First Northern Community Bancorp — Q3 2016 Form 10-Q
Business context and reporting period. The California-based bank holding company operates First Northern Bank, which primarily serves Northern California through lending and deposit-taking. This unaudited filing covers the quarter and nine months ended September 30, 2016; balance-sheet comparisons are to December 31, 2015. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2016 / Sept. 30, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net income | $2.019; diluted EPS $0.19 | Q3 2015: $1.819; diluted EPS $0.17 |
| Nine-month net income | $5.785; diluted EPS $0.54 | Nine months 2015: $5.106; diluted EPS $0.47 |
| Net interest income | Q3: $8.773; nine months: $25.683 | Q3 2015: $7.723; nine months 2015: $22.305 |
| Net interest margin | Q3: 3.35%; nine months: 3.37% | Q3 2015: 3.21%; nine months 2015: 3.16% |
| Assets | $1,119.1 | $1,044.6 at Dec. 31, 2015 |
| Net loans, including held-for-sale | $646.4 | $606.2 at Dec. 31, 2015 |
| Available-for-sale securities | $257.8 | $183.4 at Dec. 31, 2015 |
| Deposits | $1,016.5 | $948.1 at Dec. 31, 2015 |
| Stockholders’ equity | $92.4 | $85.8 at Dec. 31, 2015 |
- For the first nine months, interest and dividend income was $26.531, interest expense $0.848, provision for loan losses $1.350, non-interest income $5.197, and non-interest expense $20.226. Income before taxes was $9.304 and income-tax expense $3.519.
- Net income increased 11.0% in Q3 and 13.3% year to date. Nine-month net interest income rose 15.1% (the filing’s MD&A describes the increase as 15.3%); management attributed growth principally to higher average loan balances and higher loan yields.
- Non-interest income declined 12.6% in Q3 and 10.6% year to date, while non-interest expense increased 1.2% and 2.9%, respectively.
- Operating cash flow was $6.642 for the first nine months, versus $8.967 in 2015. Cash and cash equivalents fell $41.888 to $158.909, principally as funds were used for loan growth and securities purchases. Investing activities used $116.961; financing activities provided $68.431, including $68.411 of deposit growth.
- Loan-to-deposit ratio was 63.6%, versus 63.9% at year-end 2015. The Bank reported no FHLB advances during the periods discussed. Available funding included $77.0 of unsecured interbank lines and $257.3 of FHLB borrowing capacity, subject to collateral requirements.
- Bank regulatory capital ratios exceeded well-capitalized thresholds: leverage 8.19%, common equity Tier 1 12.09%, Tier 1 risk-based 12.09%, and total risk-based 13.34%.
Material changes and credit quality
- Loans net of allowance increased 6.3% from year-end, with growth concentrated in commercial real estate, agriculture, and residential construction. Securities increased 40.6%; deposits increased 7.2%.
- Provision for loan losses doubled year over year to $1.350 for the nine months. The allowance rose to $10.295, or 1.58% of total loans, from $9.251, or 1.51%, at year-end. Net charge-offs were $0.306, compared with net recoveries of $0.127 in the first nine months of 2015.
- Non-accrual loans increased to $6.311 from $2.728 at year-end, driven chiefly by two commercial loans totaling $5.042. After government guarantees, non-performing assets were $4.227, or 0.4% of assets. No loans were 90 days past due and still accruing at September 30.
- Substandard loans were $11.537, down from $21.732 at year-end; total impaired-loan recorded investment was $11.192, with related allowance of $1.680. Troubled debt restructurings totaled $4.923, of which $4.881 were performing.
Outlook, risks, contingencies, and unusual items
- The filing provides no quantified earnings or growth guidance. Management identifies interest rates, competition, regulation, credit quality, liquidity, and regional economic conditions as factors affecting results. It also highlights Northern California real-estate concentration, California drought and agricultural exposure, and potential deposit volatility. Approximately 74% of loans, excluding loans held-for-sale, were real-estate-related.
- Undisbursed loan commitments were $212.053, standby letters of credit $2.865, and commitments to sell loans $6.392. The reserve for unfunded commitments was $0.793. Commitments are not necessarily expected to be fully drawn. Management reported no material pending legal proceedings and no off-balance-sheet derivatives.
- Management disclosed an immaterial prior-period classification error: deferred loan-cost amortization had been classified in operating expenses rather than loan interest income. Comparative 2015 income-statement line items were revised; net income, balance sheet, cash flows, and equity were unaffected.
- A 4% stock dividend was declared in January 2016 and paid in March. The Company redeemed its remaining $12.847 of SBLF preferred shares in October 2015; no preferred dividends were reported in 2016.
- Management stated disclosure controls were effective at September 30, 2016 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the rise in non-accrual commercial loans and the higher loan-loss provision lead to further losses, charge-offs, or reserve needs.
- Collateral quality and recovery prospects for the largest non-accrual loans, particularly the $5.0 million commercial loan and its guarantees.
- Whether loan growth and securities purchases can be sustained while maintaining cash liquidity and capital ratios.
- Exposure to Northern California real estate, agriculture, drought conditions, interest-rate changes, and possible withdrawals of large time deposits.
- The nine-month net interest income growth percentage: the reported figures imply approximately 15.1%, while the MD&A states 15.3%.