First Northern Community Bancorp — Q2 2022 Form 10-Q
Business and period: The California bank holding company’s subsidiary, First Northern Bank of Dixon, serves the Sacramento Valley region, with revenue primarily from lending and deposits. This unaudited filing covers the quarter and six months ended June 30, 2022; balance-sheet comparisons are with December 31, 2021. Amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q2 / June 30, 2022 | Comparison |
|---|---|---|
| Net income | $3.546; diluted EPS $0.26 | Q2 2021: $3.306; $0.23 |
| Six-month net income | $6.587; diluted EPS $0.48 | Six months 2021: $6.484; $0.45 diluted EPS |
| Net interest income | Q2 $13.008; six months $24.646 | Q2 up 7.3%; six months up 7.2% year over year |
| Net interest margin | Q2 2.94%; six months 2.81% | Q2 2.81%; six months 2.74% in 2021 |
| Non-interest income / expense | Q2 $1.492 / $9.328; six months $3.410 / $18.430 | Six-month non-interest income down 16.3%; expenses up 3.2% year over year |
| Total assets | $1,896.8 | $1,899.1 at year-end 2021 |
| Net loans / deposits | $931.9 / $1,751.2; loan-to-deposit ratio 53.2% | Net loans up 9.2%; deposits up 1.3% from year-end |
| Cash and available-for-sale securities | $245.5 / $637.8 | Cash down $100.5; securities up $5.6 from year-end |
| Stockholders’ equity | $127.1 | $150.9 at year-end; accumulated other comprehensive loss widened to $34.8 from $4.2 |
For the first six months, operating cash flow was $5.9, investing cash flow was negative $129.2, and financing cash flow was $22.8; cash and cash equivalents fell $100.5. The filing reports no Federal Home Loan Bank advances outstanding in its average-balance table for the 2022 periods. Total liabilities were primarily deposits; the filing does not show funded borrowings at June 30.
The Bank reported capital ratios above well-capitalized thresholds: leverage 8.44% (5.0% requirement), Common Equity Tier 1 and Tier 1 risk-based 14.28% each (6.5% and 8.0% requirements), and total risk-based 15.54% (10.0% requirement). It also reported $122.0 of unsecured bank credit lines and $343.4 of remaining FHLB borrowing capacity, subject to collateral requirements.
Material changes and drivers
- Net income rose 7.3% in Q2 and 1.6% for the first half. Higher net interest income supported earnings; lower gains on mortgage loan sales reduced non-interest income.
- Net interest income benefited from higher interest earned on bank balances and securities, loan repricing and growth, while deposit interest expense remained low. The Federal Funds target range rose 150 basis points during the first half.
- Net loans grew mainly from commercial real estate originations and purchases, partly offset by PPP forgiveness. Commercial real estate loans were $613.2, about 64% of gross loans; the filing separately states approximately 84% of loans were secured by real estate.
- Available-for-sale securities had $46.9 of gross unrealized losses at June 30, versus $8.7 at year-end 2021. Management attributed the losses primarily to rising risk-free interest rates, reported no other-than-temporary impairment, and said it did not intend to sell and was not more likely than not to be required to sell before recovery. The resulting securities losses drove most of the $30.6 after-tax first-half other comprehensive loss and the decline in reported equity.
- Allowance for loan losses was $14.3, or 1.51% of loans, versus $14.0, or 1.61%, at year-end. First-half provision was $0.6 versus $0.3 in 2021; net charge-offs were $0.277.
Outlook, risks and contingencies
- The filing provides no formal earnings or financial guidance. Management expected a significant portion of the remaining PPP loans to be forgiven and reimbursed by the SBA during 2022; PPP loans outstanding were $1.5 at June 30, with $0.1 of unearned processing fees.
- Credit indicators included $10.241 of non-accrual loans, $0.600 of loans 90 days past due and still accruing, and $10.808 of non-performing assets net of guarantees (0.6% of assets). Agriculture loans accounted for $8.084 of non-accrual loans. Management said the allowance was adequate, while noting estimates and actual losses may differ.
- Key stated risks include concentrated real-estate lending, changes in property values and economic conditions, inflation and interest-rate movements, agricultural market and weather exposure, and possible deterioration in borrowers’ ability to repay. The securities portfolio remains exposed to further fair-value declines; future impairment could occur if conditions worsen.
- Undisbursed loan commitments were $209.0, performance standby letters of credit $1.9, and commitments to sell loans $0.25. The reserve for unfunded commitments was $0.7. These commitments may not be fully drawn. No material pending legal proceeding was reported.
- The company planned to adopt CECL on January 1, 2023 and was evaluating its financial-statement impact; the filing does not provide a clear estimate of the adoption adjustment. Management reported disclosure controls were effective and no material internal-control changes during the quarter.
Important facts for investors to verify
- Whether loan growth, particularly commercial real estate growth, is accompanied by stable credit quality and adequate loss reserves.
- How rising rates affect deposit costs, net interest margin, loan demand, and the fair value or saleability of the available-for-sale securities portfolio.
- Whether deposit trends, cash levels, and available borrowing capacity remain sufficient to support commitments and funding needs.
- The timing and amount of SBA forgiveness and reimbursement for remaining PPP loans.
- The eventual CECL transition impact and any changes in the allowance, impaired loans, or agricultural credit exposures.