First Northern Community Bancorp — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with 2021. The company is a California community bank holding company operating through First Northern Bank of Dixon in Northern California.
Financial performance and position
| Metric | 2022 | 2021 |
|---|---|---|
| Net income | $15.9 million | $14.2 million |
| Basic / diluted earnings per share | $1.11 / $1.09 | $0.96 / $0.95 |
| Net interest income | $54.7 million | $46.3 million |
| Net interest margin | 3.06% | 2.62% |
| Non-interest income | $6.9 million | $7.9 million |
| Non-interest expense | $39.1 million | $36.2 million |
| Net cash from operating activities | $21.8 million | $25.3 million |
Net income rose 12.0%. Higher net interest income, supported by loan growth and rising rates, more than offset higher credit-loss provision, lower non-interest income, higher operating expenses, and increased taxes. The filing reports no revenue line labeled “total revenue”; interest and dividend income was $55.9 million.
- Balance sheet: Assets were $1.871 billion, down 1.5%; deposits were $1.727 billion, essentially flat; loans, net of allowance, were $970.1 million, up 13.8% from $852.7 million.
- Loan mix and credit: Commercial real estate loans were $645.2 million, or 65.6% of gross loans. The allowance was $14.8 million, 1.50% of loans, versus $14.0 million and 1.61% a year earlier. Nonperforming loans were $8.6 million (0.9% of loans), down from $10.2 million; the 2022 provision was $0.9 million versus a $1.5 million reversal in 2021.
- Liquidity and debt: Cash and cash equivalents declined to $187.4 million from $345.9 million. The net-loans-to-deposits ratio increased to 56.2% from 49.4%. There were no FHLB advances or other borrowings outstanding at year-end; available capacity included $365.8 million from the FHLB and $122.0 million in correspondent-bank lines. Management said liquidity was adequate.
- Capital: Stockholders’ equity fell to $125.0 million from $150.9 million, principally reflecting a $42.3 million after-tax decline in accumulated other comprehensive income, mainly unrealized securities losses. Bank ratios remained above “well-capitalized” thresholds: leverage 8.7%, CET1 14.7%, and total risk-based capital 15.9%.
- Cash flows: Investing activities used $178.8 million, primarily reflecting loan growth and securities purchases; financing activities used $1.5 million, mainly reflecting the slight deposit decline. Net cash and cash equivalents decreased $158.5 million.
Material changes and unusual items
- Rising interest rates improved asset yields and net interest margin, while increasing the market-value losses on available-for-sale securities. Their fair value was $618.1 million against $683.8 million amortized cost, a $65.8 million pretax unrealized loss. Management said it did not intend, and was not likely required, to sell the securities before recovery.
- Loan growth was led by commercial real estate, up 22.4%, and residential mortgage loans, up 21.7%. Commercial loans declined 21.4%, largely due to PPP forgiveness and payoffs; PPP loans outstanding fell to $0.5 million from $37.3 million.
- Mortgage loan-sale gains fell to $0.1 million from $1.5 million as higher rates reduced originations and refinancing. Expenses rose 7.9%, including higher staffing and compensation, legal and consulting costs, and reserves for unfunded commitments.
- On January 20, 2023, the Bank completed its acquisition of three California branches, assuming approximately $116 million of deposits and acquiring approximately $4 million of loans. This was subsequent to year-end; the purchase-price allocation was not complete when the 10-K was filed.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management said the Bank expected to have adequate liquidity for normal operations in 2023. The company does not expect to pay cash dividends in the foreseeable future; it has declared annual 5% stock dividends.
- CECL became effective for the company on January 1, 2023. Management estimated the allowance for loans and unfunded commitments would rise from approximately $15.5 million to $16.7–$18.3 million, with an estimated after-tax equity reduction of $0.9–$2.1 million. Actual effects depend on economic assumptions and portfolio conditions.
- Key risks include concentrated California commercial real estate and other property-related lending; credit deterioration from economic weakness, inflation, higher rates, or falling collateral values; deposit repricing and competition; and interest-rate-driven securities valuation changes. Agricultural borrowers also face drought, wildfire, flooding, and other climate-related risks. Cybersecurity, regulatory, and operational risks are discussed in the filing.
- Commitments to extend credit and standby letters of credit totaled $207.5 million at year-end; many credit commitments may expire undrawn. Management did not expect ordinary-course litigation to materially affect results. The financial statements received an unmodified audit opinion; management concluded internal control over financial reporting was effective, while the auditor did not provide an opinion on internal controls.
Important facts for investors to verify
- Whether the improved net interest margin persists as deposit costs adjust to market rates and customer balances shift.
- Commercial real estate concentration, borrower performance, collateral values, and the status of the $8.6 million in nonperforming loans.
- Available-for-sale securities losses, liquidity needs, and whether any securities may need to be sold before their values recover.
- The realized CECL adjustment and subsequent credit-loss trends, including reserves for unfunded commitments.
- The acquired branches’ final purchase accounting, integration costs, deposit retention, and contribution to earnings.
- Changes in liquidity, deposit composition, capital ratios, and the thinly traded OTC share market.