First Northern Community Bancorp — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. The company’s principal subsidiary, First Northern Bank of Dixon, conducts community banking in Northern California’s Sacramento Valley. Financial amounts below are in U.S. dollars; “million” figures are rounded.
Financial performance and position
| Metric | Q3 2013 / September 30, 2013 | Comparable period / December 31, 2012 |
|---|---|---|
| Net income | $1.373 million for Q3; $4.178 million year to date | $1.204 million for Q3 2012; $3.503 million for nine months 2012 |
| Net income available to common shareholders | $1.211 million for Q3; $3.644 million year to date | $0.918 million for Q3 2012; $2.646 million for nine months 2012 |
| Diluted EPS | $0.13 for Q3; $0.39 year to date | $0.10 for Q3 2012; $0.28 for nine months 2012 |
| Net interest income | $7.029 million for Q3; $20.399 million year to date | $6.777 million for Q3 2012; $19.711 million for nine months 2012 |
| Net interest margin | 3.44% for Q3; 3.42% year to date | 3.63% for Q3 2012; 3.57% for nine months 2012 |
| Total assets | $876.0 million | $831.5 million at December 31, 2012 |
| Net loans, including loans held for sale | $499.0 million | $445.0 million at December 31, 2012 |
| Deposits | $783.5 million | $730.8 million at December 31, 2012 |
| Cash and cash equivalents | $149.9 million | $161.4 million at December 31, 2012 |
| Stockholders’ equity | $83.7 million | $92.3 million at December 31, 2012 |
Revenue, costs and credit: Nine-month interest and dividend income was $21.351 million, while other operating income was $7.443 million. Interest expense was $0.952 million and non-interest expense was $20.530 million. The loan-loss provision was $0.800 million year to date and zero in Q3, versus $2.051 million and $0.825 million, respectively, in 2012. The allowance for loan losses was $8.792 million, or 1.74% of loans, at September 30, 2013.
Cash flow and funding: For the first nine months, operating cash flow was $11.997 million, investing cash flow was negative $65.577 million, and financing cash flow was $42.165 million; cash decreased $11.415 million. Deposit growth funded part of loan expansion. The loan-to-deposit ratio was 63.7%, versus 60.9% at year-end 2012. The filing reports no FHLB advances or related interest expense during the 2013 periods and no other borrowings on the balance sheet at quarter-end. Available liquidity included $37 million of unsecured lines with other banks and FHLB borrowing capacity of $159.264 million, subject to collateral requirements.
Capital: The Bank’s reported leverage, Tier 1 risk-based, and total risk-based capital ratios were 9.01%, 14.16%, and 15.42%, respectively, above the filing’s well-capitalized thresholds of 5%, 6%, and 10%. The company redeemed $10 million of preferred stock in February 2013.
Material changes versus comparable periods
- Q3 net income rose 14.0% and nine-month net income rose 19.3%; management reported nine-month net income available to common shareholders up 38.5% and diluted EPS up 39.3%.
- Nine-month net interest income increased 3.5%, mainly as loan balances grew and funding costs fell. The benefit was partly offset by lower loan and securities yields; net interest margin narrowed.
- Other operating income increased 9.9% year to date, including higher loan-servicing, investment/brokerage, fiduciary and transaction-fee income. Non-interest expense rose 5.4%, primarily from salaries and benefits, occupancy and data processing.
- Net loans grew $54.0 million, or 12.1%, from year-end; deposits grew $52.7 million, or 7.2%. Commercial real estate loans increased to $230.3 million from $188.4 million.
- Net non-performing assets declined to $6.905 million from $8.207 million at year-end, and OREO fell to zero from $1.062 million. Non-accrual loans were $7.122 million versus $7.268 million at year-end; no loans were 90 days past due and still accruing.
- Available-for-sale securities generated a $2.311 million after-tax other comprehensive loss for the nine months, leaving accumulated other comprehensive loss of $1.137 million. Management attributed the unrealized declines primarily to higher intermediate- and long-term interest rates and said no securities were other-than-temporarily impaired.
Outlook, risks and unusual items
- The filing gives no quantified earnings, revenue, loan-growth or margin guidance. Management identifies a sustained low-rate environment, competition, economic and credit conditions, deposit renewals, regulation, and interest-rate changes as factors affecting results. It does not anticipate paying a cash dividend in the foreseeable future.
- Credit risk remains important: commercial real estate represented approximately 46% of loans. Troubled debt restructurings totaled $9.903 million, with $6.798 million performing under modified terms; there were no commitments to advance additional funds on existing TDRs. Management cautions that collateral may not ensure full recovery.
- Off-balance-sheet commitments totaled $177.119 million, including $172.755 million of undisbursed loan commitments and $2.387 million of performance standby letters of credit. A $0.793 million reserve covered unfunded commitments. Commitments may expire undrawn and are not equivalent to expected cash outflows.
- The company noted that new Basel III capital rules were scheduled to apply to the Bank beginning January 1, 2015 and was evaluating their future effect. It reported no material change in market-risk disclosures, no material pending legal proceeding, and no material change in previously disclosed risk factors.
- The securities-related unrealized loss reduced comprehensive income despite higher net income. Management’s impairment conclusion depends in part on its intent and expectation not to sell the securities before recovery.
Most important facts for investors to verify
- Whether loan growth, particularly in commercial real estate, is supported by underwriting quality and sustainable demand.
- Trends in non-accrual loans, past-due loans, TDR performance, charge-offs and the adequacy of the $8.792 million loan-loss allowance.
- Whether margin pressure from lower asset yields persists, and whether deposit costs or competition change as rates move.
- The valuation and potential recovery of securities with unrealized losses, and the sensitivity of capital and earnings to interest-rate changes.
- Actual liquidity availability under the bank lines and collateral-dependent FHLB facility, and the effect of Basel III requirements on capital flexibility and distributions.