Back to GetFilings.com

Table of Contents

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 June 30, 2002

Commission File Number 000-30707
First Northern Community Bancorp

(Exact name of Registrant as specified in its charter)

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 x              No o

As of August 12, 2002, there were 3,275,788 shares of Common Stock, no par value, outstanding.

Table of Contents

FIRST NORTHERN COMMUNITY BANCORP

INDEX

2

Table of Contents

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

ASSETS

See notes to unaudited condensed consolidated financial statements.

3

Table of Contents

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

See notes to unaudited condensed consolidated financial statements.

4

Table of Contents

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

See notes to unaudited condensed consolidated financial statements.

5

Table of Contents

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

6

Table of Contents

7

Table of Contents

8

Table of Contents

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 six-month periods ended June 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 $2,652,000 for the six-month period ended June 30, 2002, representing an increase of $37,000 or 1.4% over net income of $2,615,000 for the same period in 2001 and had net income of $1,392,000 for the three-month period ended June 30, 2002, representing an increase of $51,000 or 3.8% over net income of $1,341,000 for the same period in 2001.

The increase in net income over the six-month period ended June 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 a decrease in recovery of loan losses and increases in other operating expenses.

9

Table of Contents

The increase in net income over the three-month period ended June 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.

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 $13,517,000 increase in cash and due from banks, a $23,225,000 decrease in federal funds sold, a $8,246,000 decrease in investment securities, a $39,468,000 increase in loans, a $11,577,000 decrease in loans held for sale, a $414,000 increase in premises and equipment and a $289,000 decrease in accrued interest receivable and other assets from December 31, 2001 to June 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. 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 was due to 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 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 receivables.

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheet showed an increase in total deposits of $9,565,000 compared to year-end 2001 deposit totals. The increase in deposits was due to higher demand and 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. Other liabilities increased $800,000 from December 31, 2001 to June 30, 2002. The increase in other liabilities was due to increased treasury tax and loan notes payable and income taxes payable which was partially offset by decreased accrued profit sharing and incentive compensation expenses.

CHANGES IN RESULTS OF OPERATIONS

Interest Income

The reduction in general market rates reduced the yields on earning assets. The Federal Open Market Committee lowered the federal funds rate by 200 basis points during the past twelve months.

Interest income on loans for the six-month period ended June 30, 2002 is down 1.1% over the same period for 2001, from $11,074,000 to $10,956,000 and is up 1.3% for the three-month period ended June 30, 2002 over the same period for 2001, from $5,598,000 to $5,673,000. The decrease over the six-month period ended June 30, 2002 as compared to the same period a year ago, was primarily due to a 155 basis point decrease in loan yields which was partially offset by an increase in average loans. The increase over the three-month period ended June 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 123 basis point decrease in loan yields.

Interest income on investment securities for the six-month period ended June 30, 2002 is down 29.8% over the same period for 2001, from $3,781,000 to $2,653,000 and is down 24.2% for the three-month period ended June 30, 2002 over the same period for 2001, from $1,771,000 to $1,343,000. The decrease over the six-month period ended June 30, 2002 as compared to the same period a year ago, was primarily due to a decrease in average securities combined with a 47 basis point decrease in securities yields. The decrease over the three-month period ended June 30, 2002 as compared to the same period a year ago, was primarily due to a decrease in average securities combined with a 12 basis point decrease in securities yields.

Interest income on federal funds sold for the six-month period ended June 30, 2002 is up 40.0% over the same period for 2001 from $160,000 to $224,000 and is down 7.8% for the three-month period ending June 30, 2002 over the same period in 2001 from $102,000 to $94,000. The increase in federal funds income over the six-month period ended June 30, 2002 was primarily due to an increase in average federal funds sold which was partially offset by a 281 basis point decrease in federal funds rates. The decrease in federal funds income over the three-month period ended June 30, 2002 was primarily due to a 230 basis point decrease in federal funds rates which was partially offset by an increase in average federal funds sold. The changes in average federal funds sold are the result of the usual seasonality of transaction deposit accounts.

10

Table of Contents

Interest Expense

The reduction in general market rates reduced the cost of funds. The Federal Open Market Committee lowered the federal funds rate by more than 200 basis points during the past twelve months.

Interest expense on deposits and other borrowings for the six-month period ended June 30, 2002 is down 50.7% over the same period for 2001 from $4,627,000 to $2,280,000 and is down 53.7% for the three-month period ending June 30, 2002 over the same period in 2001 from $2,304,000 to $1,068,000. The decrease in interest expense over the six-month period ended June 30, 2002 was primarily due to a 200 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 June 30, 2002 was primarily due to a 199 basis point decrease in deposit rates, which was partially offset by increased average interest bearing deposits.

Provision for Loan Losses

There was no provision for loan losses for the six-month period ending June 30, 2002 compared to a recovery of $308,000 for the same period in 2001. The zero provision and recovery for those periods were due to continued favorable market conditions and loan quality in the Company’s loan portfolio. The June 30, 2002 allowance for loan losses of approximately $6,963,000 is 2.4% 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 56.4% for the six-month period ended June 30, 2002 over the same period in 2001 from $1,386,000 to $2,167,000. 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 $34,000,000 in residential mortgage loans during the first six months of 2002. The increase in other miscellaneous income was due, for the most part, to an increase in cash surrender value of life insurance policies deferred. The increase in cash surrender value of life insurance policies was due 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 16.1% for the three-month period ended June 30, 2002 over the same period in 2001 from $988,000 to $1,147,000. This increase was primarily due to mortgage brokerage income and other miscellaneous income. The increase in other miscellaneous income was due, for the most part, to an increase in cash surrender value of life insurance policies deferred. The increase in cash surrender value of life insurance policies was due 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 20.4% for the six-month period ending June 30, 2002 over the same period in 2001 from $8,065,000 to $9,711,000 and was up 23.7% for the three-month period ending June 30, 2002 over the same period in 2001 from $4,093,000 to $5,063,000.

The main reasons for the increase in other operating expense in the six-month period ending June 30, 2002 were a combination of the following: increases in salaries and benefits; occupancy and equipment; 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; retirement compensation expense; 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 depreciation, equipment maintenance and computer hardware depreciation. The increase in stationery and supplies was due to increased usage as compared to the same period in 2001. The increase in other miscellaneous expense was due to: increased postage; accounting and audit fees; miscellaneous loan and lease expense; and computer software depreciation which were partially offset by decreased legal fees, computer software and hardware service contracts; and sundry losses.

11

Table of Contents

The main reasons for the increase in other operating expense in the three-month period ending June 30, 2002 were a combination of the following: increases in salaries and benefits; occupancy and equipment; stationery; data processing 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; retirement compensation expense; 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 depreciation, equipment maintenance, service contracts and computer hardware depreciation. The increase in data processing and stationery and supplies was due to increased usage as compared to the same period in 2001. The increase in other miscellaneous expense was due to: increased postage; accounting and audit fees; miscellaneous loan and lease expense; computer software depreciation and computer software and hardware service contracts, which were partially offset by decreased legal fees.

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 $993,000 at June 30, 2002, and were comprised of twelve commercial loans and one installment loan. At December 31, 2001, non-accrual loans amounted to $530,000 and were comprised of nine commercial loans and one installment loan. At June 30, 2001, non-accrual loans amounted to $670,000 and were comprised of six commercial loans and two agricultural loans. The increase in non-accrual loans at June 30, 2002 over the balance at December 31, 2001 was due to one significant agricultural loan being added to this category.

At June 30, 2002, the Company had loans 90 days past due and still accruing totaling $23,000. Such loans amounted to $54,000 at December 31, 2001 and $5,000 at June 30, 2001.

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 74.0% on June 30, 2002. In addition, on June 30, 2002, the Company had the following short term investments: $14,195,000 in federal funds sold; $4,500,000 in securities due within one year; and $43,600,000 in securities due in one to five years.

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

Capital adequacy is generally measured by comparing the total of equity capital and reserve for loan losses to total assets. On June 30, 2002 this ratio was 10.7% and on December 31, 2001 it was 11.0%. These figures are well above the levels currently considered adequate by bank 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 145,826 shares of the Company’s outstanding common stock during the first six 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.

12

Table of Contents

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 June 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.

PART II - OTHER INFORMATION AND SIGNATURES

13

Table of Contents

The vote for ratifying the appointment of KPMG LLP as the Company’s independent auditors was as follows:

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.

14