First Northern Community Bancorp — 2011 Form 10-K Summary
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2011, with comparisons primarily to 2010. First Northern Community Bancorp is the holding company for First Northern Bank of Dixon, a California community bank serving individuals and small and midsize businesses in Northern California.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income | $26.314 million | $26.321 million |
| Net interest margin | 3.76% | 3.82% |
| Other operating income | $9.382 million | $9.154 million |
| Other operating expenses | $26.762 million | $27.889 million |
| Provision for loan losses | $5.138 million | $4.914 million |
| Net income | $2.664 million | $2.665 million |
| Net income available to common shareholders | $1.265 million | $1.673 million |
| Basic and diluted earnings per common share | $0.14 | $0.18 |
| Total assets at year-end | $781.150 million | $737.217 million |
| Total loans, net, including loans held for sale | $435.621 million | $444.360 million |
| Total deposits at year-end | $678.958 million | $640.258 million |
| Stockholders’ equity at year-end | $87.702 million | $79.596 million |
- Cash flow: Operating activities provided $8.133 million; investing activities used $47.073 million, principally reflecting securities purchases; financing activities provided $39.405 million. Cash and cash equivalents increased $0.465 million to $140.172 million.
- Margins and earnings: Net interest margin declined 6 basis points. The company reported $3.796 million of pretax income and $1.132 million of income tax expense. Preferred dividends and accretion totaled $1.399 million, reducing earnings attributable to common shareholders.
- Credit quality: The allowance for loan losses was $10.408 million, or 2.35% of total loans, versus $11.039 million, or 2.44%, in 2010. Net charge-offs were $5.769 million. Non-accrual loans fell to $8.710 million from $12.274 million; net non-performing assets were $9.973 million, or 1.3% of assets.
- Debt and liquidity: FHLB advances and other borrowings totaled $7.0 million, down from $10.529 million. The reported net loans-to-deposits ratio was 64.2%, compared with 69.4%. The Bank reported $136.509 million of available FHLB collateral borrowing capacity and $36 million of unsecured correspondent-bank lines.
- Capital: The Bank’s year-end Tier 1 leverage, Tier 1 risk-based, and total risk-based capital ratios were 9.8%, 16.2%, and 17.5%, respectively. Management reported that the Bank met the regulatory “well capitalized” thresholds.
Material changes versus 2010
- Net income was essentially unchanged, but net income available to common shareholders decreased 24.4%, mainly due to higher income tax expense and preferred-stock dividends and accretion.
- Assets rose 6.0%, largely because investment securities increased $52.9 million. Deposits also increased 6.0%, while net loans, including loans held for sale, declined $8.7 million.
- Net interest income was nearly flat as lower loan yields, loan volumes, and fees were largely offset by higher securities volume and lower deposit funding costs. Net interest margin nevertheless edged down.
- Other operating expenses declined 4.0%, while the loan-loss provision increased 4.6%. Non-accrual loans and other real estate owned declined; the allowance-to-non-accrual-loans coverage ratio improved.
Outlook, risks, contingencies, and unusual items
- For 2012, management intended to pursue deposit growth to fund loans and other earning assets, seek growth in trust, brokerage, and deposit-fee income, and control expenses. It expected liquidity to remain strong and cautioned that net interest income and margin could continue to fluctuate in an unstable rate environment. No numerical earnings or revenue guidance was provided.
- Key risks include Northern California economic and real estate conditions, the portfolio’s real-estate exposure (approximately 71% of loans excluding loans held for sale), commercial and agricultural borrower performance, collateral values, interest-rate and deposit volatility, competition, and evolving regulation.
- In September 2011, the company issued $22.847 million of U.S. Treasury Small Business Lending Fund preferred stock and redeemed $17.390 million of TARP preferred stock. In November it repurchased and cancelled the Treasury warrant for $375,000, concluding its participation in the TARP Capital Purchase Program.
- The company did not expect to pay a cash dividend in the foreseeable future; dividend and share-repurchase activity is subject to legal, regulatory, and preferred-stock restrictions. The filing reported no material pending legal proceeding and no securities impairment considered other-than-temporary in 2011.
- Management concluded internal control over financial reporting was effective as of year-end. The independent auditor gave an unqualified opinion on the financial statements but was not engaged to audit internal control effectiveness.
Important facts for investors to verify
- Whether improved non-accrual and non-performing asset trends continue, and whether collateral values support management’s loss estimates.
- How the large commercial real estate exposure and the broader Northern California economy affect credit losses, loan demand, and the allowance for loan losses.
- Whether deposit growth and the securities portfolio can sustain liquidity and earnings as loan balances and asset yields change.
- The terms, dividend burden, and restrictions associated with the $22.847 million SBLF preferred stock, and their effect on common-shareholder returns.
- The effect of low interest rates, deposit competition, and regulatory changes on future net interest margin and fee income.
- The filing’s cash-flow statement, contractual obligations, and $156.180 million of off-balance-sheet commitments, noting that many lending commitments may expire undrawn.