First Northern Community Bancorp — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; financial statements are unaudited. The company’s community-banking subsidiary operates primarily in Northern California. Amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net interest income | $8.301 | $7.102 | +16.9% |
| Net interest margin | 3.34% | 3.08% | +0.26 percentage points |
| Provision for loan losses | $0.450 | $0.350 | +$0.100 |
| Other operating income | $1.685 | $1.892 | −10.9% |
| Other operating expenses | $6.819 | $6.359 | +7.2% |
| Income before taxes | $2.717 | $2.285 | +$0.432 |
| Net income | $1.731 | $1.517 | +14.1% |
| Basic and diluted EPS | $0.16 | $0.14 | +14.3% |
Net income available to common shareholders was $1.731 million, compared with $1.485 million in Q1 2015; the prior-year figure included $32,000 of preferred dividends. Interest income growth reflected higher average loan balances and loan yields, as well as a larger securities portfolio. Lower other income and higher operating expenses partly offset that improvement.
Financial position, liquidity and capital
- Assets: $1.056 billion at March 31, up $11.4 million (1.1%) from December 31, 2015.
- Loans: Net loans held for investment were $617.5 million; loans held for sale were $2.7 million. Total net loans including loans held for sale were $620.2 million, up $14.0 million (2.3%) from year-end. Growth was concentrated in commercial real estate and residential construction.
- Securities: Available-for-sale securities were $225.7 million, up $42.4 million (23.1%) from year-end. The portfolio had $1.545 million of gross unrealized gains and $0.208 million of gross unrealized losses.
- Deposits: $958.9 million, up $10.8 million (1.1%) from year-end. The loan-to-deposit ratio, including loans held for sale, was 64.7%, versus 63.9%.
- Cash and cash equivalents: $156.3 million, down $44.5 million from year-end. The company attributed the decrease mainly to loan growth and securities purchases.
- Cash flow: Operating activities used $0.9 million; investing activities used $54.4 million, including $52.6 million of securities purchases; financing activities provided $10.8 million, primarily from deposit growth. Cash fell by $44.5 million during the quarter.
- Borrowings and liquidity: The company reported no FHLB advances or other borrowing balances in either Q1 2016 or Q1 2015. It had $57 million of unsecured lines with other banks and $246.7 million of FHLB borrowing capacity, subject to collateral requirements.
- Capital: Bank regulatory ratios exceeded well-capitalized thresholds at March 31: leverage 8.14% (5.0% requirement), common equity Tier 1 11.83% (6.5%), Tier 1 risk-based 11.83% (8.0%), and total risk-based 13.08% (10.0%).
Material changes and asset quality
- Average loans rose to $607.8 million from $536.1 million year over year; loan yield increased 6 basis points to 4.87%. Net interest margin improved as net interest income grew faster than average earning assets.
- Non-accrual loans declined to $2.028 million from $2.728 million at year-end. Net non-performing assets, after guarantees, were $1.879 million, or 0.2% of assets; there were no loans 90 days past due and still accruing at March 31.
- The allowance for loan losses increased to $9.607 million, or 1.53% of total loans, from $9.251 million, or 1.51%. Q1 net charge-offs were $94,000, versus $39,000 in Q1 2015. The provision increase was attributed primarily to higher net charge-offs.
- Troubled debt restructurings totaled $5.398 million, compared with $5.414 million at year-end; $5.170 million were performing under modified terms. One $180,000 commercial loan was modified as a TDR during the quarter.
- Stockholders’ equity was $88.3 million, up from $85.8 million at year-end. The board declared a 4% stock dividend payable March 31, 2016; per-share figures reflect the stock dividend. The company had redeemed its remaining $12.847 million of Treasury SBLF preferred shares in October 2015.
Outlook, risks and other notable items
- The filing provides no numerical earnings or growth guidance. Management identifies interest rates, loan and deposit growth, competition, regulation, customer confidence and regional economic conditions as factors affecting results. Forward-looking statements are subject to risks and are not guaranteed.
- Credit exposure is concentrated geographically and by collateral: approximately 75% of loans (excluding loans held for sale) were real-estate-related and secured by Northern California property. The filing highlights regional real-estate and economic weakness, California drought effects on agriculture, and potential deposit withdrawals as risks.
- Undisbursed loan commitments were $213.6 million; standby letters of credit were $2.9 million; commitments to sell loans were $1.0 million. These are contractual amounts and do not necessarily represent expected cash outflows. The reserve for unfunded commitments was $793,000.
- Management reported disclosure controls and procedures were effective as of March 31, 2016, with no material change in internal control over financial reporting during the quarter. No material pending legal proceeding was reported.
- The 2015 comparative income statement was revised for an immaterial classification error involving deferred loan-cost amortization: $364,000 was reclassified from salaries and other expenses to loan interest and fees. Management said the correction did not affect net income, the balance sheet, cash flows or equity.
- Management was evaluating the impact of new lease accounting and share-based compensation standards. No other-than-temporary impairment was recognized on securities; management attributed unrealized losses to interest-rate changes.
Most important facts for investors to verify
- Whether loan growth and higher yields continue to support net interest income and margin, particularly if market rates or funding costs change.
- Credit quality within commercial real estate and other Northern California real-estate exposures; review delinquency trends, criticized loans, TDR performance and allowance adequacy.
- Liquidity and funding resilience given the quarter’s cash decline, the size and potential draw of commitments, and reliance on deposits and secured borrowing capacity.
- Whether operating expense growth, especially compensation and legal and audit costs, moderates relative to revenue growth.
- The effects of regional economic conditions, California drought impacts on agricultural borrowers, and deposit competition or withdrawals.