First Northern Community Bancorp — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. First Northern Community Bank serves the Sacramento Valley region of Northern California, with most revenue generated from lending and deposits. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 2015 | Q1 2014 / comparison |
|---|---|---|
| Interest and dividend income | $7.759 | $7.479 |
| Net interest income | $7.466 | $7.154; up 4.2% |
| Net interest margin | 3.24% | 3.32% |
| Provision for loan losses | $0.350 | $0.600 |
| Other operating income | $1.892 | $1.748; up 8.2% |
| Operating expenses | $6.723 | $6.313; up 6.5% |
| Income before taxes | $2.285 | $1.989 |
| Net income | $1.517 | $1.364; up 7.1% |
| Net income available to common shareholders | $1.485 | $1.332; up 11.5% |
| Diluted EPS | $0.15 | $0.13 |
Common-shareholder income and diluted EPS growth are reported by management as 15.4%; the reported dollar amounts imply a different growth rate because of rounding. Interest expense was $0.293 million, down from $0.325 million. Income tax expense increased to $0.768 million from $0.625 million.
Financial position, liquidity and capital
- Total assets were $995.4 million, up 3.9% from December 31, 2014. Cash and cash equivalents were $254.3 million; available-for-sale securities were $163.6 million.
- Net loans held for investment were $536.9 million; loans held for sale were $4.2 million. Total loans including loans held for sale were $541.1 million, up 0.5% from year-end. The loan-to-deposit ratio was 60.6%, versus 62.8%.
- Deposits totaled $893.5 million, up 4.3% from year-end. Total liabilities were $901.4 million and stockholders’ equity was $94.0 million.
- The filing reports no FHLB advances or other borrowings during either comparative quarter. The Bank had $57 million in unsecured bank lines and $221.2 million of FHLB borrowing capacity, subject to collateral requirements.
- Bank capital ratios exceeded well-capitalized thresholds: leverage 9.08% (5.0% threshold), common equity Tier 1 14.44% (6.5%), Tier 1 risk-based 14.44% (8.0%), and total risk-based 15.69% (10.0%).
- Operating cash flow was negative $0.5 million, compared with positive $1.7 million a year earlier. Investing activities used $10.7 million, while financing activities provided $36.5 million, primarily from deposit growth. Cash increased $25.3 million to $254.3 million.
Material changes and credit quality
- Loan interest income rose 4.8%, mainly on higher average loan balances, while loan yield declined 10 basis points. Deposit funding cost fell 4 basis points; management attributed lower deposit expense to the low-rate environment.
- Expenses grew faster than net interest income, led by salaries and benefits, data processing, and other expenses. Other income benefited from $0.161 million of gains on sales of other real estate owned (OREO); two properties were sold and OREO was zero at quarter-end.
- The allowance for loan losses was $8.894 million, or 1.63% of loans, versus $8.583 million, or 1.57%, at year-end. Net charge-offs were $0.039 million, compared with $1.307 million in Q1 2014.
- Non-accrual loans were $5.065 million, down from $5.237 million at year-end; there were no loans 90 days past due and still accruing. Net non-performing assets were $4.983 million, or 0.5% of assets, compared with $5.891 million, or 0.6%, at year-end.
- Troubled debt restructurings totaled $6.593 million, including $5.435 million performing under modified terms. One consumer loan totaling $0.109 million was modified as a TDR during the quarter.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management highlights sensitivity to the low-interest-rate environment and interest-rate changes, loan and deposit trends, credit quality, and economic conditions.
- Credit exposure is concentrated geographically in Northern California and in real estate: approximately 76% of loans (excluding loans held for sale) were real-estate-related. Management cites regional economic and property-value conditions, California drought and related water restrictions, and potential agricultural-sector effects as risks.
- Undisbursed loan commitments were $184.0 million, standby letters of credit $2.1 million, and commitments to sell loans $4.6 million. These are contractual exposures, not necessarily expected cash outflows; the filing reports a $0.793 million reserve for unfunded commitments.
- The company declared a 4% stock dividend, payable March 31, 2015. Management does not anticipate common cash dividends in the foreseeable future. Preferred dividends were $0.032 million for the quarter.
- No material pending legal proceedings were reported. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the lower net interest margin (3.24% versus 3.32%) and continued loan-yield pressure offset growth in average loans and deposits.
- Whether the allowance remains adequate as portfolio mix, collateral values, California drought conditions, and real-estate concentrations evolve.
- The quality and stability of deposit growth, and the availability of contingent liquidity facilities under their collateral and other conditions.
- The assumptions behind reported capital ratios and the effects of Basel III transition requirements and the capital conservation buffer.
- How significant off-balance-sheet commitments could become if customers draw them, and the level of any resulting credit or liquidity exposure.