Other Segments |   | Total |   
|                    |                       |   |                                |       |                |   |       |   
|Net interest income |                       | $ | 8,784                          |       |                | $ | 0     |    |  | $ | 8,784 |      
|                   
|                   
|                   
|                   
|Other revenue       |                       |   | 1,332                          |       |                |   | 509   |    |  |   | 1,841 |      
|                   
|                   
|                   
|                   
|Other expenses      |                       |   | 4,758                          |       |                |   | 477   |    |  |   | 5,235 |      
|                    |                       |   |                                |       |                |   |       |    | 
|                    | Segment profit (loss) |   | $                              | 5,358 |                |   | $     | 32 |  |   | $     | 5,390 | 
|                    |                       |   |                                |       |                |   |       |    | 

|                    |                       |   |                                |       |                |   |       |   |  |   |       |       | 
|------------------- | --------------------- | - | ------------------------------ | ----- | -------------- | - | ----- | - |  | - | ----- | ----- | 
|                    |                       |   | Six months ended June 30, 2000 |      
|                    |                       |   |                                |      
|                    |                       |   | Banking                        |       | Other Segments |   | Total |  
|                    |                       |   |                                |       |                |   |       |  
|Net interest income |                       | $ | 9,067                          |       |                | $ | 0     |   |  | $ | 9,067 |      
|                   
|                   
|                   
|                   
|Other revenue       |                       |   | 987                            |       |                |   | 482   |   |  |   | 1,469 |      
|                   
|                   
|                   
|                   
|Other expenses      |                       |   | 4,412                          |       |                |   | 475   |   |  |   | 4,887 |      
|                    |                       |   |                                |       |                |   |       |   | 
|                    | Segment profit (loss) |   | $                              | 5,642 |                |   | $     | 7 |  |   | $     | 5,649 | 
|                    |                       |   |                                |       |                |   |       |   | 

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION




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

The following discussion focuses on the consolidated financial condition
of the Northern States Financial Corporation (the Company) at June 30, 2001
and the consolidated results of operations for the three and six month periods
ended June 30, 2001, compared to the same periods 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 June 30, 2001 to differ
materially from those expressed in any such forward-looking statements.

FINANCIAL CONDITION

The consolidated total assets for the Company were $558.4 million at June
30, 2001, increasing $20.1 million from the Companys year-end, December 31,
2000.

The Company had $15.5 million in federal fund sold at June 30, 2001, as
compared to $14.0 at December 31, 2000. The Company on a daily basis invests
excess cash into federal funds sold. Federal funds sold is a source of
liquidity to the Company and will fluctuate from day to day.

The fair value of securities at June 30, 2001 was $198.0 million
increasing by $7.9 million from the previous year-end. The fair value of the
securities portfolio has increased in part due to changes to the gross
unrealized gains and losses mostly caused by market rate declines. At June 30,
2001 the Companys securities showed net unrealized gains of $1 million
compared to December 31, 2000 that showed net unrealized losses of $1 million,
a shift of $2 million. During the first six months of 2001, $275.3 million in
securities were called or matured compared to only $8.4 million the previous
year. The reason for this is that at December 31, 2001 the Company had $156.4
million in agency securities with call options that allowed the issuers of the
securities to payoff the securities earlier than the stated maturity date.
With the decline in interest rates most of the issuers of these securities
exercised their call options. The Company during the first six months of 2001
purchased $281.2 million in securities and $5.9 million more in securities were
purchased than were called or matured. Most of the purchases were for U.S.
Government agency securities that increased by $8.7 million from year-end.
Equity securities increased $.9 million. An equity security was sold that
netted a gain of $314,000 from which the proceeds of the sale were used in part
to purchase a $1.0 million equity security that qualifies for Community
Reinvestment Act (CRA) purposes. Securities issued by states and political
subdivisions decreased by $1.0 million and mortgage-backed securities declined
by $ .7 million.

The Companys loan portfolio at June 30, 2001 was $304.0 million, an
increase of $5.2 million from December 31, 2000. Real estate-construction loans
continued to grow and were $8.8 million greater than at the previous year-end.
Home equity loans increased by $.8 million and remain popular with consumers as
the interest paid on the home equity loan may be used as a tax deduction.
Commercial loans decreased $3.6 million while real estate loans and installment
loans declined slightly by $.5 million and $.3 million.

17



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

The Companys lease portfolio increased $4.5 million during the first half of
2001 as leases totaling $5.0 million were purchased from an investment-banking house. These purchased
leases carry a surety bond that guarantees payment performance.

At June 30, 2001 deposits at the Company increased $23.6 million from
December 31, 2000. The increase was in time deposits $100,000 and over, which
increased $20.4 million from year-end. Most of the growth in time deposits,
$100,000 and over was from public entities. The Company is located in the
county seat and accepts deposits from local municipalities. The first half of
property taxes were paid in early June 2001 and resulted in public depositors
investing their funds into time deposits. Time deposits under $100,000
decreased $7.0 million while demand, NOW and money market balances increased
$1.8 million, $2.1 million and $6.7 million. With interest rates decreasing on
time deposits many retail customers with time deposits under $100,000,
transferred their funds into money market accounts as rates paid on money
market accounts were comparable to short-term time deposit rates. Savings
deposits remained stable at June 30, 2001 with balances of $43.6 million
declining only slightly by $.3 million from year-end.

Securities sold under repurchase agreements (repurchase agreements) and
other short-term borrowings at the Company decreased $6.0 million from December
31, 2000 to $67.6 million at June 30, 2001. These funds mainly consist of
repurchase agreements that are offered through an overnight repurchase
agreement product and a term product with maturities from 7 days to one year.
Commercial customers have increasingly placed their funds into repurchase
agreements as repurchase agreements provide the commercial customer with added
security for their funds in the form of an investment that is pledged by the
Company. Repurchase agreements also 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.

On June 30, 2001 the Company had a 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 $2,740,000 during the six months
ended June 30, 2001. The increase is the result of net income of $3,637,000,
plus the adjustment in the valuation allowance for the market value of
securities available for sale, net of tax, of $1,237,000, plus $8,000 due to
the exercise of 910 stock options pursuant to the Omnibus Incentive Plan, less
cash dividends paid of $2,142,000.

The tier 1 capital to average asset ratio at June 30, 2001 was 13.73% and
the total capital to asset ratio, on a risk adjusted basis, amounted to 19.49%,
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
$16.85 at June 30, 2001 as compared to $16.24 at December 31, 2000. On June
30, 2001, the Company and its subsidiary were in compliance with all applicable
regulatory capital requirements.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

RESULTS OF OPERATIONS

NET INCOME

The consolidated net income for the quarter ended June 30, 2001 was
$1,981,000, an increase of $19,000 compared to net income of $1,962,000 for the
same period the previous year. The annualized return on average assets was
1.44% for the quarter, a decrease from a return on average assets for the same
quarter the previous year of 1.62%. The consolidated net income for the six
months ended June 30, 2001 was $3,637,000, a decrease of $376,000 over the
first half of 2000. The annualized return on average assets for the first six
months of 2001 was 1.34%, down from the return on average assets for the same
period the previous year of 1.67%.

During 2001s second quarter, the Company sold an equity investment that
resulted in a gain of $314,000. When discounting this one-time factor from the
second quarter 2001 results, net income for the quarter would have been
$173,000 (8.82%) less than the same quarter last year. During the first
quarter of 2000, the Company received information supporting a charitable
contribution for other 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 the gain on sale of
the equity security from 2001 and the one-time tax benefit from 2000, net
income for the first half of 2001 was $415,000 or 10.75% less than for the same
period last year.

NET INTEREST INCOME

Net interest income, the difference between interest income earned on
average interest earning assets and interest expense on average interest
bearing liabilities, decreased $161,000 or 3.50% during the three months ended
June 30, 2001 compared to the same three months in 2000.

One of the major factors affecting net interest income is change to
interest rates. During the second quarter of 2001 interest rates declined as
evidenced by the prime lending rate that began the quarter at 8.00% and because
of changes to the federal discount rate moved downward three times finally
ending the quarter at 6.75% or 125 basis points less. During the second
quarter 2000, there was an upward trend for interest rates with the prime rate
beginning the quarter at 9.00% and ending the quarter at 9.50%.

Table 1 shows that during the second quarter of 2001 yields on interest
earning assets declined 69 basis points, a lesser extent than rates paid on
deposits and borrowings that declined only 14 basis points. These developments
resulted in net interest income decreasing during the second quarter of 2001.

The trend of lower interest rates in 2001 compared to increasing rates
last year has effected net interest income in that rates earned on securities
and loans have decreased during the quarter compared to last year. More than
half of the Banks loan portfolio has variable rates that have decreased as
rates have declined. Table 1, Analysis of Average Balance and Tax Equivalent
Rates for the Three Months ended June 30, 2001 and 2000 shows that loan rates
have decreased 81 basis points compared to last year. More than half of the
Banks investment securities have call options that allow the issuers of the
securities to call or payoff the securities earlier than the maturity date. As
rates have declined, many securities have been called as the issuers have
issued new securities at the lower interest rates. Table 1 shows that the
yields on taxable securities in the second quarter of 2001 have declined 52
basis points compared to last year and yields on securities exempt from income
taxes declined 32 basis points.

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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 June 30, 2001 and 2000
($ 000s)

|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |          |  |  |      |       |  |  |  |      |       |  
|------------------------------------ | -------------------------------------------- | ---------------------------------------------------- | - | ------- |  |  | -------- | ----- |  | ---- |  | ---- | ------- | - | ------- | -------- |  |  | ---- | ----- |  |  |  | ---- | ----- | -
|                                     |                                              |                                                      |   | 2001    |  |  | 2000     |      
|                                     |                                              |                                                      |   |         |  |  |          |      
|                                     |                                              |                                                      |   | Average |  |  |          |       |  |      |  |      |         |   | Average |         
|                                     |                                              |                                                      |   | Balance |  |  | Interest |       |  | Rate |  |      | Balance |   |         | Interest |  |  | Rate |      
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |          |  |  |      |      
|Assets                               |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |          |  |  |      |       |  |  |  |     
|                                    
|                                    
|                                    
|                                    
|                                     | Loans (1)(2)(3)                              |                                                      | $ | 310,624 |  |  | $        | 6,437 |  |      |  | 8.29 | %       |   | $       | 264,967  |  |  | $    | 6,025 |  |  |  | 9.10 | %    
|                                    
|                                    
|                                    
|                                    
|                                     | Taxable securities                           |                                                      |   | 181,746 |  |  |          | 2,529 |  |      |  | 5.59 | %       |   |         | 169,446  |  |  |      | 2,704 |  |  |  | 6.11 | %    
|                                    
|                                    
|                                    
|                                    
|                                     | Securities exempt from
Taxes (2)             |                                                      |   | 13,693  |  |  |          | 245   |  |      |  | 7.25 | %       |   |         | 18,317   |  |  |      | 350   |  |  |  | 7.57 | %    
|                                    
|                                    
|                                    
|                                    
|                                     | Interest bearing deposits in banks           |                                                      |   | 167     |  |  |          | 1     |  |      |  | 2.40 | %       |   |         | 240      |  |  |      | 3     |  |  |  | 5.00 | %    
|                                    
|                                    
|                                    
|                                    
|                                     | Federal funds sold                           |                                                      |   | 20,794  |  |  |          | 226   |  |      |  | 4.35 | %       |   |         | 4,955    |  |  |      | 76    |  |  |  | 6.14 | %    
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |         
|                                     | Interest earning assets                      |                                                      |   | 527,024 |  |  |          | 9,438 |  |      |  | 7.18 | %       |   |         | 457,925  |  |  |      | 9,158 |  |  |  | 7.87 | %    
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |          |  | 
|                                     | Noninterest earning assets                   |                                                      |   | 23,068  |  |  |          |       |  |      |  |      |         |   |         | 27,562   | 
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |  
|                                     | Average assets                               |                                                      | $ | 550,092 |  |  |          |       |  |      |  |      |         |   | $       | 485,487  | 
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |  
|Liabilities and stockholders equity |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |          |  |  |      |       |  |  |  |     
|                                    
|                                    
|                                    
|                                    
|                                     | NOW deposits                                 |                                                      | $ | 46,234  |  |  |          | 219   |  |      |  | 1.89 | %       |   | $       | 43,746   |  |  |      | 289   |  |  |  | 2.64 | %    
|                                    
|                                    
|                                    
|                                    
|                                     | Money market deposits                        |                                                      |   | 41,462  |  |  |          | 364   |  |      |  | 3.51 | %       |   |         | 36,073   |  |  |      | 333   |  |  |  | 3.69 | %    
|                                    
|                                    
|                                    
|                                    
|                                     | Savings deposits                             |                                                      |   | 43,609  |  |  |          | 221   |  |      |  | 2.03 | %       |   |         | 45,299   |  |  |      | 308   |  |  |  | 2.72 | %    
|                                    
|                                    
|                                    
|                                    
|                                     | Time deposits                                |                                                      |   | 209,232 |  |  |          | 3,001 |  |      |  | 5.74 | %       |   |         | 174,416  |  |  |      | 2,508 |  |  |  | 5.75 | %    
|                                    
|                                    
|                                    
|                                    
|                                     | Other borrowings                             |                                                      |   | 80,379  |  |  |          | 1,095 |  |      |  | 5.45 | %       |   |         | 68,416   |  |  |      | 980   |  |  |  | 5.73 | %    
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |         
|                                     | Interest bearing
Liabilities                 |                                                      |   | 420,916 |  |  |          | 4,900 |  |      |  | 4.66 | %       |   |         | 367,950  |  |  |      | 4,418 |  |  |  | 4.80 | %    
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |          |  | 
|                                     | Demand deposits                              |                                                      |   | 44,677  |  |  |          |       |  |      |  |      |         |   |         | 43,743   | 
|                                    
|                                    
|                                    
|                                    
|                                     | Other noninterest bearing liabilities        |                                                      |   | 10,470  |  |  |          |       |  |      |  |      |         |   |         | 8,285    | 
|                                    
|                                    
|                                    
|                                    
|                                     | Stockholders equity                         |                                                      |   | 74,029  |  |  |          |       |  |      |  |      |         |   |         | 65,509   | 
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |  
|                                     | Average liabilities and
Stockholders equity |                                                      | $ | 550,092 |  |  |          |       |  |      |  |      |         |   | $       | 485,487  | 
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |  
|                                     | Net interest income                          |                                                      |   |         |  |  | $        | 4,538 |  |      |  |      |         |   |         |          |  |  | $    | 4,740 | 
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |          |  | 
|                                     | Net yield on interest
Earning assets         |                                                      |   |         |  |  |          |       |  |      |  | 3.45 | %       |   |         |          |  |  |      |       |  |  |  | 4.07 | %    
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |          |  |  |      |       |  | 
|                                     |                                              | Interest bearing liabilities to
earning assets Ratio |   |         |  |  |          |       |  |      |  |      | 80.00   | % |         |          |  |  |      |       |  |  |  |      | 79.01 | %
|                                     |                                              |                                                      |   |         |  |  |          |       |  |      |  |      |         |   |         |          |  |  |      |       |  | 



|(1) |  | - Interest income on loans includes loan origination fees of $110 and $88 for the three months ended June 30, 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.                                                                          

20



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

TABLE 2

NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES

For the Six Months Ended June 30, 2001 and 2000
($ 000s)

|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  |  |  |       |  
|------------------------------------ | ---------------------------------------------------- |  | ------- | ------- |  | -------- | - | ------ | ---- |  |  | ------- | - | ------- | -------- | ------- |  | ---- | - | ------ |  |  |  | ----- | -
|                                     |                                                      |  | 2001    |         |  | 2000     |  
|                                     |                                                      |  |         |         |  |          |  
|                                     |                                                      |  | Average |         |  |          |   |        |      |  |  |         |   | Average |         
|                                     |                                                      |  | Balance |         |  | Interest |   |        | Rate |  |  | Balance |   |         | Interest |         |  | Rate |  
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |  
|Assets                               |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  |  |  |      
|                                    
|                                    
|                                    
|                                    
|                                     | Loans (1)(2)(3)                                      |  | $       | 308,213 |  |          | $ | 13,135 |      |  |  | 8.52    | % |         | $        | 259,122 |  |      | $ | 11,559 |  |  |  | 8.92  | %
|                                    
|                                    
|                                    
|                                    
|                                     | Taxable securities                                   |  |         | 174,627 |  |          |   | 5,057  |      |  |  | 5.80    | % |         |          | 171,145 |  |      |   | 5,442  |  |  |  | 6.10  | %
|                                    
|                                    
|                                    
|                                    
|                                     | Securities exempt from
Federal income taxes (2)      |  |         | 13,925  |  |          |   | 502    |      |  |  | 7.29    | % |         |          | 18,721  |  |      |   | 713    |  |  |  | 7.56  | %
|                                    
|                                    
|                                    
|                                    
|                                     | Interest bearing deposits in banks                   |  |         | 161     |  |          |   | 3      |      |  |  | 3.73    | % |         |          | 255     |  |      |   | 7      |  |  |  | 5.49  | %
|                                    
|                                    
|                                    
|                                    
|                                     | Federal funds sold                                   |  |         | 21,592  |  |          |   | 530    |      |  |  | 4.91    | % |         |          | 4,019   |  |      |   | 121    |  |  |  | 6.02  | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |        
|                                     | Interest earning assets                              |  |         | 518,518 |  |          |   | 19,227 |      |  |  | 7.42    | % |         |          | 453,262 |  |      |   | 17,842 |  |  |  | 7.75  | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |     
|                                     | Noninterest earning assets                           |  |         | 23,317  |  |          |   |        |      |  |  |         |   |         |          | 26,967  | 
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |        
|                                     | Average assets                                       |  | $       | 541,835 |  |          |   |        |      |  |  |         |   |         | $        | 480,229 | 
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |        
|Liabilities and stockholders equity |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  |  |  |      
|                                    
|                                    
|                                    
|                                    
|                                     | NOW deposits                                         |  | $       | 45,509  |  |          |   | 502    |      |  |  | 2.21    | % |         | $        | 43,349  |  |      |   | 573    |  |  |  | 2.64  | %
|                                    
|                                    
|                                    
|                                    
|                                     | Money market deposits                                |  |         | 39,556  |  |          |   | 742    |      |  |  | 3.75    | % |         |          | 36,785  |  |      |   | 661    |  |  |  | 3.59  | %
|                                    
|                                    
|                                    
|                                    
|                                     | Savings deposits                                     |  |         | 43,453  |  |          |   | 492    |      |  |  | 2.26    | % |         |          | 45,149  |  |      |   | 615    |  |  |  | 2.72  | %
|                                    
|                                    
|                                    
|                                    
|                                     | Time deposits                                        |  |         | 205,739 |  |          |   | 6,161  |      |  |  | 5.99    | % |         |          | 173,290 |  |      |   | 4,839  |  |  |  | 5.58  | %
|                                    
|                                    
|                                    
|                                    
|                                     | Other borrowings                                     |  |         | 80,370  |  |          |   | 2,340  |      |  |  | 5.82    | % |         |          | 65,898  |  |      |   | 1,801  |  |  |  | 5.47  | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |        
|                                     | Interest bearing liabilities                         |  |         | 414,627 |  |          |   | 10,237 |      |  |  | 4.94    | % |         |          | 364,471 |  |      |   | 8,489  |  |  |  | 4.66  | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |     
|                                     | Demand deposits                                      |  |         | 43,428  |  |          |   |        |      |  |  |         |   |         |          | 42,791  | 
|                                    
|                                    
|                                    
|                                    
|                                     | Other noninterest bearing liabilities                |  |         | 9,939   |  |          |   |        |      |  |  |         |   |         |          | 7,488   | 
|                                    
|                                    
|                                    
|                                    
|                                     | Stockholders equity                                 |  |         | 73,841  |  |          |   |        |      |  |  |         |   |         |          | 65,479  | 
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |        
|                                     | Average liabilities and
Stockholders equity         |  | $       | 541,835 |  |          |   |        |      |  |  |         |   |         | $        | 480,229 | 
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |        
|                                     | Net interest income                                  |  |         |         |  |          | $ | 8,990  |      |  |  |         |   |         |          |         |  |      | $ | 9,353  | 
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |     
|                                     | Net yield on interest
Earning assets                 |  |         |         |  |          |   |        |      |  |  | 3.47    | % |         |          |         |  |      |   |        |  |  |  | 4.06  | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 
|                                     | Interest bearing liabilities to
Earning assets ratio |  |         |         |  |          |   |        |      |  |  | 80.04   | % |         |          |         |  |      |   |        |  |  |  | 79.12 | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 



|(1) |  | - Interest income on loans includes loan origination fees of $195 and $171 for the six months ended June 30, 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.                                                                         

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

Interest rates paid on deposits and borrowings have declined as well.
Table 1 shows that rates paid on NOW, money market and savings deposits have
decreased during the second quarter of 2001 by 75, 18 and 69 basis points
compared to the same quarter last year. Rates offered on time deposit have
declined yet table 1 shows that the rates paid on time deposits, the largest
source of funds to the Company, during the second quarter of 2001 remained
almost unchanged from last year. From June through October 2000 rates for time
deposits and repurchase agreements with terms of one year or more ranged from
7.00% to 7.25% that attracted an influx of time deposits. Approximately $90
million in these funds remained at fixed rates throughout the first six months
of 2001 and have kept rates paid on time deposit at higher levels. As a
majority of these time deposits and repurchase agreements mature and reprice at
lower rates in the second half of 2001, management expects that it will have a
positive impact on net interest income.

For the six months ended 2001 net interest income decreased $283,000
compared to the same period of 2000. The same factors that caused net interest
income to decline during the second quarter of 2001 were in effect for the
first six months of 2001. Interest rates declined during the first 6 months of
2001 with the prime rate going from 9.50% at the first of year and ending at
6.75% at June 30, 2001. This trend in rates was just the opposite during the
first six months of 2000 with the prime rate starting out at 8.50% and ending
at June 30, 2000 at 9.50%. Table 2, Analysis of Average Balance and Tax
Equivalent Rates for the Six Months ended June 30, 2001 and 2000 shows that
yields on interest earning assets declined 33 basis points. Table 2 shows that
rates paid on interest bearing liabilities increased 28 basis points despite
declining interest rates. The increased rates on interest bearing liabilities
resulted from greater rates paid on time deposits and other borrowings as $90
million in time deposits and repurchase agreements with original maturities of
over one year were paying rates of 7.00% or greater during the first half of
2001.

ASSET QUALITY AND THE PROVISION FOR LOAN LOSSES

There was no provision for loan losses during the three months and six
months ended June 30, 2001 and June 30, 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 June 30, 2001, the allowance for loan losses was $3,726,000 or 1.23% of
loans as compared to $4,689,000 or 1.57% of loans at December 31, 2000. During
the first six months of 2001 $1,025,000 in loans, that had previously been
classified as impaired, were charged off to the allowance compared to $163,000
during the same period last year. Recoveries of loans previously charged off
were $62,000 during the first half of 2001 compared to $70,000 during the same
period of 2000.

Nonperforming loans which includes nonaccrual loans and loans 90 days or
more past due, still accruing were $5,109,000 at June 30, 2001 or 1.68% of
loans compared to $4,112,000 at December 31, 2000 or 1.38%. Of the $5,109,000
of the total nonperforming, $4,962,000 is secured by real estate. Subsequent
to June 30, 2001, payments of $1,429,000 were received on a nonperforming loan
totaling $2,789,000 with the balance due expected to be brought current in
early August 2001. Impaired loans totaled $1,421,000 or .47% of loans at June
30, 2001 as compared to impaired loans of $1,728,000 at December 31, 2000. The
amount of the allowance for loan losses allocated for impaired loans at June
30, 2001 was $230,000 compared to $446,000 at December 31, 2000.

22



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

Other real estate owned, a non-performing asset, at June 30, 2001 was
$2,022,000 and remained unchanged from December 31, 2000.

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s and the Board of Directors
analysis, the allowance for loan losses at June 30, 2001 is adequate to cover
current loan loss exposure. If the level of impaired and nonperforming loans
remains low during the remainder of 2001, no additional loan loss provision is
anticipated during 2001.

NONINTEREST INCOME

Noninterest income for the three months ended June 30, 2001 was $1,130,000
as compared to $747,000 for the three months ended June 30, 2000, an increase
of $383,000. Most of this increase was the result the sale of an equity
security during the quarter that netted a gain of $314,000. Service fees on
deposits increased $53,000 as compared to the same quarter last year as the
result of increases to services fees on one of the deposit products and
increased overdraft income. Income from mortgage banking activities increased
$26,000 as declining home mortgage rates increased the number of mortgages
refinanced as compared to the second quarter of 2000. Trust fee income
increased $9,000 during the three months ended June 30, 2001. Other operating
income during the second quarter of 2001 was $19,000 less due to decreased loan
fees collected on mortgage loans.

For the first six months of 2001 noninterest income was $1,841,000 as
compared to $1469,000 for the same period of 2000, an increase of $372,000.
When discounting the one-time gain on the sale of the equity security of
$314,000, noninterest income was $58,000 greater than last year. Service fees
on deposits were $51,000 greater during the first half of 2001 as compared to
the same period last year as the because of increases to services fees on one
of the deposit products and increased overdraft income. Trust income for the
six months ended June 30, 2001 declined slightly by $14,000. Mortgage banking
income increased $50,000 during the first half of 2001, as the volume of
mortgages refinanced increased due to lower home mortgage rates. Other
noninterest income declined $29,000 from last year as loan fees decreased
compared to the first half of 2000, as there had been greater new loan activity
during the first half of 2000 as compared to 2001.

NONINTEREST EXPENSES

Noninterest expenses were $2,604,000 during the three months ended June
30, 2001 an increase of $138,000 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 46.77% for the second quarter of
2001 as compared to 46.13% for the same quarter of 2000. Compared to its
peers, the Companys ability to control overhead is one of its operating
strengths.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

Increases in salaries and employee benefits expenses of $113,000 occurred
during the second quarter of 2001 compared to the same period last year, an
increase of 7.54%. Salary expense was $64,000 greater during the second
quarter of 2001 due to annual salary increases. Increases in the Companys
stock price during the second quarter of 2001 caused salaries expenses relating
to stock appreciation rights to increase by $38,000 from last
year.

Occupancy expenses for the second quarter of 2001 were $323,000, $20,000
greater when compared to the second quarter of 2000. Most of the increased
expense was the result of increased building maintenance expenses as repairs
were made to the parking lots.

Data processing expense during the three months ended June 30, 2001 was
$141,000, an increase of $19,000 from the same quarter last year. Data
processing expense has increased due to expenses relating to the Companys
internet banking product that was introduced during the fourth quarter of 2000.

FDIC insurance during the second quarter of 2001 increased $3,000 from the
same three-month period last year. Other real estate owned expenses declined
$12,000 during the second quarter of 2001. Miscellaneous other operating
expenses declined slightly by $5,000 during the three months ended June 30,
2001 compared to the same three months last year.

During the six months ended June 30, 2001, total noninterest expenses were
$5,235,000 or $348,000 greater than during the same period last year. The
Companys efficiency ratio for the first half of 2001 was 49.27% as compared to
46.38% for the first half of 2000.

Salaries and employee benefit expenses increased 5.68% or $168,000 during
the six months ending June 30, 1999 as compared to the same period last year.
Salary expense during the first half of 2001 showed increases of $107,000 or
4.71% due to regular salary increases. Increases to the Companys stock price
during the first two quarters of 2001 increased salary expenses relating to
stock appreciation rights by $65,000 when compared to the same period last
year.

Occupancy expenses were $83,000 greater during the first six months of
2001 when compared to the same period of 2000. Maintenance expenses for
building and equipment increased $49,000 during the first six months of 2001.
Needed repairs were made to the parking lots and maintenance contracts were
placed on security systems installed in 2000 as warranty periods ended. Rental
income, recorded as a reduction against occupancy expense, declined $24,000
compared to last year as one of the Companys major tenants at one of the
branch offices relocated due to a business consolidation. Expenses for
utilities were $18,000 greater than last year as utility rates had increased
during the winter of 2001.

Data processing expense was $32,000 greater during the first six months of
2001 when compared to the same period of 2000. During the fourth quarter of
2001 the Company introduced its internet banking product and expenses relating
to that product have increased data processing expense compared to last year.

FDIC deposit insurance expense was $35,000 for the first two quarters of
2001 remaining unchanged from the same period last year. Other real estate
owned expenses increased slightly by $7,000 during the six months ending June
30, 2001.

24



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

Miscellaneous other operating expenses were $58,000 more for the six
months ending June 30, 2001 than they were the same period last year.
Operating losses due to forged check losses were $33,000 greater in 2001 than
last year. Marketing expenses increased over the previous year by $26,000 in
part from increased product development costs and increased cable television
advertising.

FEDERAL AND STATE INCOME TAXES

For the three months ended June 30, 2001 and 2000, the Companys
provisions for federal and state income taxes were $983,000 and $918,000, which
as a percentage of pretax earnings was 33.16% and 31.88%. The tax rate has
increased in part because interest income from securities exempt from federal
income tax has declined during 2001 as it is becoming increasingly difficult to
replace these securities as they mature with bank qualified tax advantaged
securities. For the six months ended June 30, 2001, the Companys provision
for federal and state taxes was $1,753,000 or 32.52% of pretax earnings as
compared to $1,636,000 or 28.96% of pretax earnings for the six months ending
June 30, 2000. During the first quarter of 2000, the Company received
additional information to support a charitable contribution on real estate
owned sold during 1999 to a municipal entity. 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 half of 2000
would have been 31.67%.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2001 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 102, Selected Loan Loss Allowance Methodology and
Documentation Issues (SAB 102). Due to the recent issuance of this SAB,
management is not able to comment in the June 30, 2001 Form 10-Q regarding the
effect of this SAB.

NORTHERN STATES FINANCIAL CORPORATION




QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

The Companys primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. Interest-rate risk (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.

25



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

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 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. Several techniques might be used by an institution to
minimize IRR. One approach is to periodically analyze its assets and
liabilities and make future financing and investment decisions based on payment
streams, interest rates, contractual maturities and estimated sensitivity to
actual or potential changes in market interest rates. Such activities fall
under the broad definition of asset/liability management. The Companys
primary measurement tool used by management is to 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.

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. By increasing
deposits, borrowing, or selling assets the Company can obtain these funds.

Table 3, Effect of Interest Shocks on Financial Instruments, compares
information about the current fair value of the Companys financial instruments
at March 31, 2001 to December 31, 2000. Table 3 shows the effects of interest
rate shocks of decreasing rates 2% and increasing rates 2% on the fair value of
the Companys financial instruments. The computer simulation model that is
used to do the interest rate shocks and calculates the effect on the fair value
of the Companys balance sheet takes into consideration maturity and repricing
schedules of the various assets and liabilities. March 31, 2001 is used in
Table 3 as it has the most recent data made available from the computer
simulation model.

26



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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

TABLE 3
NORTHERN STATES FINANCIAL CORPORATION
EFFECT OF INTEREST SHOCKS ON FINANCIAL INSTRUMENTSas of March 31, 2001 and December 31, 2000
($000s)

|                       |                                                                             |  |                              |         |  |         |   |         |       |  |   |         | 
|---------------------- | --------------------------------------------------------------------------- |  | ---------------------------- | ------- |  | ------- | - | ------- | ----- |  | - | ------- | 
|                       |                                                                             |  | Fair Value at March 31, 2001 |        
|                       |                                                                             |  |                              |        
|                       |                                                                             |  | Down 2%                      |         |  | Current |   |         | Up 2% | 
|                       |                                                                             |  |                              |         |  |         |   |         |       | 
|Assets                 |                                                                             |  |                              |         |  |         |   |         |       |  |   |        
|                      
|                      
|                      
|                      
|                       | Cash and cash equivalents                                                   |  | $                            | 44,214  |  |         | $ | 44,211  |       |  | $ | 44,208  | 
|                      
|                      
|                      
|                      
|                       | Securities available for sale                                               |  |                              | 178,027 |  |         |   | 175,561 |       |  |   | 169,316 | 
|                      
|                      
|                      
|                      
|                       | Loans                                                                       |  |                              | 310,631 |  |         |   | 300,283 |       |  |   | 290,555 | 
|                      
|                      
|                      
|                      
|                       | Direct lease financing                                                      |  |                              | 11,016  |  |         |   | 10,413  |       |  |   | 9,871   | 
|                      
|                      
|                      
|                      
|                       | Accrued interest receivable                                                 |  |                              | 4,490   |  |         |   | 4,490   |       |  |   | 4,490   | 
|                      
|                      
|                      
|                      
|Financial liabilities:
|                      
|                      
|                      
|                      
|                       | Deposits                                                                    |  | $                            | 377,125 |  |         | $ | 371,012 |       |  | $ | 367,947 | 
|                      
|                      
|                      
|                      
|                       | Securities sold under repurchase agreements
and other short-term borrowings |  |                              | 72,299  |  |         |   | 71,469  |       |  |   | 70,603  | 
|                      
|                      
|                      
|                      
|                       | Federal Home Loan Bank term advances                                        |  |                              | 10,226  |  |         |   | 9,997   |       |  |   | 9,832   | 
|                      
|                      
|                      
|                      
|                       | Advances from borrowers for taxes and insurance                             |  |                              | 1,004   |  |         |   | 1,004   |       |  |   | 1,004   | 
|                      
|                      
|                      
|                      
|                       | Accrued interest payable                                                    |  |                              | 6,439   |  |         |   | 6,439   |       |  |   | 6,439   | 

|                       |                                                                             |  |                                 |         |  |         |   |         |       |  |   |         | 
|---------------------- | --------------------------------------------------------------------------- |  | ------------------------------- | ------- |  | ------- | - | ------- | ----- |  | - | ------- | 
|                       |                                                                             |  | 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   | 

27



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##### Table of Contents









SIGNATURES

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 6th day of August 2001.



|                                                   |                 |  |     |                                                                             
|-------------------------------------------------- | --------------- |  | --- | ----------------------------------------------------------------------------
|NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
|                                                   |                 |  |     |                                                                             
|                                                   |                 |  |     |                                                                             
|Date:                                              | August  6, 2001 |  | By: | /s/ Fred Abdula
Fred Abdula
Chairman of the Board of
Directors and President
|                                                   |                 |  |     |                                                                             
|                                                   |                 |  |     |                                                                             
|Date:                                              | August 6, 2001  |  | By: | /s/ Thomas M. Nemeth
Thomas M. Nemeth
Vice President and Treasurer