..NORTHERN STATES FINANCIAL CORPORATION      

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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   The Company and its subsidiary are subject to regulation by numerous agencies including the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Illinois Office of Banks and Real Estate. Among other things, these agencies limit the activities in which the Company and the Bank may engage, the investments and loans which the Bank funds, and the reserves against deposits which the Bank must maintain.
   The statements contained in this management's discussion and analysis that are not historical facts are forward-looking state-

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 ments subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. Forward- looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identifiable by the use of the words "believe", "expect", "intend", "estimate" or similar expressions. The Company cautions readers of this Annual Report that a number of important factors could cause the Company's actual results in 1999 and beyond to differ materially from those expressed in any such forward-looking statements.
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TABLE 1 ANALYSIS OF AVERAGE BALANCES, TAX EQUIVALENT YIELDS AND RATES
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($ 000's)
For the Years Ended December 31,

1998

 . .

1997

 . .

1996

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Average Balance

Interest

 Rate  

Average Balance

Interest

 Rate  

Average Balance

Interest Rate   
ASSETS
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Loans (1) (2) (3) $ 242,020 $ 21,903 9.05% $ 241,019 $ 22,343 9.27% $ 233,167 $ 22,296 9.56%
Taxable securities (5) 167,117 10,263 6.16% 132,128 8,411 6.34% 124,271 7,663 6.12%
Securities exempt from federal income taxes (2) (5) 19,552 1,543 8.18% 21,301 1,741 8.38% 22,058 1,799 8.36%
Interest bearing deposits in financial institutions 428 25 5.84% 617 35 5.67% 504 28 5.56%
Federal funds sold 21,157 1,135 5.36% 17,437 965 5.53% 13,844 742 5.36%
Interest earning assets 450,274 34,869 7.76% 412,502 33,495 8.12% 393,844 32,528 8.25%
Noninterest earning assets 20,823 22,344 25,818
Average assets (4) $ 471,097 $ 434,846 $ 419,662
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Liabilities and
stockholders' equity
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NOW deposits $ 39,310 1,157 2.94% $ 37,672 1,120 2.97% $ 39,474 1,177 2.98%
Money market deposits 42,400 1,656 3.91% 41,945 1,672 3.99% 44,272 1,792 4.05%
Savings deposits 44,067 1,311 2.98% 44,458 1,322 2.97% 46,828 1,395 2.98%
Time deposits 188,365 10,413 5.53% 171,149 9,714 5.68% 155,378 8,720 5.61%
Other borrowings 45,582 2,359 5.18% 35,082 1,787 5.09% 35,006 1,724 4.92%
Interest bearing liabilities 359,724 16,896 4.70% 330,306 15,615 4.73% 320,958 14,808 4.61%
Demand deposits and
other noninterest
bearing liabilities		 48,754 47,453 46,580
Stockholders' equity 62,619 57,087 52,124
Average liabilities and stockholders' equity

$ 471,097

$ 434,846

$ 419,662
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Net interest income

$17,973

$17,880

$17,720
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Net yield on interest earning assets 3.99% 4.33% 4.50%
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Interest-bearing liabilities to earning assets ratio

79.89%

80.07%

81.40%

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(1)- Interest income on loans includes loan origination and other fees of $475 for 1998, $492 for 1997 and $443 for 1996. Average loans include direct lease financing.
(2)- Tax-exempt income is reflected on a fully tax equivalent basis utilizing a 34% rate.
(3)- Non-accrual loans are included in average loans.
(4)- Average balances are derived from the average daily balances.

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(5)- Rate information was calculated based on the average amortized cost for securities. The 1998, 1997, and 1996, average balance information includes an average valuation allowance for taxable securities of $397, $(526) and $(985). The 1998, 1997 and 1996 average balance information includes an average valuation allowance of $682, $530, and $540 for tax-exempt securities.
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NSFC ANNUAL

 11

REPORT 1998

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