First Northern Community Bancorp — Q3 2012 Form 10-Q
Business and period: California bank holding company whose subsidiary, First Northern Bank of Dixon, primarily serves the Sacramento Valley. This unaudited report covers the quarter and nine months ended September 30, 2012; balance-sheet comparisons are with December 31, 2011. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 / September 30, 2012 | Comparable period / prior year-end |
|---|---|---|
| Net income | $1.204 Q3; $3.503 nine months | $0.948 Q3; $2.509 nine months |
| Net income available to common; diluted EPS | $0.918 and $0.10 Q3; $2.646 and $0.29 nine months | $0.341 and $0.04 Q3; $1.402 and $0.15 nine months |
| Net interest income | $6.777 Q3; $19.711 nine months | $6.727 Q3; $19.681 nine months |
| Net interest margin | 3.63% Q3; 3.57% nine months | 3.84% Q3; 3.79% nine months |
| Total assets | $805.6 | $781.2 at December 31, 2011 |
| Loans, net, including held-for-sale | $450.7 | $435.6 at December 31, 2011 |
| Available-for-sale investment securities | $182.9 | $160.2 at December 31, 2011 |
| Deposits | $705.9 | $679.0 at December 31, 2011 |
| Cash and cash equivalents | $129.2 | $140.2 at December 31, 2011 |
| FHLB advances and other borrowings | None outstanding | $7.0 at December 31, 2011 |
| Stockholders’ equity | $91.7 | $87.7 at December 31, 2011 |
For the first nine months, total interest income was $21.157 million (versus $21.583 million), interest expense was $1.446 million (versus $1.902 million), and other operating income was $6.772 million (versus $7.007 million). Operating expenses were $19.488 million, down from $20.008 million. Income tax expense increased to $1.441 million from $0.501 million.
Nine-month operating cash flow was $5.113 million; investing cash flow was negative $35.112 million and financing cash flow was positive $19.039 million. Cash declined by $10.960 million. The loan-to-deposit ratio was 63.9%, compared with 64.2% at year-end. The Bank’s September 30 capital ratios were 10.16% leverage, 16.35% Tier 1 risk-based, and 17.65% total risk-based, above the stated well-capitalized thresholds.
Changes versus comparable periods
- Nine-month net income rose about 40% year over year; diluted EPS increased from $0.15 to $0.29. Q3 net income was $1.204 million versus $0.948 million a year earlier.
- Net interest income was nearly flat year over year, while margin contracted. Management attributed the income trend to lower funding costs offsetting lower asset yields; loan yields fell as loans repriced at lower rates.
- The nine-month loan-loss provision fell to $2.051 million from $3.670 million. Net charge-offs were $2.642 million versus $3.272 million.
- Assets, loans, securities, and deposits increased from year-end. Deposits grew $26.9 million; growth in non-maturity deposits was partly offset by lower time deposits. Cash fell, in part as funds were deployed into securities and loans.
Credit, liquidity, outlook, and risks
- The allowance for loan losses was $9.817 million, or 2.16% of loans, versus $10.408 million, or 2.35%, at year-end. Gross non-accrual loans were $8.952 million; net non-performing assets were $9.684 million, or 1.2% of assets. Allowance coverage of net non-performing loans was 111.8%. No loans were 90 days past due and still accruing.
- Troubled debt restructurings totaled $7.068 million, down from $9.410 million at year-end; $6.294 million were performing under modified terms. Commercial real estate represented approximately 42% of loan principal. Management cautioned that collateral may not ensure full recovery.
- Available liquidity included $41 million in unsecured bank lines and $144.443 million of FHLB borrowing capacity, secured by pledged collateral. Undisbursed loan commitments were $155.209 million; standby letters of credit were $2.248 million.
- The filing gives no specific earnings or growth guidance. Management said it did not anticipate paying a cash dividend in the foreseeable future. It cited low interest rates, economic and credit conditions, competition, regulatory matters, and the European debt crisis as risks; it warned that actual results may differ from forward-looking statements.
- Unusual/comparable-period items: 2011 common earnings were affected by a one-time $0.4 million charge related to early recognition of the remaining discount on preferred stock issued to the U.S. Treasury. The company reported a 1% stock dividend in 2012. Available-for-sale securities generated $1.291 million of nine-month other comprehensive income; management reported no other-than-temporary impairment.
- No material pending legal proceedings were reported, and management concluded disclosure controls were effective as of September 30, 2012. The company had completed its TARP Capital Purchase Program after redeeming the TARP preferred shares and repurchasing the Treasury warrant in 2011; it retained $22.847 million of SBLF preferred stock.
Key facts for investors to verify
- Whether margin pressure from lower loan and securities yields continues, and how deposit pricing affects funding costs.
- Changes in non-accrual loans, criticized/classified credits, TDR performance, charge-offs, and allowance adequacy—especially in commercial real estate and residential mortgage exposures.
- Whether loan and deposit growth is sustained and how liquidity, securities deployment, and use of contingent borrowing capacity evolve.
- The effect of preferred-stock dividends and the retained SBLF preferred shares on earnings available to common shareholders and capital.
- Details and developments in the risk factors and off-balance-sheet commitments, including the European debt crisis and the $155.209 million of undisbursed loan commitments.