First Northern Community Bancorp — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Business context and period highlights
The company operates First Northern Bank of Dixon, a California state-chartered community bank serving the Sacramento Valley region. On January 20, 2023, it acquired three branches in Colusa, Willows and Orland from Columbia State Bank.
Financial performance and condition
- Earnings: Net income was $5.49 million, up 80.5% from $3.04 million a year earlier. Diluted EPS was $0.38 versus $0.21. The quarter included a $1.405 million pre-tax bargain purchase gain, contributing approximately $1.0 million after tax.
- Interest income and margin: Net interest income increased 37.3% to $15.98 million. Net interest margin rose to 3.55% from 2.67%. Interest income growth reflected higher yields and average loan balances; deposit interest expense increased to $0.93 million from $0.21 million.
- Other income and expenses: Non-interest income rose 49.8% to $2.87 million, primarily due to the acquisition gain; non-interest expense increased 24.0% to $11.28 million, with higher staffing, occupancy, data-processing and other costs, partly associated with the acquired branches.
- Assets and loans: Total assets were $1.903 billion, up 1.7% from year-end. Net loans, including loans held for sale, were $974.6 million, up 0.5%; available-for-sale securities were $623.8 million, up 0.9%.
- Deposits and debt: Deposits were $1.751 billion, up 1.4% from December 31, 2022, including $115.9 million assumed in the branch acquisition. The company reported no borrowings outstanding. The loan-to-deposit ratio was 55.7%.
- Cash flow and liquidity: The cash flow statement reports $5.04 million provided by operating activities, $104.12 million provided by investing activities, $90.46 million used in financing activities, and an $18.69 million increase in cash to $206.11 million. Cash, available-for-sale securities and certificates of deposit totaled $851.6 million, or 44.7% of assets. Available capacity included $122 million in unsecured bank lines and $374.48 million of remaining FHLB borrowing capacity, subject to collateral requirements.
- Capital: The Bank’s reported ratios exceeded well-capitalized thresholds: leverage 8.64%, common equity Tier 1 14.58%, Tier 1 risk-based 14.58%, and total risk-based 15.83%.
Material changes versus comparable periods
- Compared with Q1 2022, net income, diluted EPS, net interest income and net interest margin increased. Interest income on loans rose 17.8%; deposit interest expense rose 345.0% as deposit costs increased.
- The company recorded no provision for credit losses in Q1 2023, versus $0.30 million in Q1 2022. Net charge-offs were $0.108 million.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $0.8 million and the reserve for unfunded commitments by $0.5 million; the combined $1.3 million increase reduced opening retained earnings by $0.916 million after tax.
- Accumulated other comprehensive loss improved to $40.5 million from $46.5 million at year-end, reflecting $6.0 million of quarterly after-tax securities-related comprehensive income.
Outlook, risks and unusual items
- No numerical earnings or financial guidance was provided. Management said the branch acquisition extends its footprint and is expected to support growth, liquidity and profitability; acquired-branch results were not separately reported because operations were integrated.
- The securities portfolio had $57.5 million of gross unrealized losses at March 31, 2023, mostly on securities in a loss position for at least 12 months. Management attributed losses to interest rates, stated the securities were investment grade, and said it did not intend to sell and was not more likely than not to be required to sell before recovery. No allowance for credit losses on these securities was recorded.
- Credit indicators included $8.16 million of non-accrual loans, $0.40 million of loans at least 90 days past due and still accruing, and $12.87 million of additional substandard loans excluding non-performing loans. The allowance was $15.48 million, or 1.56% of total loans. One $0.4 million consumer loan secured by residential real estate was in foreclosure.
- Management identified heightened banking-sector uncertainty following other bank failures. Potential deposit outflows, higher funding costs, securities-sale losses, reduced liquidity or lending capacity, and increased regulatory costs could adversely affect results. Deposit trends are also exposed to Federal Reserve actions and competition.
- Off-balance-sheet commitments totaled $213.3 million, including $211.9 million of undisbursed loan commitments and $1.0 million of standby letters of credit. The reserve for unfunded commitments was $1.2 million.
- The filing reports no material pending legal proceedings and no material changes in internal control over financial reporting during the quarter. Management concluded disclosure controls were effective as of March 31, 2023.
Important facts for investors to verify
- How much of earnings growth persists after excluding the $1.405 million acquisition gain, and whether acquired branches deliver the expected profitability.
- Deposit retention, mix and pricing, including the effects of competition and higher interest rates on funding costs and net interest margin.
- The liquidity and capital effects if securities with $57.5 million of unrealized losses had to be sold, and the availability and terms of contingent borrowing sources.
- Trends in substandard, delinquent and non-accrual loans, and whether the CECL allowance remains adequate as forecasts and portfolio conditions change.
- Reconciliation of the cash flow statement with MD&A liquidity discussion: the statement reports investing cash inflow of $104.12 million and financing outflow of $90.46 million, while MD&A cites different net liquidity amounts for those categories. The filing text does not clearly reconcile these presentations.