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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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, 2002

OR

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

For the transition period from       to      

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

YES:     XXX                  NO:              

4,368,255 shares of common stock were outstanding
as of June 30, 2002

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NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
JUNE 30, 2002
INDEX

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NORTHERN STATES FINANCIAL CORPORATION
FORM 10-Q
JUNE 30, 2002

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, 2002 and the condensed consolidated statements of income for the three and six month periods ended June 30, 2002 and 2001 and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2002 and 2001. 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 auditing standards generally accepted in the United States of America, 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 accounting principles generally accepted in the United States of America.

    /s/   Crowe, Chizek and Company LLP

Oak Brook, Illinois
July 19, 2002

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NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001
(In thousands of dollars) (Unaudited)

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

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NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three months and six months ended June 30, 2002 and 2001
(In thousands of dollars, except per share data) (Unaudited)

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

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NORTHERN STATES FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2002 and 2001
(In thousands of dollars)(Unaudited)

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

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002

(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 accounting principles generally accepted in the United States of America. The interim financial statements do not purport to contain all the necessary financial disclosures covered by accounting principles generally accepted in the United States of America that might otherwise be necessary for complete financial statements.

     To prepare financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and future results could differ. The allowance for loan losses and status of contingencies are particularly subject to change.

     The condensed consolidated balance sheets are as of June 30, 2002 and December 31, 2001. The condensed consolidated statements of income are for the three and six months ended June 30, 2002 and 2001. The condensed consolidated statements of cash flows are for the six months ended June 30, 2002 and 2001.

     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, 2001, 2000 and 1999.

     The results of operations for the three and six month periods ended June 30, 2002, are not necessarily indicative of the results to be expected for the full year.

     Net income was utilized to calculate both basic and diluted earnings per share for all periods presented. Information regarding weighted average shares utilized in computing basic and diluted earnings per share is as follows:

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2002

(Dollar amounts in thousands, except per share data)

(Unaudited)

     On April 17, 2002 it was announced that the Northern States Financial Corporation’s Board of Directors had approved a stock repurchase program that allows the Company to purchase up to 200,000 shares of Northern States Financial Corporation stock either in open market or private transactions. At June 30, 2002, 104,000 shares of treasury stock been purchased that the Company carries at cost.

     Information related to stockholders’ equity was as follows:

Note 2 — Commitments, Off-Balance Sheet Risk and Contingencies

     At June 30, 2002 and December 31, 2001, the contract amount of the Company’s off-balance sheet commitments were as follows:

     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.

     The Company also has Community Reinvestment Act (CRA) investment commitments outstanding of $1,000. The commitment is to be funded over seven years.

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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, 2002 and the consolidated results of operations for the three and six month periods ended June 30, 2002, compared to the same periods of 2001. 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, 2002 to differ materially from those expressed in any such forward-looking statements.

FINANCIAL CONDITION

     The consolidated total assets for the Company were $591.7 million at June 30, 2002, increasing $4.4 million from the Company’s year-end, December 31, 2001.

     The Company had $28.9 million in federal fund sold at June 30, 2002, as compared to $16.0 at December 31, 2001. 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 carrying value of securities available for sale at June 30, 2002 was $201.0 million decreasing by $12.9 million from the previous year-end. During the first six months of 2002 market conditions caused the fair value of the securities to increase $1.8 million. The statement of cash flows, however, shows that during the six months ended June 30, 2002 $173.1 million in securities were called or matured while only $162.8 million in securities were purchased causing the securities portfolio to decrease. Also contributing to the decrease in securities were sales of securities that occurred during the first quarter of 2002. The Company sold $4.4 million of securities classified as available for sale and realized gains of $8,000. Most of the Company’s mortgage-backed securities, consisting of many small issues that were no longer cost effective to administer, were sold. A U.S. Government agency security with an amortized cost of $1.0 million was also sold at a small gain. The funds derived from the sale of the agency security were used to purchase a like security without call provisions that earned a better yield. Much of the net proceeds from securities activity during the first half of 2002 were used to fund loan growth.

     The Company’s loan and lease portfolio at June 30, 2002 was $334.2 million, an increase of $7.5 million from December 31, 2001. Real estate-construction loans continued to grow and were $4.8 million greater than at the previous year-end. Home equity loans increased by $3.4 million and remain popular with consumers as the interest paid on the home equity loan may be used as a tax deduction. A decline in commercial loans of $9.7 million was offset by an increase to real estate loans of $9.8 million.

     At June 30, 2002 deposits at the Company increased $18.9 million from December 31, 2001. The increase was in time deposits $100,000 and over, which increased $22.4 million from year-end. Most of

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NORTHERN STATES FINANCIAL CORPORATION

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

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 2002 and resulted in public depositors investing their funds into time deposits.

     Securities sold under repurchase agreements (repurchase agreements) and other short-term borrowings at the Company decreased $7.4 million from December 31, 2001 to $78.8 million at June 30, 2002. 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. At June 30, 2002 securities sold under repurchase agreements to related parties totaled $49.6 million.

     On June 30, 2002 the Company had a term advances from the Federal Home Loan Bank in the amount of $5.0 million declining from $10.0 million at December 31, 2001. During the first quarter of 2002, $5.0 million was paid down on the advances.

     Total stockholders’ equity increased $138,000 during the six months ended June 30, 2002. Stockholders’ equity increased by net income of $4,094,000, plus the adjustment in the valuation allowance for the market value of securities available for sale, net of tax, of $1,105,000, plus $21,000 due to the exercise of 2,500 stock options pursuant to the Omnibus Incentive Plan, plus $13,000 derived from the tax benefit from the exercise of the 2,500 stock options. At June 30, 2002 no stock options remained outstanding. These increases were partially offset by the repurchase of 104,000 shares of the Company’s common stock as treasury stock for $2,725,000 and payment of cash dividends of $2,370,000 on June 1, 2002.

     The tier 1 capital to average asset ratio at June 30, 2002 was 13.65% and the total capital to asset ratio, on a risk adjusted basis, amounted to 19.72%, 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 $17.51 at June 30, 2002 as compared to $17.08 at December 31, 2001. On June 30, 2002, the Company and its subsidiary were in compliance with all applicable regulatory capital requirements.

RESULTS OF OPERATIONS

NET INCOME

     The consolidated net income for the quarter ended June 30, 2002 was $2,094,000, an increase of $113,000 compared to net income of $1,981,000 for the same period the previous year. The annualized return on average assets was 1.47% for the quarter, an increase from a return on average assets for the same quarter the previous year of 1.44%. The consolidated net income for the six months ended June 30, 2002 was $4,094,000, an increase of $457,000 over the first half of 2001. The annualized return on average assets for the first six months of 2002 was 1.43%, increasing from the return on average assets for the same period the previous year of 1.34%.

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NORTHERN STATES FINANCIAL CORPORATION

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

     During 2001’s second quarter, the Company sold an equity investment that resulted in a gain of $314,000. When comparing the second quarter 2002 to the same quarter of 2001after discounting this one-time event, net income for the three months ended June 30, 2002 would have been $305,000 or 17.05% greater than the same three months 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, increased $719,000 or 16.20% during the three months ended June 30, 2002 compared to the same three months in 2001.

     One of the major factors affecting net interest income is change to interest rates. Interest rates during the second quarter of 2002 remained stable as evidenced by the prime lending rate that remained at 4.75% during the quarter. This contrasts to the second quarter of 2001 when interest rates declined as the prime lending rate began the quarter at 8.00% and because of changes to the federal discount rate moved downward three times ending the quarter at 6.75%, a decline of 125 basis points.

     When comparing the three months ended June 30, 2002 to the same period last year, rates on deposits and borrowings declined faster than rates earned on interest earning assets. This had a positive effect on the second quarter 2002 net interest income compared to last year. Table 1, “Analysis of Average Balance and Tax Equivalent Rates for the Three Months ended June 30, 2002 and 2001” shows that during the second quarter of 2002, yields on interest earning assets were 128 basis points lower than for the same period last year. Rates paid on deposits and borrowings, however, were 211 basis points lower in the second quarter of 2002 compared to the same quarter of 2001.

     For both the second quarters of 2002 and 2001 more than half of the Bank’s loan portfolio had variable rates. The stable rate environment in 2002 has kept rates earned on these loans constant. In the meantime, time deposits that were opened one to two years ago, when rates were higher, and matured during 2002 renewed at the lower rates contributing to deposit rates declining to a greater extent than interest earning asset rates.

     For similar reasons net interest income for the six months ended June 30, 2002 increased $1,287,000 compared to the same period of 2001. Interest rates during the first 6 months of 2002 remained stable with the prime rate remaining at 4.75% during the period. During the first six months of 2001 the prime rate fell 275 basis points, starting out the year at 9.50% and ending at June 30, 2001 at 6.75%. 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 151 basis points during the first half of 2002 compared to last year. Table 2 shows that rates paid on interest bearing liabilities decreased to a greater extent, declining 227 basis points during the first six months of 2002 compared to the same six months of 2001. This development had a positive effect on net interest income.

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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, 2002 and 2001 — Rates are Annualized
($ 000s)

(1)		- Interest income on loans includes loan origination fees of $106 and $110 for the three months ended June 30, 2002 and 2001.
(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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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, 2002 and 2001 — Rates are Annualized
($ 000s)