Business context and reporting period
First Northern Community Bancorp is a bank holding company whose subsidiary, First Northern Bank of Dixon, primarily serves Northern California. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. Unless otherwise noted, financial amounts below are in millions of dollars.
Financial performance and condition
- Third-quarter results: Net income was $2.80 million, versus $2.02 million a year earlier; diluted EPS was $0.25 versus $0.18. Net interest income was $9.95 million, up from $8.77 million. Net interest margin was 3.53%, versus 3.35%.
- Nine-month results: Net income was $7.86 million, up 35.9% from $5.79 million; diluted EPS was $0.70 versus $0.52. Net interest income increased 12.5% to $28.85 million, and net interest margin rose to 3.49% from 3.37%.
- Drivers and expenses: Management attributed higher net interest income to growth in average loan and investment balances and improved yields. Nine-month non-interest income rose to $6.38 million from $5.20 million, including a $1.19 million recognized gain on a sale-leaseback. Non-interest expense increased to $21.88 million from $20.23 million, mainly reflecting higher staffing, data-processing and other costs.
- Balance sheet at September 30: Total assets were $1.193 billion, up 2.2% from year-end 2016. Net loans, including loans held for sale, were $694.9 million; available-for-sale securities were $302.3 million; deposits were $1.081 billion. The loan-to-deposit ratio was 64.3%, compared with 63.3% at year-end.
- Credit quality: The allowance for loan losses was $11.56 million, or 1.64% of total loans, versus $10.90 million, or 1.60%, at year-end. Nine-month provision was $0.60 million, compared with $1.35 million in 2016; net recoveries were $64,000. Non-accrual loans were $2.78 million, down from $6.30 million at year-end; non-performing assets net of guarantees were $3.46 million, or 0.3% of assets. One $755,000 loan was 90 days past due and still accruing.
- Cash flow and liquidity: Nine-month operating cash flow was $12.24 million; investing activities used $38.85 million and financing activities provided $17.13 million. Cash and cash equivalents ended at $150.16 million, down $9.49 million from year-end. The company reported no FHLB advances during the periods presented. It had $80 million of unsecured bank lines and $293.8 million of FHLB borrowing capacity, subject to collateral requirements.
- Capital: The Bank reported ratios above well-capitalized thresholds: leverage 8.50% (5.0% requirement), common equity Tier 1 12.38% (6.5%), Tier 1 risk-based 12.38% (8.0%), and total risk-based 13.64% (10.0%).
Material changes, outlook, and risks
- Loans, securities and deposits grew from December 31, 2016; cash declined, primarily as funds were used to purchase securities. Loan growth was concentrated in commercial real estate, agriculture and residential mortgage lending.
- The January 2017 sale-leaseback produced a total gain of $1.682 million; $1.187 million was recognized in nine-month income and $495,000 was deferred and will reduce occupancy expense over the six-year operating lease term.
- Management provided no specific earnings or financial guidance. It expects to adopt the revenue recognition standard on January 1, 2018 and does not expect a material impact. The company is evaluating the future lease-accounting standard and expected-credit-loss standard; the latter is expected to cause earlier recognition of credit losses, but the impact was not quantified.
- Key risks include the concentration of lending in Northern California and real-estate-secured loans (about 75% of loans excluding loans held for sale), exposure to commercial real estate and agriculture, changes in rates and local economic conditions, and potential effects of drought, flooding and wildfires. Management cited increased qualitative credit-risk factors, including concentration risk and economic factors, despite lower reported problem loans.
- Off-balance-sheet commitments totaled $226.6 million, principally $223.8 million of undisbursed loan commitments; these amounts are not necessarily expected to be drawn. The Bank had $2.33 million of performance standby letters of credit and an $850,000 reserve for unfunded commitments. Management reported no material pending litigation and no material change in market-risk disclosures. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether continued loan growth and rate changes support net interest income and margin without increasing funding costs materially.
- Credit performance in commercial real estate and other real-estate-secured lending; changes in non-accrual, past-due and classified loans; and adequacy of the allowance.
- The amount and timing of any draws on the $223.8 million in undisbursed commitments and the availability of collateral-dependent borrowing capacity.
- How much of nine-month earnings growth reflects recurring operations versus the sale-leaseback gain, and how staffing and other expense growth develop.
- Actual adoption effects of the revenue, lease and expected-credit-loss accounting standards, which were not fully quantified in the filing.