FIRST NORTHERN COMMUNITY BANCORP - Quarter Report: 2023 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

(Mark one)

 

 

For the Quarterly Period Ended March 31, 2023

 

OR

 

 

For the transition period from _______________ to _______________

 

Commission File Number 000-30707

 

FIRST NORTHERN COMMUNITY BANCORP

(Exact name of registrant as specified in its charter)

 

 

195 N. First Street, Dixon, California		95620
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 

The number of shares of Common Stock outstanding as of May 8, 2023 was 14,735,407.

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FIRST NORTHERN COMMUNITY BANCORP

 

INDEX

 

PART I – FINANCIAL INFORMATION

 

FIRST NORTHERN COMMUNITY BANCORP

 

ITEM I.    – FINANCIAL STATEMENTS (UNAUDITED) 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

See notes to unaudited condensed consolidated financial statements.

FIRST NORTHERN COMMUNITY BANCORP

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

See notes to unaudited condensed consolidated financial statements.

FIRST NORTHERN COMMUNITY BANCORP

 

See notes to unaudited condensed consolidated financial statements.

FIRST NORTHERN COMMUNITY BANCORP

 

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data)

See notes to unaudited condensed consolidated financial statements.

FIRST NORTHERN COMMUNITY BANCORP

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

See notes to unaudited condensed consolidated financial statements.

FIRST NORTHERN COMMUNITY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined.

The following accounting policies were updated from those disclosed in the Form 10-K for the year ended December 31, 2022 and were effective as of January 1, 2023.

Allowance for Credit Losses – Available-For-Sale Securities

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses.

Allowance for Credit Losses – Loans

The allowance for credit losses (ACL) is a valuation account that is deducted from the loan’s amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Management estimates the ACL using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. In determining the ACL, accruing loans with similar risk characteristics are generally evaluated collectively. To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators including historical credit losses have been statistically correlated with various econometrics, including California unemployment rate, and California gross domestic product. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. The Company utilized a reasonable and supportable forecast period of approximately eight quarters and obtained the forecast data from Moody’s Analytics. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process.

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments to evaluate and measure the ACL:

Commercial:

Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses.  These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above.  Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

Commercial Real Estate:

Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied.  Loans secured by owner-occupied real estate are primarily susceptible to changes in the market conditions of the related business.  This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles. These same risks apply to commercial loans whether secured by equipment, receivables or other personal property or unsecured.  Problem commercial real estate loans are generally identified by periodic review of financial information that may include financial statements, tax returns, payment history of the borrower, and site inspections.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral.  When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default.  Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resulting over-supply of space.  Losses are dependent on the value of underlying collateral at the time of default.  Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means.

Agriculture:

Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock.  Repayment is primarily from the sale of an agricultural product or service.  Agricultural loans are generally secured by inventory, receivables, equipment, and other real property.  Agricultural loans primarily are susceptible to changes in market demand for specific commodities.  This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as adverse weather conditions such as drought, fire, or floods.  Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.

Residential mortgage loans:  Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks; non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’s cash flow to sustain payments, and shortfalls in collateral value.  In general, non-payment is usually due to loss of employment and follows general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts.

Residential construction loans:  Construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the risks related to residential mortgage loans, but the added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion.  Losses are primarily related to underlying collateral value and changes therein as described above.  Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

Consumer:

Consumer loans, whether unsecured or secured, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’s cash flow to sustain payments, and shortfall in collateral value.  In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly the upward movements in the unemployment rate, loss of collateral value, inflation and demand shifts.

Unfunded commitments: The estimated credit losses associated with these unfunded lending commitments is calculated using the same models and methodologies noted above and incorporate utilization assumptions at time of default. The reserve for unfunded commitments is maintained on the condensed consolidated balance sheet in other liabilities.

Accrued interest receivable on loans is not included in the calculation of the allowance for credit losses.

Accounting Standards Adopted in 2023

On January 1, 2023, the Company adopted ASU 2016-03 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities, based on management’s intent to sell the security or likelihood the Company will be required to sell the security, before recovery of the amortized cost basis.

Results for the reporting periods beginning January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon adoption of CECL, the Company recognized an increase in the ACL for loans and reserve for unfunded commitments totaling $1,300,000 as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings of $916,000, net of deferred taxes of $384,000.

On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.  For public business entities, these amendments require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20.  Results for the reporting periods beginning January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.

Recently Issued Accounting Pronouncements

In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope.  This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.  An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.   An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.  In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.  This ASU extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848.  ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.  The Company is in the process of evaluating the provisions of this ASU but does not expect it to have a material impact on the Company’s consolidated financial statements.

In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.  These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.   This ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

The Company had no allowance for credit losses on available-for-sale securities as of March 31, 2023.

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2022 are summarized as follows:

Amortized cost and fair value exclude accrued interest receivable of $2,119,000 and $2,151,000 at March 31, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  In addition, factors such as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities.

The fair value of investment securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for securities declines. As a result, other than temporary impairments may occur in the future.

4.	LOANS AND ALLOWANCE FOR CREDIT LOSSES

($ in thousands)		March 31, 2023				December 31, 2022
Commercial		$	103,290			$	106,771
Commercial Real Estate			661,545				645,166
Agriculture			103,364				114,040
Residential Mortgage			93,339				92,669
Residential Construction			12,551				10,167
Consumer			15,204				15,287
			989,293				984,100
Allowance for credit losses			(15,484	)			(14,792	)
Net deferred origination fees and costs			406				830
Loans, net		$	974,215			$	970,138

($ in thousands)		30-59 days Past Due & Accruing				60-89 days Past Due & Accruing				90 days or More Past Due & Accruing				Nonaccrual Loans				Total Past Due & Nonaccrual Loans				Current & Accruing Loans				Total Loans				Nonaccrual loans with No ACL
March 31, 2023
Commercial		$	747			$	49			$	403			$	—			$	1,199			$	102,091			$	103,290			$	—
Commercial Real Estate			—				—				—				—				—				661,545				661,545				—
Agriculture			—				—				—				7,416				7,416				95,948				103,364				7,416
Residential Mortgage			887				—				—				119				1,006				92,333				93,339				119
Residential Construction			—				—				—				—				—				12,551				12,551				—
Consumer			775				—				—				620				1,395				13,809				15,204				620
Total		$	2,409			$	49			$	403			$	8,155			$	11,016			$	978,277			$	989,293			$	8,155
December 31, 2022
Commercial		$	41			$	—			$	403			$	—			$	444			$	106,327			$	106,771			$	—
Commercial Real Estate			—				—				—				—				—				645,166				645,166				—
Agriculture			—				—				—				7,416				7,416				106,624				114,040				7,416
Residential Mortgage			—				—				—				123				123				92,546				92,669				123
Residential Construction			—				—				—				—				—				10,167				10,167				—
Consumer			—				—				—				637				637				14,650				15,287				637
Total		$	41			$	—			$	403			$	8,176			$	8,620			$	975,480			$	984,100			$	8,176

(in thousands)
		Term Loans Amortized Cost Basis by Origination Year - As of March 31, 2023
		2023				2022				2021				2020				2019				Prior				Revolving Loans Amortized Cost Basis				Total
Commercial
Pass		$	1,178			$	21,990			$	25,632			$	7,214			$	9,538			$	10,088			$	24,307			$	99,947
Special Mention			—				—				—				—				—				—				—				—
Substandard			50				—				2,411				583				—				—				299				3,343
Doubtful/Loss			—				—				—				—				—				—				—				—
Total Commercial loans		$	1,228			$	21,990			$	28,043			$	7,797			$	9,538			$	10,088			$	24,606			$	103,290
Current Period Write-offs			—				(41	)			—				—				(86	)			—				—				(127	)
Current Period Recoveries			—				—				—				—				—				23				—				23
Current Period Net Write-offs			—				(41	)			—				—				(86	)			23				—				(104	)
Commercial Real Estate
Pass		$	26,972			$	171,926			$	203,578			$	46,080			$	61,457			$	129,969			$	7,116			$	647,098
Special Mention			—				—				—				863				3,692				—				—				4,555
Substandard			—				—				173				2,622				6,064				1,033				—				9,892
Doubtful/Loss			—				—				—				—				—				—				—				—
Total Commercial Real Estate loans		$	26,972			$	171,926			$	203,751			$	49,565			$	71,213			$	131,002			$	7,116			$	661,545
Current Period Write-offs			—				—				—				—				—				—				—				—
Current Period Recoveries			—				—				—				—				—				—				—				—
Current Period Net Write-offs			—				—				—				—				—				—				—				—
Agriculture
Pass		$	5,292			$	20,525			$	24,483			$	9,082			$	4,483				12,114			$	18,905			$	94,884
Special Mention			—				—				—				—				—				1,064				—				1,064
Substandard			—				—				1,148				—				—				—				6,268				7,416
Doubtful/Loss			—				—				—				—				—				—				—				—
Total Agriculture loans		$	5,292			$	20,525			$	25,631			$	9,082			$	4,483			$	13,178			$	25,173			$	103,364
Current Period Write-offs			—				—				—				—				—				—				—				—
Current Period Recoveries			—				—				—				—				—				—				—				—
Current Period Net Write-offs			—				—				—				—				—				—				—				—

(in thousands)
		Term Loans Amortized Cost Basis by Origination Year - As of March 31, 2023
		2023				2022				2021				2020				2019				Prior				Revolving Loans Amortized Cost Basis				Total
Residential Mortgage
Pass		$	3,643			$	24,392			$	27,350			$	14,680			$	6,205			$	16,716			$	—			$	92,986
Special Mention			—				—				—				—				—				195				—				195
Substandard			—				39				—				—				—				119				—				158
Doubtful/Loss			—				—				—				—				—				—				—				—
Total Residential Mortgage loans		$	3,643			$	24,431			$	27,350			$	14,680			$	6,205			$	17,030			$	—			$	93,339
Current Period Write-offs			—				—				—				—				—				(3	)			—				(3	)
Current Period Recoveries			—				—				—				—				—				—				—				—
Current Period Net Write-offs			—				—				—				—				—				(3	)			—				(3	)
Residential Construction
Pass		$	115			$	8,378			$	3,594			$	464			$	—			$	—			$	—			$	12,551
Special Mention			—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				—				—				—
Doubtful/Loss			—				—				—				—				—				—				—				—
Total Residential Construction loans		$	115			$	8,378			$	3,594			$	464			$	—			$	—			$	—			$	12,551
Current Period Write-offs			—				—				—				—				—				—				—				—
Current Period Recoveries			—				—				—				—				—				—				—				—
Current Period Net Write-offs			—				—				—				—				—				—				—				—
Consumer
Pass		$	234			$	897			$	173			$	207			$	82			$	443			$	12,548			$	14,584
Special Mention			—				—				—				—				—				—				—				—
Substandard			—				—				—				—				—				—				620				620
Doubtful/Loss			—				—				—				—				—				—				—				—
Total Consumer loans		$	234			$	897			$	173			$	207			$	82			$	443			$	13,168			$	15,204
Current Period Write-offs			(1	)			—				—				—				—				—				—				(1	)
Current Period Recoveries			—				—				—				—				—				—				—				—
Current Period Net Write-offs			(1	)			—				—				—				—				—				—				(1	)
Total Loans
Pass		$	37,434			$	248,108			$	284,810			$	77,727			$	81,765			$	169,330			$	62,876			$	962,050
Special Mention			—				—				—				863				3,692				1,259				—				5,814
Substandard			50				39				3,732				3,205				6,064				1,152				7,187				21,429
Doubtful/Loss			—				—				—				—				—				—				—				—
Total Loans		$	37,484			$	248,147			$	288,542			$	81,795			$	91,521			$	171,741			$	70,063			$	989,293
Current Period Write-offs		$	(1	)		$	(41	)		$	—			$	—			$	(86	)		$	(3	)		$	—			$	(131	)
Current Period Recoveries		$	—			$	—			$	—			$	—			$	—			$	23			$	—			$	23
Current Period Net Write-offs		$	(1	)		$	(41	)		$	—			$	—			$	(86	)		$	20			$	—			$	(108	)