First Northern Community Bancorp — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement amounts are generally in thousands unless stated otherwise. The company operates First Northern Bank of Dixon, serving Northern California’s Sacramento Valley.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest and dividend income | $18.26m | $14.48m | $54.45m | $39.55m |
| Net interest income | $15.87m | $14.21m | $49.64m | $38.86m |
| Provision for credit losses | $0.50m | $0.30m | $3.10m | $0.90m |
| Net income | $4.62m | $4.57m | $14.67m | $11.16m |
| Diluted EPS | $0.32 | $0.31 | $1.01 | $0.77 |
| Net interest margin | 3.51% | 3.12% | 3.68% | 2.92% |
- Quarterly trend: Q3 net income rose 1.1% year over year. Net interest income increased 11.7%, while net interest margin was down from 3.97% in Q2 2023. Deposit interest expense increased sharply year over year, to $2.39m from $0.27m in Q3.
- Nine-month trend: Net income rose 31.5%. Management attributed stronger net interest income principally to higher loan yields and balances and higher rates earned on bank deposits; higher deposit costs and credit-loss provision partly offset those gains. The $1.405m bargain purchase gain from the branch acquisition also contributed to year-to-date non-interest income and earnings.
- Operating costs and returns: Nine-month non-interest expense increased 14.8% to $32.53m. Annualized return on average assets was 1.02% for the nine months (0.96% in Q3); return on average equity was 14.41% for the nine months (13.11% in Q3).
- Balance sheet at September 30: Assets were $1.902bn; loans held for investment, net, were $1.037bn, with an additional $0.369m held for sale; available-for-sale securities were $567.4m; deposits were $1.746bn; and stockholders’ equity was $136.5m. Compared with December 31, 2022, assets grew 1.7%, loans (including held-for-sale) 6.9%, and deposits 1.1%; securities declined 8.2%.
- Credit: The loan allowance was $16.15m, or 1.53% of total loans; nonaccrual loans were $6.12m, down from $8.18m at year-end. Total substandard loans increased to $23.73m from $15.07m. A suspected customer-fraud event involving one agricultural relationship led to a $2.567m charge-off during the first nine months.
- Cash flow and funding: Nine-month operating cash flow was $25.0m; investing activities provided $80.0m, including $103.4m of cash acquired in the branch transaction; financing activities used $95.3m. Cash and cash equivalents ended at $197.1m. The company reported no borrowings outstanding.
- Liquidity and capital: Cash, certificates of deposit and available-for-sale securities totaled $785.2m, or 41.3% of assets. The loan-to-deposit ratio was 59.4%, versus 56.2% at year-end. Available facilities included $122m in unsecured bank lines and $405.6m of remaining FHLB capacity, subject to collateral requirements. Bank capital ratios exceeded well-capitalized thresholds: leverage 9.21%, common equity Tier 1 and Tier 1 risk-based 14.31%, and total risk-based 15.56%.
Material changes, outlook, and risks
- On January 20, 2023, the company acquired three California branches in Colusa, Willows and Orland. The transaction brought in $115.9m of deposits and included $4.0m of loans; it generated a $1.405m bargain purchase gain and a $4.970m core deposit intangible. Management said the acquisition expands its footprint and deposit base and is expected to support growth and profitability. Acquired branch results were commingled with the company’s operations, so separate post-acquisition revenue and earnings were not provided.
- The company adopted CECL on January 1, 2023, recording a $1.3m increase in the allowance and unfunded-commitment reserve and a $0.916m after-tax reduction to opening retained earnings.
- Available-for-sale securities had $69.5m of gross unrealized losses at quarter-end, mostly on securities in a loss position for over 12 months. Management attributed the losses to market interest rates, considered the securities investment grade, and said it did not intend to sell them and was not more likely than not to be required to sell before recovery. No credit-loss allowance was recorded for these securities. The accumulated other comprehensive loss balance was $49.2m.
- Management gave no specific numerical earnings or operating guidance in the provided filing text. It cited loan demand, Federal Reserve actions and heightened deposit competition as factors affecting the remainder of 2023. The filing highlights risks from deposit outflows, higher funding costs, interest-rate-driven securities losses, economic weakness, real-estate concentration, credit deterioration, regulatory changes and cybersecurity threats. Real-estate mortgage loans represented about 86% of loans, with construction loans about 2%.
- There were no material pending legal proceedings reported. Management concluded disclosure controls were effective as of September 30, 2023 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether deposit pricing, mix and balances remain stable as time deposits grow and competition for funding continues; assess the role of brokered deposits in the year-to-date funding picture.
- Subsequent developments in the agricultural relationship tied to the suspected fraud, related collateral and recoveries, and trends in delinquent, nonaccrual and substandard loans.
- Whether the $69.5m unrealized securities loss position changes, and the potential effect of any need to sell securities on earnings, liquidity or capital.
- How net interest margin evolves as asset yields and deposit costs reprice; Q3 margin declined from Q2 despite year-over-year improvement.
- Whether the branch acquisition delivers the expected deposit retention, customer growth and profitability, and whether purchase-accounting fair values change during the measurement period.
- Capital and liquidity headroom under stress, including the availability and collateral terms of stated borrowing facilities and the effect of deposit outflows or additional credit-loss provisions.