FIRST NORTHERN COMMUNITY BANCORP quarterly report, Q2 FY2017

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Business context and reporting period

First Northern Community Bancorp’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. Its subsidiary, First Northern Bank of Dixon, is a California community bank focused on lending and deposit-taking in Northern California’s Sacramento Valley.

Financial results and condition

  • Quarterly earnings: Net income was $2.548 million, up 25.2% from $2.035 million a year earlier. Diluted EPS was $0.23 versus $0.18.
  • Six-month earnings: Net income was $5.061 million, up 34.4% from $3.766 million. Diluted EPS was $0.45 versus $0.34.
  • Interest income and margins: Six-month net interest income rose 11.8% to $18.907 million; net interest margin increased to 3.46% from 3.38%. For the second quarter, net interest income was $9.594 million and margin was 3.51%, versus $8.609 million and 3.42% a year earlier.
  • Credit costs: The six-month loan-loss provision was $0.600 million, down from $0.900 million; there was no provision in Q2 2017 versus $0.450 million in Q2 2016. The allowance for loan losses was $11.720 million, or 1.71% of loans, at June 30.
  • Balance sheet: Total assets were $1.157 billion, down 0.8% from year-end 2016. Net loans, including loans held for sale, were $675.825 million, up 0.4%; securities were $304.387 million, up 9.9%; deposits were $1.049 billion, down 1.4%. Stockholders’ equity was $97.581 million.
  • Liquidity and funding: Cash and cash equivalents were $131.510 million, down $28.133 million from year-end. The loan-to-deposit ratio was 64.4%. The company reported $77 million in short-term unsecured bank lines and $265.684 million of FHLB borrowing capacity, subject to collateral requirements. It had no FHLB advances during the reported periods.
  • Cash flow: Six-month operating cash flow was $8.243 million, compared with $2.674 million in 2016. Investing activities used $21.943 million and financing activities used $14.433 million; cash declined by $28.133 million.
  • Capital: The Bank’s June 30 ratios exceeded well-capitalized thresholds: leverage 8.41%, Common Equity Tier 1 12.50%, Tier 1 risk-based 12.50%, and total risk-based 13.75%.

Material changes versus prior periods

  • Higher average loan and securities balances drove much of the increase in interest income and net interest income; management also cited higher rates on new and repricing loans. Deposit interest expense fell 7.0% for the first half, with the average cost of funds declining by 2 basis points.
  • Six-month non-interest income increased 29.9% to $4.600 million, primarily reflecting a sale-leaseback gain. The company recognized $1.187 million of the transaction gain in income; $0.495 million of the total $1.682 million gain was deferred and is being recognized as a reduction of occupancy expense over the six-year lease term. Excluding this unusual gain, underlying income growth would be lower.
  • Non-interest expense rose 8.0% for the first half to $14.723 million, including higher salaries and benefits, data processing, and other expenses. Q2 expense increased 6.1% year over year.
  • Non-accrual loans declined to $3.027 million from $6.297 million at year-end 2016. Net non-performing assets were $2.952 million, or 0.3% of assets. Net recoveries were $0.221 million in the first half, versus net charge-offs of $0.121 million in the 2016 period.
  • Available-for-sale securities increased as the company purchased mortgage-backed securities and collateralized mortgage obligations. Cash declined primarily due to investment-securities purchases; deposits also decreased.

Outlook, risks, contingencies and unusual items

  • The filing provides no specific earnings, revenue, or margin guidance. Management cautions that interim results are not necessarily indicative of full-year results.
  • Key disclosed risks include concentration in Northern California and real-estate-related lending: approximately 75% of loans were real-estate-secured, making results sensitive to regional economic conditions and collateral values. Agricultural lending is exposed to commodity demand and adverse weather.
  • Potential deposit withdrawals, including from time deposits over $250,000, could affect liquidity and funding costs. At June 30, such deposits totaled $20.579 million.
  • Off-balance-sheet commitments totaled $218.523 million, including $213.065 million of undisbursed loan commitments and $3.030 million of standby letters of credit. The reserve for unfunded commitments was $0.850 million. Commitment totals do not necessarily represent expected cash needs because some may expire undrawn.
  • Management identified the allowance for loan losses as a significant area of estimation judgment. The company expects the future expected-credit-loss accounting standard to cause earlier loss recognition, but had not quantified its effect.
  • No material pending legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

  1. How much of earnings growth is repeatable after separating the sale-leaseback gain and related deferred expense benefit.
  2. Whether loan quality, commercial real estate concentration, collateral values, and the allowance remain adequate as the portfolio grows.
  3. Trends in deposit balances and mix, large time-deposit maturities, available borrowing capacity, and cash liquidity.
  4. Whether expense growth, particularly staffing and data-processing costs, moderates relative to revenue growth.
  5. How future adoption of expected-credit-loss and lease accounting standards affects reserves, reported assets, liabilities, and capital.