First Northern Community Bancorp :FNRN-US: Earnings Analysis: 2016 By the Numbers : March 22, 2017

First Northern Community Bancorp reports financial results for the year ended December 31, 2016.

We analyze the earnings along side the following peers of First Northern Community Bancorp – 1st Constitution Bancorp, First Defiance Financial Corp., BankFinancial Corporation and Magyar Bancorp, Inc. (FCCY-US, FDEF-US, BFIN-US and MGYR-US) that have also reported for this period.

Highlights

  • Net interest income margins widened from 80.78% to 82.71% compared to the same period last year.
  • Net loan assets changed 10.55% compared to same period last year and 10.55% from previous period, total deposits changed 12.19% compared to same period last year and 12.19% from previous period.
  • Year-on-year change in operating cash flow of -6.23% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as from one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income (See complete table at the end of this report):

2016 2015 2014 2013 2012
Relevant Numbers (Annual)
Revenues 42.09 39.58 36.98 36.89 35.9
Revenue Growth (YOY) N/A N/A N/A N/A N/A
Earnings 8.05 6.92 5.87 5.38 4.65
Earnings Growth (YOY) 16.33 17.9 9.03 15.88 74.4
Net Margin 19.13 17.49 15.87 14.59 12.94
EPS 0.7 0.59 0.5 0.41 0.31
Return on Equity 9.04 7.66 6.49 5.31 3.9
Return on Assets 0.73 0.69 0.63 0.62 0.58

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Earnings Growth Analysis

The company’s earnings growth was influenced by the year-on-year improvement in net interest income margins from 80.78% to 82.71%. However, the company’s loan loss provisions have prevented it from fully capitalizing on these net interest income margin improvements. FNRN-US‘s net interest income after provisions margin showed no improvement. Loan loss provisions as a percentage of net interest income were 5.17% this period, and 2.03% a year ago.

Net Interest Income Margin Versus Loan Loss Provisions Margin

Quadrant label definitions. Hover to know more

High Risk; High Reward Loans, Risky Loan Portfolio, Conservative Loan Portfolio, Safer Loan Portfolio
Net Interest Income Margin History
Loan Loss Provisions Margin History

Net Loans and Total Deposits

A financial institution’s core operations represented by Net Interest Income and Net Interest Income after Provisions are dependent on both the growth and quality of its deposits as well as the growth and quality of its loans. A firm could boost its interest income in the short-term by just increasing its loan assets with less concern about their quality – but this would eventually lead to greater loan loss provisions. Similarly a drive to increase deposits could result in higher interest expenses and eventually effect the firm’s equity. It is thus important to understand net interest income performance in context to loan loss provisions, loan assets and deposits.

Loan Assets Growth Rate History (HY YOY)
Total Deposits Growth Rate History (HY YOY)

The firm’s improvement in net interest income margins was influenced by both the relative increase in the levels of net loan assets and the level of total deposits as a percentage of equity. On an absolute basis, net loan assets changed 10.55% compared to the same period last year and 10.55% from the previous period. Total deposits changed 12.19% compared to the same period last year and 12.19% from the previous period.

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

FNRN-US‘s change in operating cash flow of -6.23% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating margins from 26.93% to 30.74% and (2) one-time items. The company’s pretax margins are now 30.74%, compared to 26.93% for the same period last year.

EBIT Margin History
PreTax Margin History
EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables

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Company Profile

First Northern Community Bancorp is a bank holding company, which engages in the operation of First Northern Bank. Through the bank, it offers business banking, personal banking, lending services, and wealth management. The company was founded on May 19, 2000 and is headquartered in Dixon, CA.

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