First Northern Community Bancorp — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. First Northern is a California community bank holding company serving businesses and individuals in Northern California through First Northern Bank of Dixon. Comparisons below are primarily with FY2018.
Financial performance and condition
| Metric | FY2019 / year-end | FY2018 / comparison |
|---|---|---|
| Net income | $14.7 million | $12.6 million; up 17.3% |
| Basic / diluted EPS | $1.15 / $1.14 | $0.99 / $0.97 |
| Interest and dividend income | $49.0 million | $45.6 million |
| Net interest income | $47.1 million | $44.3 million; up 6.3% |
| Net interest margin | 4.00% | 3.83% |
| Provision for loan losses | None | $2.1 million |
| Non-interest income / expense | $7.2 million / $33.9 million | $7.2 million / $32.2 million |
| Return on average assets / equity | 1.18% / 11.88% | 1.03% / 12.00% |
| Total assets | $1.293 billion | $1.250 billion; up 3.4% |
| Loans, net of allowance, plus loans held for sale | $773.0 million | $765.7 million |
| Deposits | $1.139 billion | $1.125 billion; up 1.3% |
| Stockholders’ equity | $132.9 million | $112.5 million |
| Cash and cash equivalents | $111.5 million | $116.0 million |
| Operating / investing / financing cash flow | $16.6 million / $(35.2) million / $14.1 million | Net cash decreased $4.5 million |
| Borrowings | No secured, Federal Funds, or long-term borrowings outstanding | None reported |
The Bank’s year-end regulatory capital ratios were 9.9% Tier 1 leverage, 14.6% common equity Tier 1 and Tier 1 risk-based, and 15.8% total risk-based capital; each exceeded the stated “well capitalized” thresholds. Available borrowing capacity included $349.1 million at the FHLB and $82 million in unsecured correspondent-bank lines. Management considered liquidity adequate; the net-loans-to-deposits ratio was 67.9%.
Material changes and management commentary
- Earnings growth reflected higher interest income and the absence of the prior-year loan-loss provision. Net interest income increased $2.8 million, with higher loan and securities yields contributing; deposit interest expense rose $0.6 million.
- The loan-loss allowance declined to $12.4 million, or 1.58% of loans, from $12.8 million, or 1.65%. Net charge-offs increased to $466,000 from $411,000.
- Net non-performing assets fell to $942,000 (0.1% of assets) from $6.2 million (0.5%). Non-accrual loans were $1.2 million gross; there were no loans 90 days past due and still accruing. The Bank had no OREO at year-end, compared with $1.1 million in 2018.
- Non-interest expense rose 5.5%, primarily from staffing, new administrative and branch locations, higher data-processing costs associated with outsourced core processing and IT infrastructure, and an OREO write-down. A reversal of FDIC assessment expense partly offset the increase.
- Commercial real estate represented approximately 58% of loans; management reported approximately 82% of loans were secured by real estate. Commercial real estate loans grew 7.5%, while commercial, agricultural, residential construction, and consumer balances declined.
- Investment securities rose to $342.9 million. Unrealized losses were $940,000 at year-end, down from $5.9 million in 2018; management reported no other-than-temporary impairment in 2019.
Outlook, risks and contingencies
Management expected liquidity to remain strong in 2020 and anticipated continued growth in existing markets, but provided no quantified earnings or financial guidance. The Company does not expect to pay cash dividends in the foreseeable future; it declared a 5% stock dividend payable in March 2020.
Key risks include Northern California economic and real-estate concentration, commercial real-estate and construction credit exposure, agricultural sensitivity to weather and commodity conditions, interest-rate and deposit-cost changes, competition, cybersecurity and operational disruption, and evolving regulatory requirements. The company noted wildfire-related impacts and utility power shut-offs in its markets. It qualified to delay adoption of the expected-credit-loss standard (CECL) until January 1, 2023; the effect was not yet reasonably estimable and could increase the allowance. At year-end, commitments totaled $202.2 million, mainly undisbursed loan commitments; many may expire unused. Management said routine legal proceedings were not expected to have a material adverse effect.
The auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded controls were effective at December 31, 2019.
Important facts for investors to verify
- Whether the zero 2019 loan-loss provision is sustainable given net charge-offs, classified loans, and the portfolio’s real-estate concentration.
- Credit trends in commercial real estate and other major loan categories, collateral values, and the adequacy of the $12.4 million allowance.
- How falling market rates and higher deposit costs affect net interest margin and earnings.
- The composition, liquidity, and interest-rate sensitivity of the $342.9 million securities portfolio and the implications of its unrealized gains and losses.
- The timing and eventual balance-sheet and earnings effects of CECL adoption in 2023, and the draw risk from $202.2 million of commitments.
- Whether growth-related operating costs, new-office investments, and the stated liquidity outlook develop as management expects; also confirm dividend policy and stock-market liquidity, as shares trade OTC and are not exchange-listed.