First Northern Community Bancorp — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The company is a bank holding company whose subsidiary, First Northern Bank of Dixon, serves Northern California, principally the Sacramento Valley. Unless otherwise noted, dollar amounts below are in millions.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income | $8.61 | $7.48 | $16.91 | $14.58 |
| Provision for loan losses | $0.45 | — | $0.90 | $0.35 |
| Non-interest income | $1.86 | $2.02 | $3.54 | $3.91 |
| Non-interest expense | $6.81 | $6.77 | $13.63 | $13.13 |
| Net income | $2.04 | $1.77 | $3.77 | $3.29 |
| Diluted earnings per share | $0.19 | $0.16 | $0.35 | $0.30 |
| Net interest margin | 3.42% | 3.20% | 3.38% | 3.14% |
At June 30, 2016, total assets were $1.070 billion, up 2.4% from December 31, 2015. Net loans held for investment were $633.8 million; including loans held for sale, total loans were $635.6 million, up 4.9%. Available-for-sale securities were $235.2 million, up 28.3%. Deposits were $969.9 million, up 2.3%, and stockholders’ equity was $90.7 million. The loan-to-deposit ratio was 65.5%, compared with 63.9% at year-end.
Six-month operating cash flow was $2.7 million; investing cash flow was negative $81.7 million and financing cash flow was positive $21.7 million. Cash and cash equivalents declined $57.3 million to $143.5 million, primarily as funds were used for loan growth and securities purchases. The filing reports no FHLB advances during the comparable periods. It lists $57 million in short-term unsecured bank credit lines and $251.2 million in FHLB borrowing capacity, subject to collateral requirements.
The Bank’s June 30 regulatory capital ratios exceeded the stated well-capitalized thresholds: leverage 8.24% (5.0% threshold), Common Equity Tier 1 11.92% (6.5%), Tier 1 risk-based 11.92% (8.0%), and total risk-based 13.18% (10.0%).
Changes versus comparable periods
- Q2 net income rose 15.0% year over year; six-month net income rose 14.6%. Net interest income increased 15.1% for Q2 and 16.0% year to date, helped by higher average loan balances and loan yields. The six-month average loan yield rose 8 basis points.
- Six-month net interest margin expanded to 3.38% from 3.14%. Deposit interest expense declined 4.6% as average funding cost fell 3 basis points, partly offset by higher interest-bearing liabilities.
- Six-month non-interest income fell 9.6%, reflecting lower gains on sales of real estate owned and loans, servicing income, and several fee businesses. Non-interest expense rose 3.8%, including higher staffing, branch relocation, and debit-card costs.
- The loan-loss provision increased to $0.90 million from $0.35 million for the first half. The allowance rose to $10.03 million, or 1.56% of loans, from $9.25 million, or 1.51%, at year-end.
- Non-accrual loans decreased to $1.35 million from $2.73 million at year-end; net non-performing assets were $1.26 million, or 0.1% of assets. Net charge-offs were $0.12 million, versus net recoveries of $0.17 million in the first half of 2015.
Outlook, risks, and notable items
- The filing provides no quantified earnings or growth guidance. Management identifies interest rates, competition, regulation, credit quality, and regional economic conditions as factors affecting results. It specifically discusses California drought and potential agricultural-sector effects.
- Credit concentration is material: approximately 74% of loans, excluding loans held for sale, were secured by real estate, with collateral located in Northern California. The filing warns that regional economic or property-market deterioration could raise defaults and reduce collateral values. Agriculture is also exposed to commodity and weather conditions.
- Deposits are a funding source and large time deposits can be withdrawn. Certificates of deposit over $250,000 represented about 2% of deposits. Undisbursed loan commitments were $210.4 million, standby letters of credit $2.9 million, and commitments to sell loans $3.8 million; the totals are contractual amounts and not necessarily expected cash outflows.
- Management’s forward-looking statement topics include an expectation of no cash dividend on common stock in the foreseeable future; no specific forecast or timetable is provided. The Board declared a 4% stock dividend in January, payable in March 2016.
- The 2015 comparative income statement was reclassified for deferred loan-cost amortization; the change had no effect on net income, balance sheets, cash flows, or equity. Management concluded the prior classification error was immaterial.
- The company reported no material pending legal proceedings, no material change in market-risk disclosures, and effective disclosure controls as of June 30, 2016. Management was evaluating the impact of newly issued lease, stock-compensation, and expected-credit-loss accounting standards.
Investor verification points
- Review loan growth, real-estate concentration, agricultural exposure, criticized loan grades, and the adequacy of the allowance as the portfolio expands.
- Verify that improved net interest margin and earnings persist, particularly given lower non-interest income and higher credit-loss provisions and operating costs.
- Assess the cash decline and the availability and collateral requirements of backup borrowing facilities, alongside deposit stability and the $210.4 million in undisbursed commitments.
- Monitor Northern California real estate and economic conditions, drought impacts, and the potential effect of interest-rate changes on loan yields, securities values, and funding costs.
- Confirm future common-dividend policy and any subsequent developments in credit quality, commitments, or regulatory capital.