FNRN

Business Context and Reporting Period

Company: First Northern Community Bancorp (Parent of First Northern Bank of Dixon)
Filing Type: Form 10-K (Annual Report)
Fiscal Year Ended: December 31, 2009
Reporting Date: March 29, 2010
Business Overview: A California state-chartered bank holding company operating 16 offices across Solano, Yolo, Sacramento, and Placer counties. The bank focuses on commercial, agricultural, and real estate lending for individuals and small-to-medium-sized businesses.

Key Financial Metrics (Year Ended Dec 31, 2009)

Material Changes vs. Prior Period

• Profitability: The Company reported a net loss of $1.05 million, a 23.3% improvement over the $1.37 million loss in 2008. However, net loss per common share increased to $0.21 from $0.15 due to preferred stock dividends and accretion associated with the TARP program.
• Asset Growth: Total assets increased 11.4% to $747.6 million, driven primarily by a $121.9 million increase in cash and due from banks and a $33.8 million increase in investment securities. This was partially offset by a $43.1 million decrease in net loans.
• Loan Portfolio: Total loans decreased 8.3%. Significant declines were seen in commercial loans (-18.3%) and real estate construction loans (-38.8%), while real estate mortgage loans increased 3.1%.
• Deposit Growth: Total deposits increased 11.4% to $651.4 million, with average deposits rising 5.0%.
• Interest Rates: Net interest income declined 13.5% due to lower loan rates and volumes, partially offset by lower deposit rates. The net interest margin compressed by 91 basis points.
• Capital: Stockholders' equity increased $16.1 million to $78.1 million, primarily due to the issuance of $17.4 million in preferred stock and warrants under the TARP Capital Purchase Program.

Guidance, Outlook, and Risks

• TARP Participation: On March 13, 2009, the Company issued $17.39 million of preferred stock and a warrant to the U.S. Treasury. This imposes restrictions on common stock dividends, share repurchases, and executive compensation. The preferred stock dividend rate is 5% for the first five years, increasing to 9% thereafter if not redeemed.
• Dividend Policy: The Company does not expect to pay a cash dividend in the foreseeable future due to regulatory restrictions and TARP terms.
• Asset Quality Risks: Approximately 73% of the loan portfolio is secured by real estate. The Company faces significant risk from the deterioration of the Northern California real estate market. Non-performing assets increased to $20.7 million, though management believes they are adequately collateralized.
• Regulatory Environment: The Company is subject to extensive regulation by the FDIC and California Department of Financial Institutions. Recent FDIC actions include a special assessment of $320,000 and a prepayment of $3.82 million for future assessments.
• Outlook: Management intends to maintain deposit growth to fund loan growth and identify opportunities in Asset Management and Trust services. They anticipate continued fluctuation in net interest income due to the unstable rate environment.

Key Facts for Investor Verification

• TARP Redemption: Verify the Company's ability and timeline to redeem the $17.39 million TARP preferred stock to avoid the dividend rate increase from 5% to 9% after March 13, 2014.
• Loan Loss Reserves: Monitor the adequacy of the $11.92 million allowance for loan losses (2.45% of total loans) given the high concentration of real estate loans and the increase in non-performing assets.
• Construction Loan Exposure: Review the significant 38.8% decline in real estate construction loans and the associated charge-offs to assess the severity of the downturn in this sector.
• FDIC Assessments: Confirm the impact of the $3.82 million prepaid FDIC assessment on future liquidity and expense ratios.
• Stock Liquidity: Note that the common stock trades on the OTC Bulletin Board (Symbol: FNRN) and is not listed on a national exchange, which may limit liquidity.