FIRST NORTHERN COMMUNITY BANCORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

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

For the Quarter Ended September 30, 2002

Commission File Number 000-30707

First Northern Community Bancorp
(Exact name of Registrant as specified in its charter)

California		68-0450397
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)


195 N. First St., Dixon, CA 95620
(Address of principal executive offices)
(Zip Code)

707-678-3041
(Registrant’s telephone number including area code)

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 such shorter periods as the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes

As of November 12, 2002, there were 3,230,958 shares of Common Stock, no par value, outstanding.

FIRST NORTHERN COMMUNITY BANCORP

INDEX

		Page

PART I: FINANCIAL INFORMATION

Item 1	Financial Statements—Unaudited

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Income	4

	Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income	5

	Condensed Consolidated Statements of Cash Flows	6

	Notes to Condensed Consolidated Financial Statements	7-10

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11-17

Item 3	Quantitative and Qualitative Disclosures about Market Risk	17

Item 4	Controls and Procedures	17

PART II: OTHER INFORMATION

Item 1	Legal Proceedings	18

Item 2	Changes in Securities.	18

Item 3	Defaults Upon Senior Securities	18

Item 4	Submission of Matters to a Vote of Security Holders	18

Item 5	Other Information	18

Item 6	Exhibits and Reports on Form 8-K	18

	Signatures	19

	Certifications	20-21

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

			September 30, 2002		December 31, 2001

ASSETS
Cash and due from banks			$	27,295	$	16,900
Federal funds sold				19,655		37,420
Investment securities - available for sale				74,351		96,797
Loans, net of allowance for loan losses of
		$7,242 at September 30, 2002 and
		$6,926 at December 31, 2001		312,467		244,277
Loans held for sale				17,824		25,074
Premises and equipment, net				7,389		6,709
Accrued Interest receivable and other assets				14,452		12,656

		TOTAL ASSETS	$	473,433	$	439,833

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
	Demand		$	116,059	$	104,944
	Interest-bearing transaction deposits			48,605		44,083
	Savings & MMDA’s			140,413		119,477
	Time, under $100,000			63,765		67,697
	Time, $100,000 and over			53,857		55,614

		Total deposits		422,699		391,815
Borrowed Funds				5,067		3,580
Accrued interest payable and other liabilities				3,492		2,882

		TOTAL LIABILITIES		431,258		398,277

Stockholders’ equity
	Common stock, no par value; 4,000,000 shares authorized; 3,233,626 shares issued and outstanding in 2002and 3,191,464 shares issued and outstanding in 2001			24,396		24,136
	Additional paid in capital			977		977
	Retained earnings			13,079		14,232
	Accumulated other comprehensive income, net			3,723		2,211

		TOTAL STOCKHOLDERS’ EQUITY		42,175		41,556

		TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	473,433	$	439,833

See notes to unaudited condensed consolidated financial statements.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

				Three months ended September 30, 2002		Three months ended September 30, 2001		Nine months ended September 30, 2002		Nine months ended September 30, 2001

Interest Income
	Loans			$	6,174	$	5,806	$	17,131	$	16,881
	Federal funds sold				83		237		307		397
	Investment securities
		Taxable			925		1,199		3,070		4,416
		Non-taxable			222		276		730		840

			Total interest income		7,404		7,518		21,238		22,534
Interest Expense
	Deposits				979		2,060		3,162		6,589
	Other borrowings				50		56		148		154

			Total interest expense		1,029		2,116		3,310		6,743

			Net interest income		6,375		5,402		17,928		15,791
Provision for (recovery of) loan losses					270		—		270		(308	)

			Net interest income after provision for (recovery of) loan losses		6,105		5,402		17,658		16,099

Other operating income
	Service charges on deposit accounts				431		417		1,223		1,212
	Gains (losses) on available for sale securities transactions				392		36		430		(241	)
	Gains on sales of loans				157		251		550		504
	Alternative investment income				45		68		197		210
	ATM fees				57		59		165		170
	Mortgage brokerage income				190		67		368		153
	Loan servicing income				65		53		205		141
	Other income				196		99		562		286

			Total other operating income		1,533		1,050		3,700		2,435

Other operating expenses
	Salaries and employee benefits				3,302		2,666		9,281		7,644
	Occupancy and equipment				713		618		2,101		1,759
	Data processing				221		131		545		439
	Stationery and supplies				112		125		443		369
	Advertising				83		90		230		214
	Other				888		703		2,430		1,974

			Total other operating expense		5,319		4,333		15,030		12,399

			Income before income tax expense		2,319		2,119		6,328		6,135
Provision for income tax expense					755		749		2,112		2,150

			Net income	$	1,564	$	1,370	$	4,216	$	3,985

Basic Income per share				$	0.48	$	0.41	$	1.27	$	1.17

Diluted Income per share				$	0.46	$	0.39	$	1.23	$	1.14

See notes to unaudited condensed consolidated financial statements.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(in thousands except per share amounts)

Description											Comprehensive Income		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income, Net		Total Stockholders’ Equity
					Common Stock

					Shares			Amounts

Balance at December 31, 2001						3,191,464		$	24,136					977		14,232			2,211		41,556
Comprehensive income:
		Net income									$	4,216				4,216					4,216

	Other comprehensive income:
				Unrealized holding gains arising during the current period, net of tax effect of $1,008								1,512							1,512		1,512

			Comprehensive income								$	5,728

6% stock dividend						190,253			5,356							(5,356	)
Cash in lieu of fractional shares																(13	)				(13	)
Stock options exercised						61,974			498												498
Stock repurchase and retirement						(210,065	)		(5,594	)											(5,594	)

Balance at September 30, 2002						3,233,626		$	24,396					977		13,079			3,723		42,175

See notes to unaudited condensed consolidated financial statements.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

						Nine months ended September 30, 2002			Nine Months ended September 30, 2001

Operating Activities
	Net Income					$	4,216		$	3,985
	Adjustments to reconcile net income to net cash used in operating activities:
		Depreciation					854			689
		Provision for (recovery of) loan losses					270			(308	)
		(Gain) loss on available for sale securities					(430	)		241
		Net increase in loans held for sale					(6,595	)		(9,534	)
		Gain on sale of loans					(550	)		(504	)
		Increase in accrued interest receivable and other assets					(1,796	)		(3,352	)
		Increase in accrued interest payable and other liabilities					2,097			2,619

			Net cash used in operating activities				(1,934	)		(6,164	)
Investing Activities
	Net decrease in investment securities						24,388			30,521
	Net increase in loans						(54,065	)		(23,730	)
	Purchases of premises and equipment, net						(1,534	)		(1,197	)

			Net cash (used in) provided by investing activities				(31,211	)		5,594
Financing Activities
	Net increase in deposits						30,884			23,755
	Cash dividends paid						(13	)		(7	)
	Stock Options Exercised						498			181
	Repurchase of stock						(5,594	)		(1,705	)

			Net cash provided by financing activities				25,775			22,224

					Net change in cash and cash equivalents		(7,370	)		21,654
Cash and cash equivalents at beginning of period							54,320			34,660

Cash and cash equivalents at end of period						$	46,950		$	56,314

		Supplemental disclosures of cash flow information:
	Cash paid during the period for:
			Interest			$	3,489		$	5,989
			Income Taxes			$	2,046		$	2,247

Supplemental disclosures of noncash investing and financing activities:
				Transfer of loans held for sale to loans held to maturity		$	14,395		$	—
				Stock dividend distributed		$	5,356		$	3,126

See notes to unaudited condensed consolidated financial statements.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 and December 31, 2001

1.	BASIS OF PRESENTATION

	The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Articles 9 and 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of results expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the First Northern Community Bancorp’s Annual Report to shareholders and Form 10-K for the year ended December 31, 2001. All material intercompany accounts have been eliminated in consolidation.

2.	RECLASSIFICATIONS

	Certain reclassifications from loan fees to loan interest income have been made to the 2001 financial statements to conform to the 2002 presentation.

3.	LOANS

	Effective March 29, 2002, June 26, 2002 and September 10, 2002 the Bank transferred $6,618,000, $3,515,000 and $4,262,000 from their loans held for sale portfolio to their loans held to maturity portfolio.

4.	OUTSTANDING SHARES AND EARNINGS PER SHARE

	On February 4, 2002, the Board of Directors of the First Northern Community Bancorp declared a 6% stock dividend payable as of March 31, 2002. Earnings per share amounts have been adjusted to reflect the effect of the stock dividend.

	Earnings Per Share (EPS)

	Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted EPS incorporates the dilutive effect of common stock options outstanding on an average basis during the period. The following table presents basic and diluted EPS for the three-month and nine-month periods ending September 30, 2002 and September 30, 2001 (amounts in thousands, except share amounts and earnings per share):

		Three months ended September 30,				Nine months ended September 30,

		2002		2001		2002		2001

Basic earnings per share:
	Net income	$	1,564	$	1,370	$	4,216	$	3,985

	Denominator:
	Weighted average common shares outstanding		3,267,579		3,376,851		3,313,024		3,409,158

	Basic EPS	$	0.48	$	0.41	$	1.27	$	1.17

Diluted earnings per share:
	Net income	$	1,564	$	1,370	$	4,216	$	3,985

	Denominator:
	Weighted average common shares outstanding		3,267,579		3,376,851		3,313,024		3,409,158
	Incremental shares due to dilutive stock options		113,616		106,658		120,329		83,939

	Adjusted weighted average common shares outstanding		3,381,195		3,483,509		3,433,353		3,493,097

	Diluted EPS	$	0.46	$	0.39	$	1.23	$	1.14

5.	ALLOWANCE FOR LOAN LOSSES

	The allowance for loan losses is maintained at levels considered adequate by management to provide for possible loan losses. The allowance is based on management’s assessment of various factors affecting the loan portfolio, including problem loans, business conditions and loss experience, and an overall evaluation of the quality of the underlying collateral. Changes in the allowance for loan losses during the nine-months ended September 30, 2002 and 2001 and for the year ended December 31, 2001 were as follows (in thousands):

	Nine months ended September 30,						Year ended December 31,

	2002			2001			2001

Balance, beginning of period	$	6,926		$	7,228		$	7,228
Provision for (recovery of) loan losses		270			(308	)		(308	)
Loan charge-offs		(71	)		(86	)		(154	)
Loan recoveries		117			86			160

Balance, end of period	$	7,242		$	6,920		$	6,926

6.	FIDUCIARY POWERS

	On July 1, 2002, the Bank received trust powers from applicable regulatory agencies and on that date began to offer fiduciary services for individuals, businesses, governments and charitable organizations in the Solano, Yolo, Sacramento, Placer and El Dorado County areas. The Bank’s full-service asset management and trust department, which offers and manages such fiduciary services, is located in downtown Sacramento.

7.	INCOME TAX CREDITS

	On July 15, 2002, the Bank made a $2,355,000 equity investment in a partnership, which owns low-income affordable housing projects that generate tax benefits in the form of federal and state housing tax credits. As a limited partner investor in this partnership, the Company receives tax benefits in the form of tax deductions from partnership operating losses and federal and state income tax credits. The federal and state income tax credits are earned over a 10-year period as a result of the investment property meeting certain criteria and are subject to recapture for noncompliance with such criteria over a 15-year period. The expected benefit resulting from the low-income housing tax credits is recognized in the period for which the tax benefit is recognized in the Company’s consolidated tax returns. This investment is accounted for using the effective yield method and is recorded in other assets on the balance sheet. Under the effective yield method, the Company recognizes tax credits as they are allocated and amortizes the initial cost of the investment to provide a constant effective yield over the period that tax credits are allocated to the Company. The effective yield is the internal rate of return on the investment, based on the cost of the investment and the guaranteed tax credits allocated to the Company. Any expected residual value of the investment was excluded from the effective yield calculation. Cash received from operations of the limited partnership or sale of the property, if any, will be included in earnings when realized or realizable.

8.	GOODWILL AND OTHER INTANGIBLE ASSETS

	In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 142, Goodwill and Other Intangible Assets. Statement 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of Statement 142. Statement 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with Statement Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

	The Company adopted the provisions of Statement 142 effective January 1, 2002. The Company does not have any goodwill and intangible assets acquired in business combinations. The adoption of Statement 142 did not have a material impact on the financial condition or operating results of the Company.

9.	ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS

	The FASB issued Statement No. 143, Accounting for Asset Retirement Obligations in August 2001. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.

	As a result, Statement No. 143 applies to all entities that have legal obligations associated with the retirement of long-lived tangible assets that result from the acquisition, construction, development or normal use of the asset. As used in this Statement, a legal obligation results from existing law, statute, ordinance, written or oral contract, or by legal construction of a contract under the doctrine of promissory estoppels.

	Statement No. 143 requires an enterprise to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of a tangible long-lived asset. Since the requirement is to recognize the obligation when incurred, approaches that have been used in the past to accrue the asset retirement obligation over the life of the asset are no longer acceptable. Statement No. 143 also requires the enterprise to record the contra to the initial obligation as an increase to the carrying amount of the related long-lived asset (i.e., the associated asset retirement costs) and to depreciate that cost over the remaining useful life of the asset. The liability is changed at the end of each period to reflect the passage of time (i.e., accretion expense) and changes in the estimated future cash flows underlying the initial fair value measurement. Enterprises are required to adopt Statement No. 143 for fiscal years beginning after June 15, 2002. Early adoption is encouraged. The Company does not expect future adoption of Statement No. 143 to have a material impact on the financial condition or operating results of the Company.

10.	ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

	In October 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While Statement No. 144 supersedes Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental provisions of that Statement.

	Statement No. 144 also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. By broadening the presentation of discontinued operations to include more disposal transactions, the FASB has enhanced management’s ability to provide information that helps financial statement users to assess the effects of a disposal transaction on the ongoing operations of an entity. The Company adopted the provisions of Statement 144 on January 1, 2002. The adoption of Statement No. 144 did not have a material impact on the financial condition or operating results of the Company.

11.	RESCISSION OF SFAS NO. 4, 44, AND 64, AMENDMENTS OF SFAS NO. 13, AND TECHNICAL CORRECTIONS

	In April 2002, the FASB issued SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion No. 30 will now be used to classify those gains and losses. SFAS No. 64, which amended SFAS No. 4, is no longer applicable because SFAS No. 4 has been rescinded.

	The accounting, disclosure and financial statements provisions of SFAS No. 145 are effective for financial statements in fiscal years beginning after May 15, 2002. Any gain or loss on extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in Opinion No. 30 for classification as an extraordinary item shall be reclassified pursuant to the criteria in Opinion No. 30.The implementation of Statement No. 145 is not expected to have a material impact on the financial condition or operating results of the Company.

12.	ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES

	In August 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which requires the Company to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Statement 146 replaces Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The provisions of Statement 146 are to apply prospectively to exit or disposal activities initiated after December 31, 2002.

13.	ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS

	On October 1, 2002 the FASB issued Statement No. 147, Acquisitions of Certain Financial Institutions. This Statement brings all business combinations involving financial institutions, except mutuals, into the scope of Statement No. 141, Business Combinations.

	Statement No. 147 requires that all acquisitions of financial institutions that meet the definition of a business, including acquisitions of part of a financial institution that meet the definition of a business, must be accounted for in accordance with Statement No. 141 and the related intangibles accounted for in accordance with Statement No. 142, Goodwill and Other Intangible Assets. Statement No. 147 removes such acquisitions from the scoped of Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrifts Institutions, which was adopted in February 1983 to address financial institutions acquisitions during a period when many of such acquisitions involved “troubled” institutions.

	Statement No. 147 also amends Statement No. 144, Accounting for the Impairment of Disposal of Long-Lived Assets, to include in its scope long-term customer-relations intangible assets of financial institutions. Statement No. 147 is generally effective immediately and provides guidance with respect to amortization and impairment of intangibles recognized in connection with acquisitions previously within the scope of Statement No. 72.

ITEM 2.

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

FORWARD-LOOKING STATEMENTS

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “safe harbor” created by those sections. Forward-looking statements include the information concerning possible or assumed future results of operations of the Company set forth under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements also include statements in which words such as “expect,” “anticipate,” “intend,” “plan,” “believe,” estimate,” “consider,” or similar expressions are used, or similar expressions and includes assumptions concerning the Company’s operations, future results, and prospects. These forward-looking statements are based upon current expectations and are subject to risk, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Some factors that may cause actual results to differ from the forward-looking statements include the following: (i) the effect of changing regional and national economic conditions; (ii) uncertainty regarding the economic outlook resulting from the terrorist attacks on September 11, 2001 or threats of additional attacks and possible responses of the U.S. Government thereto; (iii) significant changes in interest rates and prepayment speeds; (iv) credit risks of commercial, agricultural, real estate, consumer, and other lending activities; (v) changes in federal and state banking or other laws and regulations; and (vi) other external developments which could materially impact the Company’s operational and financial performance. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. The Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances arising after the date on which they are made.

The following is a discussion and analysis of the significant changes in the Company’s Unaudited Condensed Consolidated Balance Sheets and of the significant changes in income and expenses reported in the Company’s Unaudited Condensed Consolidated Statements of Income and Comprehensive Income as of and for the three-month and nine-month periods ended September 30, 2002 and 2001 and should be read in conjunction with the Company’s consolidated 2001 financial statements and the notes thereto, along with other financial information included in this document.

SUMMARY

The Company recorded net income of $4,216,000 for the nine-month period ended September 30, 2002, representing an increase of $231,000 or 5.8% over net income of $3,985,000 for the same period in 2001. The Company had net income of $1,564,000 for the three-month period ended September 30, 2002, representing an increase of $194,000 or 14.2% over net income of $1,370,000 for the same period in 2001.

The increase in net income over the nine-month period ended September 30, 2002 as compared to the same period a year ago, resulted primarily from an increase in net interest income and other operating income which was partially offset by an increase in provision for loan losses and increases in other operating expenses.

The increase in net income over the three-month period ended September 30, 2002 as compared to the same period a year ago, resulted primarily from an increase in net interest income and other operating income which was partially offset by increases in other operating expenses and an increase in provision for loan losses.

On February 4, 2002, the Board of Directors of the First Northern Community Bancorp declared a 6% stock dividend payable as of March 31, 2002. Earnings per share amounts have been adjusted to reflect the effect of the stock dividend.

CHANGES IN FINANCIAL CONDITION

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheet showed a $10,395,000 increase in cash and due from banks, a $17,765,000 decrease in federal funds sold, a $22,446,000 decrease in investment securities, a $68,190,000 increase in loans, a $7,250,000 decrease in loans held for sale, a $680,000 increase in premises and equipment, a $2,315,000 increase in investment in unconsolidated subsidiary, and a $519,000 decrease in accrued interest receivable and other assets from December 31, 2001 to September 30, 2002. The reason for the increase in cash and due from banks was due to an increase in items in process of collection resulting from growth in deposit accounts and maintaining larger correspondent bank balances to offset monthly service charges and fees. The decrease in federal funds sold was due to increased loans and items in the process of collection. The decrease in investment securities was due to proceeds from sales, maturities and calls. The proceeds from the sale of investment securities were used to fund new loans. The increase in loans resulted from an increase in commercial and real estate loans, which was due to the significant demand for mortgage and construction financing during the current low interest environment. The decrease in loans held for sale was in real estate loans and was due, for the most part, to transfers of loans to the loans held to maturity portfolio. The increase in investments in unconsolidated subsidiary was due to an equity investment in a limited partnership, which owns low-income affordable housing projects that generate tax benefits in the form of federal and state tax housing credits. The decrease in accrued interest receivable and other assets was due to decreased securities interest receivables and decreased income taxes receivables, which was partially offset by increased loan interest receivable.

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheet showed an increase in total deposits of $30,884,000 compared to year-end 2001 deposit totals. The increase in deposits was due to higher demand, savings and money market deposit totals combined with lower time deposit totals. The fluctuations were due to cyclical changes in deposit requirements of the Bank’s depositors. Borrowed funds increased $1,487,000 from December 31, 2001 to September 30, 2002. The increase in borrowed funds was due to increased treasury tax and loan notes payable. Other liabilities increased $610,000 from December 31, 2001 to September 30, 2002. The increase in other liabilities was due to increased income taxes payable, accrued retirement compensation expense and incentive compensation expense, which were partially offset by decreased accrued profit sharing expense.

CHANGES IN RESULTS OF OPERATIONS

Interest Income

The reduction in general market rates reduced the yields on earning assets. The Federal Open Market Committee has lowered the federal funds rate by 125 basis points during the past twelve months.

Interest income on loans for the nine-month period ended September 30, 2002 is up 1.5% over the same period for 2001, from $16,881,000 to $17,131,000 and is up 6.3% for the three-month period ended September 30, 2002 over the same period for 2001, from $5,806,000 to $6,174,000. The increase over the nine-month period ended September 30, 2002 as compared to the same period a year ago, was primarily due to an increase in average loans which was partially offset by a 208 basis point decrease in loan yields. The increase over the three-month period ended September 30, 2002 as compared to the same period a year ago, was primarily due to an increase in average loans which was partially offset by a 110 basis point decrease in loan yields.

Interest income on investment securities for the nine-month period ended September 30, 2002 is down 27.7% over the same period for 2001, from $5,256,000 to $3,800,000 and is down 22.2% for the three-month period ended September 30, 2002 over the same period for 2001, from $1,475,000 to $1,147,000. The decrease over the nine-month period ended September 30, 2002 as compared to the same period a year ago, was primarily due to a decrease in average securities combined with a 61 basis point decrease in securities yields. The decrease over the three-month period ended September 30, 2002 as compared to the same period a year ago, was primarily due to a decrease in average securities combined with a 23 basis point decrease in securities yields.

Interest income on federal funds sold for the nine-month period ended September 30, 2002 is down 22.7% over the same period for 2001 from $397,000 to $307,000 and is down 65% for the three-month period ending September 30, 2002 over the same period in 2001 from $237,000 to $83,000. The decrease in federal funds income over the nine-month period ended September 30, 2002 was primarily due to a decrease in average federal funds sold and by a 318 basis point decrease in federal funds rates. The decrease in federal funds income over the three-month period ended September 30, 2002 was primarily due to a 177 basis point decrease in federal funds rates. The changes in average federal funds sold are the result of the usual seasonality of transaction deposit accounts.

Interest Expense

The reduction in general market rates reduced the cost of funds. The Federal Open Market Committee has lowered the federal funds rate by more than 125 basis points during the past twelve months.

Interest expense on deposits and other borrowings for the nine-month period ended September 30, 2002 is down 50.9% over the same period for 2001 from $6,743,000 to $3,310,000 and is down 51.74% for the three-month period ending September 30, 2002 over the same period in 2001 from $2,116,000 to $1,029,000. The decrease in interest expense over the nine-month period ended September 30, 2002 was primarily due to a 285 basis point decrease in deposit rates, which was partially offset by increased average interest bearing deposits. The decrease in interest expense over the three-month period ended September 30, 2002 was primarily due to a 172 basis point decrease in deposit rates, which was partially offset by increased average interest bearing deposits.

Provision for Loan Losses

There was a provision for loan losses of $270,000 for the nine-month period ending September 30, 2002 compared to a recovery of $308,000 for the same period in 2001. The provision was due to an increase in average loans and the recovery was due to improved loan quality in the Company’s loan portfolio. The September 30, 2002 allowance for loan losses of approximately $7,242,000 is 2.3% of total loans compared to $6,926,000 or 2.7% of total loans at December 31, 2001. The decrease in the percentage of the allowance for loan losses to total loans was the result of loan growth. The allowance for loan losses is maintained at a level considered adequate by management to provide for possible loan losses.

Other Operating Income

Other operating income was up 52% for the nine-month period ended September 30, 2002 over the same period in 2001 from $2,435,000 to $3,700,000. This increase was primarily due to gains on sales of loans; mortgage brokerage income; loan servicing income; realized gains on available for sale securities and other miscellaneous income. Realized gains/losses on available for sale securities accounted for most of the increase in other operating income and this was due to gains on sales in 2002 compared to an other than temporary decline in value of a corporate bond and realized losses on sales in 2001. The increase in gains on sales of loans was primarily due to the significant increase in mortgage financing and refinancing activity over the same period in 2001. The bank sold approximately $42,000,000 in residential mortgage loans during the first nine months of 2002. Subsequent to February 28, 2002, all of these loans were sold servicing released. The increase in other miscellaneous income was due, for the most part, to an increase in cash surrender value of life insurance policies. The increase in cash surrender value of life insurance policies was due to the purchase of single-premium insurance policies in the amount of $6,810,000, the benefit accruals of which will fund certain executive officers’ and directors’ death, disability and retirement benefits.

Other operating income was up 46% for the three-month period ended September 30, 2002 over the same period in 2001 from $1,050,000 to $1,533,000. This increase was primarily due to mortgage brokerage income and other miscellaneous income. Realized gains/losses on available for sale securities accounted for most of the increase in other operating income and this was due to gains on sales over the same period in 2001. The increase in other miscellaneous income was due, for the most part, to an increase in cash surrender value of life insurance policies. The increase in cash surrender value of life insurance policies was due to the purchase of single-premium insurance policies in the amount of $6,810,000, the benefit accruals of which will fund certain executive officers’ and directors’ death, disability and retirement benefits.

Other Operating Expense

Total other operating expense was up 21.2% for the nine-month period ending September 30, 2002 over the same period in 2001 from $12,399,000 to $15,030,000 and was up 22.8% for the three-month period ending September 30, 2002 over the same period in 2001 from $4,333,000 to $5,319,000.

The main reasons for the increase in other operating expense in the nine-month period ending September 30, 2002 were a combination of the following: increases in salaries and benefits; occupancy and equipment; data processing; stationery and supplies and other miscellaneous expense. The increase in salaries and benefits was due to increases in: the number of employees needed for branch and department expansion; merit salary increases; payroll taxes; retirement compensation expense; worker’s compensation expense; group insurance; and increases in profit sharing and incentive compensation provisions due to increased number of employees combined with increases in commissions for real estate loans. The increase in occupancy and equipment was due to increased rent expense, furniture, equipment and leasehold depreciation, equipment and building maintenance and computer hardware depreciation. The increase in data processing was due to increased expenses associated with upgrading and expanding the data communications network. The increase in stationery and supplies was due to increased usage and new branch and department expansion as compared to the same period in 2001. The increase in other miscellaneous expense was due to: increased postage; employee training; accounting and audit fees; miscellaneous loan and lease expense; amortization expense of the investment in unconsolidated subsidiary for the affordable housing tax credit investment; and computer software depreciation which were partially offset by decreased legal fees; consulting fees; and sundry losses.

The main reasons for the increase in other operating expense in the three-month period ending September 30, 2002 were a combination of the following: increases in salaries and benefits; occupancy and equipment; data processing and other miscellaneous expense. The increase in salaries and benefits was due to increases in: the number of employees needed for branch and department expansion; merit salary increases; payroll taxes; retirement compensation expense; worker’s compensation expense; group insurance; and increases in profit sharing and incentive compensation provisions due to increased income combined with increases in commissions for real estate loans. The increase in occupancy and equipment was due to increased rent expense, furniture and equipment and leasehold depreciation, equipment and building maintenance, utilities, hazard and liability insurance, equipment rental, property taxes, and computer hardware depreciation. The increase in data processing was due to increased expenses associated with upgrading and expanding the data communications network as compared to the same period in 2001. The increase in other miscellaneous expense was due to: increased postage; accounting and audit fees; telephone; miscellaneous loan expense; computer software depreciation; amortization expense of the investment in unconsolidated subsidiary for the affordable housing tax credit investment and computer software and hardware service contracts; which were partially offset by decreased stationary and supplies and consulting fees.

Off-Balance Sheet Commitments

The following table shows the distribution of the Company’s undisbursed loan commitments at the dates indicated.

(Dollars in thousands)	September 30, 2002		September 30, 2001		December 31, 2001

Undisbursed loan commitments	$	134,622		95,080		117,486
Standby letters of credit		1,654		1,906		1,993

	$	136,276		96,276		119,479

Asset Quality

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of current collateral values, and to maintain an adequate allowance for loan losses at all times.

It is generally the Company’s policy to discontinue interest accruals once a loan is past due as to interest or principal payments for a period of ninety days. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected.

Non-accrual loans amounted to $849,000 at September 30, 2002, and were comprised of nine commercial loans, one agricultural loan and two installment loans. At December 31, 2001, non-accrual loans amounted to $530,000 and were comprised of nine commercial loans and one installment loan. At September 30, 2001, non-accrual loans amounted to $621,000 and were comprised of seven commercial loans and one installment loan. The increase in non-accrual loans at September 30, 2002 over the balance at December 31, 2001 was due to one significant agricultural loan being added to this category.

At September 30, 2002, the Company had loans 90 days past due and still accruing totaling $228,000. Such loans amounted to $54,000 at December 31, 2001 and $113,000 at September 30, 2001.

Allowance for Loan Losses

The Allowance for Loan Losses is maintained at a level believed by management to be adequate to provide for losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Bank makes credit reviews of the loan portfolio and considers current economic conditions, loan loss experience, and other factors in determining the adequacy of the reserve balance. The allowance for loan losses is based on estimates and actual losses may vary from current estimates.

The following table summarizes the loan loss experience of the Company for the nine months ended September 30, 2002 and 2001, and for the year ended December 31, 2001.

Analysis of the Allowance for Loan Losses
(Dollars in Thousands)

			September 30						December 31

			2002			2001			2001

Balance at Beginning of Period			$	6,926		$	7,228		$	7,228
Provision for (Reversal and Recovery of) Loan Losses				270			(308	)		(308	)
Loans Charged-Off:
	Commercial			(28	)		(50	)		(113	)
	Real Estate Mortgage			—			—			—
	Installment Loans to Individuals			(43	)		(36	)		(41	)

		Total Charged-Off		(71	)		(86	)		(154	)

Recoveries:
	Commercial			111			64			138
	Real Estate Mortgage			—			—			—
	Installment Loans to Individuals			6			22			22

		Total Recoveries		117			86			160

Net Recoveries				46			—			6

Balance at End of Period			$	7,242		$	6,920		$	6,926

Ratio of Net Recoveries
	To Average Loans Outstanding During the Period			0.02	%		0.00	%		0.00	%
Allowance for Loan Losses
	To Total Loans at the end of the Period			2.31	%		2.94	%		2.84	%
	To Nonperforming Loans at the end of the Period			672.42	%		942.78	%		1,185.96	%

Deposits

Deposits are the Company’s primary source of funds. At September 30, 2002, the Company had a deposit mix of 14% in savings deposits, 28% in time deposits, 30% in interest-bearing checking accounts and 28% in noninterest-bearing demand accounts. Noninterest-bearing demand deposits enhance the Company’s net interest income by lowering its costs of funds.

The Company obtains deposits primarily from the communities it serves. No material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company accepts deposits in excess of $100,000 from customers. These deposits are priced to remain competitive.

Maturities of time certificates of deposits of $100,000 or more outstanding at September 30, 2002, September 30, 2001 and December 31, 2001 are summarized as follows:

(Dollars in thousands)	September 30, 2002		September 30, 2001		December 31, 2001

Three months or less	$	26,360		23,101		28,110
Over three through twelve months		25,855		26,335		24,918
Over twelve months		1,642		2,483		2,586

Total	$	53,857		51,919		55,614

Liquidity and Capital Resources

To be able to serve our market area, the Company must maintain proper liquidity and adequate capital. Liquidity is measured by various ratios, with the most common being the ratio of net loans to deposits (including loans held for sale). This ratio was 78.1% on September 30, 2002. In addition, on September 30, 2002, the Company had the following short term investments: $19,655,000 in federal funds sold; $6,873,000 in securities due within one year; and $41,354,000 in securities due in one to five years.

To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks totaling $20,700,000.

Capital adequacy is generally measured by comparing the total of equity capital and a portion of the reserve for loan losses to total risk-weighted assets. On September 30, 2002, this ratio was 11.4% and on December 31, 2001, it was 13.7%. These ratios are above the levels currently considered to be well capitalized according to the standards set by the Bank’s regulators.

The Company approved a new stock repurchase program effective April 30, 2002 to replace the Company’s previous stock purchase plan that expired on the same date. The new stock repurchase program, which will remain in effect until April 30, 2004, allows purchases in an aggregate of up to 4% of the Company’s outstanding shares of common stock over each rolling 12-month period. The Company repurchased 210,065 shares of the Company’s outstanding common stock during the first nine months of 2002.

The Company’s primary source of liquidity on a stand-alone basis is dividends from the Bank. Dividends from the Bank are subject to regulatory restrictions.

As of September 30, 2002, the Bank’s capital ratios exceeded applicable regulatory requirements. The following tables present the capital ratios for the Bank, compared to the standards for well-capitalized depository institutions, as of December 31, 2001 (amounts in thousands except percentage amounts).

	Actual					Well Capitalized Ratio			Minimum Capital Requirement

	Capital		Ratio

Leverage	$	37,385		8.1	%		5.0	%		4.0	%
Tier 1 Risk-Based		37,385		10.1	%		6.0	%		4.0	%
Total Risk-Based		42,051		11.4	%		10.0	%		8.0	%

Return on Equity and Assets

	Nine months ended September 30, 2002			Nine months ended September 30, 2001			Year ended December 31, 2001

Annualized return on average assets		1.26	%		1.33	%		1.30	%
Annualized return on beginning core equity		14.29	%		14.84	%		14.90	%

Certifications Under Section 906 of the Sarbanes-Oxley Act of 2002

The certification by the Company’s chief executive officer and chief financial officer of this report on Form 10-Q, as required by section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), has been submitted to the Securities and Exchange Commission as additional correspondence accompanying this report.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the quantitative and qualitative disclosures about market risk as of September 30, 2002, from those presented in First Northern Community Bancorp’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.

ITEM 4.

CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Based on their evaluation as of a date within 90 days of the filing date of this Quarterly Report on 10-Q, the principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures (as defined in Section 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in Internal Controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken.

PART II - OTHER INFORMATION AND SIGNATURES

ITEM 1.
Legal Proceedings
Not Applicable.

ITEM 2.
Changes in Securities
Not Applicable.

ITEM 3.
Defaults upon Senior Securities
Not Applicable.

ITEM 4.
Submission of Matters to a Vote of Security Holders
Not Applicable.

ITEM 5.
Other Information
Not Applicable.

ITEM 6.
Exhibits and Reports on Form 8 - K.
	(a)	Exhibits

		None

	(b)	Reports on Form 8 - K.

		1. Form 8-K filing dated July 30, 2002 announcing second quarter 2002 results of First Northern Community Bancorp.

		2. Form 8-K filing dated August 13, 2002 announcing written statements of the chief executive officer and chief financial officer of First Northern Community Bancorp submitted in accordance with section 906 of the Sarbanes–Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized to sign on behalf of the registrant.

			FIRST NORTHERN COMMUNITY BANCORP


Date:	November 13, 2002	by	/s/ LOUISE A. WALKER

			Louise A. Walker, Sr. Vice President / Chief Financial Officer

CERTIFICATIONS

I, Owen J. Onsum, certify that:

1. I have reviewed this quarterly report on Form 10-Q of First Northern Community Bancorp;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 13, 2002

	/s/ OWEN J. ONSUM

	Owen J. Onsum President and Chief Executive Officer

I, Louise A. Walker, certify that:

1. I have reviewed this quarterly report on Form 10-Q of First Northern Community Bancorp;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 13, 2002

	/s/ LOUISE A. WALKER

	Louise A. Walker Sr. Vice President and Chief Financial Officer

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