First Northern Community Bancorp — 2013 Form 10-K
Business context and reporting period. The company is a California bank holding company whose principal subsidiary, First Northern Bank of Dixon, provides commercial banking across Northern California. This annual report covers the fiscal year ended December 31, 2013, with comparisons primarily to 2012. Amounts below are U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Interest and dividend income | $28.86 | $28.26 | +2.1% |
| Net interest income | $27.59 | $26.46 | +4.3% |
| Provision for loan losses | $1.20 | $3.28 | −63.4% |
| Other operating income | $9.30 | $9.44 | −1.5% |
| Other operating expenses | $27.46 | $26.25 | +4.6% |
| Net income | $5.38 | $4.65 | +15.9% |
| Net income available to common shareholders | $4.71 | $3.51 | +34.3% |
| Diluted earnings per share | $0.48 | $0.36 | +33.3% |
- Balance sheet and growth: Year-end assets were $897.7 million, up 8.0%; deposits were $803.8 million, up 10.0%; and loans, including loans held for sale, net of allowance were $508.1 million, up 14.2%. Commercial real estate loans increased 24.9% to $235.3 million; commercial loans increased 24.6% to $110.6 million.
- Margins and returns: Net interest margin fell to 3.41% from 3.55%, while net interest spread declined to 3.32% from 3.42%. Return on average assets was 0.62%, versus 0.58%.
- Credit quality: Net charge-offs fell to $0.4 million from $5.1 million. The allowance for loan losses was $9.35 million, or 1.81% of loans, compared with $8.55 million, or 1.91%, in 2012. Net non-performing loans were $9.15 million, up from $7.15 million; allowance coverage of non-performing loans declined to 102.3% from 119.7%. No loans were 90 days past due and still accruing.
- Cash flow and liquidity: Operating cash flow was $16.2 million; investing cash outflow was $62.7 million; financing cash inflow was $62.4 million. Cash and cash equivalents increased $15.9 million to $177.3 million. The net-loans-to-deposits ratio was 63.2%, and management described liquidity as adequate and expected it to remain strong in 2014. Available borrowing capacity included $165.3 million from the FHLB and $37.0 million of correspondent-bank lines.
- Debt and capital: The company reported no long-term borrowings at year-end and no FHLB advances or federal funds purchased. Bank capital ratios were 9.1% Tier 1 leverage, 14.7% Tier 1 risk-based, and 15.9% total risk-based; management said the Bank met the “well capitalized” standard. Stockholders’ equity decreased to $84.9 million from $92.3 million, reflecting, among other items, a $10.0 million preferred-stock redemption and $2.2 million of other comprehensive loss.
Material changes versus the prior comparable period
- Profitability improved as lower loan-loss provision and interest expense, together with loan growth, more than offset higher operating costs and slightly lower other operating income.
- Loan growth was concentrated in commercial real estate and commercial lending; agriculture and consumer balances declined. Approximately 73% of loans were real-estate-related, with commercial real estate representing about 46% of the portfolio.
- Non-accrual loans increased to $9.57 million from $7.27 million. Non-performing assets were $9.15 million, or 1.0% of assets, versus $8.21 million, also 1.0%, in 2012; OREO declined to zero from $1.06 million.
- Available-for-sale securities fell to $173.3 million from $184.5 million. The company recorded $2.25 million of other comprehensive loss, primarily reflecting unrealized securities losses; it reported no other-than-temporary impairment in 2013.
Outlook, risks, contingencies, and unusual items
- Management planned to continue growing deposits to fund loans and other earning assets, develop fee income in trust and investment services, and control expenses. It expected continued downward pressure on net interest margin in the first half of 2014.
- Key risks include Northern California economic and real-estate conditions, commercial real-estate and other loan concentrations, borrower and collateral performance, agricultural and weather exposure, interest-rate movements, deposit outflows, competition, regulatory changes, and cybersecurity or operational disruptions.
- Off-balance-sheet commitments totaled $178.3 million, including $172.6 million of undisbursed loan commitments and $2.5 million of performance standby letters of credit. Many loan commitments may expire undrawn. The Bank maintained a $0.8 million reserve for unfunded commitments.
- The company redeemed $10.0 million of Treasury SBLF preferred stock in February 2013; $12.847 million remained outstanding at year-end. It said it did not expect to pay cash dividends in the foreseeable future. A 3% stock dividend was declared in January 2014, payable March 31, 2014.
- No material pending legal proceeding was reported. The independent auditor issued an unqualified opinion on the financial statements; management concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether the rise in non-accrual loans and decline in allowance coverage signal renewed credit deterioration, particularly in commercial real estate and agriculture.
- Whether loan growth and deposit funding can be sustained without further net-interest-margin compression.
- The valuation and duration exposure of the securities portfolio, including the effect of interest-rate changes on accumulated other comprehensive income and capital.
- The terms and remaining restrictions associated with the $12.847 million SBLF preferred stock, including implications for common dividends and capital distributions.
- How much of the $178.3 million of commitments is likely to be drawn and the resulting implications for liquidity and capital.
- The 10-K reports annual results, not a standalone fourth-quarter income statement; the filing text does not provide a clear standalone Q4 earnings value.