First Northern Community Bancorp — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited consolidated results. The company’s subsidiary, First Northern Bank of Dixon, provides community banking services in Northern California. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2014 / March 31, 2014 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $7.154 | $6.535 in Q1 2013; up 9.5% |
| Other operating income | $1.748 | $2.621 in Q1 2013; down 33.3% |
| Net income | $1.364 | $1.363 in Q1 2013 |
| Net income available to common shareholders | $1.332 | $1.151 in Q1 2013 |
| Diluted earnings per share | $0.14 | $0.12 in Q1 2013 |
| Net interest margin | 3.32% | 3.36% in Q1 2013 |
| Net cash from operating activities | $1.698 | $2.233 in Q1 2013 |
| Total assets | $932.960 | $897.669 at December 31, 2013 |
| Net loans, including held-for-sale | $505.956 | $508.113 at December 31, 2013 |
| Available-for-sale securities | $166.624 | $173.269 at December 31, 2013 |
| Deposits | $839.083 | $803.787 at December 31, 2013 |
| Cash and cash equivalents | $222.177 | $177.254 at December 31, 2013 |
Interest and dividend income was $7.479 million, against $0.325 million of interest expense. Income before taxes was $1.989 million, compared with $2.002 million in Q1 2013. Operating expenses declined 6.5% to $6.313 million. Preferred dividends fell to $32,000 from $212,000, contributing to the increase in earnings available to common shareholders despite nearly unchanged net income.
Cash increased $44.923 million during the quarter: operating activities provided $1.698 million, investing activities provided $7.967 million, and financing activities provided $35.258 million, principally reflecting $35.296 million of deposit growth. The loan-to-deposit ratio was 60.3%, down from 63.2% at year-end.
No FHLB advances or related interest expense were outstanding in the periods discussed. The filing reports $57 million of short-term unsecured bank credit lines and $174.328 million of FHLB borrowing capacity, subject to collateral requirements. Bank regulatory capital ratios were 8.88% leverage, 14.86% Tier 1 risk-based, and 16.12% total risk-based, above the stated well-capitalized thresholds.
Material changes and credit quality
- Net interest income grew mainly from higher average loan balances; loan yield declined 34 basis points. The margin eased four basis points year over year.
- Other operating income fell, particularly gains on loan sales, loan servicing income, and investment and brokerage services income. Management attributed weaker loan-sale gains to higher market rates and lower sales volume, and service-income declines to lower demand or activity.
- Non-accrual loans rose to $10.276 million from $9.570 million at year-end. Net non-performing assets, after guarantees, increased to $9.859 million, or 1.1% of assets. Allowance coverage of net non-performing loans was 87.7%, versus 102.3% at year-end.
- The loan-loss provision was $600,000, versus $400,000 in Q1 2013. Net charge-offs increased to $1.307 million from $108,000, largely reflecting commercial and consumer charge-offs. The allowance was $8.646 million, or 1.68% of loans, compared with $9.353 million, or 1.81%, at year-end.
- Total loans decreased modestly from year-end; commercial and commercial real estate balances increased, while agriculture, residential, construction, and consumer balances declined. Commercial real estate represented approximately 48% of principal loan balances.
- A 3% stock dividend was declared, with payment as of March 31, 2014; per-share figures were adjusted retroactively. Common shares outstanding increased to 9,800,456 from 9,495,674 at year-end.
Outlook, risks, and contingencies
The filing provides no specific earnings or revenue guidance. Management identifies the low-rate environment, loan and deposit trends, competition, credit quality, regulatory changes, and the local economy as factors affecting future results. California’s early-2014 drought may weaken agricultural borrowers and related collateral values. The bank’s concentration in Northern California and real-estate-related lending also exposes it to regional economic and property-market deterioration.
Other principal risks include interest-rate changes affecting margins and mortgage originations, borrower repayment and collateral risk, and deposit renewal and funding conditions. Basel III capital rules were scheduled to apply to the bank beginning January 1, 2015; management was evaluating their future impact. The filing states that there were no material pending legal proceedings expected to have a material adverse effect and no material changes in market-risk disclosures. Undisbursed loan commitments were $187.552 million, standby letters of credit $2.341 million, and commitments to sell loans $1.159 million; the company maintained a $793,000 reserve for unfunded commitments. Management did not anticipate common cash dividends in the foreseeable future.
Important facts for investors to verify
- Whether rising non-accrual balances and sharply higher quarterly net charge-offs persist, and whether the allowance remains adequate.
- How California drought conditions affect agricultural borrowers, real-estate collateral, and regional credit performance.
- Whether deposit growth and the large cash balance can support lending and profitability without further margin pressure.
- The sustainability of noninterest income after reduced loan-sale, servicing, and brokerage activity.
- The bank’s capital position under Basel III and the availability and collateral conditions of its disclosed borrowing facilities.
- The detailed allowance roll-forward contains an apparent inconsistent ending figure in one table; the balance sheet and management discussion report $8.646 million, while an allocation-table line shows $8.846 million. Confirm against the filed statements and XBRL data.