FIRST NORTHERN COMMUNITY BANCORP annual report, FY2023

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First Northern Community Bancorp — FY2023 Form 10-K

Reporting period: Year ended December 31, 2023; comparisons are primarily with FY2022. This is an annual filing, not a standalone fourth-quarter report. First Northern Community Bancorp is a California bank holding company whose subsidiary, First Northern Bank of Dixon, provides community banking services in Northern California. The Company acquired three California branches from Columbia State Bank in January 2023.

Financial performance and condition

  • Profit: Net income was $21.6 million, up 35.7% from $15.9 million. Basic and diluted EPS were $1.42 and $1.41, respectively, versus $1.05 and $1.04.
  • Interest income and margin: Net interest income rose 21.7% to $66.5 million. Net interest margin increased to 3.70% from 3.06%; net interest spread was 3.34% versus 2.99%. Total interest and dividend income was $74.1 million, while interest expense rose to $7.6 million from $1.2 million as deposit rates increased.
  • Other income and expenses: Non-interest income increased 13.2% to $7.8 million, including a $1.4 million bargain-purchase gain from the branch acquisition. Non-interest expense rose 11.7% to $43.6 million, with higher personnel, occupancy, data-processing and acquired-intangible costs. Income tax expense was $8.1 million; the effective tax rate was 27.3%.
  • Loans and credit: Loans, net of allowance, were $1.052 billion, up 8.5%. Commercial real estate loans were $721.7 million, about 67.5% of gross loans. The allowance for credit losses was $16.6 million, or 1.55% of loans, versus $14.8 million and 1.50% in 2022. Provision expense was $1.1 million. Non-performing assets were $8.3 million, or 0.5% of assets; non-accrual loans fell to $4.0 million from $8.2 million. Net charge-offs were $0.1 million.
  • Deposits and liquidity: Deposits declined 2.0% to $1.692 billion. Approximately 37% of deposits were uninsured, down from 45%. Cash and cash equivalents were $149.2 million; available-for-sale securities were $572.4 million. The Bank reported $104.5 million of excess Federal Reserve reserves, $395.5 million of FHLB borrowing capacity and $132 million in unsecured correspondent-bank lines. Management considered liquidity adequate and said it had means to fund normal operations in 2024.
  • Debt and capital: No FHLB advances, Federal Funds purchased or long-term borrowings were outstanding at year-end. Stockholders’ equity rose to $159.2 million from $125.0 million, aided by earnings and a $12.8 million improvement in other comprehensive income. Bank capital ratios were 9.7% Tier 1 leverage, 14.8% CET1 and Tier 1 risk-based, and 16.0% total risk-based; the Bank was categorized as well capitalized.
  • Cash flow: Operating activities provided $27.3 million, compared with $21.8 million. Investing activities provided $83.6 million, including $103.4 million of cash acquired in the branch transaction; financing activities used $149.1 million, principally reflecting deposit outflows. Cash and cash equivalents decreased $38.2 million to $149.2 million.

Material changes and notable items

  • Higher market rates and loan growth drove higher asset yields and net interest income, while deposit interest expense increased substantially. The federal funds target range was 5.25%–5.50% at year-end.
  • The acquired Colusa, Orland and Willows branches added approximately $116 million of deposits and $4 million of loans at closing. The transaction generated a $1.4 million bargain-purchase gain and a $5.0 million core deposit intangible.
  • Available-for-sale securities had $48.7 million of gross unrealized losses at year-end, down from $65.8 million in 2022. Management attributed the losses primarily to interest rates, stated it did not intend to sell the securities and concluded it was not more likely than not it would be required to sell before recovery. No securities credit-loss allowance was recorded.
  • The Company adopted CECL on January 1, 2023, recording a $1.3 million increase in loan and unfunded-commitment reserves and a $0.9 million after-tax reduction to retained earnings. The auditor identified the allowance for credit losses and CECL-related estimates as a critical audit matter.
  • A $2.6 million charge-off related to suspected customer fraud on one agricultural relationship was fully recovered later in 2023. The filing reports no material pending litigation and no material cybersecurity impact to date.

Outlook, risks and contingencies

The filing provides no specific numerical earnings, revenue or margin guidance. Management expects liquidity to support normal 2024 operations but cautions that actual results may differ from forward-looking statements. Key exposures include deposit competition and funding costs, interest-rate movements, potential recession or persistent inflation, credit deterioration and collateral values—especially in commercial real estate and other real-estate lending—and agricultural, weather and wildfire risks. Cybersecurity, third-party technology, regulatory changes and possible future deposit-insurance assessments are also identified risks.

Management’s credit-loss sensitivity analysis indicates that more pessimistic external risk factors could add approximately $3.4 million to the allowance on existing loans. The Company does not expect to pay a cash dividend in the foreseeable future; it declared a 5% stock dividend payable in March 2024. Its common stock trades over the counter, with limited liquidity.

Most important facts for investors to verify

  • Whether deposits remain stable and funding costs continue to rise, particularly given the 37% uninsured-deposit share and the year-over-year deposit decline.
  • Commercial real estate concentration, criticized and potential-problem loan trends, the $3.4 million allowance sensitivity, and subsequent performance of the past-due residential construction loan.
  • Whether securities unrealized losses recover or create pressure to sell, and how available liquidity and pledged collateral compare with potential deposit outflows.
  • Whether recurring earnings excluding the $1.4 million acquisition gain sustain the FY2023 improvement, and how the acquired branches affect expenses, deposits and profitability.
  • The filing’s capital and liquidity disclosures alongside subsequent regulatory developments; management states the Bank was well capitalized, and the auditor gave an unqualified opinion on the financial statements.