First Northern Community Bancorp — Q1 2024 Form 10-Q
Business context and period: The company’s subsidiary, First Northern Bank of Dixon, is a California state-chartered community bank serving the Sacramento Valley region. This unaudited report covers the three months ended March 31, 2024; balance-sheet comparisons are to December 31, 2023. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2024 / March 31, 2024 | Comparable period / December 31, 2023 |
|---|---|---|
| Net interest income | $15.36 | $15.98 in Q1 2023 |
| Net interest margin | 3.49% | 3.55% in Q1 2023; 3.76% in Q4 2023 |
| Net income | $4.28 | $5.49 in Q1 2023 |
| Diluted earnings per share | $0.28 | $0.36 in Q1 2023 |
| Net cash from operating activities | $2.65 | $5.04 in Q1 2023 |
| Total assets | $1,887.1 | $1,871.8 |
| Loans, net | $1,047.3 | $1,052.5 |
| Available-for-sale securities, at fair value | $558.4 | $572.4 |
| Total deposits | $1,708.9 | $1,692.4 |
| Cash and cash equivalents | $186.9 | $149.2 |
| Stockholders’ equity | $162.3 | $159.2 |
- Interest and dividend income rose to $18.54 million from $16.91 million, but deposit interest expense increased to $3.18 million from $0.93 million, contributing to lower net interest income. The reported year-over-year margin decline was 6 basis points.
- The company reported a $0.30 million reversal of provision for credit losses. Non-interest income was $1.51 million and non-interest expense was $11.23 million. The effective tax rate was 28.0%.
- Cash increased $37.7 million during the quarter. Cash provided by investing activities was $18.63 million and financing activities provided $16.42 million, principally reflecting a $16.43 million net increase in deposits.
- The loan-to-deposit ratio was 61.3%, down from 62.2%. The company reported no borrowings outstanding. Available liquidity comprised $763.5 million of cash, certificates of deposit and available-for-sale securities, or 40.5% of assets; it also had $130 million in unsecured bank lines and $404.6 million of remaining FHLB borrowing capacity, subject to collateral requirements.
- The Bank’s reported capital ratios exceeded well-capitalized thresholds: leverage 10.11%, common equity Tier 1 and Tier 1 risk-based 15.29%, and total risk-based 16.54%.
Material changes and notable items
- Net income declined 22.1% year over year. Q1 2023 included a one-time $1.4 million pre-tax bargain purchase gain from the acquisition of three branches, which affects the comparison. Diluted EPS declined 22.2%.
- Net interest income fell 3.9% year over year as higher loan income was more than offset by sharply higher deposit costs. Average interest-bearing deposit cost rose to 1.35% from 0.38%.
- Deposits increased 1.0% from year-end, with growth in time deposits. Approximately 37% of deposits were uninsured at both March 31, 2024 and December 31, 2023.
- Loans decreased 0.5%, primarily due to agricultural loan payoffs. Commercial real estate loans were $726.1 million, the largest loan category.
- Non-accrual loans rose to $8.78 million from $4.00 million at year-end, including a $4.00 million residential construction loan. There were no loans 90 days or more past due and still accruing at March 31. Non-performing assets were 0.5% of total assets.
- Substandard loans excluding non-performing loans totaled $18.44 million, up from $12.33 million at year-end. The allowance for credit losses was $16.25 million, or 1.52% of loans, versus $16.60 million, or 1.55%, at year-end; net charge-offs were $0.10 million.
- Available-for-sale securities had $50.38 million of gross unrealized losses at quarter-end, including $49.96 million on securities in a loss position for at least 12 months. Management attributed the losses primarily to interest rates, stated it did not intend to sell and did not expect to be required to sell before recovery; no securities credit-loss allowance was recorded. Accumulated other comprehensive loss was $35.19 million.
- The company declared a 5% stock dividend, paid March 25, 2024. Shares outstanding were 15,550,731 at March 31 and 15,529,531 as of May 6, 2024.
Outlook, risks and contingencies
- The filing provides no quantified earnings, margin, loan-growth or deposit-growth guidance. Management says loan demand will depend partly on economic and competitive conditions and deposit trends will depend on Federal Reserve actions and competition.
- Management cited stable forecast national unemployment and GDP, together with lower loans, as factors behind the credit-loss provision reversal. It stated the allowance appropriately reflected expected losses at quarter-end.
- A newly highlighted risk is reduced availability and rising cost of homeowners insurance in California. The bank’s real estate mortgage and construction loans represented approximately 89% and 3%, respectively, of total loan principal; uninsured or underinsured property losses could increase credit losses.
- Other stated exposures include interest-rate and deposit competition risk, economic and credit-cycle risk, California wildfire and other natural-disaster exposure, cybersecurity, and regulatory and compliance risks. The securities portfolio’s unrealized losses could become recognized losses if securities are sold or credit conditions deteriorate.
- Off-balance-sheet commitments totaled $181.9 million, including $179.9 million of undisbursed loan commitments, $1.24 million of standby letters of credit and $0.77 million of commitments to sell loans. The reserve for unfunded commitments was $1.10 million. No material pending legal proceedings were reported; routine litigation was not expected to have a material adverse effect.
- Management concluded disclosure controls and procedures were effective as of March 31, 2024, and reported no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Whether deposit pricing and mix continue to pressure net interest income and margin, particularly as time deposits grow and mature.
- Whether the increase in non-accrual and substandard loans persists, especially the residential construction exposure and agricultural portfolio, and whether the allowance remains adequate.
- The sensitivity of capital and earnings to California property-insurance availability, wildfire exposure and real-estate collateral values.
- Whether securities unrealized losses change and whether liquidity needs could require sales before recovery of amortized cost.
- How uninsured deposits, available borrowing capacity and deposit competition evolve; the filing reports no borrowings outstanding at quarter-end.
- The distinction between the year-over-year earnings decline and the prior-year bargain purchase gain, and the lack of specific forward financial guidance.