First Northern Community Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; balance-sheet comparisons are with December 31, 2021 unless noted. Unaudited. The company’s subsidiary, First Northern Bank of Dixon, is a California community bank serving Northern California.
Financial performance and condition
| Metric | Q1 2022 | Comparable / prior period |
|---|---|---|
| Net income | $3.041 million | $3.178 million in Q1 2021, down 4.3% |
| Diluted EPS | $0.22 | $0.22 in Q1 2021 |
| Net interest income | $11.638 million | $10.872 million in Q1 2021, up 7.1% |
| Net interest margin | 2.67% | 2.67% in Q1 2021 |
| Total assets | $1.868 billion | $1.899 billion at year-end 2021, down 1.7% |
| Net loans, including held-for-sale | $874.4 million | $853.8 million at year-end, up 2.4% |
| Deposits | $1.716 billion | $1.728 billion at year-end, down 0.7% |
| Allowance for loan losses | $14.258 million; 1.60% of loans | $13.952 million; 1.61% at year-end |
- Total interest and dividend income was $11.847 million, versus $11.096 million in Q1 2021. Interest expense fell to $209,000 from $224,000.
- Net interest income after the $300,000 loan-loss provision was $11.338 million. The provision was unchanged from Q1 2021.
- Non-interest income declined 16.2% to $1.918 million, mainly because gains on loan sales fell to $68,000 from $639,000 as higher rates slowed mortgage refinancing. Non-interest expense rose 7.1% to $9.102 million, including higher other expenses and legal fees.
- Operating cash flow was $1.995 million; investing activities used $60.845 million and financing activities used $12.329 million. Cash and cash equivalents fell $71.179 million during the quarter to $274.750 million.
- Stockholders’ equity was $134.130 million, down from $150.911 million at year-end, largely reflecting a $19.963 million after-tax other comprehensive loss on securities. The company reported no other-than-temporary impairment and said it did not intend, and was not likely to be required, to sell the securities before recovery.
- The filing reports no FHLB advances at March 31, 2022. Available liquidity included $122 million of unsecured bank lines and $332.876 million of remaining FHLB borrowing capacity, subject to collateral requirements. The loan-to-deposit ratio was 51.0%, versus 49.4% at year-end.
- The Bank’s reported capital ratios exceeded well-capitalized thresholds: leverage 8.37%, common equity Tier 1 14.86%, Tier 1 risk-based 14.86%, and total risk-based 16.11%.
Material changes and operating developments
- Loans held for investment increased primarily through commercial real estate originations and purchases; PPP forgiveness payments partly offset growth. Commercial real estate represented approximately 63% of loans, and the filing says approximately 83% of loans were secured by real estate.
- PPP loans outstanding fell to $14.8 million from $37 million at year-end. The company recognized approximately $1.4 million of PPP fees in Q1, compared with $0.8 million a year earlier, and expected a significant portion of remaining PPP loans to be forgiven and reimbursed by the SBA during 2022.
- Non-accrual loans declined to $9.283 million from $10.197 million; non-performing assets net of guarantees were $9.250 million, or 0.5% of assets. Most non-accrual balances were agricultural loans. There were no loans 90 days past due and still accruing.
- Available-for-sale securities were $645.155 million at fair value. Their aggregate unrealized losses were $32.479 million before tax at quarter-end, compared with $8.677 million at year-end; management attributed the decline in values mainly to rising risk-free rates, not credit quality.
- The company declared a 5% stock dividend, paid March 25, 2022. It repurchased 1,485 shares during the quarter under its repurchase program.
Outlook, risks, and contingencies
- The filing provides no specific earnings or financial guidance. Management noted that the Federal Reserve raised its target federal funds range by 25 basis points during Q1. The effect of further rate changes on loan yields, deposit costs, securities values, and mortgage activity remains a key uncertainty.
- Key risks include the concentration in real estate lending, commercial real estate conditions, agricultural exposures and weather, inflation, economic and pandemic-related effects, and potential deterioration in collateral values or borrower repayment capacity.
- Undisbursed loan commitments were $208.071 million; standby letters of credit were $1.812 million; and commitments to sell loans were $630,000. These off-balance-sheet amounts do not necessarily represent future cash requirements. The reserve for unfunded commitments was $700,000.
- The company was evaluating adoption of the current expected credit losses standard (CECL), effective for it January 1, 2023; the eventual accounting adjustment was not quantified. It was also evaluating the effects of the 2022 amendments concerning troubled debt restructurings and loan disclosures.
- Management said disclosure controls were effective as of March 31, 2022, with no material change in internal control over financial reporting during the quarter. The company reported no material pending legal proceedings.
Important facts for investors to verify
- Whether loan growth, particularly in commercial real estate, is accompanied by stable credit quality and adequate allowance coverage.
- How the securities portfolio’s unrealized losses and future interest-rate movements affect equity, liquidity, and potential realized losses.
- Whether PPP forgiveness and SBA reimbursements occur as expected, and how the runoff of PPP fees affects loan income.
- How deposit trends and funding costs respond to rate increases, and whether stated borrowing capacity remains available on acceptable terms.
- The expected impact and implementation progress of CECL adoption in 2023.