First Northern Community Bancorp — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing; the supplied text does not provide standalone fourth-quarter results.
Business context
First Northern Community Bancorp is a California bank holding company operating First Northern Bank of Dixon. The Bank provides community banking services across Northern California, focusing on individuals and small and mid-sized businesses. Lending, particularly commercial real estate, agriculture and other business lending, is central to the business.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Interest and dividend income | $45.6 million | $40.0 million |
| Net interest income | $44.3 million | $38.9 million |
| Net interest margin | 3.83% | 3.48% |
| Provision for loan losses | $2.1 million | $0.6 million |
| Non-interest income | $7.2 million | $8.1 million |
| Non-interest expense | $32.2 million | $29.4 million |
| Income before taxes | $17.3 million | $17.1 million |
| Income tax expense | $4.7 million | $8.3 million |
| Net income | $12.6 million | $8.7 million |
| Diluted earnings per share | $1.02 | $0.71 |
- Net income increased 43.5%. Higher interest income and lower tax expense drove the improvement, partly offset by higher loan-loss provision and operating costs.
- Net interest income rose 13.9%, mainly on loan growth and higher rates. Average loan yield increased to 5.03% from 4.89%; interest-bearing deposit costs also rose.
- Return on average assets was 1.03% (0.74% in 2017); return on average equity was 12.00% (8.88%).
- At year-end, assets were $1.250 billion, up 2.6%; deposits were $1.125 billion, up 1.8%; and shareholders’ equity was $112.5 million, up 12.4%. Net loans, including loans held for sale, were $765.7 million, up 3.5%; investments were $314.6 million, up 12.1%.
- Cash and cash equivalents fell to $116.0 million from $152.9 million. Operating cash flow was $15.7 million; investing cash flow was negative $72.5 million; financing cash flow was $20.0 million. Net cash decreased $36.9 million.
- The Company had no short- or long-term borrowings at year-end. Available borrowing capacity included $325.2 million from the FHLB and $67.0 million in unsecured correspondent-bank lines.
- Regulatory capital remained strong: Bank Tier 1 leverage was 9.0%, common equity Tier 1 was 13.1%, and total risk-based capital was 14.4%. The Bank was categorized as well capitalized.
Material changes and notable items
- Provision for loan losses increased to $2.1 million from $0.6 million, reflecting higher specific reserves on impaired loans, increases in classified and criticized loans, and loan growth. Net charge-offs were $411,000 versus $366,000.
- Non-accrual loans, net of guarantees, increased to $5.1 million from $3.7 million. Net non-performing assets rose to $6.2 million, or 0.5% of assets, from $3.7 million, or 0.3%. The increase included $1.1 million of other real estate owned and $4.1 million of net non-accrual agricultural loans.
- Loans classified as substandard or doubtful, excluding non-performing loans, rose to $15.9 million from $2.0 million. The allowance for loan losses was $12.8 million, or 1.65% of total loans, versus $11.1 million, or 1.49%; coverage of net non-performing loans declined to 250.4% from 300.1%.
- Non-interest income declined 11.3%, partly because 2017 included a $1.187 million pretax sale-leaseback gain. Non-interest expense increased 9.4%, primarily due to salary and staffing costs and data-processing expenses related to core-system migration and IT enhancements.
- The effective tax rate fell to 27.4% from 48.7%. The 2017 comparison included a $1.7 million deferred-tax remeasurement charge following enactment of the Tax Cuts and Jobs Act; the lower federal corporate tax rate benefited 2018.
- Available-for-sale securities had $5.9 million of gross unrealized losses at year-end, including $5.7 million on securities in a loss position for at least 12 months. Management attributed losses mainly to interest-rate movements and reported no other-than-temporary impairment.
Liquidity, outlook, risks and contingencies
- Management considered liquidity adequate and expected it to remain strong in 2019 while the Bank continued growth in existing markets. The net-loans-to-deposits ratio was 68.1%; core deposits were 88.7% of assets. The Bank noted possible deposit outflows if stock-market values continued to improve.
- Credit risk is concentrated in Northern California and real estate-related lending: approximately 78% of loans were real-estate-related, and commercial real estate accounted for about 54% of the loan portfolio. Management cited economic, collateral-value, agricultural commodity, drought, wildfire and other weather risks.
- Interest-rate changes may affect loan demand, deposit costs and net interest margin. The Bank’s net interest income benefited from rising rates in 2018, but management stated the effect of future rate and monetary-policy changes is uncertain.
- The Company was evaluating the expected-credit-loss standard (CECL), scheduled to apply in 2020. Management could not reasonably estimate the adoption impact and warned it could increase allowances and affect capital, earnings or lending.
- Commitments and contingencies included $201.983 million of undisbursed loan commitments, $2.974 million of standby letters of credit and $570,000 of commitments to sell loans. Many lending commitments may expire undrawn. Management did not expect ordinary-course legal proceedings to have a material adverse effect.
- The Company did not expect to pay a cash dividend in the foreseeable future; it declared a 5% stock dividend for 2019. The common stock trades over the counter and has a limited public market.
- The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective at year-end.
Important facts for investors to verify
- Review the rise in classified loans and non-accrual agricultural credits, and assess subsequent performance, collateral values and reserve adequacy.
- Track whether loan growth and higher asset yields continue to outpace deposit-cost increases and operating-expense growth.
- Assess the securities portfolio’s unrealized losses, interest-rate sensitivity and any future need to sell securities before recovery.
- Monitor CECL implementation plans and any disclosed estimates of its effects on the allowance, regulatory capital and earnings.
- Confirm liquidity trends, deposit concentration and actual use or availability of FHLB and correspondent-bank facilities.
- Consider the limited trading market for the stock, the absence of expected cash dividends and the effect of stock dividends on per-share comparisons.