FIRST NORTHERN COMMUNITY BANCORP quarterly report, Q3 FY2019

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First Northern Community Bancorp — Q3 2019 Form 10-Q

Business context and period. The company is a bank holding company whose subsidiary, First Northern Bank of Dixon, serves communities in Northern California. This unaudited filing covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are with December 31, 2018. Amounts below are in millions unless stated otherwise.

Financial performance and position

  • Q3 earnings: Net income was $3.754 million, up 8.3% from $3.467 million a year earlier. Diluted EPS was $0.30 versus $0.28. Pretax income was $5.185 million; income-tax expense was $1.431 million.
  • Nine-month earnings: Net income was $11.145 million, up 21.1% from $9.203 million. Diluted EPS was $0.91 versus $0.75.
  • Revenue and margin: Q3 net interest income was $11.711 million, up 2.2% year over year; noninterest income was $1.789 million, essentially unchanged. Nine-month net interest income was $35.208 million, up 7.6%; noninterest income was $5.319 million, down slightly. Net interest margin was 3.93% in Q3, up from 3.90% year over year but down from 4.11% in Q2; nine-month margin was 4.05% versus 3.82%.
  • Expenses and credit costs: Q3 noninterest expense rose 5.1% to $8.315 million; nine-month expense rose 5.9% to $25.138 million. There was no loan-loss provision in Q3 or the first nine months, compared with $0.525 million and $1.575 million, respectively, in the comparable 2018 periods.
  • Balance sheet at September 30: Assets were $1.287 billion, up 3.0% from year-end. Deposits were $1.138 billion, up 1.2%. Net loans including loans held for sale were $758.510 million, down 0.9%; available-for-sale securities were $325.310 million, up 3.4%. Cash and cash equivalents were $136.093 million, versus $116.032 million at year-end.
  • Credit quality: The allowance for loan losses was $12.287 million, or 1.60% of loans, versus $12.822 million, or 1.65%, at year-end. Net nonperforming assets were $1.973 million (0.2% of assets), down from $6.212 million; management attributed the decline principally to payoff of four agriculture loans in one lending relationship. No loans were 90 days past due and still accruing.
  • Cash flow: Nine-month operating cash flow was $10.258 million, investing cash outflow was $3.611 million, and financing cash inflow was $13.414 million. Cash increased $20.061 million to $136.093 million.
  • Liquidity, capital, and borrowings: The loan-to-deposit ratio was 66.7%, down from 68.1% at year-end. The company reported $67 million of short-term unsecured bank lines and $329.738 million of FHLB borrowing capacity, subject to collateral requirements. It reported no FHLB advances during the periods presented. Bank capital ratios exceeded well-capitalized thresholds: leverage 10.03%, common equity Tier 1 and Tier 1 risk-based 13.99%, and total risk-based 15.24%. The filing does not provide a separate total-debt figure.

Material changes and notable items

  • Year-to-date earnings growth reflected higher net interest income and no loan-loss provision, partly offset by higher operating expenses. Interest expense on deposits increased 48% year over year for the nine months, as the average cost of funds rose.
  • Loan balances declined amid paydowns and maturities, while cash and securities increased. Deposit growth was attributed to new customers and seasonal fluctuations.
  • Noninterest expense increases included staffing ahead of a new branch opened in Q4 2019, costs for new administrative office space, and higher data-processing costs related to planned outsourcing of core processing and network infrastructure. A Q3 FDIC-assessment credit partially offset expenses.
  • Other notable items included a $308,000 write-down of an existing commercial real estate property, a gain on sale of land in Q1, and lower trust income following the sale of the Trust Department in Q4 2018. The company adopted lease accounting in January 2019; at quarter-end it reported $7.224 million of right-of-use assets and $7.663 million of lease liabilities.
  • Available-for-sale securities had $1.020 million of gross unrealized losses at quarter-end, compared with $5.890 million at year-end 2018. Management did not consider the losses other-than-temporary and said it did not intend, and was not more likely than not required, to sell the securities before recovery.

Outlook, risks, and contingencies

  • The filing gives no specific earnings, revenue, margin, or loan-growth guidance. Management described forward-looking statements as uncertain and cautioned that actual results may differ.
  • Management cited interest-rate changes, deposit funding costs, competition, local economic conditions, and credit quality as factors affecting results. The loan portfolio has substantial real estate exposure: the filing states approximately 81% of loans were secured by real estate, and commercial real estate represented about 57% of principal loan balances.
  • Risks include Northern California real estate and economic conditions, agricultural exposure to commodity and weather events, wildfires and utility power shut-offs, and potential changes in collateral values or loan performance. The filing also identifies cybersecurity and regulatory risks.
  • The company was evaluating the expected-credit-loss standard (CECL), with adoption delayed to January 1, 2023 for qualifying small reporting companies. Management could not reasonably estimate the effect and said adoption could increase the allowance.
  • Off-balance-sheet commitments totaled $198.342 million, including $192.502 million of undisbursed loan commitments and $1.269 million of standby letters of credit. The filing says commitments may not be fully drawn. No material pending legal proceedings were reported.

Important facts for investors to verify

  • Whether the improvement in nonperforming loans and assets persists, particularly after the agriculture-loan payoffs, and whether the allowance remains adequate.
  • How the 5.1% Q3 expense increase, branch expansion, and technology outsourcing affect future operating efficiency and margins.
  • Whether deposit-cost increases continue to offset asset-yield benefits, given Q3 margin declined from Q2 despite year-over-year improvement.
  • The degree of real estate, commercial real estate, and regional industry concentration, and sensitivity to Northern California economic, wildfire, and power-shut-off risks.
  • Future CECL implementation effects, including any change to credit-loss reserves; the filing does not provide a clear estimate.
  • Liquidity and capital availability under stress, including the collateral conditions on FHLB capacity and the regulatory limits on dividends from the Bank.