First Northern Community Bancorp — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unaudited consolidated statements. The company’s subsidiary, First Northern Bank of Dixon, is a California community bank operating primarily in the Sacramento Valley.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net interest income | $6.592 million | $6.498 million | $12.954 million | $12.889 million |
| Provision for loan losses | $1.490 million | $0.863 million | $2.480 million | $2.313 million |
| Net income | $0.795 million | $0.599 million | $1.561 million | $0.960 million |
| Net income available to common shareholders | $0.544 million | $0.350 million | $1.061 million | $0.465 million |
| Diluted EPS | $0.06 | $0.04 | $0.12 | $0.05 |
| Net interest margin | 3.82% | 3.79% | 3.77% | 3.77% |
For the six months, total interest income declined 4.7% to $14.260 million, but interest expense fell 37.2% to $1.306 million, supporting slightly higher net interest income. Lower loan yields and average loan balances weighed on interest income; lower funding costs reflected deposit repricing and a shift toward lower-cost deposits. Other operating income rose 5.1% to $4.553 million, while operating expenses fell 7.8% to $13.220 million. The company reported a $0.246 million income tax expense, versus a $0.392 million tax benefit in the prior-year half, when tax credits contributed to the benefit.
Balance sheet, liquidity and capital
- Total assets were $746.996 million at June 30, up 1.3% from year-end 2010. Net loans, including loans held for sale, were $432.080 million, down 2.8%; available-for-sale securities were $134.830 million, up 25.6%.
- Deposits were $650.429 million, up 1.6% from December 31, 2010. Federal Home Loan Bank advances and other borrowings totaled $8.200 million, down from $10.529 million. Stockholders’ equity was $81.599 million.
- Cash and due from banks stood at $132.982 million, compared with $139.707 million at year-end. Six-month operating cash flow was $3.204 million, investing cash flow was negative $17.336 million, and financing cash flow was positive $7.407 million; cash declined $6.725 million.
- The loan-to-deposit ratio was 66.4%, versus 69.4% at year-end. Available funding included $34 million in unsecured bank lines and $130.116 million of FHLB borrowing capacity, subject to collateral terms.
- Bank capital ratios exceeded well-capitalized thresholds: leverage 9.86% versus 5.0%; Tier 1 risk-based 15.66% versus 6.0%; total risk-based 16.92% versus 10.0%.
Material changes and credit quality
- Net income increased 62.6% for the first half and 32.7% in Q2 year over year. Six-month diluted EPS rose to $0.12 from $0.05.
- Non-accrual loans rose to $14.303 million from $12.274 million at year-end, primarily reflecting higher commercial real estate non-accruals ($9.648 million versus $5.864 million). No loans were 90 days past due and still accruing.
- Net non-performing assets were $15.908 million, or 2.13% of total assets, compared with $14.879 million and 2.02% at year-end. Non-performing loans were 3.22% of total loans; allowance coverage of non-performing loans was 75.8%, down from 90.5% at year-end.
- The allowance for loan losses was $10.784 million, or 2.44% of loans, unchanged as a percentage from year-end. Six-month net charge-offs increased to $2.735 million from $2.199 million; provision expense was $2.480 million.
- Performing impaired loans, generally restructured loans complying with modified terms, rose to $10.950 million from $7.891 million at year-end. Management said most non-performing impaired loans appeared adequately collateralized or government-guaranteed, but cautioned that full recovery was not assured.
- The five largest non-accrual loans represented approximately 80% of non-accrual balances, versus 58% at year-end, creating notable borrower and collateral concentration within problem credits.
Outlook, risks and unusual items
The filing provides no specific earnings or balance-sheet guidance. Management emphasized uncertainty around economic conditions, credit quality, loan-loss estimates, interest rates, regulatory developments and liquidity. The filing also identified potential pressure on mortgage lending from a scheduled reduction in the conforming-loan limit, possible added costs and complexity in mortgage servicing, and economic uncertainty following the downgrade of U.S. sovereign debt by Standard & Poor’s.
Six-month results included $0.456 million of gains on available-for-sale securities and $0.215 million of gains on sales of other real estate owned. Other real estate owned declined to $1.682 million after property sales, partly offset by additions. The company had $148.237 million of undisbursed loan commitments and $2.919 million of standby letters of credit. It reported no material pending legal proceedings beyond ordinary-course litigation. Management stated that the company did not anticipate common cash dividends in the foreseeable future; preferred stock carries cumulative dividends and restrictions on certain common-stock actions.
Key facts for investors to verify
- Whether the rise in non-accrual commercial real estate loans and reduced allowance coverage lead to further provisions or charge-offs.
- Collateral values, guarantees and recovery prospects for the largest problem loans, particularly the five largest non-accrual exposures.
- Whether lower funding costs can continue to offset pressure on loan yields and declining loan balances.
- The quality and sustainability of earnings, including securities and OREO gains, tax effects and expense reductions.
- Availability and conditions of contingent funding lines, and the effect of deposit mix and maturities on liquidity.
- Preferred-stock dividend obligations and related restrictions, and the effect of mortgage-market and servicing changes on business and costs.