First Northern Community Bancorp — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. First Northern Community Bancorp operates First Northern Bank of Dixon, serving Northern California, with lending and deposit-taking as its principal activities. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 2019 / June 30, 2019 | Comparison |
|---|---|---|
| Net income | $3.406 million; diluted EPS $0.28 | Q2 2018: $3.003 million; diluted EPS $0.24 |
| Six-month net income | $7.391 million; diluted EPS $0.60 | Six months 2018: $5.736 million; diluted EPS $0.47 |
| Net interest income | Q2: $11.817 million; six months: $23.497 million | Year-over-year increases of 10.1% and 10.6%, respectively |
| Net interest margin | Q2: 4.11%; six months: 4.10% | Q2 2018: 3.83%; six months 2018: 3.78% |
| Non-interest income / expense | Q2: $1.671 million / $8.805 million; six months: $3.530 million / $16.823 million | Six-month income decreased 0.5%; expenses increased 6.4% year over year |
| Provision for loan losses | None in Q2 or first half 2019 | Q2 2018: $0.525 million; first half 2018: $1.050 million |
| Total assets | $1.232 billion | Down 1.4% from December 31, 2018 |
| Net loans, including held-for-sale | $732.773 million | Down 4.3% from December 31, 2018 |
| Deposits | $1.092 billion | Down 2.9% from December 31, 2018 |
| Cash and cash equivalents | $124.285 million | Up from $116.032 million at December 31, 2018 |
| Allowance for loan losses | $12.838 million; 1.72% of loans | December 31, 2018: $12.822 million; 1.65% of loans |
| Equity | $124.882 million | Up from $112.461 million at December 31, 2018 |
For the six months ended June 30, operating cash flow was $6.521 million, investing cash flow was $34.607 million and financing cash flow was negative $32.875 million, resulting in an $8.253 million increase in cash. The filing reports no FHLB advances during the periods presented. At June 30, operating lease liabilities were $4.435 million.
The loan-to-deposit ratio was 67.1%. Liquidity resources included $67 million in short-term unsecured bank lines and FHLB borrowing capacity of approximately $326.9 million, subject to collateral requirements. The Bank’s reported capital ratios exceeded the well-capitalized thresholds: leverage 9.98%, common equity Tier 1 and Tier 1 risk-based each 14.34%, and total risk-based 15.60%.
Material changes and drivers
- Net income rose 13.4% in Q2 and 28.9% in the first half. Higher net interest income and the absence of a loan-loss provision were important contributors; this was partly offset by higher operating expenses.
- Management attributed higher interest income primarily to improved loan and securities yields, including repricing and new loan originations. Deposit funding costs also rose: interest expense increased 60.9% in Q2 and 51.3% in the first half year over year.
- Loans declined amid principal repayments and slower-than-expected lending. Management cited a wet, cool spring that delayed crop planting and agricultural line advances, as well as later-than-expected residential and commercial construction activity.
- Deposits fell amid competition for lower-cost funding as short-term rates rose, together with seasonal fluctuations. Non-interest-bearing transaction deposits represented 37.4% of deposits at June 30.
- Non-interest expense increased, reflecting staffing associated with a planned new branch, higher profit sharing, enhanced IT infrastructure, and expense related to an other-real-estate-owned property write-down. Non-interest income was broadly flat for the first half; lower trust income followed the sale of the Trust Department in Q4 2018.
- Asset quality improved from year-end: non-accrual loans declined to $1.138 million from $6.252 million, primarily after payoff of four agricultural loans in one lending relationship. Net non-performing assets were $2.361 million, or 0.2% of assets. One $490,000 loan was 90 days or more past due and still accruing.
Outlook, risks and unusual items
- The filing provides no quantified earnings or financial guidance. Management said a new branch was targeted to open in Q3 2019; the filing does not quantify expected costs or returns.
- Management described the allowance as adequate, but it is based on estimates and actual losses may differ. The company was evaluating the forthcoming expected-credit-loss standard (CECL) and said adoption could increase the allowance; the impact could not yet be reasonably estimated.
- Credit and collateral risks are concentrated in Northern California and real estate: approximately 80% of loans were secured by real estate. The filing highlights exposure to regional economic weakness, falling property values, commercial real estate conditions, agriculture and weather, construction activity, interest rates, competition for deposits, and cybersecurity and regulatory risks.
- Q2 included $315,000 of other-real-estate-owned expense; the filing attributes the increase in this expense to a write-down of an existing commercial real estate property. The first half also included a $281,000 gain on sale of land, reported in cash-flow adjustments.
- The company adopted lease accounting on January 1, 2019, recognizing a right-of-use asset and lease liability; June 30 balances were $4.044 million and $4.435 million, respectively. A 5% stock dividend was declared in January and distributed in March; per-share figures were adjusted accordingly.
- Management reported no material pending legal proceedings and no material change in market-risk disclosures. It stated disclosure controls were effective as of June 30, 2019.
Most important facts for investors to verify
- Whether loan growth resumes after the weather- and construction-related slowdown, and how real estate, agriculture and regional economic exposure evolves.
- Whether lower non-accrual balances and the current allowance remain adequate, particularly as credit conditions change and CECL implementation approaches.
- Whether deposit competition raises funding costs further and pressures net interest margin, despite the year-over-year margin improvement.
- The drivers and sustainability of higher earnings, including the lack of loan-loss provision, expense growth, the new branch, and the effect of the Trust Department sale.
- Liquidity and capital capacity under deposit outflows or credit stress, including the collateral conditions on FHLB availability and the use of off-balance-sheet commitments.