First Northern Community Bancorp — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. Unaudited consolidated results; financial amounts below are in millions unless stated otherwise. The company operates First Northern Bank of Dixon, a California state-chartered community bank serving the Sacramento Valley region.
Financial results and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net income | $0.948 | $0.757 | $2.509 | $1.717 |
| Net income available to common shareholders | $0.341 | $0.509 | $1.403 | $0.974 |
| Diluted EPS | $0.04 | $0.06 | $0.15 | $0.11 |
| Net interest income | $6.727 | $6.760 | $19.681 | $19.649 |
| Provision for loan losses | $1.190 | $0.990 | $3.670 | $3.303 |
| Other operating income | $2.454 | $1.985 | $7.007 | $6.317 |
| Other operating expenses | $6.788 | $7.006 | $20.008 | $21.346 |
- Margins: Net interest margin was 3.84% in Q3 2011 versus 3.93% a year earlier; year-to-date margin was 3.79% versus 3.82%.
- Balance sheet, September 30: Assets were $766.7 million, up 4.0% from December 31, 2010. Net loans including held-for-sale loans were $431.4 million, down 2.9%; available-for-sale securities were $138.7 million, up 29.3%; deposits were $662.8 million, up 3.5%.
- Funding and liquidity: Cash and cash equivalents were $149.5 million. The loan-to-deposit ratio was 65.1%, down from 69.4% at year-end 2010. The company reported $34 million in unsecured bank lines and $139.3 million in FHLB borrowing capacity. FHLB advances and other borrowings totaled $8.5 million, versus $10.5 million at year-end.
- Cash flow, nine months: Operating cash flow was $3.5 million, investing cash flow was negative $19.0 million, and financing cash flow was positive $25.3 million. Cash increased $9.8 million to $149.5 million.
- Credit and allowance: Allowance for loan losses was $11.4 million, or 2.60% of loans, versus $11.0 million, or 2.44%, at year-end. Nine-month net charge-offs were $3.3 million, compared with $2.8 million in 2010.
- Capital: Bank regulatory ratios exceeded “well-capitalized” thresholds: leverage 10.05% (5.0% requirement), Tier 1 risk-based 16.16% (6.0%), and total risk-based 17.42% (10.0%). Consolidated stockholders’ equity was $88.4 million.
Material changes versus comparable periods
- Nine-month net income rose 46% year over year, while Q3 net income increased 25%. Common-shareholder income and EPS declined in Q3 despite higher company net income, primarily reflecting preferred-stock dividends and accretion.
- Interest expense fell 34.6% year to date, more than offsetting lower interest income; net interest income was essentially flat. Management attributed lower funding costs to deposit repricing and a shift toward lower-cost deposits.
- Noninterest income increased 10.9% year to date, including higher investment-security sale gains and other fee income. Expenses fell 6.3%, partly due to lower OREO, data-processing, and miscellaneous costs.
- Non-accrual loans declined to $4.6 million from $12.3 million at December 31, 2010, primarily after disposition of a $6.57 million loan in Q3. Net nonperforming assets were $7.4 million, or 0.97% of assets, versus $14.9 million, or 2.02%, at year-end.
- Loans contracted while securities and deposits grew. Management cited diminished loan demand across several lending categories.
Outlook, commentary, risks, and unusual items
- The filing provides no specific earnings or growth guidance. It states the company does not anticipate paying a cash dividend in the foreseeable future.
- On September 15, 2011, the company issued $22.847 million of new non-cumulative SBLF preferred stock to the U.S. Treasury and redeemed $17.390 million of its TARP preferred stock, plus accrued unpaid dividends. The Treasury’s 352,977-share common-stock warrant remains outstanding.
- Management reported a one-time $0.4 million charge from early recognition of the remaining discount on the redeemed TARP preferred stock. This reduced income available to common shareholders; nine-month net income itself includes the preferred-stock accounting effects as described in the filing.
- Credit risks include commercial real estate exposure (about 41% of loans), borrower and collateral weakness, economic conditions, and loan demand. The allowance increased as management cited higher net charge-offs. Management cautioned that collateral or guarantees may not ensure full recovery.
- Other risks identified include potential spillover from European sovereign-debt problems to U.S. markets and economic recovery, interest-rate changes, regulatory developments, and general forward-looking-statement uncertainties. The bank’s loans are pledged under a blanket lien supporting actual and potential FHLB and Federal Reserve borrowings.
- Off-balance-sheet commitments included $146.1 million of undisbursed loan commitments, $1.3 million of standby letters of credit, and $10.1 million of commitments to sell loans. No material pending legal proceeding was reported. Management stated disclosure controls were effective as of September 30, 2011.
Important facts for investors to verify
- Review the $0.4 million preferred-stock discount accretion and confirm its impact on common earnings, EPS, and comparability with prior periods.
- Assess whether the decline in non-accrual loans is sustainable, including the effect of the large Q3 loan disposition, and monitor criticized/substandard loans, TDRs, OREO, and charge-offs.
- Evaluate commercial real estate concentration, collateral values, and the adequacy of the $11.4 million loan-loss allowance against portfolio risks.
- Track whether loan demand recovers and whether securities growth, low-cost deposits, and reduced funding costs can sustain margins and earnings.
- Review the new SBLF preferred-stock terms, ongoing preferred dividends, remaining Treasury warrant dilution, and available borrowing capacity alongside the sizable unfunded commitments.