First Northern Community Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The company operates First Northern Bank of Dixon, serving the Sacramento Valley region of Northern California. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial results and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $17.8 | $13.0 | $33.8 | $24.6 |
| Net interest margin | 3.97% | 2.94% | 3.76% | 2.81% |
| Provision for credit losses | $2.6 | $0.3 | $2.6 | $0.6 |
| Net income | $4.6 | $3.5 | $10.1 | $6.6 |
| Diluted earnings per share | $0.31 | $0.24 | $0.69 | $0.45 |
- Net interest income rose 36.7% in Q2 and 37.0% for the first half. Higher loan balances and yields, rising rates on interest-bearing bank balances and securities, and a higher securities yield drove growth. Deposit interest expense also increased substantially.
- Non-interest income was $1.5 million in Q2, little changed year over year, and $4.4 million for the first half, up 28.4%, including a $1.4 million bargain-purchase gain from the branch acquisition. Non-interest expense rose 11.1% in Q2 and 17.5% for the first half, reflecting staffing, acquisition-related costs, data processing and other expenses.
- Annualized return on average assets was 0.96% in Q2 and 1.05% for the first half; return on average equity was 13.23% and 15.08%, respectively.
- At June 30, total assets were $1.91 billion, net loans including loans held for sale were $1.019 billion, deposits were $1.759 billion, and stockholders’ equity was $136.7 million. Loans grew 5.0% and deposits 1.8% from December 31, 2022. The loan-to-deposit ratio was 57.9%.
- Cash and cash equivalents were $204.8 million. Available-for-sale securities were $587.7 million, with $62.4 million of gross unrealized losses, primarily attributed by management to interest-rate movements rather than credit quality. The company reported no borrowings outstanding.
- First-half operating cash flow was $13.0 million, compared with $5.9 million in 2022. Investing activities provided $87.4 million, including $103.4 million of cash consideration associated with the branch acquisition; financing activities used $83.0 million. Cash increased $17.4 million during the period.
- The allowance for credit losses was $15.6 million, or 1.51% of loans. Non-accrual loans were $6.2 million, and non-performing assets were $6.6 million, or 0.3% of total assets.
- The Bank’s reported capital ratios exceeded well-capitalized thresholds: leverage 8.99%, common equity Tier 1 14.56%, Tier 1 risk-based 14.56%, and total risk-based 15.81%.
Material changes and unusual items
- On January 20, 2023, the company acquired three California branches in Colusa, Willows and Orland. It assumed $115.9 million of deposits and recorded a $1.4 million bargain-purchase gain and a $5.0 million core deposit intangible. The acquisition expanded the company’s footprint; management expects it to support growth and profitability. Fair-value estimates remain subject to review during the acquisition measurement period.
- A suspected customer-fraud credit event involving one agricultural relationship resulted in a $2.567 million charge-off in Q2. The company said the charge-off, loan growth and a higher forecast for California unemployment contributed to the $2.6 million provision. The filing also reports two modified agricultural loans totaling $4.005 million that defaulted and were charged down.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance and reserve for unfunded commitments by a combined $1.3 million and reduced opening retained earnings by $916,000 after tax.
- Q2 loan interest income included $1.285 million recognized following a paydown on a non-performing agricultural loan relationship. First-half income also included the acquisition gain; therefore, reported earnings include these unusual items.
- Available-for-sale securities fair value was $587.7 million versus amortized cost of $650.1 million. Management stated it did not intend to sell the securities and did not expect to be required to sell them before recovery; a forced sale could make unrealized losses affect earnings and capital.
Liquidity, outlook and risks
- Cash, certificates of deposit and available-for-sale securities totaled $813.7 million, or 42.5% of assets. Additional stated liquidity sources included $122.0 million in unsecured bank lines, $378.0 million of remaining FHLB borrowing capacity, and $615.5 million in par value of unpledged securities eligible for the Bank Term Funding Program, subject to its terms and collateral requirements.
- Deposits increased overall, but management attributed the balance partly to acquired deposits and brokered-deposit purchases and noted seasonal fluctuations and deposit outflows related to market conditions and monetary policy. Management said future deposit balances depend in part on Federal Reserve actions and competition.
- Off-balance-sheet amounts included $198.4 million of undisbursed loan commitments, $1.3 million of standby letters of credit, and $1.9 million of commitments to sell loans. The reserve for unfunded lending commitments was $1.2 million. Commitments do not necessarily represent future cash requirements.
- The filing provides no specific full-year earnings or operating guidance. It identifies interest rates, deposit competition and funding costs, banking-industry confidence, economic weakness, real-estate concentration, agricultural and weather-related risks, credit quality, cybersecurity, and regulatory changes as risks. The filing’s forward-looking-statement discussion references an expectation of no cash dividend in the foreseeable future.
- The company reported no material pending legal proceedings and stated that disclosure controls were effective as of June 30, 2023. It reported no material change in internal control over financial reporting during the quarter.
Key investor verification points
- Track the agricultural fraud-related exposure, collectability and collateral, subsequent recoveries, and whether further charge-offs or provision increases are needed.
- Assess deposit stability and composition, including brokered and acquired deposits, deposit pricing, and the effect of competition on funding costs and net interest margin.
- Monitor the securities portfolio’s unrealized losses, duration, liquidity and potential effect on capital if liquidity needs require asset sales.
- Review commercial real-estate concentration and changes in criticized or classified loans; verify that allowance levels remain adequate under changing economic forecasts.
- Evaluate the acquired branches’ deposit retention, integration costs, fair-value adjustments and contribution to recurring earnings apart from the bargain-purchase gain.