First Northern Community Bancorp — 2015 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2015, not a quarterly filing. First Northern is a California bank holding company whose principal subsidiary, First Northern Bank of Dixon, provides commercial banking, lending, deposit, mortgage, trust and investment services in Northern California.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income | $32.0 million | $29.5 million |
| Provision for loan losses | $0.65 million | $1.8 million |
| Other operating income | $7.6 million | $7.5 million |
| Other operating expenses | $28.3 million | $26.6 million |
| Net income | $6.9 million | $5.9 million |
| Net income available to common shareholders | $6.8 million | $5.7 million |
| Basic / diluted earnings per share | $0.64 / $0.64 | $0.55 / $0.54 |
| Total assets at year-end | $1.045 billion | $957.9 million |
| Loans, net, including loans held for sale | $606.2 million | $538.5 million |
| Total deposits | $948.1 million | $857.1 million |
| Stockholders’ equity | $85.8 million | $92.1 million |
Net interest margin was 3.35%, compared with 3.32% in 2014. Return on average assets was 0.69%, up from 0.62%; return on average equity was 7.41%, versus 6.59%. The filing does not state a single consolidated profit-margin percentage.
- Cash flow: Operating activities provided $13.6 million; investing activities used $107.2 million; financing activities provided $78.3 million. Cash and cash equivalents fell $15.4 million to $200.8 million, principally as loan growth and securities purchases used funds.
- Credit quality: The allowance for loan losses was $9.25 million, or 1.51% of loans, versus $8.58 million, or 1.57%, in 2014. Net recoveries were $18,000, compared with $2.57 million in net charge-offs in 2014. Non-accrual loans were $2.73 million gross; non-performing assets net of guarantees were $2.58 million, or 0.3% of assets, down from $5.89 million, or 0.6%.
- Debt and liquidity: The company reported no long-term borrowings or year-end Federal Funds purchased. Available capacity included $246.3 million from the FHLB and $57.0 million in unsecured correspondent-bank lines. Management described liquidity as adequate and expected it to remain strong; the net loans-to-deposits ratio was 63.9%.
- Capital: The Bank’s Basel III ratios were 8.0% Tier 1 leverage, 12.1% common equity Tier 1, 12.1% Tier 1 risk-based and 13.3% total risk-based capital. The Bank was categorized as well capitalized. Equity declined mainly because the company redeemed its remaining $12.8 million of U.S. Treasury preferred stock in October 2015.
Material changes versus 2014
- Net income rose 17.0%, and net income available to common shareholders increased 19.3%, supported by higher net interest income and lower loan-loss provision.
- Loans increased 12.6% and deposits increased 10.6%. Agriculture loans grew 38.8% and commercial real estate loans 13.7%; residential mortgage and consumer balances declined.
- Other operating expenses increased 6.4%, principally from higher salaries and employee benefits, which rose $1.6 million.
- Asset quality improved: non-accrual loans decreased from $5.24 million to $2.73 million, and the Bank sold two commercial OREO properties, ending 2015 with no OREO.
Outlook, commentary and risks
For 2016, management planned to continue deposit growth to fund loans and other earning assets, pursue fee-income opportunities in trust, investment and brokerage services and deposit fees, and control expenses. It expected liquidity to remain strong while growing in existing markets. No specific earnings or growth guidance was provided.
The company does not expect to pay a cash dividend in the foreseeable future, although it declared a 4% stock dividend payable in March 2016. Key disclosed risks include Northern California and real-estate concentration (about 72% of loans were real-estate-related), commercial real-estate exposure, California drought effects on agricultural borrowers, interest-rate and net-interest-margin sensitivity, deposit withdrawals, regulatory and compliance costs, and cybersecurity and operational disruptions. Management reported no material pending legal proceeding; the independent auditor issued an unqualified opinion on the financial statements, and management concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether rapid loan and deposit growth can be sustained without weakening underwriting or funding costs, particularly in commercial real estate and agriculture.
- Whether the allowance remains adequate as classified loans rose to $21.7 million from $16.6 million, despite lower non-accrual loans and charge-offs.
- How changing interest rates affect asset yields, deposit costs and net interest margin.
- How the preferred-stock redemption and new Basel III capital-buffer phase-in affect capital, distributions and future growth.
- Whether the 2016 operating plan and liquidity outlook are borne out; the filing provides no quantified earnings guidance.