FIRST NORTHERN COMMUNITY BANCORP quarterly report, Q1 FY2018

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First Northern Community Bancorp — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018; balance-sheet comparisons are to December 31, 2017. Financial statements are unaudited. The company’s banking subsidiary serves the Sacramento Valley region of Northern California.

Financial performance and position

  • Profit: Net income was $2.733 million, up 8.7% from $2.513 million. Diluted EPS was $0.23 versus $0.22; basic EPS was $0.24 versus $0.22.
  • Interest income and margins: Net interest income increased 12.9% to $10.512 million. Net interest margin rose to 3.74% from 3.42%. Interest income was $10.775 million and interest expense was $0.263 million.
  • Credit costs: The provision for loan losses was $0.525 million, down from $0.600 million. Net charge-offs were $0.057 million. The allowance was $11.715 million, or 1.60% of loans, compared with $11.133 million, or 1.49%, at year-end.
  • Other income and expenses: Non-interest income fell 36.6% to $1.804 million, mainly because Q1 2017 included a $1.187 million real-estate sale-leaseback gain. Non-interest expense rose 6.5% to $7.994 million, including higher salaries and benefits and data-processing costs. Income-tax expense declined to $1.064 million from $1.542 million; the filing cites the lower federal corporate tax rate and lower pretax income.
  • Cash flow: Operating cash flow was $3.219 million. Cash and equivalents decreased $4.381 million to $148.511 million. Financing cash flow was negative $11.956 million. The investing cash-flow line is presented with a positive $4.356 million amount but described as “used”; the filing text does not provide a clear sign reconciliation.
  • Balance sheet and funding: Total assets were $1.204 billion, down 1.1% from year-end. Deposits were $1.093 billion, down $11.946 million; net loans including loans held for sale were $720.989 million, down 2.6%. Available-for-sale securities were $291.166 million, up 3.7%. The loan-to-deposit ratio was 66.0%, versus 67.0%.
  • Liquidity, debt and capital: The company reported no borrowings outstanding. It had $80 million in short-term unsecured bank lines and $312.421 million of FHLB borrowing capacity, subject to collateral requirements. Bank capital ratios exceeded well-capitalized thresholds: leverage 8.69%, Common Equity Tier 1 and Tier 1 risk-based 12.43%, and total risk-based 13.69%.
  • Equity and comprehensive income: Stockholders’ equity was $101.064 million at quarter-end. A $1.811 million after-tax unrealized securities loss reduced comprehensive income to $0.922 million. The company declared a 4% stock dividend, payable March 29, 2018.

Material changes and asset quality

  • Average loans and loan yields increased year over year, helping raise loan interest income 10.6%; average loan yield rose to 4.98% from 4.89%. Reinvestment and higher yields also lifted interest income on securities and bank balances.
  • Loans declined from year-end, primarily reflecting lower demand across commercial, commercial real estate, agricultural, residential construction and consumer lending; residential mortgage loans increased. Securities purchases contributed to the increase in the investment portfolio.
  • Non-accrual loans decreased to $3.575 million from $3.767 million. Net non-performing assets were $3.130 million, or 0.3% of assets. However, loans rated substandard increased to $15.512 million from $5.812 million, and substandard or doubtful loans excluding non-performing loans rose to $11.937 million from $2.045 million.
  • Troubled debt restructurings were $4.921 million, down from $5.896 million at year-end; no new TDRs were reported during the quarter. The company reported no other real estate owned.

Outlook, risks and notable items

  • The filing provides no specific earnings, growth or margin guidance. Management cautions that interim results are not necessarily indicative of full-year results.
  • Key risks include the concentration of lending and operations in Northern California, real-estate collateral exposure, changes in regional economic conditions and property values, agricultural conditions, interest-rate movements, competition, and regulatory and compliance requirements. The risk-factor section states that approximately 78% of the loan portfolio, excluding loans held for sale, was real-estate-related or secured by real estate.
  • Management identified the allowance for loan losses as an area involving significant judgment. The allowance for expected credit losses standard (ASU 2016-13) was not yet quantified; management expected the change to an expected-loss model to result in earlier loss recognition.
  • Unfunded commitments totaled $213.079 million, standby letters of credit $3.093 million, and commitments to sell loans $2.484 million. The reserve for unfunded commitments was $0.850 million. These commitments may not be fully drawn.
  • Unrealized losses on available-for-sale securities totaled $6.935 million. Management attributed them primarily to market-rate changes, 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 in the quarter.
  • The company adopted the customer-revenue standard on January 1, 2018 with no material financial-statement impact. It was evaluating the impact of the lease standard, effective for public companies for fiscal years beginning after December 15, 2018.
  • Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material pending legal proceedings were disclosed.

Important facts for investors to verify

  1. Whether the rise in substandard and potential problem loans is sustained, and how it may affect future provisions, charge-offs and the allowance.
  2. The composition and duration of securities’ unrealized losses, and sensitivity of their fair values and net interest margin to further rate changes.
  3. Drivers of deposit and loan declines, and whether loan demand and deposit funding trends change in subsequent quarters.
  4. Actual usage and collateral availability for credit lines, FHLB capacity and off-balance-sheet commitments.
  5. The eventual effect of the expected-credit-loss and lease accounting standards, and any updated management outlook in later filings.