First Northern Community Bancorp — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The unaudited consolidated results are for the company and its subsidiary, First Northern Bank of Dixon, a California community bank serving Northern California’s Sacramento Valley. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net interest income | $6.835 | $6.541 | $13.370 | $12.934 |
| Provision for loan losses | $0.400 | $0.676 | $0.800 | $1.226 |
| Other operating income | $2.549 | $2.341 | $5.170 | $4.466 |
| Other operating expenses | $6.851 | $6.526 | $13.605 | $13.018 |
| Net income | $1.442 | $1.207 | $2.805 | $2.299 |
| Net income available to common shareholders | $1.282 | $0.921 | $2.433 | $1.728 |
| Diluted earnings per share | $0.14 | $0.10 | $0.26 | $0.18 |
- Net income increased 19.5% in Q2 and 22.0% for the first six months. Common-shareholder income rose 39.2% and 40.8%, respectively. The filing’s MD&A cites different rounded growth rates for some common-shareholder comparisons.
- Net interest margin was 3.46% in Q2 versus 3.57% a year earlier, and 3.41% for the first half versus 3.54%. Lower funding costs supported net interest income, while lower asset yields weighed on margin.
- The filing does not present a conventional total-revenue line. Interest and dividend income was $7.147 million in Q2 and $14.016 million for the first half; other operating income is shown above.
Financial position, liquidity and capital
- At June 30, total assets were $844.7 million, up 1.6% from year-end 2012. Net loans, including loans held for sale, were $471.4 million, up 5.9%; investment securities were $190.8 million; deposits were $754.3 million, up 3.2%.
- Cash and cash equivalents were $141.8 million, down $19.5 million from December 31. The loan-to-deposit ratio increased to 62.5% from 60.9%. The company reported $37 million of short-term unsecured bank lines and $148.1 million of FHLB borrowing capacity, subject to collateral requirements.
- No borrowings are presented on the June 30 balance sheet. Total liabilities were $762.4 million and stockholders’ equity was $82.3 million. The company redeemed $10 million of preferred stock in February 2013; preferred stock outstanding was $12.8 million at quarter-end.
- Bank regulatory capital ratios exceeded the stated well-capitalized thresholds: leverage 9.01% versus 5.0%; Tier 1 risk-based 14.45% versus 6.0%; and total risk-based 15.71% versus 10.0%.
- First-half cash flow was $9.1 million provided by operating activities, $41.7 million used in investing activities, and $13.1 million provided by financing activities, resulting in a $19.5 million decrease in cash.
Asset quality and material changes
- Gross loans increased to $477.9 million from $448.2 million at year-end, led by commercial and commercial real estate lending. Commercial real estate represented approximately 44% of principal loan balances.
- The allowance for loan losses was $8.7 million, or 1.83% of loans, versus $8.6 million, or 1.91%, at year-end. First-half net charge-offs were $0.628 million, compared with $1.850 million in the first half of 2012.
- Non-accrual loans were $7.8 million, up from $7.3 million at year-end; there were no loans 90 days or more past due and still accruing. Net non-performing assets, after guarantees, were $7.6 million, or 0.9% of assets, versus $8.2 million at year-end. The change includes the sale of three OREO properties; OREO was zero at June 30.
- Troubled debt restructurings totaled $8.1 million, up from $6.9 million at year-end; specific reserves were $1.0 million. The company reported no commitments to advance additional funds on existing TDRs.
- Available-for-sale securities were $190.8 million, up from $184.5 million at year-end. Rising long-term rates contributed to $2.45 million of first-half after-tax other comprehensive loss and moved accumulated other comprehensive income from positive $1.17 million to a loss of $1.28 million. Management said the unrealized losses were rate-related, all affected securities were investment grade, and none was considered other-than-temporarily impaired.
Outlook, risks and other notable items
- The filing provides no specific earnings or growth guidance. Management said it did not anticipate paying a cash dividend in the foreseeable future.
- Management identified interest-rate sensitivity, credit quality and collateral values, deposit funding, and regulatory changes as risks. It cautioned that a rising-rate environment could reduce securities values and affect borrowers, loan refinancing and prepayment income; low rates had pressured asset yields and net interest margins.
- New Basel III capital rules were adopted in July 2013 and are scheduled to apply to the Bank beginning January 1, 2015, with phased implementation of a capital conservation buffer. The company was evaluating the future impact.
- Off-balance-sheet commitments totaled $173.7 million, including $168.2 million of undisbursed loan commitments and $1.9 million of performance standby letters of credit. The filing says commitment amounts do not necessarily represent future cash needs; a $0.793 million reserve for unfunded commitments was recorded.
- No material pending legal proceedings were reported beyond routine litigation; management did not expect those matters to have a material adverse effect. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether loan growth, particularly in commercial real estate, is accompanied by stable delinquency, non-accrual and criticized-loan trends.
- Whether the allowance remains adequate as non-accrual loans and TDR balances evolve, and how collateral values support impaired loans.
- How changes in market rates affect net interest margin and the fair value of the securities portfolio, including the unrealized-loss position.
- The availability and terms of contingent liquidity sources, deposit stability, and the Bank’s readiness for Basel III requirements.
- The filing reports improved earnings but lower net interest margin; assess whether non-interest income gains and lower credit costs are sustainable.