First Northern Community Bancorp — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated financial statements. The company’s banking subsidiary serves the Sacramento Valley region of Northern California.
Financial performance and condition
| Metric | Q2 2014 / June 30, 2014 | Comparable period / prior year-end |
|---|---|---|
| Net income | $1.339 million for Q2; $2.703 million for six months | $1.442 million for Q2 2013; $2.805 million for six months 2013 |
| Net income available to common shareholders | $1.307 million for Q2; $2.639 million for six months | $1.282 million for Q2 2013; $2.433 million for six months 2013 |
| Diluted EPS | $0.13 for Q2; $0.27 for six months | $0.13 for Q2 2013; $0.25 for six months 2013 |
| Net interest income | $7.358 million for Q2; $14.512 million for six months | $6.835 million for Q2 2013; $13.370 million for six months 2013 |
| Net interest margin | 3.34% for Q2; 3.33% for six months | 3.46% for Q2 2013; 3.41% for six months 2013 |
| Total assets | $930.8 million | $897.7 million at December 31, 2013 |
| Net loans, including held-for-sale | $523.3 million | $508.1 million at December 31, 2013 |
| Deposits | $834.5 million | $803.8 million at December 31, 2013 |
| Cash and cash equivalents | $207.3 million | $177.3 million at December 31, 2013 |
| Allowance for loan losses | $8.174 million; 1.54% of total loans | $9.353 million; 1.81% at December 31, 2013 |
Six-month operating cash flow was $4.6 million, versus $9.1 million in the first half of 2013. Investing activities used $5.1 million, while financing activities provided $30.6 million, largely reflecting a $30.7 million increase in deposits. The loan-to-deposit ratio was 62.7%, compared with 63.2% at year-end 2013. The filing reports no significant borrowings outstanding; average FHLB advances and other borrowings were negligible.
The Bank’s June 30 capital ratios exceeded well-capitalized thresholds: leverage 9.00% versus 5.0%; Tier 1 risk-based 14.82% versus 6.0%; and total risk-based 16.08% versus 10.0%. It had $57.0 million of short-term unsecured bank lines and $182.6 million of FHLB borrowing capacity, subject to collateral requirements.
Changes versus comparable periods
- Q2 net income declined 7.1% year over year; six-month net income declined 3.6%. Six-month common earnings rose 8.3% and diluted EPS increased from $0.25 to $0.27, partly reflecting lower preferred dividends.
- Six-month net interest income rose 8.2%, primarily as average loans grew, but net interest margin narrowed. Loan yields fell 28 basis points for the six-month period; higher interest income on loans and securities more than offset slightly higher deposit interest expense.
- Other operating income fell about 31% in both the quarter and first half, reflecting lower deposit service charges, mortgage loan-sale gains, brokerage and servicing income. Other operating expenses fell 3.8% in Q2 and 5.2% year to date.
- Loan growth was concentrated in commercial and commercial real estate lending. Net loans increased 3.0% from year-end; deposits increased 3.8%. Investment securities declined 6.5% to $162.0 million.
- Non-accrual loans fell to $7.075 million from $9.570 million at year-end. Net non-performing assets, after guarantees, were $7.228 million, or 0.8% of assets, versus $9.145 million, or 1.0%. Net charge-offs increased to $2.379 million for the first half from $0.628 million a year earlier.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management highlights sensitivity to interest rates, net interest margin, deposit pricing, loan demand and mortgage refinancing activity; it cautions that interim results may not indicate full-year results.
- Key credit risks include commercial real estate and construction exposure, geographic concentration in Northern California, and potential effects of California’s severe drought, particularly on agricultural borrowers. Commercial real estate represented approximately 47% of loan principal.
- The $1.2 million first-half loan-loss provision was higher than the prior-year $0.8 million, while the allowance declined due to net charge-offs. Management considers the allowance adequate, but actual losses may differ from estimates.
- The company recorded a $50,000 impairment on another interest-earning asset in the first half. It also transferred $462,000 of loans to other real estate owned, compared with none at year-end. A 3% stock dividend was declared in January and paid in March 2014.
- Unfunded loan commitments were $170.2 million and performance standby letters of credit were $1.854 million; the reserve for unfunded commitments was $793,000. Management reported no material pending legal proceedings and no expected material liability from loan-sale representations and warranties.
- Basel III capital rules were scheduled to apply to the Bank beginning January 1, 2015; management was evaluating their future impact. The company stated it did not anticipate paying a common cash dividend in the foreseeable future.
Important facts for investors to verify
- Whether elevated first-half net charge-offs, particularly commercial loan charge-offs, continue and how they affect the allowance and future provisions.
- Trends in net interest margin and loan yields as rates, asset mix and deposit costs change.
- Credit performance and collateral coverage in commercial real estate, construction and drought-exposed agricultural portfolios, including the status of non-accrual loans and TDRs.
- The durability of deposit growth and liquidity access, including availability of borrowing lines and the effect of collateral requirements.
- The impact of Basel III capital requirements and the company’s capital and dividend plans.