First Northern Community Bancorp — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company is a bank holding company whose subsidiary, First Northern Bank of Dixon, primarily serves Northern California’s Sacramento Valley. Financial statement amounts below are in millions unless stated otherwise.
Financial performance and position
- Quarterly earnings: Net income was $1.82 million, up 15.9% from $1.57 million a year earlier. Net income available to common shareholders was $1.79 million; diluted EPS was $0.17 versus $0.15.
- Nine-month earnings: Net income was $5.11 million, up 19.5% from $4.27 million. Net income available to common shareholders was $5.01 million; diluted EPS was $0.49 versus $0.41.
- Net interest income and margin: Nine-month net interest income rose 7.3% to $23.55 million from $21.95 million. Net interest margin was 3.34%, compared with 3.33%. For Q3, net interest income was $8.15 million versus $7.44 million, and margin was 3.38% versus 3.34%.
- Other income and expenses: Nine-month non-interest income edged down to $5.59 million from $5.68 million, while non-interest expense rose to $20.68 million from $19.75 million. The loan-loss provision fell to $0.65 million from $1.60 million.
- Balance sheet: Total assets were $1.038 billion, up 8.3% from December 31, 2014. Net loans, including loans held for sale, rose 10.1% to $592.7 million; deposits increased 8.7% to $931.3 million. Available-for-sale securities fell 11.0% to $134.6 million.
- Cash flow and liquidity: Nine-month operating cash flow was $9.0 million; investing activities used $38.1 million, primarily reflecting loan growth; financing activities provided $74.3 million, principally from deposit growth. Cash and equivalents rose to $261.3 million. The loan-to-deposit ratio was 63.6%.
- Debt and capital: The filing reports no FHLB advances during the nine-month period. At September 30, the Bank’s leverage, Common Equity Tier 1, Tier 1 risk-based and total risk-based capital ratios were 9.20%, 13.95%, 13.95% and 15.20%, respectively, above the stated well-capitalized thresholds.
Material changes and credit quality
- Loan growth was concentrated in commercial real estate, commercial, agricultural and residential construction lending. Commercial real estate represented about 49% of loan principal; approximately 73% of loans were real-estate-related, increasing exposure to collateral values and regional economic conditions.
- Non-accrual loans declined to $2.61 million from $5.24 million at year-end 2014. Net non-performing assets, after government guarantees, were $2.45 million, or 0.2% of assets, versus $5.89 million, or 0.6%. There were no loans 90 days past due and still accruing.
- The allowance for loan losses was $9.36 million, or 1.56% of loans, compared with $8.58 million, or 1.57%, at year-end. The nine-month period recorded net recoveries of $0.13 million, versus net charge-offs of $2.55 million in the prior-year period.
- Other real estate owned declined to zero from $0.74 million after property sales. Total troubled debt restructurings were $5.62 million, of which $5.48 million were performing in compliance with modified terms.
Outlook, risks and unusual items
- The filing gives no specific earnings or growth guidance. Management identifies interest rates, competition, regulatory requirements, local economic conditions and credit quality as factors affecting results. It highlights California drought conditions as a potential risk to agricultural borrowers.
- Key risks include real-estate lending concentration and Northern California property values, as well as cybersecurity, operational disruption and regulatory compliance. Management states that no material legal proceeding is pending.
- Undisbursed loan commitments were $206.2 million, standby letters of credit $3.0 million and commitments to sell loans $2.1 million. These are not necessarily expected cash outflows; the reserve for unfunded commitments was $0.79 million.
- Subsequent event: On October 26, 2015, after quarter-end, the company redeemed its remaining $12.85 million of U.S. Treasury Small Business Lending Fund preferred stock.
- The company declared a 4% stock dividend in January, payable in March 2015. Management’s forward-looking statement topics include an expectation of no cash dividend on common stock in the foreseeable future; the filing provides no separate formal dividend forecast.
Important facts for investors to verify
- Whether loan growth, particularly in commercial real estate and agriculture, remains consistent with underwriting standards and regional conditions.
- Whether lower non-accrual balances and net recoveries persist, and whether the allowance remains adequate as the portfolio expands.
- How deposit growth, excess cash and loan growth affect net interest margin, funding needs and earnings.
- The post-quarter preferred-stock redemption’s effect on capital, preferred dividends and future results; confirm the redemption’s completion and accounting treatment.
- Any developments in California drought exposure, cybersecurity preparedness, regulatory capital requirements or common-stock dividend policy.