First Northern Community Bancorp — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. First Northern is a California bank holding company whose subsidiary provides community banking services in Northern California, primarily to individuals and small and midsize businesses.
Financial performance and condition
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net interest income | $34.8 million | $30.3 million | Up 14.9% |
| Provision for loan losses | $1.8 million | $0.65 million | Up $1.15 million |
| Non-interest income | $7.3 million | $7.6 million | Down 4.0% |
| Non-interest expense | $27.4 million | $26.6 million | Up 2.9% |
| Net income | $8.1 million | $6.9 million | Up 17.4% |
| Net income per diluted share | $0.73 | $0.62 | Up 17.7% |
| Total assets, year-end | $1.167 billion | $1.045 billion | Up 11.7% |
| Loans, net of allowance, including held-for-sale | $673.1 million | $606.2 million | Up 11.0% |
| Deposits, year-end | $1.064 billion | $948.1 million | Up 12.2% |
| Stockholders’ equity | $92.3 million | $85.8 million | Up $6.5 million |
- Profitability: Net interest margin was 3.37%, versus 3.17% in 2015. Return on average assets was 0.74% (0.69% in 2015); return on average equity was 8.87% (7.41%).
- Cash flow: Operating activities provided $9.7 million; investing activities used $166.5 million, chiefly reflecting securities purchases and loan growth; financing activities provided $115.7 million, mainly from deposit growth. Cash and cash equivalents ended at $159.6 million, down $41.2 million.
- Credit and allowance: Allowance for loan losses was $10.9 million, or 1.60% of loans, compared with $9.3 million, or 1.51%, in 2015. Net charge-offs were $152,000, versus $18,000 in net recoveries the prior year. Non-accrual loans rose to $6.3 million from $2.7 million; net of guarantees, non-performing assets were $4.2 million, or 0.4% of assets. The allowance covered 258.5% of non-performing loans net of guarantees, versus 358.8%.
- Funding and capital: No long-term borrowings or short-term borrowings were outstanding at year-end. Available borrowing capacity was $260.4 million from the FHLB and $77.0 million in correspondent-bank lines. The Bank’s capital ratios were 8.0% Tier 1 leverage, 11.7% common equity Tier 1, and 13.0% total risk-based capital; it was categorized as well capitalized.
Material changes versus 2015
- Loan and deposit growth supported higher net interest income and earnings. Commercial real estate loans increased 17.8%, agriculture loans 20.2%, and residential construction loans 95.9%; commercial, residential mortgage, and consumer loans declined.
- Investment securities increased $93.7 million to $277.1 million, while cash decreased $41.2 million. Management attributed the securities growth to investing excess cash.
- Credit costs increased: the loan-loss provision rose to $1.8 million, and net charge-offs shifted from modest recoveries to $152,000 in net charge-offs. Non-accrual loans increased, including a $5.0 million commercial loan.
- Non-interest income fell mainly because gains on sales of other real estate owned declined. Compensation, occupancy, and other operating costs contributed to higher expenses.
- Accumulated other comprehensive loss widened to $2.35 million from $0.50 million, primarily reflecting unrealized securities losses. The filing says the losses were principally interest-rate related and that no securities impairment was considered other-than-temporary.
Outlook, risks, contingencies, and unusual items
- For 2017, management plans to continue growing deposits to fund loans and other earning assets, seek additional non-interest income opportunities—particularly investment and brokerage services—and manage expenses. Management expected liquidity to remain strong.
- Key risks include concentration in Northern California and real estate lending (approximately 75% of loans were real-estate related), commercial real estate and construction exposure, agricultural conditions and drought, borrower credit deterioration, interest-rate and deposit competition risks, and extensive regulatory requirements. A single commercial relationship accounts for most of the year-end non-accrual loan balance.
- Off-balance-sheet commitments totaled $212.6 million, including $207.2 million of undisbursed loan commitments and $3.5 million of performance standby letters of credit. Management said many credit commitments may expire unused; the Bank had no financial standby letters of credit outstanding and no liability for the performance letters at year-end.
- No material pending legal proceeding was reported. The company reported effective internal control over financial reporting, and the independent auditor issued unqualified opinions on the financial statements and internal controls.
- Subsequent event: On January 6, 2017, the company completed a sale-leaseback involving land and a building partly occupied by its Auburn branch. The transaction generated a $1.682 million gain, of which $495,000 was deferred and will reduce occupancy expense over the initial six-year lease term.
- The company declared a 4% stock dividend for 2017, payable March 31, 2017; it did not expect to pay cash dividends in the foreseeable future. Prior-period expense classifications were revised for deferred loan-cost amortization; management deemed the error immaterial, with no effect on net income, balance sheets, cash flows, or equity.
- The filing identifies the forthcoming expected-credit-loss accounting standard as likely to accelerate loss recognition; management had not quantified its effect. The future lease standard will require recognition of lease assets and liabilities; the impact had not been quantified.
Investor verification priorities
- Review the $5.0 million non-accrual commercial loan, its guarantees and collateral, subsequent performance, and the associated allowance; it represented most of non-accrual loans.
- Assess whether the allowance and higher provision remain appropriate as loan growth and real estate, construction, and agricultural concentrations evolve.
- Verify deposit stability, liquidity needs, and the effect of continued growth in loans and securities, including the maturity and interest-rate profile of assets and deposits.
- Track whether 2017 loan, deposit, and fee-income growth supports earnings without materially higher credit or operating costs.
- Confirm the accounting and ongoing expense impact of the Auburn sale-leaseback, and future adoption impacts of expected-credit-loss and lease accounting standards.