First Northern Community Bancorp — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; balance-sheet comparisons are to December 31, 2019 unless noted. Unaudited consolidated results. First Northern Bank of Dixon operates primarily in Northern California’s Sacramento Valley.
Key financial results and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net income | $2.679 million | $3.985 million in Q1 2019 |
| Diluted earnings per share | $0.21 | $0.31 in Q1 2019 |
| Net interest income | $11.231 million | $11.680 million in Q1 2019 |
| Net interest margin | 3.63% | 4.09% in Q1 2019 |
| Total interest and dividend income | $11.749 million | $12.051 million in Q1 2019 |
| Non-interest income / expense | $1.649 million / $8.570 million | $1.859 million / $8.018 million in Q1 2019 |
| Provision for loan losses | $650,000 | None in Q1 2019 |
| Total assets | $1.341 billion | $1.293 billion |
| Loans, net, including loans held for sale | $764.722 million | $773.003 million |
| Available-for-sale investment securities | $354.950 million | $342.897 million |
| Total deposits | $1.182 billion | $1.139 billion |
| Cash and cash equivalents | $143.861 million | $111.493 million |
| Stockholders’ equity | $140.793 million | $132.915 million |
- Net income declined 32.8% year over year; diluted EPS fell 32.3%. Annualized return on average assets was 0.81% versus 1.30%; return on average equity was 7.89% versus 13.84%.
- Net interest margin contracted 46 basis points year over year. Lower loan yields and interest income—following Federal Reserve rate cuts—more than offset growth in average earning assets; deposit interest expense also increased.
- Net cash used in operating activities was $5.569 million and net cash used in investing activities was $5.457 million. Financing activities provided $43.394 million, principally from deposit growth. Cash increased by $32.368 million during the quarter.
- The allowance for loan losses was $12.869 million, or 1.67% of loans, versus $12.356 million, or 1.58%, at year-end. Net charge-offs were $137,000.
- Non-accrual loans were $1.189 million; net non-performing assets after guarantees were $1.117 million, or 0.1% of assets. Loans rated substandard or doubtful, excluding reported non-performing loans, totaled $16.415 million.
- Liquidity indicators included a 64.7% loan-to-deposit ratio and $82 million in short-term unsecured bank lines. The Bank had $323.148 million of FHLB borrowing capacity, subject to collateral requirements, and no borrowings outstanding.
- Bank regulatory capital ratios exceeded the stated well-capitalized thresholds: leverage 10.06%, common equity Tier 1 14.93%, Tier 1 risk-based 14.93%, and total risk-based 16.18%.
Material changes and management commentary
- Management attributed the loan-loss provision increase primarily to higher qualitative reserves reflecting COVID-19-related economic uncertainty. The allowance also increased following net charge-offs and loan portfolio changes.
- Deposits rose 3.8% from year-end, attributed mainly to new customers and seasonal fluctuations. Net loans, including loans held for sale, fell 1.1%, while securities increased 3.5%.
- Non-interest income declined 11.3%, including lower deposit service charges after the Bank waived overdraft and NSF fees for an initial 60-day period, and the absence of a prior-year land-sale gain. Non-interest expense rose 6.9%, driven mainly by staffing and occupancy costs.
- COVID-19 relief included payment and fee relief for customers, extended grace periods, and changes to branch operations. About 40% of employees were working remotely; branch hours were reduced. Management reported no significant unusual customer line-of-credit advances as of the filing discussion.
- After quarter-end, the Bank reported approving approximately 650 first-phase SBA Paycheck Protection Program applications totaling about $184 million, and approximately 520 second-phase applications totaling about $42 million as of April 30. These loans were expected to be booked in Q2 2020.
- The Company declared a 5% stock dividend, paid March 25, 2020. Management’s forward-looking statements indicated it did not expect to pay a cash dividend in the foreseeable future.
Outlook, risks, and contingencies
- The filing provides no quantified earnings, margin, or loan-loss guidance. Management stated that the ultimate effects of the pandemic were highly uncertain and could materially adversely affect results, financial condition, and operations.
- Key exposures include Northern California economic conditions, commercial real estate, construction, agriculture, retail, hospitality, and small-business borrowers. Approximately 82% of loans were secured by real estate; management identified retail, restaurants, and hospitality/hotels as particularly affected commercial real estate exposures.
- The filing warns of possible higher delinquencies, defaults, charge-offs, and allowance needs if business closures persist, economic conditions worsen, or customers draw more credit. Real estate collateral values and available-for-sale securities could also be affected.
- Off-balance-sheet commitments totaled $227.658 million: $208.260 million of undisbursed loan commitments, $2.082 million of standby letters of credit, and $17.316 million of commitments to sell loans. A $940,000 reserve for unfunded commitments was recorded.
- No material pending legal proceedings were reported. The filing also notes potential operational, cybersecurity, workforce, and litigation risks associated with the pandemic and participation in PPP.
Important facts for investors to verify
- How subsequent quarters’ credit grades, payment deferrals, non-performing loans, charge-offs, and provisions evolved as COVID-19 effects became clearer.
- PPP loan funding, balances booked, fee income, forgiveness and repayment trends, and any related legal or operational exposures.
- Whether deposit growth and liquidity remained stable, and whether the Bank used its available borrowing facilities.
- The persistence of lower net interest margin after the Federal Reserve’s rate cuts, including the pace of loan repricing and deposit-cost changes.
- Commercial real estate and other real-estate collateral performance, given the loan portfolio’s concentration and regional exposure.
- Changes in securities fair values and accumulated other comprehensive income; Q1 securities-related unrealized gains materially increased reported equity.