First Northern Community Bancorp — Q1 2019 Form 10-Q
Business context and period: First Northern Community Bancorp is the parent of First Northern Bank of Dixon, a California state-chartered bank focused on lending and deposit-taking in Northern California’s Sacramento Valley. This unaudited report covers the quarter ended March 31, 2019; income and cash flow comparisons are with Q1 2018, while balance-sheet comparisons are with December 31, 2018. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $11.68; net interest margin 4.09% | $10.51 and 3.74% in Q1 2018 |
| Net income | $3.99 | $2.73 in Q1 2018 |
| EPS | Basic $0.33; diluted $0.32 | Basic $0.23; diluted $0.22 in Q1 2018 |
| Operating cash flow | $3.00 | $3.22 in Q1 2018 |
| Cash and cash equivalents | $128.09 | $116.03 at December 31, 2018 |
| Total assets | $1,218.97 | $1,249.85 at December 31, 2018 |
| Loans, net, including loans held for sale | $734.01 | $765.69 at December 31, 2018 |
| Deposits | $1,086.23 | $1,124.61 at December 31, 2018 |
| Stockholders’ equity | $118.03 | $112.46 at December 31, 2018 |
| Allowance for loan losses | $12.75, or 1.71% of loans | $12.82, or 1.65%, at December 31, 2018 |
Net interest income plus non-interest income was $13.54, compared with $12.32 in Q1 2018. The filing reports no loan-loss provision for Q1 2019, versus $0.53 million in Q1 2018. Interest expense rose to $0.37 million from $0.26 million; non-interest expense was nearly flat at $8.02 million versus $7.99 million. The filing does not present a conventional gross-margin measure.
Cash increased by $12.06 million during the quarter. Cash from operations was $3.00 million; investing activities provided $47.46 million, principally reflecting net loan paydowns and securities cash flows; financing activities used $38.39 million, primarily from deposit outflows. The cash-flow statement’s investing subtotal label appears inconsistent with the positive amount and the reported cash reconciliation.
At quarter-end, the loan-to-deposit ratio was 67.6%. The Bank reported no borrowings outstanding, $67 million of short-term unsecured bank lines and $330.6 million of FHLB borrowing capacity, subject to collateral requirements. Bank capital ratios exceeded the stated well-capitalized thresholds: leverage 9.65%, common equity Tier 1 and Tier 1 risk-based 13.81%, and total risk-based 15.07%. Lease liabilities were $4.62 million following adoption of the new lease standard.
Material changes and management commentary
- Net income increased 45.8% year over year; diluted EPS increased from $0.22 to $0.32. Management attributed stronger net interest income chiefly to higher loan and securities yields and higher average loan balances. NIM rose to 4.09% from 3.74%.
- Assets fell 2.5% from year-end, net loans including loans held for sale fell 4.1%, securities fell 5.1%, and deposits fell 3.4%. Management attributed lower loans mainly to paydowns and maturities, and lower deposits to seasonal patterns and competition for low-cost funding as short-term rates rose.
- Non-interest income rose 3.1%. It included a $0.28 million gain on sale of land; management also cited higher loan-sale gains and mortgage brokerage income. The Trust Department had been sold in Q4 2018.
- Net charge-offs were $0.08 million. Non-accrual loans were $5.65 million, down from $6.25 million at year-end, but one $0.66 million commercial loan was 90 days past due and still accruing. Net non-performing assets were $6.61 million, or 0.5% of assets, versus $6.21 million at year-end.
- The portfolio is concentrated in commercial real estate and other real-estate-secured lending; management disclosed that about 80% of loans were real-estate-related. Agriculture exposure also creates sensitivity to commodity markets and weather. The company cautioned that collateral values and recoveries are uncertain.
Outlook, risks, contingencies, and unusual items
The filing gives no numerical earnings, revenue, or margin guidance. Management describes forward-looking expectations as uncertain and subject to economic, competitive, regulatory, interest-rate, and credit risks. It expects not to pay a cash dividend on common stock in the foreseeable future, as referenced among its forward-looking topics.
- The company was evaluating adoption of CECL, effective for it in 2020. It warned the expected-loss model could increase the allowance and require allowances on certain securities and other financial assets, but said it could not yet reasonably estimate the impact.
- Undisbursed loan commitments were $204.18 million; performance standby letters of credit were $2.45 million; commitments to sell loans were $1.08 million. The reserve for unfunded commitments was $0.88 million. Commitment totals do not necessarily represent future cash needs because some expire undrawn.
- Available-for-sale securities had $4.35 million of gross unrealized losses at quarter-end, including $4.33 million on securities in a loss position for at least 12 months. Management attributed losses to market conditions, particularly interest rates, and said it did not intend, and was not likely to be required, to sell before recovery. No other-than-temporary impairment was recorded.
- The 5% stock dividend was declared in January and distributed in March 2019. The company adopted lease accounting on January 1, recognizing a right-of-use asset and lease liability. These are notable presentation and per-share comparability items.
- No material pending legal proceeding was disclosed. 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
- Whether deposit outflows continue and how competition for low-cost funding affects deposit costs, liquidity, and net interest margin.
- Whether loan paydowns and portfolio contraction persist, particularly in commercial real estate, agriculture, and other real-estate-secured exposures.
- Trends in past-due, non-accrual, classified, and restructured loans, and the adequacy of the allowance given its decline in dollars and the quarter’s net charge-offs.
- The sustainability of earnings growth after considering higher yields, the one-time land-sale gain, and the absence of a loan-loss provision in Q1.
- The eventual CECL adoption impact and any changes to credit-loss estimates or securities allowances.
- The cash-flow statement’s investing subtotal presentation, which appears inconsistent with the reported cash increase and component totals.