First Northern Community Bancorp — Q1 2013 Form 10-Q
Business and period: The company’s subsidiary, First Northern Bank of Dixon, is a California-chartered community bank serving Northern California’s Sacramento Valley. This unaudited filing covers the three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. Amounts below are in U.S. dollars.
Financial performance and position
- Earnings: Net income was $1.363 million, up 24.8% from $1.092 million a year earlier. Net income available to common shareholders was $1.151 million versus $0.807 million; diluted EPS was $0.12 versus $0.09.
- Interest income and margin: Net interest income rose 2.2% to $6.535 million from $6.393 million, as lower funding costs more than offset lower asset yields. Net interest margin declined to 3.36% from 3.51% in Q1 2012. Average loan yield was 5.53%, down from 5.69%; average cost of interest-bearing liabilities fell to 0.27% from 0.46%.
- Other income and expenses: Other operating income increased 23.3% to $2.621 million, including higher gains on loan sales and loan-servicing income. Other operating expenses increased 4.0% to $6.754 million, driven primarily by salaries and employee benefits. Income tax expense rose to $639,000 from $384,000.
- Credit costs and quality: The provision for loan losses was $400,000, down from $550,000. The allowance was $8.846 million, or 1.98% of loans, versus $8.554 million, or 1.91%, at year-end. Net charge-offs were $108,000 versus $601,000. Non-accrual loans fell to $6.809 million from $7.268 million; net non-performing assets were $7.779 million, or 0.9% of assets. No loans were 90 days past due and still accruing.
- Balance sheet: Total assets were $852.6 million, up 2.5% from year-end. Deposits increased 4.2% to $761.7 million. Net loans, including loans held for sale, declined 0.4% to $443.5 million; available-for-sale securities increased 9.4% to $201.9 million. The loan-to-deposit ratio was 58.2%, compared with 60.9%.
- Cash flow and funding: Operating activities provided $2.233 million, compared with $3.461 million in Q1 2012. Investing activities used $18.161 million, principally reflecting securities investment; financing activities provided $20.683 million, including deposit growth and a $10 million preferred-stock redemption. Cash and cash equivalents ended at $166.1 million, up $4.8 million during the quarter.
- Debt, liquidity, and capital: The company reported no FHLB advances or other borrowings outstanding during Q1. It had $37 million of unsecured bank lines and $145.7 million of FHLB borrowing capacity, subject to collateral requirements. Bank capital ratios exceeded “well-capitalized” thresholds: leverage 8.86% versus 5.0%; Tier 1 risk-based 15.10% versus 6.0%; total risk-based 16.35% versus 10.0%.
Material changes and notable items
- On February 8, 2013, the company redeemed $10 million of its U.S. Treasury Small Business Lending Fund preferred stock; preferred stock outstanding declined from $22.847 million to $12.847 million. Preferred dividends were $212,000, down from $285,000.
- A 2% stock dividend was declared in January and distributed in March. Common shares outstanding were 9,476,800 at March 31, 2013; EPS figures reflect the stock dividend retrospectively.
- Deposits rose by $30.9 million, with increases in demand, interest-bearing transaction, and savings balances. Securities grew by $17.4 million, while net loans including held-for-sale decreased by $1.5 million.
- Commercial real estate represented approximately 43% of the loan portfolio. Total impaired loans recorded were $13.116 million; troubled debt restructurings totaled $7.085 million. The five largest non-accrual loans comprised about 70% of non-accrual balances.
- Unfunded loan commitments were $168.1 million, with $2.441 million of standby letters of credit and a $793,000 reserve for unfunded commitments. Management reported no material pending litigation and no material changes to previously disclosed risk factors.
Outlook, commentary, and risks
Management provided no specific earnings or balance-sheet guidance. It said it did not anticipate paying a cash dividend in the foreseeable future. Management attributed improved earnings mainly to lower funding costs and higher non-interest income, while noting lower loan and securities yields in the low-rate environment. Forward-looking statements are subject to economic, credit, interest-rate, regulatory, and other risks; management cautioned that interim results are not necessarily indicative of full-year results. Disclosure controls were concluded to be effective as of March 31, 2013, and no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether lower net interest margin and repricing of loans and securities continue to pressure earnings despite lower funding costs.
- Credit performance and collateral support for non-accrual loans, impaired loans, and troubled debt restructurings, particularly given commercial real estate concentration.
- The sustainability of higher non-interest income, including gains on loan sales and servicing income, and the trend in operating expenses.
- Liquidity and capital after the preferred-stock redemption, including availability and terms of borrowing facilities and the effect of deposit mix and growth.
- The filing’s Q1 net interest margin comparison: the detailed table reports 3.36% for 2013 versus 3.51% for 2012; one narrative sentence contains an apparent date typo.