First Northern Community Bancorp — 2012 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; balance-sheet comparisons are to December 31, 2011. Financial statements are unaudited. The company operates First Northern Bank of Dixon, serving Northern California’s Sacramento Valley region.
Financial performance and condition
| Metric | Q2 2012 / June 30, 2012 | Prior comparison |
|---|---|---|
| Net income | $1.207 million for the quarter; $2.299 million for six months | $0.795 million and $1.561 million, respectively, in 2011 |
| Net income available to common shareholders | $0.921 million for the quarter; $1.728 million for six months | $0.544 million and $1.061 million, respectively |
| Diluted earnings per share | $0.10 for the quarter; $0.19 for six months | $0.06 and $0.12, respectively |
| Net interest income | $6.541 million for the quarter; $12.934 million for six months | $6.592 million and $12.954 million, respectively |
| Net interest margin | 3.57% for the quarter; 3.54% for six months | 3.82% and 3.77%, respectively |
| Provision for loan losses | $0.676 million for the quarter; $1.226 million for six months | $1.490 million and $2.480 million, respectively |
| Total assets | $785.1 million | $781.2 million at December 31, 2011 |
| Total loans, net, including held-for-sale | $441.2 million | $435.6 million at December 31, 2011 |
| Deposits | $687.2 million | $679.0 million at December 31, 2011 |
| Cash and cash equivalents | $117.8 million | $140.2 million at December 31, 2011 |
| Borrowings | No FHLB advances or other borrowings outstanding | $7.0 million at December 31, 2011 |
| Stockholders’ equity | $90.3 million | $87.7 million at December 31, 2011 |
For the first six months, operating cash flow was $4.563 million, investing cash flow was negative $27.583 million, and financing cash flow was positive $0.650 million. Cash decreased $22.370 million. The loan-to-deposit ratio was 64.2%, unchanged from year-end.
The Bank reported regulatory capital ratios above “well-capitalized” thresholds: leverage 10.08% versus 5.0%; Tier 1 risk-based 16.53% versus 6.0%; and total risk-based 17.79% versus 10.0%.
Changes versus prior periods
- Six-month net income rose 43.8%; common income rose 54.5%; diluted EPS increased from $0.12 to $0.19. The quarter’s net income rose 50.0% year over year.
- Six-month net interest income was nearly flat, down $20,000, while net interest margin fell 23 basis points. Lower loan yields and securities reinvested at lower rates weighed on asset returns; lower deposit costs partly offset the pressure.
- Lower loan-loss provision supported earnings: the six-month provision fell by $1.254 million year over year. Net charge-offs were $1.850 million, down from $2.735 million in the first half of 2011.
- Other operating income declined 1.9% to $4.466 million for six months; operating expenses declined 1.5% to $13.018 million. Gains on sales of loans held-for-sale rose to $0.900 million from $0.268 million.
- Investment securities increased $23.1 million, or 14.4%, from year-end, while cash fell $22.4 million. Deposits increased $8.2 million; the $7.0 million of year-end borrowings was repaid.
Credit quality, liquidity, outlook and risks
- Non-accrual loans were $9.282 million, up from $8.710 million at year-end. Net non-performing assets, after guarantees, were $9.106 million, or 1.2% of assets; the company reported no loans 90 days past due and still accruing. Other real estate owned declined to zero after three property sales.
- The allowance for loan losses was $9.784 million, or 2.19% of loans, versus $10.408 million, or 2.35%, at year-end. Coverage was 107.5% of net non-performing loans. Commercial real estate represented approximately 42% of the loan portfolio. Management cautioned that collateral may not ensure full recovery.
- Troubled debt restructurings totaled $7.096 million, down from $9.410 million at year-end; related specific reserves were $1.848 million. Off-balance-sheet undisbursed loan commitments and standby letters of credit totaled $153.870 million; the filing also reports $6.324 million of commitments to sell loans. The reserve for unfunded lending commitments was $0.793 million.
- Liquidity resources included $36 million in unsecured bank lines and $143.875 million of FHLB borrowing capacity, subject to collateral. All loans were pledged under a blanket lien for potential FHLB and Federal Reserve borrowing. The filing reports no expected cash dividend in the foreseeable future.
- No quantified earnings or revenue guidance was provided. Management cited the low-rate environment, competition, regulation, credit quality, economic conditions and interest-rate sensitivity as factors affecting results. It identified potential spillover from the European debt crisis as a risk to U.S. markets and the economic recovery.
- The company reported no material pending legal proceedings and no material changes in market-risk disclosures. Management concluded disclosure controls were effective as of June 30, 2012; no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether non-accrual loans and criticized or classified credits stabilize, particularly in commercial real estate and commercial lending, and whether the allowance remains adequate as losses emerge.
- Whether loan growth and loan-sale gains can offset continued pressure on loan yields and net interest margin.
- How the larger securities portfolio, falling cash balance, deposit mix and unused borrowing capacity affect liquidity and interest-rate risk.
- Whether the Bank’s capital ratios and the holding company’s ability to receive regulated Bank dividends support future capital needs and any eventual common dividend.
- The quality and sustainability of reported earnings given lower provisions and increased gains on held-for-sale loan transactions.