First Northern Community Bancorp — Q3 2018 Form 10-Q
Business and period: First Northern Community Bancorp is the holding company for First Northern Bank of Dixon, a California state-chartered bank focused on lending and deposit-taking in Northern California. This unaudited filing covers the quarter and nine months ended September 30, 2018; balance-sheet comparisons are to December 31, 2017. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net interest income | $11.46 | $9.95 | $32.71 | $28.85 |
| Net interest margin | 3.90% | 3.53% | 3.82% | 3.49% |
| Provision for loan losses | $0.53 | — | $1.58 | $0.60 |
| Non-interest income | $1.79 | $1.78 | $5.34 | $6.38 |
| Non-interest expense | $7.92 | $7.16 | $23.73 | $21.88 |
| Net income | $3.47 | $2.80 | $9.20 | $7.86 |
| Diluted EPS | $0.30 | $0.24 | $0.79 | $0.67 |
- Balance sheet: Total assets were $1,243.9 million, up 2.2% from year-end 2017. Net loans held for investment were $762.8 million; loans held for sale were $1.0 million. Available-for-sale securities were $291.0 million.
- Deposits and liquidity: Deposits rose 1.8% to $1,124.6 million; the loan-to-deposit ratio was 67.9%, versus 67.0% at year-end. Cash and cash equivalents were $139.7 million, down $13.2 million since year-end. The Bank reported $80 million of unsecured lines with other banks and $307.3 million of FHLB borrowing capacity, subject to collateral requirements.
- Cash flow: Nine-month operating cash flow was $12.9 million; investing activities used $46.0 million and financing activities provided $19.9 million. Cash declined to $139.7 million from $152.9 million.
- Credit and capital: The allowance for loan losses was $12.3 million, or 1.59% of loans, versus $11.1 million, or 1.49%, at year-end. Net non-performing assets were $1.9 million (0.1% of assets), down from $3.7 million; non-accrual loans were $2.3 million. Bank capital ratios exceeded well-capitalized thresholds: leverage 8.99%, common equity Tier 1 and Tier 1 risk-based 12.68%, and total risk-based 13.93%.
- Debt: The Company reported no borrowings or associated interest expense during the three- or nine-month periods.
- Equity and securities: Stockholders’ equity was $106.6 million. Accumulated other comprehensive loss widened to $7.4 million, chiefly reflecting unrealized securities losses; the available-for-sale portfolio had $8.5 million of gross unrealized losses at quarter-end.
Changes versus comparable periods
- Q3 net income increased 23.8%; nine-month net income rose 17.1%. Net interest income grew 15.2% in Q3 and 13.4% year to date, supported by higher loan balances and yields and rising market rates.
- Net interest margin expanded to 3.90% in Q3 and 3.82% year to date. Deposit interest expense increased, but remained modest.
- Credit-loss provision increased to $1.58 million for the first nine months from $0.60 million; the Q3 provision was $0.53 million versus none a year earlier. Management cited higher balances and qualitative reserve factors, including a rise in substandard loans to $19.6 million from $5.8 million at year-end.
- Nine-month non-interest income declined 16.4%, mainly because the prior-year period included a $1.19 million gain on a real-estate sale-leaseback. Nine-month non-interest expense increased 8.4%, driven primarily by salaries and employee benefits and data processing.
- The effective tax burden fell following the Tax Cuts and Jobs Act’s reduction of the federal corporate tax rate from 35% to 21%; nine-month income-tax provision decreased to $3.54 million from $4.89 million.
- Loan growth was concentrated in commercial real estate, agriculture, residential mortgage and residential construction lending. Total loans increased 3.2% from year-end, while total deposits increased 1.8%.
Outlook, risks and notable items
- The filing provides no specific earnings, growth or margin guidance. Management notes results are interim and not necessarily indicative of full-year performance.
- Key risks include concentration in Northern California and real-estate-related lending: approximately 78% of loans (excluding loans held for sale) were secured by real estate. Regional economic weakness or declining collateral values could increase defaults and losses. Agricultural lending is also exposed to commodity and weather conditions.
- Management cited rising short-term rates, a flattening yield curve, inflation and global trade concerns as factors considered in reserve estimates. The company expects the new expected-credit-loss standard (CECL) to result in earlier loss recognition; its impact had not been quantified.
- Available-for-sale securities had $8.5 million in unrealized losses, attributed primarily to market interest-rate changes. Management said it did not intend to sell the securities and did not expect to be required to sell before recovery; no other-than-temporary impairment was recognized during the first nine months.
- Off-balance-sheet commitments totaled $209.0 million, primarily $205.6 million of undisbursed loan commitments. These amounts are not necessarily expected cash requirements because commitments may expire undrawn. The filing reports no material pending legal proceedings and no material changes in market-risk disclosures.
- The Company identifies expectations regarding not paying a cash dividend in the foreseeable future among its forward-looking topics; the filing provides no specific new dividend guidance. It declared a 4% stock dividend in January 2018, distributed in March.
Important facts for investors to verify
- Whether the sharp increase in substandard loans and the higher loan-loss provision signal further deterioration; review the loan classes and reserve assumptions underlying the $12.3 million allowance.
- Whether credit quality remains sound, including trends in non-accrual loans, net non-performing assets, TDRs and guarantees, and the reported improvement in non-performing assets.
- How interest-rate changes affect net interest margin, deposit pricing and the value of the securities portfolio, including the $8.5 million of unrealized losses.
- Whether real-estate and Northern California concentration, agricultural exposure, and $205.6 million of undisbursed commitments create material sensitivity to local economic or collateral-value changes.
- How much the lower tax rate and the absence of the prior-year sale-leaseback gain affect comparisons of recurring earnings; also verify the timing and expected balance-sheet impact of lease and CECL accounting adoption.