First Northern Community Bancorp — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The company operates through First Northern Bank of Dixon, a California-chartered community bank serving the Sacramento Valley region. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Interest and dividend income | $7.752 | $7.335 | $22.925 | $21.351 |
| Net interest income | $7.440 | $7.029 | $21.952 | $20.399 |
| Provision for loan losses | $0.400 | — | $1.600 | $0.800 |
| Net income | $1.570 | $1.373 | $4.273 | $4.178 |
| Net income available to common shareholders | $1.537 | $1.211 | $4.176 | $3.644 |
| Diluted earnings per share | $0.16 | $0.12 | $0.43 | $0.37 |
| Net interest margin | 3.34% | 3.44% | 3.33% | 3.42% |
At September 30, 2014, total assets were $954.1 million, up 6.3% from year-end 2013. Net loans, including loans held for sale, were $526.1 million, up 3.5%; deposits were $855.8 million, up 6.5%; and available-for-sale securities were $143.8 million, down 17.0%. Cash and cash equivalents stood at $246.6 million, compared with $177.3 million at December 31, 2013. The loan-to-deposit ratio was 61.5%, versus 63.2% at year-end.
For the first nine months, operating cash flow was $7.9 million, investing cash flow was positive $9.6 million, and financing cash flow was positive $51.9 million. Cash increased $69.4 million. Management attributed the cash build largely to holding more funds in interest-bearing Federal Reserve accounts rather than reinvesting in longer-term bonds. The filing reports no FHLB advances in the quarter; available funding included $57.0 million of unsecured bank lines and up to $192.0 million of FHLB capacity, subject to collateral requirements.
The allowance for loan losses was $8.4 million, or 1.58% of loans, versus $9.4 million, or 1.81%, at year-end 2013. Nine-month net charge-offs increased to $2.6 million from $0.6 million in the prior-year period. Non-performing assets, net of guarantees, fell to $6.6 million (0.7% of assets) from $9.1 million (1.0%) at year-end. The bank’s September 30 capital ratios were 9.22% leverage, 15.16% Tier 1 risk-based and 16.41% total risk-based, each above the stated well-capitalized thresholds.
Material changes and management commentary
- Net income rose 14.3% in Q3 and 2.4% year to date. Common-shareholder income and diluted EPS increased more sharply, partly reflecting lower preferred dividends.
- Nine-month net interest income rose 7.8%, primarily on higher average loan balances and securities yields. The margin nevertheless narrowed as loan yields declined; management cited new originations and repricing at lower rates.
- Other operating income declined 23.7% year to date, mainly due to lower gains on sales of loans, investment and brokerage income, and loan-servicing income. Lower salaries and occupancy costs contributed to a 3.8% decrease in operating expenses.
- Net charge-offs rose substantially, particularly in commercial loans, contributing to the higher loan-loss provision. Non-accrual loans improved to $6.6 million from $9.6 million at year-end, though two consumer loans totaling $147,000 were 90 days or more past due and still accruing.
- The company distributed a 3% stock dividend in 2014. It reported no cash dividend on common stock and stated it did not anticipate paying one in the foreseeable future.
Outlook, risks and contingencies
The filing provides no specific earnings or growth guidance. Management identifies the low-interest-rate environment, loan and deposit pricing, economic conditions, and regulatory change as factors that may affect results. The Federal Reserve ended its asset-purchase program in October 2014 while indicating that short-term rates would remain low for some time; the timing and pace of later policy changes remain uncertain.
Key credit risks include concentration in commercial real estate and other real-estate-secured lending, construction lending, and agricultural exposure. Management specifically cautions that California’s severe drought could weaken agricultural borrowers and related collateral. The bank also faces sensitivity to Northern California economic and property-market conditions, interest-rate changes, mortgage origination trends, and evolving mortgage regulations. Basel III capital rules were scheduled to apply to the bank beginning January 1, 2015; management was evaluating their effect.
Off-balance-sheet commitments totaled $176.2 million, including $172.6 million of undisbursed loan commitments and $2.0 million of standby letters of credit. The company had a $0.8 million reserve for unfunded commitments. Management reported no material pending legal proceeding and no material change in market-risk disclosures. Disclosure controls were assessed as effective, with no material quarter-related change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth and improved non-performing-asset measures persist, and whether elevated net charge-offs require further provisioning.
- How the decline in net interest margin affects future earnings as rates and loan/deposit pricing change.
- The quality and concentration of commercial real estate, construction, and agricultural loans, including drought-related borrower exposure.
- Whether the cash build and available borrowing lines provide sufficient liquidity, and how Basel III implementation affects capital flexibility.
- Whether weaker loan-sale, servicing, and brokerage income continues, and whether management’s no-common-cash-dividend outlook changes.