First Northern Community Bancorp — FY 2014 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2014, and compares results primarily with 2013. First Northern is a California bank holding company operating First Northern Bank of Dixon, a community bank serving Northern California. Its core business is commercial, real estate, agricultural and consumer lending, funded mainly by customer deposits.
Key financial metrics
| Metric | FY 2014 / Dec. 31, 2014 | Prior comparable period |
|---|---|---|
| Net interest income | $29.5 million | $27.6 million in 2013 |
| Other operating income | $7.5 million | $9.3 million in 2013 |
| Provision for loan losses | $1.8 million | $1.2 million in 2013 |
| Other operating expenses | $26.6 million | $27.5 million in 2013 |
| Net income | $5.9 million | $5.4 million in 2013 |
| Net income available to common shareholders | $5.7 million; basic EPS $0.57, diluted EPS $0.56 | $4.7 million; basic EPS $0.47, diluted EPS $0.46 |
| Net interest margin | 3.32% | 3.41% in 2013 |
| Return on average assets / average equity | 0.62% / 6.59% | 0.62% / 6.36% in 2013 |
| Total assets | $957.9 million | $897.7 million at year-end 2013 |
| Net loans, including loans held for sale | $538.5 million | $508.1 million at year-end 2013 |
| Total deposits | $857.1 million | $803.8 million at year-end 2013 |
| Stockholders’ equity | $92.1 million | $84.9 million at year-end 2013 |
| Cash and cash equivalents | $229.1 million | $177.3 million at year-end 2013 |
Cash flow and funding. Cash provided by operating activities was $10.4 million; investing activities used $11.9 million; financing activities provided $53.2 million. Cash and cash equivalents increased $51.8 million during the year. The company had no long-term borrowings or borrowings outstanding at year-end. Available borrowing capacity included $212.9 million from the Federal Home Loan Bank and $57.0 million in correspondent-bank lines.
Credit and capital. The allowance for loan losses was $8.6 million, or 1.57% of loans, versus $9.4 million, or 1.81%, a year earlier. Net charge-offs increased to $2.6 million from $0.4 million. Non-performing assets were $5.9 million, or 0.6% of assets, compared with $9.1 million, or 1.0%, in 2013; allowance coverage of non-performing loans net of guarantees was 166.5%, up from 102.3%. The Bank’s year-end Basel I ratios were 9.0% Tier 1 leverage, 15.0% Tier 1 risk-based and 16.3% total risk-based capital; management said the Bank was well capitalized.
Material changes versus 2013
- Common-shareholder income rose 21.3%, supported by higher net interest income, lower operating expenses and lower preferred dividends.
- Net interest income increased 6.9%, primarily from loan growth and higher investment-security yields. Net interest margin nevertheless declined 9 basis points to 3.32% as loan yields fell.
- Other operating income declined 19.4%, chiefly from lower gains on loans held for sale and reduced service-charge and other income.
- Loans grew 6.0% net of the allowance, with growth in commercial, commercial real estate and agricultural lending partly offset by declines in residential mortgage, construction and consumer loans. Deposits grew 6.6% and assets 6.7%.
- Credit metrics improved in non-performing loans and assets, but higher charge-offs drove a larger loan-loss provision and a lower allowance-to-loans ratio.
Outlook, risks and contingencies
- Management’s 2015 priorities were to continue deposit growth to fund loans and other earning assets, pursue operating-income opportunities in trust, investment and brokerage services and deposit fees, and control expenses. It expected continued downward pressure on net interest margin during the first half of 2015.
- Management expected liquidity to remain strong, while noting that improving stock-market values could prompt deposit outflows. The Bank reported an 83.7% core-deposits-to-assets ratio and described its liquidity as adequate.
- Key risks include Northern California real estate and commercial-credit concentration, agricultural exposure to drought and weather, borrower and collateral deterioration, and the sensitivity of margins to interest rates. Approximately 73% of loans excluding loans held for sale were real-estate-related.
- New U.S. Basel III capital rules took effect for the Bank on January 1, 2015, with transition periods and a capital-conservation buffer phased in through 2019. The filing says management was evaluating their impact.
- Commitments to extend credit, standby letters of credit and commitments to sell loans totaled $174.3 million; many lending commitments may expire undrawn. The Bank reserved $0.8 million for unfunded commitments. Management did not expect routine pending litigation to have a material adverse effect.
- The company had $12.8 million of preferred stock outstanding. It declared a 4% stock dividend payable in March 2015 and said it did not expect to pay cash dividends in the foreseeable future. No common-stock repurchases occurred in 2014.
- Available-for-sale securities had $606,000 of gross unrealized losses at year-end; management considered them temporary and recorded no other-than-temporary impairment in 2014. The filing also reported a $50,000 loss on disposal of an equity investment and $736,000 of other real estate owned.
Important facts for investors to verify
- Whether loan growth and deposit growth continued without renewed deterioration in commercial real estate, commercial or agricultural credit quality.
- Subsequent charge-offs, reserve adequacy and the movement of non-accrual loans, troubled debt restructurings and foreclosed property.
- Actual net interest margin and deposit costs as rates and monetary policy change, including any deposit outflows.
- The impact of Basel III capital definitions and phase-ins on regulatory ratios, capital distributions and the preferred-stock restrictions.
- The quality and recurring nature of noninterest income, particularly gains on loan sales and trust, brokerage and deposit-fee revenue.
- The filing’s audited statements received an unqualified opinion; management reported effective internal control over financial reporting as of December 31, 2014.