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United States
SECURITIES 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 September 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                 |  | 0-19300                  |  | 36-3449727                          
|(State of Incorporation) |  | (Commission
File Number) |  | (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)



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

YES:XXX      NO:

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



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TABLE OF CONTENTS



|                              |                                                                                               |                                                                                                                       |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | INDEPENDENT ACCOUNTANTS REPORT                                                                                      
|                              |                                                                                               | CONDENSED CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2001 AND DECEMBER 31, 2000                                 
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000          
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
|                              |                                                                                               | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000                
|                              |                                                                                               | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                                                                 
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|PART II. OTHER INFORMATION   
|                              | SIGNATURES                                                                                   



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NORTHERN STATES FINANCIAL CORPORATION AND SUBSIDIARY
FORM 10-Q
SEPTEMBER 30, 2001
INDEX

PART I. FINANCIAL INFORMATION

|                           |                                                                                               |                                                                                                                           |      |     |             |  | 
|-------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------- | ---- | --- | ----------- |  | 
|                           |                                                                                               |                                                                                                                           |      |     | Page Number | 
|                           |                                                                                               |                                                                                                                           |      |     |             | 
|                           | Item 1. Financial Statements                                                                  |                                                                                                                           |      |     |            
|                          
|                           |                                                                                               | Independent Accountants Report                                                                                           |      |     | 2           | 
|                          
|                           |                                                                                               | Condensed consolidated balance sheets as of September 30,
2001 and December 31, 2000                                      |      |     | 3           | 
|                          
|                           |                                                                                               | Condensed consolidated statements of income for the three and
nine months ended September 30, 2001 and 2000               |      |     | 4           | 
|                          
|                           |                                                                                               | Condensed
consolidated statements of comprehensive income for the three
and nine months ended September 30, 2001 and 2000 |      |     | 5           | 
|                          
|                           |                                                                                               | Condensed consolidated statements of cash flows for the nine months
ended September 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 - | 26  |            
|                          
|                           | Item 7A. Quantitative and qualitative disclosures about market risk                           |                                                                                                                           | 26 - | 28  |            
|                          
|PART II. OTHER INFORMATION |                                                                                               |                                                                                                                           |      |    
|                          
|                           | Signatures                                                                                    |                                                                                                                           |      | 29  |            

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION
FORM 10-Q
SEPTEMBER 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 September 30, 2001 and the condensed
consolidated statements of income and comprehensive income for the three month
and nine month periods ended September 30, 2001 and 2000 and the condensed
consolidated statements of cash flows for the nine month periods ended
September 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 LLPOak Brook, Illinois
October 29, 2001

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NORTHERN STATES FINANCIAL CORPORATION




CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2001 and December 31, 2000
(In thousands of dollars) (Unaudited)

|                                                                                   |                                 |                                            |         |               |         |   |              |         |         | 
|---------------------------------------------------------------------------------- | ------------------------------- | ------------------------------------------ | ------- | ------------- | ------- | - | ------------ | ------- | ------- | 
|                                                                                   |                                 |                                            |         | September 30, |         |   | December 31, |        
|                                                                                   |                                 |                                            |         | 2001          |         |   | 2000         |        
|                                                                                   |                                 |                                            |         |               |         |   |              |        
|                                                                                   |                                 | Assets                                     |         |               |         |   |              |         |         | 
|Cash and due from banks                                                            |                                 | $                                          | 18,600  |               |         | $ | 17,013       |        
|Interest bearing deposits in financial institutions -
maturities less than 90 days |                                 |                                            | 119     |               |         |   | 174          |        
|Federal funds sold                                                                 |                                 |                                            | 11,000  |               |         |   | 14,000       |        
|                                                                                   |                                 |                                            |         |               |         |  
|                                                                                   | Total cash and cash equivalents |                                            |         | 29,719        |         |   |              | 31,187  |        
|Securities available for sale                                                      |                                 |                                            | 211,541 |               |         |   | 190,050      |        
|Loans                                                                              |                                 |                                            | 310,177 |               |         |   | 298,851      |        
|Less: Allowance for loan losses                                                    |                                 |                                            | (3,736  | )             |         |   | (4,689       | )      
|                                                                                   |                                 |                                            |         |               |         |  
|                                                                                   | Loans, net                      |                                            |         | 306,441       |         |   |              | 294,162 |        
|Direct lease financing                                                             |                                 |                                            | 13,976  |               |         |   | 7,417        |        
|Office buildings and equipment, net                                                |                                 |                                            | 5,647   |               |         |   | 5,796        |        
|Other real estate owned                                                            |                                 |                                            | 2,022   |               |         |   | 2,022        |        
|Accrued interest receivable                                                        |                                 |                                            | 4,209   |               |         |   | 4,816        |        
|Other assets                                                                       |                                 |                                            | 1,291   |               |         |   | 2,806        |        
|                                                                                   |                                 |                                            |         |               |         |  
|                                                                                   | Total assets                    |                                            | $       | 574,846       |         |   | $            | 538,256 |        
|                                                                                   |                                 |                                            |         |               |         |  
|                                                                                  
|                                                                                   |                                 | Liabilities and Stockholders Equity       |         |               |         |   |              |         |         | 
|Liabilities                                                                        |                                 |                                            |         |               |         |   |              |        
|Deposits                                                                           |                                 |                                            |         |               |         |   |              |        
|                                                                                   | Demand  noninterest bearing    |                                            | $       | 44,098        |         |   | $            | 44,567  |        
|                                                                                   | NOW accounts                    |                                            |         | 45,312        |         |   |              | 44,197  |        
|                                                                                   | Money market accounts           |                                            |         | 44,261        |         |   |              | 35,603  |        
|                                                                                   | Savings                         |                                            |         | 44,270        |         |   |              | 43,910  |        
|                                                                                   | Time, $100,000 and over         |                                            |         | 137,863       |         |   |              | 97,822  |        
|                                                                                   | Time, under $100,000            |                                            |         | 95,086        |         |   |              | 107,022 |        
|                                                                                   |                                 |                                            |         |               |         |  
|                                                                                   |                                 | Total deposits                             |         |               | 410,890 |   |              |         | 373,121 | 
|Securities sold under repurchase agreements
and other short-term borrowings        |                                 |                                            | 68,543  |               |         |   | 73,618       |        
|Federal Home Loan Bank advances                                                    |                                 |                                            | 10,000  |               |         |   | 10,000       |        
|Advances from borrowers for taxes and insurance                                    |                                 |                                            | 395     |               |         |   | 816          |        
|Accrued interest payable and other liabilities                                     |                                 |                                            | 7,098   |               |         |   | 8,262        |        
|                                                                                   |                                 |                                            |         |               |         |  
|                                                                                   |                                 | Total liabilities                          |         |               | 496,926 |   |              |         | 465,817 | 
|                                                                                  
|Stockholders Equity                                                               |                                 |                                            |         |               |         |   |              |        
|Common stock                                                                       |                                 |                                            | 1,785   |               |         |   | 1,784        |        
|Additional paid-in capital                                                         |                                 |                                            | 11,443  |               |         |   | 11,436       |        
|Retained earnings                                                                  |                                 |                                            | 63,343  |               |         |   | 59,817       |        
|Accumulated other comprehensive income (loss), net                                 |                                 |                                            | 1,349   |               |         |   | (598         | )      
|                                                                                   |                                 |                                            |         |               |         |  
|                                                                                   | Total stockholders equity      |                                            |         | 77,920        |         |   |              | 72,439  |        
|                                                                                   |                                 |                                            |         |               |         |  
|                                                                                   |                                 | Total liabilities and stockholders equity |         | $             | 574,846 |   |              | $       | 538,256 | 
|                                                                                   |                                 |                                            |         |               |         |  

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 nine months ended September 30, 2001 and 2000
(In thousands of dollars, except per share data) (Unaudited)

|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |        |               |   |        |        |        | 
|--------------------------------------------------- | --------------------------------------------------- | ------------------------------ | ----- | ------------------ | ----- | - | ----------------- | ----- | ----- | ------------- | ------ | ------ | ------------- | - | ------ | ------ | ------ | 
|                                                    |                                                     |                                |       | Three months ended |       |   | Nine months ended |      
|                                                    |                                                     |                                |       |                    |       |   |                   |      
|                                                    |                                                     |                                |       | September 30,      |       |   | September 30,     |       |       | September 30, |        |        | September 30, |  
|                                                    |                                                     |                                |       | 2001               |       |   | 2000              |       |       | 2001          |        |        | 2000          |  
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |        |               |  
|Interest income                                     |                                                     |                                |       |                    |       |   |                   |       |       |               |        |        |               |   |        |       
|                                                    | Loans (including fee income)                        |                                | $     | 6,311              |       |   | $                 | 6,642 |       |               | $      | 19,411 |               |   | $      | 18,158 |       
|                                                    | Securities                                          |                                |       |                    |       |   |                   |       |       |               |        |        |               |   |        |        |       
|                                                    |                                                     | Taxable                        |       |                    | 2,500 |   |                   |       | 2,694 |               |        |        | 7,557         |   |        |        | 8,136  | 
|                                                    |                                                     | Exempt from federal income tax |       |                    | 157   |   |                   |       | 224   |               |        |        | 488           |   |        |        | 694    | 
|                                                    | Interest
bearing deposits in financial institutions |                                |       | 3                  |       |   |                   | 5     |       |               |        | 6      |               |   |        | 12     |       
|                                                    | Federal funds sold                                  |                                |       | 140                |       |   |                   | 61    |       |               |        | 670    |               |   |        | 182    |       
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|                                                    |                                                     | Total interest income          |       |                    | 9,111 |   |                   |       | 9,626 |               |        |        | 28,132        |   |        |        | 27,182 | 
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|Interest expense                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |        |               |   |        |       
|                                                    | Time deposits                                       |                                |       | 2,844              |       |   |                   | 2,827 |       |               |        | 9,005  |               |   |        | 7,666  |       
|                                                    | Other deposits                                      |                                |       | 763                |       |   |                   | 939   |       |               |        | 2,499  |               |   |        | 2,788  |       
|                                                    | Other borrowings                                    |                                |       | 942                |       |   |                   | 1,303 |       |               |        | 3,282  |               |   |        | 3,104  |       
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|                                                    |                                                     | Total interest expense         |       |                    | 4,549 |   |                   |       | 5,069 |               |        |        | 14,786        |   |        |        | 13,558 | 
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|Net interest income                                 |                                                     |                                | 4,562 |                    |       |   | 4,557             |       |       |               | 13,346 |        |               |   | 13,624 |       
|Provision for loan losses                           |                                                     |                                | 0     |                    |       |   | 0                 |       |       |               | 0      |        |               |   | 0      |       
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|Net interest income after provision for
loan losses |                                                     |                                | 4,562 |                    |       |   | 4,557             |       |       |               | 13,346 |        |               |   | 13,624 |       
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|Noninterest income                                  |                                                     |                                |       |                    |       |   |                   |       |       |               |        |        |               |   |        |       
|                                                    | Service fees on deposits                            |                                |       | 442                |       |   |                   | 363   |       |               |        | 1,191  |               |   |        | 1,061  |       
|                                                    | Trust income                                        |                                |       | 154                |       |   |                   | 180   |       |               |        | 519    |               |   |        | 559    |       
|                                                    | Mortgage banking income                             |                                |       | 59                 |       |   |                   | 20    |       |               |        | 152    |               |   |        | 63     |       
|                                                    | Gains on sales of securities                        |                                |       | 273                |       |   |                   | 0     |       |               |        | 587    |               |   |        | 0      |       
|                                                    | Other operating income                              |                                |       | 172                |       |   |                   | 155   |       |               |        | 492    |               |   |        | 504    |       
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|                                                    |                                                     | Total noninterest income       |       |                    | 1,100 |   |                   |       | 718   |               |        |        | 2,941         |   |        |        | 2,187  | 
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|Noninterest expense                                 |                                                     |                                |       |                    |       |   |                   |       |       |               |        |        |               |   |        |       
|                                                    | Salaries and employee benefits                      |                                |       | 1,602              |       |   |                   | 1,552 |       |               |        | 4,728  |               |   |        | 4,510  |       
|                                                    | Occupancy and equipment, net                        |                                |       | 320                |       |   |                   | 300   |       |               |        | 1,024  |               |   |        | 921    |       
|                                                    | Data processing                                     |                                |       | 134                |       |   |                   | 117   |       |               |        | 407    |               |   |        | 358    |       
|                                                    | FDIC deposit insurance                              |                                |       | 17                 |       |   |                   | 18    |       |               |        | 52     |               |   |        | 53     |       
|                                                    | Other real estate owned                             |                                |       | 8                  |       |   |                   | 45    |       |               |        | 47     |               |   |        | 77     |       
|                                                    | Other operating expenses                            |                                |       | 530                |       |   |                   | 476   |       |               |        | 1,588  |               |   |        | 1,476  |       
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|                                                    |                                                     | Total noninterest expense      |       |                    | 2,611 |   |                   |       | 2,508 |               |        |        | 7,846         |   |        |        | 7,395  | 
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|Income before income taxes                          |                                                     |                                | 3,051 |                    |       |   | 2,767             |       |       |               | 8,441  |        |               |   | 8,416  |       
|Provision for income taxes                          |                                                     |                                | 1,020 |                    |       |   | 880               |       |       |               | 2,773  |        |               |   | 2,516  |       
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|Net income                                          |                                                     | $                              | 2,031 |                    |       | $ | 1,887             |       |       | $             | 5,668  |        |               | $ | 5,900  |       
|                                                    |                                                     |                                |       |                    |       |   |                   |       |       |               |        |       
|                                                   
|Basic earnings per share                            |                                                     | $                              | 0.46  |                    |       | $ | 0.42              |       |       | $             | 1.27   |        |               | $ | 1.32   |       
|                                                   
|Diluted earnings per share                          |                                                     | $                              | 0.45  |                    |       | $ | 0.42              |       |       | $             | 1.27   |        |               | $ | 1.32   |       

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

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION




CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months and nine months ended September 30, 2001 and 2000
(In thousands of dollars) (Unaudited)

|                            |                                                                                     |   |                    |     |  |                   |       |       |               |   |       |               |  |   |       |     | 
|--------------------------- | ----------------------------------------------------------------------------------- | - | ------------------ | --- |  | ----------------- | ----- | ----- | ------------- | - | ----- | ------------- |  | - | ----- | --- | 
|                            |                                                                                     |   | Three months ended |     |  | Nine months ended |      
|                            |                                                                                     |   |                    |     |  |                   |      
|                            |                                                                                     |   | September 30,      |     |  | September 30,     |       |       | September 30, |   |       | September 30, | 
|                            |                                                                                     |   | 2001               |     |  | 2000              |       |       | 2001          |   |       | 2000          | 
|                            |                                                                                     |   |                    |     |  |                   |       |       |               |   |       |               | 
|Net income                  |                                                                                     | $ | 2,031              |     |  | $                 | 1,887 |       |               | $ | 5,668 |               |  | $ | 5,900 |    
|Other comprehensive income: |                                                                                     |   |                    |     |  |                   |       |       |               |   |       |               |  |   |       |    
|                            | Unrealized gains arising during period
on securities available for sale, net of tax |   |                    | 710 |  |                   |       | 2,093 |               |   |       | 1,947         |  |   |       | 943 | 
|                            |                                                                                     |   |                    |     |  |                   |       |       |               |   |       |              
|Comprehensive income        |                                                                                     | $ | 2,741              |     |  | $                 | 3,980 |       |               | $ | 7,615 |               |  | $ | 6,843 |    
|                            |                                                                                     |   |                    |     |  |                   |       |       |               |   |       |              

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
Nine months ended September 30, 2001 and 2000
(In thousands of dollars) (Unaudited)

|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          |               |         |       |               |        |         |  
|------------------------------------------------ | -------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- | ---------------------------------------------------- | -------- | ------------- | ------- | ----- | ------------- | ------ | ------- | -
|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          | September 30, |         |       | September 30, |       
|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          | 2001          |         |       | 2000          |       
|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          |               |         |       |               |       
|Cash flows from operating activities             |                                                                            |                                                                                                           |                                                                             |                                                      |          |               |         |      
|                                                 | Net income                                                                 |                                                                                                           | $                                                                           | 5,668                                                |          |               | $       | 5,900 |              
|                                                 | Adjustments to reconcile net income to net cash from
operating activities: |                                                                                                           |                                                                             |                                                      |          |               |         |       |              
|                                                 |                                                                            | Depreciation                                                                                              |                                                                             |                                                      | 329      |               |         |       | 356           |       
|                                                 |                                                                            | Deferred loan fees                                                                                        |                                                                             |                                                      | 4        |               |         |       | 138           |       
|                                                 |                                                                            | Net gain on sale of other real estate owned                                                               |                                                                             |                                                      | 0        |               |         |       | (3            | )     
|                                                 |                                                                            | Net gain on sale of securities available for sale                                                         |                                                                             |                                                      | (587     | )             |         |       | 0             |       
|                                                 |                                                                            | Amortization of mortgage servicing rights                                                                 |                                                                             |                                                      | 29       |               |         |       | 40            |       
|                                                 |                                                                            | Net change in interest receivable                                                                         |                                                                             |                                                      | 607      |               |         |       | (902          | )     
|                                                 |                                                                            | Net change in interest payable                                                                            |                                                                             |                                                      | (1,206   | )             |         |       | 1,281         |       
|                                                 |                                                                            | Net change in other assets                                                                                |                                                                             |                                                      | 254      |               |         |       | 171           |       
|                                                 |                                                                            | Net change in other liabilities                                                                           |                                                                             |                                                      | 42       |               |         |       | (167          | )     
|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          |              
|                                                 |                                                                            |                                                                                                           |                                                                             | Net cash from operating activities                   |          |               | 5,140   |       |               |        | 6,814   |  
|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          |              
|Cash flows from investing activities             |                                                                            |                                                                                                           |                                                                             |                                                      |          |               |         |      
|                                                 |                                                                            | Proceeds from maturities of interest-bearing deposits in financial
institutions  maturities over 90 days |                                                                             |                                                      | 0        |               |         |       | 100           |       
|                                                 |                                                                            | Proceeds from maturities and calls of securities available for sale                                       |                                                                             |                                                      | 480,005  |               |         |       | 10,559        |       
|                                                 |                                                                            | Proceeds from sales of securities available for sale                                                      |                                                                             |                                                      | 778      |               |         |       | 0             |       
|                                                 |                                                                            | Purchases of securities available for sale                                                                |                                                                             |                                                      | (498,508 | )             |         |       | (1,374        | )     
|                                                 |                                                                            | Net change in loans made to customers                                                                     |                                                                             |                                                      | (12,283  | )             |         |       | (34,359       | )     
|                                                 |                                                                            | Property and equipment expenditures                                                                       |                                                                             |                                                      | (180     | )             |         |       | (81           | )     
|                                                 |                                                                            | Proceeds from sale of other real estate owned                                                             |                                                                             |                                                      | 0        |               |         |       | 83            |       
|                                                 |                                                                            | Net change in direct lease financing                                                                      |                                                                             |                                                      | (6,559   | )             |         |       | (228          | )     
|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          |              
|                                                 |                                                                            |                                                                                                           |                                                                             | Net cash from investing activities                   |          |               | (36,747 | )     |               |        | (25,300 | )
|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          |              
|Cash flows from financing activities             |                                                                            |                                                                                                           |                                                                             |                                                      |          |               |         |      
|                                                 |                                                                            | Net increase (decrease) in:                                                                               |                                                                             |                                                      |          |               |         |       |               |       
|                                                 |                                                                            |                                                                                                           | Deposits                                                                    |                                                      |          | 37,769        |         |       |               | 27,890 |        
|                                                 |                                                                            |                                                                                                           | Securities sold under repurchase agreements
and other short-term borrowings |                                                      |          | (5,075        | )       |       |               | (4,778 | )      
|                                                 |                                                                            |                                                                                                           | Advances from borrowers for taxes and insurance                             |                                                      |          | (421          | )       |       |               | (286   | )      
|                                                 |                                                                            | 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                   |          |               | 30,139  |       |               |        | 30,928  |  
|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          |              
|Net change in cash and cash equivalents          |                                                                            |                                                                                                           | (1,468                                                                      | )                                                    |          |               | 12,442  |      
|Cash and cash equivalents at beginning of period |                                                                            |                                                                                                           | 31,187                                                                      |                                                      |          |               | 16,900  |      
|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          |              
|Cash and cash equivalents at end of period       |                                                                            | $                                                                                                         | 29,719                                                                      |                                                      |          | $             | 29,342  |      
|                                                 |                                                                            |                                                                                                           |                                                                             |                                                      |          |              
|Supplemental disclosures                         |                                                                            |                                                                                                           |                                                                             |                                                      |          |               |         |      
|                                                 |                                                                            | Cash paid during the period for                                                                           |                                                                             |                                                      |          |               |         |       |               |       
|                                                 |                                                                            |                                                                                                           |                                                                             | Interest                                             |          | $             | 15,992  |       |               | $      | 12,277  |  
|                                                 |                                                                            |                                                                                                           |                                                                             | Income taxes                                         |          |               | 2,505   |       |               |        | 2,446   |  
|                                                 |                                                                            | 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.

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NORTHERN STATES FINANCIAL CORPORATION




NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 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 September 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
nine months ended September 30, 2001 and 2000. The condensed consolidated
statements of cash flows are for the nine months ended September 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 nine month periods ended
September 30, 2001, 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:

|                                                          |  |                    |           |  |                   |  |           |               |  |  |               |  |  |  |           | 
|--------------------------------------------------------- |  | ------------------ | --------- |  | ----------------- |  | --------- | ------------- |  |  | ------------- |  |  |  | --------- | 
|                                                          |  | Three months ended |           |  | Nine months ended | 
|                                                          |  |                    |           |  |                   | 
|                                                          |  | September 30,      |           |  | September 30,     |  |           | September 30, |  |  | September 30, | 
|                                                          |  | 2001               |           |  | 2000              |  |           | 2001          |  |  | 2000          | 
|                                                          |  |                    |           |  |                   |  |           |               |  |  |               | 
|Average outstanding common shares                         |  |                    | 4,461,755 |  |                   |  | 4,460,845 |               |  |  | 4,461,755     |  |  |  | 4,460,289 | 
|Effect of stock options                                   |  |                    | 6,252     |  |                   |  | 6,934     |               |  |  | 6,068         |  |  |  | 6,772     | 
|                                                          |  |                    |           |  |                   |  |           |               |  |  |               | 
|Average outstanding shares for
diluted earnings per share |  |                    | 4,468,007 |  |                   |  | 4,467,779 |               |  |  | 4,467,823     |  |  |  | 4,467,061 | 
|                                                          |  |                    |           |  |                   |  |           |               |  |  |               | 

Information related to stockholders equity was as follows:

|                              |  |               |           |  |              |   |           | 
|----------------------------- |  | ------------- | --------- |  | ------------ | - | --------- | 
|                              |  | September 30, |           |  | December 31, |  
|                              |  | 2001          |           |  | 2000         |  
|                              |  |               |           |  |              |  
|Par value per share           |  | $             | 0.40      |  |              | $ | 0.40      | 
|Authorized shares             |  |               | 6,500,000 |  |              |   | 6,500,000 | 
|Issued and outstanding shares |  |               | 4,461,755 |  |              |   | 4,460,845 | 

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

|                                          |       |      |           |         |       |                  |       |        |      |   |       |     |   |   |         |         | 
|----------------------------------------- | ----- | ---- | --------- | ------- | ----- | ---------------- | ----- | ------ | ---- | - | ----- | --- | - | - | ------- | ------- | 
|                                          |       |      | Amortized |         |       | Gross Unrealized |       |        | Fair |  
|September 30, 2001                        |       | Cost |           |         | Gains |                  |       | Losses |      |   | Value |    
|                                          |       |      |           |         |       |                  |       |        |      |   |       |    
|U.S. Treasury                             |       | $    | 1,000     |         |       | $                | 10    |        |      | $ | 0     |     |   | $ | 1,010   |        
|U.S. Government agencies and corporations |       |      | 187,780   |         |       |                  | 1,694 |        |      |   | (2    | )   |   |   | 189,472 |        
|States and political subdivisions         |       |      | 13,762    |         |       |                  | 338   |        |      |   | (5    | )   |   |   | 14,095  |        
|Mortgage-backed securities                |       |      | 4,155     |         |       |                  | 84    |        |      |   | 0     |     |   |   | 4,239   |        
|Equity securities                         |       |      | 2,642     |         |       |                  | 114   |        |      |   | (31   | )   |   |   | 2,725   |        
|                                          |       |      |           |         |       |                  |       |        |      |   |       |    
|                                          | Total |      | $         | 209,339 |       |                  | $     | 2,240  |      |   | $     | (38 | ) |   | $       | 211,541 | 
|                                          |       |      |           |         |       |                  |       |        |      |   |       |    

|                                          |       |      |           |         |       |                  |     |        |      |   |        |        |   |   |         |         | 
|----------------------------------------- | ----- | ---- | --------- | ------- | ----- | ---------------- | --- | ------ | ---- | - | ------ | ------ | - | - | ------- | ------- | 
|                                          |       |      | Amortized |         |       | Gross Unrealized |     |        | Fair |  
|December 31, 2000                         |       | Cost |           |         | Gains |                  |     | Losses |      |   | Value  |       
|                                          |       |      |           |         |       |                  |     |        |      |   |        |       
|U.S. Treasury                             |       | $    | 1,000     |         |       | $                | 4   |        |      | $ | 0      |        |   | $ | 1,004   |        
|U.S. Government agencies and corporations |       |      | 167,065   |         |       |                  | 76  |        |      |   | (1,623 | )      |   |   | 165,518 |        
|States and political subdivisions         |       |      | 15,531    |         |       |                  | 123 |        |      |   | (58    | )      |   |   | 15,596  |        
|Mortgage-backed securities                |       |      | 5,384     |         |       |                  | 38  |        |      |   | (39    | )      |   |   | 5,383   |        
|Equity securities                         |       |      | 2,047     |         |       |                  | 502 |        |      |   | 0      |        |   |   | 2,549   |        
|                                          |       |      |           |         |       |                  |     |        |      |   |        |       
|                                          | Total |      | $         | 191,027 |       |                  | $   | 743    |      |   | $      | (1,720 | ) |   | $       | 190,050 | 
|                                          |       |      |           |         |       |                  |     |        |      |   |        |       

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Contractual maturities of securities available for sale at September 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                |       | $ | 41,974    |         |  | $     | 41,999  |        
|Due after one year through five years  |       |   | 149,071   |         |  |       | 150,889 |        
|Due after five years through ten years |       |   | 11,497    |         |  |       | 11,689  |        
|                                       |       |   |           |         |  |      
|                                       |       |   | 202,542   |         |  |       | 204,577 |        
|Mortgage-backed securities             |       |   | 4,155     |         |  |       | 4,239   |        
|Equity securities                      |       |   | 2,642     |         |  |       | 2,725   |        
|                                       |       |   |           |         |  |      
|                                       | Total |   | $         | 209,339 |  |       | $       | 211,541 | 
|                                       |       |   |           |         |  |      

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 $142,085 at
September 30, 2001. As of September 30, 2001, the Company held no structured
notes.

There were two sales of an equity securities during the three months ended
September 30, 2001 that resulted in a gain of $273. During the nine months ended
September 30, 2001, there were three sales of equity securities that resulted in
a gain of $587. There were no sales of securities during 2000.

Securities carried at $156,265 and $158,129 at September 30, 2001 and
December 31, 2000 were pledged to secure public deposits, repurchase agreements
and for other purposes as required or permitted by law.

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

|                           |                                                      |   |               |         |  |              |         |         | 
|-------------------------- | ---------------------------------------------------- | - | ------------- | ------- |  | ------------ | ------- | ------- | 
|                           |                                                      |   | September 30, |         |  | December 31, |        
|                           |                                                      |   | 2001          |         |  | 2000         |        
|                           |                                                      |   |               |         |  |              |        
|Commercial                 |                                                      | $ | 91,052        |         |  | $            | 94,353  |        
|Real estate  construction |                                                      |   | 36,183        |         |  |              | 25,538  |        
|Real estate  mortgage     |                                                      |   | 152,600       |         |  |              | 149,869 |        
|Home equity                |                                                      |   | 21,385        |         |  |              | 20,233  |        
|Installment                |                                                      |   | 9,454         |         |  |              | 9,361   |        
|                           |                                                      |   |               |         |  |             
|                           | Total loans                                          |   |               | 310,674 |  |              |         | 299,354 | 
|Unearned income            |                                                      |   | (6            | )       |  |              | (16     | )      
|Deferred loan fees         |                                                      |   | (491          | )       |  |              | (487    | )      
|                           |                                                      |   |               |         |  |             
|                           | Loans, net of unearned income
and deferred loan fees |   |               | 310,177 |  |              |         | 298,851 | 
|Allowance for loan losses  |                                                      |   | (3,736        | )       |  |              | (4,689  | )      
|                           |                                                      |   |               |         |  |             
|                           | Loans, net                                           |   | $             | 306,441 |  |              | $       | 294,162 | 
|                           |                                                      |   |               |         |  |             

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

Real estate  mortgage loans with a carrying value of $18,446 and $21,786
were pledged to secure public deposits at September 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 $14,152 at September 30, 2001 and $4,112 at December 31, 2000.

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

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

|                                             |  |               |       |  |              |   |       | 
|-------------------------------------------- |  | ------------- | ----- |  | ------------ | - | ----- | 
|                                             |  | September 30, |       |  | December 31, |  
|                                             |  | 2001          |       |  | 2000         |  
|                                             |  |               |       |  |              |  
|Loans with no allowance for losses allocated |  | $             | 0     |  |              | $ | 0     | 
|Loans with allowance for losses allocated    |  |               | 1,478 |  |              |   | 1,728 | 
|Amount of the allowance allocated            |  |               | 311   |  |              |   | 446   | 

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

|                                                                   |  |                    |       |  |                   |   |     |               |  |   |               |  |  |   |     | 
|------------------------------------------------------------------ |  | ------------------ | ----- |  | ----------------- | - | --- | ------------- |  | - | ------------- |  |  | - | --- | 
|                                                                   |  | Three months ended |       |  | Nine months ended |  
|                                                                   |  |                    |       |  |                   |  
|                                                                   |  | September 30,      |       |  | September 30,     |   |     | September 30, |  |   | September 30, | 
|                                                                   |  | 2001               |       |  | 2000              |   |     | 2001          |  |   | 2000          | 
|                                                                   |  |                    |       |  |                   |   |     |               |  |   |               | 
|Average of impaired loans
during the period                        |  | $                  | 1,836 |  |                   | $ | 621 |               |  | $ | 1,758         |  |  | $ | 557 | 
|Interest income recognized during
the impairment period            |  |                    | 8     |  |                   |   | 0   |               |  |   | 18            |  |  |   | 0   | 
|Cash-basis interest income recognized
during the impairment period |  |                    | 8     |  |                   |   | 0   |               |  |   | 18            |  |  |   | 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.

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

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

|                                                      |               |       |       |               |         |   |              |        |        | 
|----------------------------------------------------- | ------------- | ----- | ----- | ------------- | ------- | - | ------------ | ------ | ------ | 
|                                                      |               |       |       | September 30, |         |   | December 31, |       
|                                                      |               |       |       | 2001          |         |   | 2000         |       
|                                                      |               |       |       |               |         |   |              |       
|Unused lines of credit and commitments to make loans: |               |       |       |               |         |   |              |       
|                                                      | Fixed rate    |       | $     | 35,570        |         |   | $            | 17,278 |       
|                                                      | Variable rate |       |       | 95,369        |         |   |              | 81,375 |       
|                                                      |               |       |       |               |         |   |             
|                                                      |               | Total |       | $             | 130,939 |   |              | $      | 98,653 | 
|                                                      |               |       |       |               |         |   |             
|Standby letters of credit                             |               | $     | 4,592 |               |         | $ | 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 nine months ended
September 30, 2001, twelve months ended December 31, 2000 and nine months ended
September 30, 2000 were as follows:

|                                           |                          |   |               |       |  |              |       |       |               |   |       |       | 
|------------------------------------------ | ------------------------ | - | ------------- | ----- |  | ------------ | ----- | ----- | ------------- | - | ----- | ----- | 
|                                           |                          |   | September 30, |       |  | December 31, |       |       | September 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                          |                          |   | (1,055        | )     |  |              | (838  | )     |               |   | (166  | )    
|Recoveries on loans
previously charged off |                          |   | 102           |       |  |              | 159   |       |               |   | 111   |      
|                                           |                          |   |               |       |  |              |       |       |              
|                                           | Balance at end of period |   | $             | 3,736 |  |              | $     | 4,689 |               |   | $     | 5,313 | 
|                                           |                          |   |               |       |  |              |       |       |              

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 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 nine months ended September 30, 2001 total stockholders equity
increased $5,481. The increase is a result of net income of $5,668, plus the
change in the valuation allowance from December 31, 2000 for the fair value of
securities available for sale, net of tax, of $1,947, 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 nine months ended September 30, 2000 total stockholders equity
increased $4,945. The increase was the result of net income of $5,900, plus the
change in the valuation allowance from December 31, 1999 for the fair value of
securities available for sale, net of tax, of $943, 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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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

At September 30, 2001, all remaining options had an exercise price of
$8.32. The options outstanding had a remaining life of three 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 nine months ended September 30, 2001, no stock appreciation
rights were exercised. At both September 30, 2001 and 2000, 12,280 stock
appreciation rights were outstanding at the grant price $8.32 per share. There
was no expense (benefit) from the stock appreciation rights during the three
months ended September 30, 2001 and was $18 for the three months ended September
30, 2000. For the nine months ended ended September 30, 2001 and 2000 the
expense (benefit) relating to stock appreciation rights was $22 and ($25). The
stock appreciation rights will expire during 2002.

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NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

Note 8  Other Comprehensive Income

Other comprehensive income components and related taxes for the three and
nine months ended September 30, 2001 and 2000 were as follows:

|                                                                 |                            |   |                    |     |  |                   |        |       |               |   |        |               |  |   |       |     | 
|---------------------------------------------------------------- | -------------------------- | - | ------------------ | --- |  | ----------------- | ------ | ----- | ------------- | - | ------ | ------------- |  | - | ----- | --- | 
|                                                                 |                            |   | Three months ended |     |  | Nine months ended |       
|                                                                 |                            |   |                    |     |  |                   |       
|                                                                 |                            |   | September 30,      |     |  | September 30,     |        |       | September 30, |   |        | September 30, | 
|                                                                 |                            |   | 2001               |     |  | 2000              |        |       | 2001          |   |        | 2000          | 
|                                                                 |                            |   |                    |     |  |                   |        |       |               |   |        |               | 
|Unrealized holding gains
on securities available for sale        |                            | $ | 1,432              |     |  | $                 | 3,417  |       |               | $ | 3,766  |               |  | $ | 1,540 |    
|Less reclassification adjustments
for gains recognized in income |                            |   | 273                |     |  |                   | 0      |       |               |   | 587    |               |  |   | 0     |    
|Tax effect                                                       |                            |   | (449               | )   |  |                   | (1,324 | )     |               |   | (1,232 | )             |  |   | (597  | )  
|                                                                 |                            |   |                    |     |  |                   |        |       |               |   |        |              
|                                                                 | Other comprehensive income |   | $                  | 710 |  |                   | $      | 2,093 |               |   | $      | 1,947         |  |   | $     | 943 | 
|                                                                 |                            |   |                    |     |  |                   |        |       |               |   |        |              

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 nine months ended September 30, 2001 or 2000.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2001

(Dollar amounts in thousands, except per share data)

(Unaudited)

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

|                    |                       |   |                                       |       |  |                |     |     |       |   |       |       | 
|------------------- | --------------------- | - | ------------------------------------- | ----- |  | -------------- | --- | --- | ----- | - | ----- | ----- | 
|                    |                       |   | Three months ended September 30, 2001 |      
|                    |                       |   |                                       |      
|                    |                       |   | Banking                               |       |  | Other Segments |     |     | Total |  
|                    |                       |   |                                       |       |  |                |     |     |       |  
|Net interest income |                       | $ | 4,562                                 |       |  | $              | 0   |     |       | $ | 4,562 |      
|Other revenue       |                       |   | 865                                   |       |  |                | 235 |     |       |   | 1,100 |      
|Other expenses      |                       |   | 2,357                                 |       |  |                | 254 |     |       |   | 2,611 |      
|                    |                       |   |                                       |       |  |                |     |     |      
|                    | Segment profit (loss) |   | $                                     | 3,070 |  |                | $   | (19 | )     |   | $     | 3,051 | 
|                    |                       |   |                                       |       |  |                |     |     |      

|                    |                       |   |                                       |       |  |                |     |    |       |   |       |       | 
|------------------- | --------------------- | - | ------------------------------------- | ----- |  | -------------- | --- | -- | ----- | - | ----- | ----- | 
|                    |                       |   | Three months ended September 30, 2000 |      
|                    |                       |   |                                       |      
|                    |                       |   | Banking                               |       |  | Other Segments |     |    | Total |  
|                    |                       |   |                                       |       |  |                |     |    |       |  
|Net interest income |                       | $ | 4,557                                 |       |  | $              | 0   |    |       | $ | 4,557 |      
|Other revenue       |                       |   | 490                                   |       |  |                | 228 |    |       |   | 718   |      
|Other expenses      |                       |   | 2,275                                 |       |  |                | 233 |    |       |   | 2,508 |      
|                    |                       |   |                                       |       |  |                |     |    |      
|                    | Segment profit (loss) |   | $                                     | 2,772 |  |                | $   | (5 | )     |   | $     | 2,767 | 
|                    |                       |   |                                       |       |  |                |     |    |      

|                    |                       |   |                                      |       |  |                |     |    |       |   |        |       | 
|------------------- | --------------------- | - | ------------------------------------ | ----- |  | -------------- | --- | -- | ----- | - | ------ | ----- | 
|                    |                       |   | Nine months ended September 30, 2001 |      
|                    |                       |   |                                      |      
|                    |                       |   | Banking                              |       |  | Other Segments |     |    | Total |  
|                    |                       |   |                                      |       |  |                |     |    |       |  
|Net interest income |                       | $ | 13,346                               |       |  | $              | 0   |    |       | $ | 13,346 |      
|Other revenue       |                       |   | 2,197                                |       |  |                | 744 |    |       |   | 2,941  |      
|Other expenses      |                       |   | 7,115                                |       |  |                | 731 |    |       |   | 7,846  |      
|                    |                       |   |                                      |       |  |                |     |    |      
|                    | Segment profit (loss) |   | $                                    | 8,428 |  |                | $   | 13 |       |   | $      | 8,441 | 
|                    |                       |   |                                      |       |  |                |     |    |      

|                    |                       |   |                                      |       |  |                |     |   |       |   |        |       | 
|------------------- | --------------------- | - | ------------------------------------ | ----- |  | -------------- | --- | - | ----- | - | ------ | ----- | 
|                    |                       |   | Nine months ended September 30, 2000 |      
|                    |                       |   |                                      |      
|                    |                       |   | Banking                              |       |  | Other Segments |     |   | Total |  
|                    |                       |   |                                      |       |  |                |     |   |       |  
|Net interest income |                       | $ | 13,624                               |       |  | $              | 0   |   |       | $ | 13,624 |      
|Other revenue       |                       |   | 1,477                                |       |  |                | 710 |   |       |   | 2,187  |      
|Other expenses      |                       |   | 6,687                                |       |  |                | 708 |   |       |   | 7,395  |      
|                    |                       |   |                                      |       |  |                |     |   |      
|                    | Segment profit (loss) |   | $                                    | 8,414 |  |                | $   | 2 |       |   | $      | 8,416 | 
|                    |                       |   |                                      |       |  |                |     |   |      

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

FINANCIAL CONDITION

The consolidated total assets for the Company were $574.8 million at
September 30, 2001, increasing $36.6 million from the Companys year-end,
December 31, 2000.

The Company had $11.0 million in federal fund sold at September 30, 2001,
as compared to $14.0 million 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 September 30, 2001 was $211.5 million
increasing by $21.5 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
September 30, 2001 the Companys securities showed net unrealized gains of $2.2
million as compared to net unrealized losses of $1.0 million at December 31,
2000, a shift of $3.2 million. During the first nine months of 2001, $480.0
million in securities were called or matured compared to only $10.6 million the
same period last year. A major 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. During the first nine months of 2001 $204.3 million in
securities were called which included some new purchases made during 2001.
With the decline in interest rates most of the issuers of these securities
exercised their call options. Another reason for the large amount of
securities being called or maturing during the first nine months of 2001 is
that for liquidity and pledging purposes the Company
purchased short-term U.S. Government agency discount notes with maturities of
less than 60 days. The Company purchased $499.5 million in securities during
the first nine months of 2001, which resulted in $19.5 million more in
securities being purchased than were called or matured. Most of the purchases
were for U.S. Government agency securities, which increased by $24.0 million
from year-end. Equity securities increased slightly. Three equity security
securities were sold during 2001 that netted a gain of $587,000 from which a
portion of the proceeds of the sales 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
$1.5 million and mortgage-backed securities declined by $1.1 million.

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NORTHERN STATES FINANCIAL CORPORATION

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

The Companys loan portfolio at September 30, 2001 was $310.2 million, an
increase of $11.3 million from December 31, 2000. Real estate-construction
loans continued to grow and were $10.6 million greater than at the previous
year-end. Real estate-mortgage loans increased $2.7 million while home equity
loans increased by $1.2 million. Home equity loans remain popular with
consumers as the interest paid on the loan may be used as a tax deduction.
Commercial loans decreased $3.3 million while installment loans increased only
slightly.

The Companys lease portfolio increased $6.6 million during the first nine
months of 2001 as leases totaling $7.5 million were purchased from an
investment-banking house. These purchased leases carry surety bonds that
guarantee payment performance.

At September 30, 2001, deposits at the Company increased $37.8 million
from December 31, 2000. The major increase was in time deposits $100,000 and
over, which increased $40.0 million from year-end with the growth coming from
public depositors. The Company is located in the county seat and accepts
deposits from local municipalities. Property taxes were collected in June and
September 2001 and resulted in public entities investing their funds into time
deposits. Time deposits under $100,000 decreased $11.9 million as time deposit
rates fell during the third quarter. The Company from June through October
2000 offered rates ranging from 7.00% to 7.25% for time deposits and repurchase
agreements with terms of one year or more that attracted an influx of time
deposits especially from retail customers. During the third quarter 45% of the
time deposits and repurchase agreements with rates greater than 7.00% matured.
As time deposit rates fell, many retail customers transferred a portion of
their matured time deposits to money market accounts resulting in an increase
to money market deposits of $8.7 million. At September 30, 2001, NOW and
savings deposits increased $1.1 million and $.4 million while demand accounts
declined $.5 million.

Securities sold under repurchase agreements (repurchase agreements) and
other short-term borrowings at the Company decreased $5.1 million from December
31, 2000 to $68.5 million at September 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 September 30, 2001 the Company had a term advances from the Federal
Home Loan Bank in the amount of $10.0 million. This borrowing remains
unchanged from December 31, 2000.

Total stockholders equity increased $5,481,000 during the nine months
ended September 30, 2001. The increase is the result of net income of
$5,668,000, plus the adjustment in the valuation allowance for the market value
of securities available for sale, net of tax, of $1,947,000, 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.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

The tier 1 capital to average asset ratio at September 30, 2001 was 13.92%
and the total capital to asset ratio, on a risk adjusted basis, amounted to
19.47%, 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 $17.46 at September 30, 2001 as compared to $16.24 at December
31, 2000. On September 30, 2001, the Company and its subsidiary were in
compliance with all applicable regulatory capital requirements.

RESULTS OF OPERATIONS

NET INCOME

The consolidated net income for the quarter ended September 30, 2001 was
$2,031,000, an increase of $144,000 compared to net income of $1,887,000 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 1.49%. The consolidated net income for the nine
months ended September 30, 2001 was $5,668,000, a decrease of $232,000 over the
first nine months of 2000. The annualized return on average assets for the
first nine months of 2001 was 1.38%, down from the return on average assets for
the same period the previous year of 1.61%.

During 2001s third quarter, the Company sold two equity investments that
resulted in a net gain of $273,000. When discounting this one-time factor from
the third quarter 2001 results, net income (after tax) for the quarter would
have been $23,000 or 1.22% less than the same quarter last year.

The Company for the nine months ended September 30, 2001 had net gains
from sales of equity securities of $587,000. When discounting the after tax
effect of these sales, net income for the nine months ended September 30, 2001
would have been $5,308,000. 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 gains on sales of equity securities from 2001 and
the one-time tax benefit from 2000, net income for the first nine months of
2001 was $439,000 or 7.64% 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, increased by $5,000 during the three months ended
September 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 third quarter of 2001 interest rates declined as
evidenced by the prime lending rate that began the quarter at 6.75% and because
of changes to the federal discount rate moved downward twice during the quarter
finally ending at 6.00% or 75 basis points less than at the beginning of the
period. During the third quarter 2000, the prime rate remained stable at
9.50%.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

The effect of the drop in interest rates during 2001 as compared to 2000
is illustrated in Table 1, Analysis of Average Balance and Tax Equivalent
Rates for the Three Months ended September 30, 2001 and 2000. The table shows
that during the third quarter of 2001, yields on interest earning assets were
119 basis points lower than the yields during the third quarter of 2000.
Quarterly average rates paid on deposits and borrowings shows a smaller decline
of only 104 basis points. These developments resulted in net interest income
on a fully tax equivalent basis to decrease $32,000 during the third quarter of
2001 compared to the same period last year.

Table 1 shows that loan rates during the third quarter of 2001 have
decreased 139 basis points compared to last year. More than half of the Banks
loan portfolio has variable rates that have decreased as rates have declined.
Over 50% 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 replaced them with new securities bearing lower interest rates.
Table 1 shows that the yields on taxable securities in the third quarter of
2001 have declined 76 basis points compared to last year and yields on
securities exempt from income taxes have declined 37 basis points.

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 third quarter of 2001 by 104, 90 and 75 basis points
compared to the same quarter last year. Rates offered on time deposit and
other borrowings that include repurchase agreements also declined during the
three months ended September 30, 2001 by 100 and 149 basis points compared to
the same period last year. From June through October 2000 rates for time
deposits and repurchase agreements with terms of one year or more were offered
with rates from 7.00% to 7.25% and attracted an influx of time deposits.
During the third quarter of 2001 approximately $46 million of those time
deposits and repurchase agreements with rates greater than 7.00% matured which
contributed to the decline in rates paid on time deposits and repurchase
agreements.

For the nine months ended September 30, 2001, net interest income
decreased $278,000 compared to the same period of 2000. The same factors that
caused net interest income to decline during the third quarter of 2001 were in
effect for the first nine months of 2001. Interest rates declined during the
first nine months of 2001 with the prime rate going from 9.50% at the beginning
of the year and ending at 6.00% at September 30, 2001. The trend during the
first nine months of 2000 was an increasing rate environment with the prime
rate starting out at 8.50% and ending at September 30, 2000 at 9.50%. Table 2,
Analysis of Average Balance and Tax Equivalent Rates for the Nine Months ended
September 30, 2001 and 2000 shows that yields on interest earning assets
declined 62 basis points while rates paid on interest bearing liabilities
declined 17 basis points. When rates on earning assets decline to a greater
extent than rates paid on deposits and borrowings net interest income is
negatively impacted and will usually decrease.

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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 September 30, 2001 and 2000
($ 000s)

|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  |  |  |       |  
|------------------------------------ | ---------------------------------------------------- |  | ------- | ------- |  | -------- | - | ----- | ---- |  |  | ------- | - | ------- | -------- | ------- |  | ---- | - | ----- |  |  |  | ----- | -
|                                     |                                                      |  | 2001    |         |  | 2000     |  
|                                     |                                                      |  |         |         |  |          |  
|                                     |                                                      |  | Average |         |  |          |   |       |      |  |  |         |   | Average |          |         |  |      |   |       |  |  | 
|                                     |                                                      |  | Balance |         |  | Interest |   |       | Rate |  |  | Balance |   |         | Interest |         |  | Rate |  
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |  
|Assets                               |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  |  |  |      
|                                     | Loans (1)(2)(3)                                      |  | $       | 319,622 |  |          | $ | 6,326 |      |  |  | 7.92    | % |         | $        | 286,287 |  |      | $ | 6,660 |  |  |  | 9.31  | %
|                                     | Taxable securities                                   |  |         | 187,950 |  |          |   | 2,500 |      |  |  | 5.35    | % |         |          | 170,143 |  |      |   | 2,694 |  |  |  | 6.11  | %
|                                     | Securities exempt from
Taxes (2)                     |  |         | 13,556  |  |          |   | 238   |      |  |  | 7.15    | % |         |          | 17,965  |  |      |   | 339   |  |  |  | 7.52  | %
|                                     | Interest bearing deposits in banks                   |  |         | 200     |  |          |   | 3     |      |  |  | 6.00    | % |         |          | 240     |  |      |   | 5     |  |  |  | 8.33  | %
|                                     | Federal funds sold                                   |  |         | 16,858  |  |          |   | 140   |      |  |  | 3.32    | % |         |          | 3,716   |  |      |   | 61    |  |  |  | 6.57  | %
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |      
|                                     | Interest earning assets                              |  |         | 538,186 |  |          |   | 9,207 |      |  |  | 6.86    | % |         |          | 478,351 |  |      |   | 9,759 |  |  |  | 8.05  | %
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  | 
|                                     | Noninterest earning assets                           |  |         | 25,234  |  |          |   |       |      |  |  |         |   |         |          | 26,820  |  |      |   |       |  |  |  |       |  
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  | 
|                                     | Average assets                                       |  | $       | 563,420 |  |          |   |       |      |  |  |         |   |         | $        | 505,171 |  |      |   |       |  |  |  |       |  
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  | 
|Liabilities and stockholders equity |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  |  |  |      
|                                     | NOW deposits                                         |  | $       | 43,871  |  |          |   | 188   |      |  |  | 1.71    | % |         | $        | 41,675  |  |      |   | 286   |  |  |  | 2.75  | %
|                                     | Money market deposits                                |  |         | 45,082  |  |          |   | 356   |      |  |  | 3.16    | % |         |          | 34,796  |  |      |   | 353   |  |  |  | 4.06  | %
|                                     | Savings deposits                                     |  |         | 43,900  |  |          |   | 219   |      |  |  | 2.00    | % |         |          | 43,649  |  |      |   | 300   |  |  |  | 2.75  | %
|                                     | Time deposits                                        |  |         | 220,901 |  |          |   | 2,844 |      |  |  | 5.15    | % |         |          | 183,736 |  |      |   | 2,827 |  |  |  | 6.15  | %
|                                     | Other borrowings                                     |  |         | 79,011  |  |          |   | 942   |      |  |  | 4.77    | % |         |          | 83,238  |  |      |   | 1,303 |  |  |  | 6.26  | %
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |      
|                                     | Interest bearing
Liabilities                         |  |         | 432,765 |  |          |   | 4,549 |      |  |  | 4.20    | % |         |          | 387,094 |  |      |   | 5,069 |  |  |  | 5.24  | %
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  | 
|                                     | Demand deposits                                      |  |         | 45,999  |  |          |   |       |      |  |  |         |   |         |          | 42,695  |  |      |   |       |  |  |  |       |  
|                                     | Other noninterest bearing liabilities                |  |         | 8,592   |  |          |   |       |      |  |  |         |   |         |          | 7,311   |  |      |   |       |  |  |  |       |  
|                                     | Stockholders equity                                 |  |         | 76,064  |  |          |   |       |      |  |  |         |   |         |          | 68,071  |  |      |   |       |  |  |  |       |  
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  | 
|                                     | Average liabilities and
Stockholders equity         |  | $       | 563,420 |  |          |   |       |      |  |  |         |   |         | $        | 505,171 |  |      |   |       |  |  |  |       |  
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  | 
|                                     | Net interest income                                  |  |         |         |  |          | $ | 4,658 |      |  |  |         |   |         |          |         |  |      | $ | 4,690 |  |  |  |       |  
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  | 
|                                     | Net yield on interest
earning assets                 |  |         |         |  |          |   |       |      |  |  | 3.47    | % |         |          |         |  |      |   |       |  |  |  | 3.87  | %
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  | 
|                                     | Interest bearing liabilities to
earning assets Ratio |  |         |         |  |          |   |       |      |  |  | 80.60   | % |         |          |         |  |      |   |       |  |  |  | 79.87 | %
|                                     |                                                      |  |         |         |  |          |   |       |      |  |  |         |   |         |          |         |  |      |   |       |  | 



|(1) |  | - Interest income on loans includes loan origination fees of $98 and $85 for the three months ended September 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

TABLE 2

NORTHERN STATES FINANCIAL CORPORATION
ANALYSIS OF AVERAGE BALANCE AND TAX EQUIVALENT RATES
For the Nine Months Ended September 30, 2001 and 2000
($ 000s)

|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  |  |  |       |  
|------------------------------------ | ---------------------------------------------------- |  | ------- | ------- |  | -------- | - | ------ | ---- |  |  | ------- | - | ------- | -------- | ------- |  | ---- | - | ------ |  |  |  | ----- | -
|                                     |                                                      |  | 2001    |         |  | 2000     |  
|                                     |                                                      |  |         |         |  |          |  
|                                     |                                                      |  | Average |         |  |          |   |        |      |  |  |         |   | Average |          |         |  |      |   |        |  |  | 
|                                     |                                                      |  | Balance |         |  | Interest |   |        | Rate |  |  | Balance |   |         | Interest |         |  | Rate |  
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |  
|Assets                               |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  |  |  |      
|                                     | Loans (1)(2)(3)                                      |  | $       | 312,016 |  |          | $ | 19,461 |      |  |  | 8.32    | % |         | $        | 268,177 |  |      | $ | 18,219 |  |  |  | 9.06  | %
|                                     | Taxable securities                                   |  |         | 179,068 |  |          |   | 7,557  |      |  |  | 5.64    | % |         |          | 170,811 |  |      |   | 8,136  |  |  |  | 6.10  | %
|                                     | Securities exempt from
Federal income taxes (2)      |  |         | 13,802  |  |          |   | 740    |      |  |  | 7.24    | % |         |          | 18,469  |  |      |   | 1,052  |  |  |  | 7.55  | %
|                                     | Interest bearing deposits in banks                   |  |         | 174     |  |          |   | 6      |      |  |  | 4.60    | % |         |          | 250     |  |      |   | 12     |  |  |  | 6.40  | %
|                                     | Federal funds sold                                   |  |         | 20,014  |  |          |   | 670    |      |  |  | 4.46    | % |         |          | 3,918   |  |      |   | 182    |  |  |  | 6.19  | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |       
|                                     | Interest earning assets                              |  |         | 525,074 |  |          |   | 28,434 |      |  |  | 7.23    | % |         |          | 461,625 |  |      |   | 27,601 |  |  |  | 7.85  | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 
|                                     | Noninterest earning assets                           |  |         | 23,956  |  |          |   |        |      |  |  |         |   |         |          | 26,918  |  |      |   |        |  |  |  |       |  
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 
|                                     | Average assets                                       |  | $       | 549,030 |  |          |   |        |      |  |  |         |   |         | $        | 488,543 |  |      |   |        |  |  |  |       |  
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 
|Liabilities and stockholders equity |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  |  |  |      
|                                     | NOW deposits                                         |  | $       | 44,963  |  |          |   | 690    |      |  |  | 2.05    | % |         | $        | 42,791  |  |      |   | 859    |  |  |  | 2.68  | %
|                                     | Money market deposits                                |  |         | 41,398  |  |          |   | 1,098  |      |  |  | 3.54    | % |         |          | 36,122  |  |      |   | 1,014  |  |  |  | 3.74  | %
|                                     | Savings deposits                                     |  |         | 43,602  |  |          |   | 711    |      |  |  | 2.17    | % |         |          | 44,649  |  |      |   | 915    |  |  |  | 2.73  | %
|                                     | Time deposits                                        |  |         | 210,793 |  |          |   | 9,005  |      |  |  | 5.70    | % |         |          | 176,772 |  |      |   | 7,666  |  |  |  | 5.78  | %
|                                     | Other borrowings                                     |  |         | 79,917  |  |          |   | 3,282  |      |  |  | 5.48    | % |         |          | 71,678  |  |      |   | 3,104  |  |  |  | 5.77  | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |       
|                                     | Interest bearing liabilities                         |  |         | 420,673 |  |          |   | 14,786 |      |  |  | 4.69    | % |         |          | 372,012 |  |      |   | 13,558 |  |  |  | 4.86  | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 
|                                     | Demand deposits                                      |  |         | 44,285  |  |          |   |        |      |  |  |         |   |         |          | 42,759  |  |      |   |        |  |  |  |       |  
|                                     | Other noninterest bearing liabilities                |  |         | 9,490   |  |          |   |        |      |  |  |         |   |         |          | 7,429   |  |      |   |        |  |  |  |       |  
|                                     | Stockholders equity                                 |  |         | 74,582  |  |          |   |        |      |  |  |         |   |         |          | 66,343  |  |      |   |        |  |  |  |       |  
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 
|                                     | Average liabilities and
Stockholders equity         |  | $       | 549,030 |  |          |   |        |      |  |  |         |   |         | $        | 488,543 |  |      |   |        |  |  |  |       |  
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 
|                                     | Net interest income                                  |  |         |         |  |          | $ | 13,648 |      |  |  |         |   |         |          |         |  |      | $ | 14,043 |  |  |  |       |  
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 
|                                     | Net yield on interest
earning assets                 |  |         |         |  |          |   |        |      |  |  | 3.47    | % |         |          |         |  |      |   |        |  |  |  | 4.00  | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 
|                                     | Interest bearing liabilities to
earning assets ratio |  |         |         |  |          |   |        |      |  |  | 80.23   | % |         |          |         |  |      |   |        |  |  |  | 79.38 | %
|                                     |                                                      |  |         |         |  |          |   |        |      |  |  |         |   |         |          |         |  |      |   |        |  | 



|(1) |  | - Interest income on loans includes loan origination fees of $293 and $256 for the nine months ended September 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

ASSET QUALITY AND THE PROVISION FOR LOAN LOSSES

There was no provision for loan losses during the three months and nine
months ended September 30, 2001 and 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 September 30, 2001, the allowance for loan losses was $3,736,000 or
1.20% of loans as compared to $4,689,000 or 1.57% of loans at December 31,
2000. During the first nine months of 2001 $1,055,000 in loans, that had
previously been classified as impaired, were charged off to the allowance
compared to $166,000 during the same period last year. Recoveries of loans
previously charged off were $102,000 during the first nine months of 2001
compared to $111,000 during the same period of 2000.

Nonperforming loans which include nonaccrual loans and loans 90 days or
more past due, still accruing were $14,152,000 at September 30, 2001 or 4.56%
of loans compared to $4,112,000 at December 31, 2000 or 1.38%. This increase
resulted from the reclassification of one loan totaling $10,555,000 for real
estate development that became past due greater than 90 days. The creditor is
waiting for municipal approval for the development that is expected to occur in
2002. An analysis of the collateral for the nonperforming loans shows that 94%
of these loans are secured by real estate. Loans classified as impaired loans
totaled $1,478,000 or .48 % of loans at September 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 September 30, 2001 was $311,000
compared to $446,000 at December 31, 2000.

Other real estate owned, a non-performing asset, at September 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 September 30, 2001 is adequate to
cover current loan loss exposure.

NONINTEREST INCOME

Noninterest income for the three months ended September 30, 2001 was
$1,100,000 as compared to $718,000 for the three months ended September 30,
2000, an increase of $382,000. A majority of this increase was the result of
sales of equity securities during the quarter that netted a gain of $273,000.
Service fees on deposits increased $79,000 as compared to the same quarter
last year as the result of increases to services fees on some deposit products
and increased overdraft fee income. Income from mortgage banking activities
increased $39,000 as declining home mortgage rates increased the number of
mortgages refinanced as compared to the second quarter of 2000. Other
operating income during the third quarter of 2001 was $17,000 greater due to
increased loan fees collected on commercial and mortgage loans. Much of trust
fee income is tied to the performance of stocks held in trusts and with the
drops in the stock market indexes during the three month ended September 30,
2001, trust fee income consequently declined $26,000.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

For the first nine months of 2001 noninterest income was $2,941,000 as
compared to $2,187,000 for the same period of 2000, an increase of $754,000.
When discounting the one-time gain on the sales of the equity securities of
$587,000, noninterest income was $167,000 greater than last year. Service fees
on deposits were $130,000 greater during the first nine months of 2001 as
compared to the same period last year as service fees on some deposit products
were increased and overdraft fee income also was greater. Trust income for the
nine months ended September 30, 2001 declined by $40,000 as much of the trust
fees are tied to performances of stocks held in the trusts. Mortgage banking
income increased $89,000 during the nine months ended September 30, 2001.
Lower home mortgage rates contributed to increased volumes of table funded
loans originated by the mortgage banking area which totaled $9.5 million during
the first nine months of 2001 compared to $3.4 million last year. Other
noninterest income declined $12,000 from last year as loan fees from the
servicing of sold loans declined as the balances on sold loans decreased.

NONINTEREST EXPENSES

Noninterest expenses were $2,611,000 during the three months ended
September 30, 2001 an increase of $103,000 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 46.11% for the third quarter of
2001 as compared to 47.55% for the same quarter of 2000. Compared to its
peers, the Companys ability to control overhead is one of its operating
strengths.

The Company showed growth of $50,000 in salaries and employee benefits
expenses during the third quarter of 2001 compared to the same period last
year, an increase of 3.22%. The salary increase is attributable to annual
salary increases.

Occupancy expenses for the third quarter of 2001 were $320,000, $20,000
greater when compared to the third quarter of 2000. Most of the increased
expense was the result of increased building maintenance expenses as one branch
was painted and rental units at one branch were repaired.

Data processing expense during the three months ended September 30, 2001
was $134,000, an increase of $17,000 from the same quarter last year. Data
processing expense has increased due to updates to our customer information
file done by our data processing service bureau as well as expenses relating to
the Companys internet banking product that was introduced during the fourth
quarter of 2000.

FDIC insurance during the third quarter of 2001 declined slightly from the
same three-month period last year. Other real estate owned expenses declined
$37,000 during the third quarter of 2001 as major repairs were made during the
third quarter of 2000 to prepare a property for sale.

Miscellaneous other operating expenses increased $54,000 during the three
months ended September 30, 2001 compared to the same three months last year.
Legal expense and loan and collection expenses increased $24,000 due to the
increase in nonperforming loans. Expenses relating to our bank accounts with
our correspondent banks increased $14,000 due to the decline in interest rates.
Audit expenses also increased $5,000 during the period as an audit of the
Companys data processing was performed.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

During the nine months ended September 30, 2001, total noninterest
expenses were $7,846,000 or $451,000 greater than during the same period last
year. The Companys efficiency ratio for the first nine months of 2001 was
48.17% as compared to 46.77% for same period of 2000.

Salaries and employee benefit expenses increased 4.83% or $218,000 during
the nine months ending September 30, 2001 as compared to the same period last
year. Regular salary expense during the first three quarters of 2001 showed
increases of $177,000 and was due primarily to regular annual salary increases.
Increases to the Companys stock price during the first nine months of 2001
increased expenses relating to stock appreciation rights by $47,000 when
compared to the same period last year.

Occupancy expenses were $103,000 greater during the first nine months of
2001 when compared to the same period of 2000. Maintenance expenses for
building and equipment increased $86,000 during the first nine 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.
Repairs were also made to vacant branch rental units to make them more
attractive to potential tenants. Rental income, recorded as a reduction
against occupancy expense, declined $25,000 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 $21,000 greater than last
year as utility rates increased during the winter of 2001. Partially
offsetting these increases was a decline to depreciation expense of $26,000 as
fixed assets became fully depreciated.

Data processing expense was $49,000 greater during the first nine 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.
Data processing expense also increased due to updates to our customer
information file done by our data processing service bureau in order to be
compliant with upcoming regulations.

FDIC deposit insurance expense was $52,000 for the first three quarters of
2001 decreasing only slightly from the same period last year. Other real
estate owned expenses declined $30,000 during the nine months ending September
30, 2001, as the previous year there had been repair expenses to prepare a
property for sale.

Miscellaneous other operating expenses were $112,000 more for the nine
months ending September 30, 2001 than they were the same period last year.
Legal and loan and collection expenses increased $42,000 over the same period
last year as the levels of nonperforming loans increased during 2001.
Operating losses due to forged check losses were $25,000 greater in 2001 than
last year. Marketing expenses increased over the previous year by $22,000 in
part from increased product development costs and increased cable television
advertising. Expenses relating to our bank accounts with our correspondent
banks increased $17,000 due to the decline in interest rates. Audit expenses
also increased $17,000 during the period due to increased auditing of the
Companys operations including our data processing function.

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##### Table of Contents



NORTHERN STATES FINANCIAL CORPORATION

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

FEDERAL AND STATE INCOME TAXES

For the three months ended September 30, 2001 and 2000, the Companys
provisions for federal and state income taxes were $1,020,000 and $880,000,
which as a percentage of pretax earnings was 33.43% and 31.80%. 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 nine months ended September 30, 2001, the
Companys provision for federal and state taxes was $2,773,000 or 32.85% of
pretax earnings as compared to $2,516,000 or 29.90% of pretax earnings for the
nine months ending September 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 nine
months of 2000 would have been 31.71%.

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, the
accounting community is still in the process of providing guidelines as to the
implementation of the SAB. As such, management is not able to comment
regarding the effect of this SAB.

In July 2001, Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations and SFAS No. 142, "Goodwill and Other Intangible
Assets were issued by the Financial Accounting Standards Board (FASB). SFAS
141, Business Combinations, no longer permits the use of the
pooling-of-interests method and requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method. This
accounting standard will have no effect on the Companys financial statements
unless the Company enters into a business combination transaction.

SFAS 142, Goodwill and Other Intangible Assets, requires that goodwill
no longer be amortized to earnings, but instead be reviewed for impairment.
The amortization of goodwill ceases upon adoption of the Statement, which for
most companies will be January 1, 2002. This pronouncement will not have a
material effect on the Companys financial statements.

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.

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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 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 June 30, 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. June 30, 2001 is used in
Table 3 as it has the most recent data made available from the computer
simulation model.

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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 INSTRUMENTS
as of June 30, 2001 and December 31, 2000
($000s)

|                       |                                                                             |  |                             |         |  |         |   |         |       |  |   |         | 
|---------------------- | --------------------------------------------------------------------------- |  | --------------------------- | ------- |  | ------- | - | ------- | ----- |  | - | ------- | 
|                       |                                                                             |  | Fair Value at June 30, 2001 |        
|                       |                                                                             |  |                             |        
|                       |                                                                             |  | Down 2%                     |         |  | Current |   |         | Up 2% | 
|                       |                                                                             |  |                             |         |  |         |   |         |       | 
|Assets                 |                                                                             |  |                             |         |  |         |   |         |       |  |   |        
|                       | Cash and cash equivalents                                                   |  | $                           | 34,396  |  |         | $ | 34,394  |       |  | $ | 34,392  | 
|                       | Securities available for sale                                               |  |                             | 201,534 |  |         |   | 197,995 |       |  |   | 188,751 | 
|                       | Loans                                                                       |  |                             | 320,150 |  |         |   | 308,166 |       |  |   | 296,978 | 
|                       | Direct lease financing                                                      |  |                             | 13,782  |  |         |   | 12,983  |       |  |   | 9,870   | 
|                       | Accrued interest receivable                                                 |  |                             | 4,010   |  |         |   | 4,010   |       |  |   | 4,010   | 
|                      
|Financial liabilities: |                                                                             |  |                             |         |  |         |   |         |       |  |   |        
|                       | Deposits                                                                    |  | $                           | 407,939 |  |         | $ | 399,304 |       |  | $ | 392,148 | 
|                       | Securities sold under repurchase agreements
and other short-term borrowings |  |                             | 68,868  |  |         |   | 68,099  |       |  |   | 67,238  | 
|                       | Federal Home Loan Bank term advances                                        |  |                             | 10,219  |  |         |   | 9,986   |       |  |   | 9,870   | 
|                       | Advances from borrowers for taxes and insurance                             |  |                             | 657     |  |         |   | 657     |       |  |   | 657     | 
|                       | Accrued interest payable                                                    |  |                             | 5,002   |  |         |   | 5,002   |       |  |   | 5,002   | 

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

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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 12th day of November  2001.



|                                                   |  |                   |  |     |  |                                                                               | 
|-------------------------------------------------- |  | ----------------- |  | --- |  | ----------------------------------------------------------------------------- | 
|NORTHERN STATES FINANCIAL CORPORATION
(Registrant)
|                                                  
|                                                  
|Date:                                              |  | November 12, 2001 |  | By: |  | /s/  Fred Abdula
Fred Abdula
Chairman of the Board of
Directors and President
|                                                  
|Date:                                              |  | November 12, 2001 |  | By: |  | /s/  Thomas M. Nemeth
Thomas M. Nemeth
Vice President and Treasurer          

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