ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report may include forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for
those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our forecasts and expectations. See Part I, Item 1A. “Risk Factors,” and the other risks described in our
2021 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and the other risks described in our Quarterly Reports on Form 10-Q for factors to be considered when reading any forward-looking statements
in this filing.
This report and other reports or statements which we may release may include forward-looking statements, which are subject to the “safe harbor” created by section 27A of the Securities Act of
1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles and when we are speaking on behalf
of the Company. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words “believe,” “expect,” “target,” “anticipate,” “intend,” “plan,” “seek,”
“strive,” “estimate,” “potential,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or “may.” These forward-looking statements are intended to provide investors with
additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information available to us at the date of these statements. We do
not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date any forward-looking statements are made.
In this document and in other SEC filings or other public statements, for example, we make forward-looking statements relating to the following topics, among others:
|
● |
Our business objectives, strategies and initiatives, our organizational structure, the growth of our business and our competitive position and prospects, and the effect of competition on our business and strategies
|
|
● |
Our assessment of significant factors and developments that have affected or may affect our results
|
|
● |
Legal and regulatory actions, and future legislative and regulatory developments, including the effects of the Dodd-Frank Wall Street Reform and Protection Act (the “Dodd-Frank Act”), the Economic
Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”), and other legislation and governmental measures introduced in response to the financial crisis which began in 2008 and the ensuing recession affecting the banking
system, financial markets and the U.S. economy, as well as the effect of the federal Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted in March 2020, in an effort to mitigate the consequences of the
coronavirus pandemic and the governmental actions in response to the pandemic
|
|
● |
Regulatory and compliance controls, processes and requirements and their impact on our business
|
|
● |
The costs and effects of legal or regulatory actions
|
|
● |
Expectations regarding draws on performance letters of credit and liabilities that may result from recourse provisions in standby letters of credit
|
|
● |
Our intent to sell or hold, and the likelihood that we would be required to sell, various investment securities
|
|
● |
Our regulatory capital requirements, including the capital rules established after the 2008 financial crisis by the U.S. federal banking agencies and our current intention not to elect to use the community
bank leverage ratio framework
|
|
● |
Expectations regarding our non-payment of a cash dividend on our common stock in the foreseeable future
|
|
● |
Credit quality and provision for credit losses and management of asset quality and credit risk, expectations regarding collections and expectations regarding the forgiveness and SBA reimbursement and
guarantee of loans made under the Paycheck Protection Program ("PPP") and the timing thereof
|
|
● |
Our allowances for loan losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, the adequacy of the allowance for loan losses, underwriting
standards, and risk grading
|
|
● |
Our assessment of economic conditions and trends and credit cycles and their impact on our business
|
|
● |
The seasonal nature of our business
|
|
● |
The impact of changes in interest rates and our strategy to manage our interest rate risk profile and the possible effect of changes in residential mortgage interest rates on new originations and
refinancing of existing residential mortgage loans
|
|
● |
Loan portfolio composition and risk grade trends, expected charge-offs, portfolio credit quality, our strategy regarding troubled debt restructurings (“TDRs”), delinquency rates and our underwriting
standards and our expectations regarding our recognition of interest income on loans that were provided payment deferrals upon completion of the payment forbearance period
|
|
● |
Our deposit base including renewal of time deposits
|
|
● |
The impact on our net interest income and net interest margin
|
|
● |
The effect of possible changes in the initiatives and policies of the federal and state bank regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, Securities and
Exchange Commission and other standard setters
|
|
● |
Tax rates and the impact of changes in the U.S. tax laws, including the Tax Cuts and Jobs Act
|
|
● |
Our pension and retirement plan costs
|
|
● |
Our liquidity strategies and beliefs concerning the adequacy of our liquidity position
|
|
● |
Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements or changes in accounting principles
|
|
● |
Expected rates of return, maturities, loss exposure, growth rates, yields, and projected results
|
|
● |
The possible impact of weather-related or other natural conditions, including drought, fire or flooding, seismic events, and related governmental responses, including related electrical power outages, on
economic conditions, especially in the agricultural sector
|
|
● |
Maintenance of insurance coverages appropriate for our operations
|
|
● |
Threats to the banking sector and our business due to cybersecurity issues and attacks and regulatory expectations related to cybersecurity
|
|
● |
Our expectations regarding the implementation of the expected loss model for determining the allowance for credit losses
|
|
● |
The effects of the coronavirus pandemic on the U.S., California and global economies and the actions of governments to reduce the spread of the virus and to mitigate the resulting economic consequences
|
|
● |
The possible adverse impacts on the banking industry and our business from a period of significant, prolonged inflation
|
|
● |
Descriptions of assumptions underlying or relating to any of the foregoing
|
Readers of this document should not rely on any forward-looking statements, which reflect only our management’s belief as of the date of this report. There are numerous risks and uncertainties
that could and will cause actual results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our financial
condition and results of operations or prospects. Such risks and uncertainties include, but are not limited to those listed in Item 1A “Risk Factors” of Part II of this Form 10-Q, Item 2 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of Part I of this Form 10-Q and "Risk Factors" and “Supervision and Regulation” in our 2021 Annual Report on Form 10-K, and in our other reports to the SEC.
INTRODUCTION
This overview of Management’s Discussion and Analysis highlights selected information in this report and may not contain all of the information that is important to you. For a more complete
understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire report and any other reports to the Securities and Exchange Commission
(“SEC”), together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Our subsidiary, First Northern Bank of Dixon (the “Bank”), is a California state-chartered bank that derives most of its revenues from lending and deposit taking in the Sacramento Valley region
of Northern California. Interest rates, business conditions and customer confidence all affect our ability to generate revenues. In addition, the regulatory and compliance environment and competition can present challenges to our ability to
generate those revenues.
Significant results and developments during the third quarter and year-to-date 2022 included:
• |
Net income of $11.2 million for the nine months ended September 30, 2022, up 1.5% from $11.0 million earned for the same period last year. Net income of $4.6 million for the three months ended September 30,
2022, up 1.3% from $4.5 million for the same period last year.
|
• |
Diluted income per share of $0.80 for the nine months ended September 30, 2022, up 3.9% from diluted income per share of $0.77 in the same period last year. Diluted income per share of $0.33 for the three
months ended September 30, 2022, up 3.1% from diluted income per share of $0.32 for the same period last year.
|
• |
Net interest income of $38.9 million for the nine months ended September 30, 2022, up 11.8% from $34.8 million for the same period last year. Net interest income of $14.2 million for the three months ended
September 30, 2022, up 20.7% from $11.8 million for the same period last year.
|
• |
Net interest margin of 2.92% for the nine months ended September 30, 2022, up 9.0% from 2.68% for the same period last year. Net interest margin of 3.12% for the three months ended September 30, 2022, up
20.9% from 2.58% for the same period last year.
|
• |
Provision for loan losses of $0.9 million for the nine months ended September 30, 2022, compared to reversal of provision for loan losses of $1.5 million for the same period last year. Provision for loan
losses of $0.3 million for the three months ended September 30, 2022, compared to reversal of provision for loan losses of $1.8 million for the same period last year.
|
• |
Total assets of $1.9 billion as of September 30, 2022 and December 31, 2021.
|
• |
Total net loans (including loans held-for-sale) of $971.2 million as of September 30, 2022, up 13.8% from $853.8 million as of December 31, 2021.
|
• |
Total investment securities of $608.0 million as of September 30, 2022, down 3.8% from $632.2 million as of December 31, 2021. The decrease in investment securities was primarily due to the
increase in unrealized losses on the investment portfolio due to the increases in market interest rates over the yields available at the time the underlying securities were purchased.
|
• |
Total deposits of $1.8 billion as of September 30, 2022, up 4.1% from $1.7 billion as of December 31, 2021.
|
SUMMARY FINANCIAL DATA
The Company recorded net income of $11,155,000 for the nine months ended September 30, 2022, representing an increase of $162,000 or 1.5% from net income of $10,993,000 for the same period in
2021. The Company recorded net income of $4,568,000 for the three months ended September 30, 2022, representing an increase of $59,000, or 1.3%, from net income of $4,509,000 for the same period in 2021.
The following tables present a summary of the results for the three and nine months ended September 30, 2022 and 2021, and a summary of financial condition at September 30, 2022 and December
31, 2021.
|
|
Three Months
Ended September
30, 2022
|
|
|
Three Months
Ended September
30, 2021
|
|
|
Nine Months
Ended September
30, 2022
|
|
|
Nine Months
Ended September
30, 2021
|
|
(dollars in thousands except for per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income to Average Assets (annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income to Average Equity (annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Equity to Average Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022
|
|
|
December 31, 2021
|
|
|
|
|
|
|
|
|
(in thousands except for ratios)
|
|
|
|
|
At Period End:
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,932,713
|
|
|
$
|
1,899,087
|
|
Total Investment Securities, at fair value
|
|
$
|
607,985
|
|
|
$
|
632,213
|
|
Total Loans, Net (including loans held-for-sale)
|
|
$
|
971,249
|
|
|
$
|
853,780
|
|
Total Deposits
|
|
$
|
1,799,605
|
|
|
$
|
1,728,302
|
|
Loan-To-Deposit Ratio
|
|
|
54.0
|
%
|
|
|
49.4
|
%
|
FIRST NORTHERN COMMUNITY BANCORP
Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)
|
|
Three months ended
September 30, 2022
|
|
|
Three months ended
September 30, 2021
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate (4)
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate (4)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing due from banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, taxable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, non-taxable (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest receivable and other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing transaction deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payable and other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest thereon is excluded. Loan interest
income includes net loan fees of approximately $223 and $1,194 for the three months ended September 30, 2022 and 2021, respectively. Net loan fees for the three months ended September 30, 2022 and September 30, 2021 include $154 and
$1,134 in PPP loan fees recognized, respectively.
|
(2)
|
Interest income and yields on tax-exempt securities are not presented on a taxable-equivalent basis.
|
(3)
|
Net interest margin is computed by dividing net interest income by total average interest-earning assets.
|
(4) |
For disclosure purposes, yield /rates are annualized by dividing the number of days in the reported period by 365.
|
FIRST NORTHERN COMMUNITY BANCORP
Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)
|
|
Nine months ended
September 30, 2022
|
|
|
Nine months ended
September 30, 2021
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate (4)
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate (4)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest bearing due from banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, taxable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities, non-taxable (2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average interest-earning assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest receivable and other assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing transaction deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank Advances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payable and other liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total average liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest margin (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest thereon is excluded. Loan interest
income includes net loan fees of approximately $2,703 and $4,202 for the nine months ended September 30, 2022 and 2021, respectively. Net loan fees for the nine months ended September 30, 2022 and September 30, 2021 include $2,706 and
$3,478 in PPP loan fees recognized, respectively.
|
(2) |
Interest income and yields on tax-exempt securities are not presented on a taxable-equivalent basis.
|
(3)
|
Net interest margin is computed by dividing net interest income by total average interest-earning assets.
|
(4) |
For disclosure purposes, yield /rates are annualized by dividing the number of days in the reported period by 365.
|
FIRST NORTHERN COMMUNITY BANCORP
Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)
|
|
Three months ended
September 30, 2022
|
|
|
Three months ended
June 30, 2022
|
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1)
|
|
$
|
949,424
|
|
|
$
|
10,857
|
|
|
|
4.54
|
%
|
|
$
|
897,608
|
|
|
$
|
10,465
|
|
|
|
4.68
|
%
|
Certificates of deposit
|
|
|
11,423
|
|
|
|
57
|
|
|
|
1.98
|
%
|
|
|
11,056
|
|
|
|
53
|
|
|
|
1.92
|
%
|
Interest bearing due from banks
|
|
|
208,059
|
|
|
|
1,061
|
|
|
|
2.02
|
%
|
|
|
215,098
|
|
|
|
456
|
|
|
|
0.85
|
%
|
Investment securities, taxable
|
|
|
589,082
|
|
|
|
2,122
|
|
|
|
1.43
|
%
|
|
|
603,796
|
|
|
|
1,933
|
|
|
|
1.28
|
%
|
Investment securities, non-taxable (2)
|
|
|
40,272
|
|
|
|
250
|
|
|
|
2.46
|
%
|
|
|
35,190
|
|
|
|
206
|
|
|
|
2.35
|
%
|
Other interest earning assets
|
|
|
9,440
|
|
|
|
137
|
|
|
|
5.76
|
%
|
|
|
8,976
|
|
|
|
106
|
|
|
|
4.74
|
%
|
Total average interest-earning assets
|
|
|
1,807,700
|
|
|
|
14,484
|
|
|
|
3.18
|
%
|
|
|
1,771,724
|
|
|
|
13,219
|
|
|
|
2.99
|
%
|
Non-interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
|
41,157
|
|
|
|
|
|
|
|
|
|
|
|
47,651
|
|
|
|
|
|
|
|
|
|
Premises and equipment, net
|
|
|
6,125
|
|
|
|
|
|
|
|
|
|
|
|
6,294
|
|
|
|
|
|
|
|
|
|
Interest receivable and other assets
|
|
|
54,289
|
|
|
|
|
|
|
|
|
|
|
|
51,856
|
|
|
|
|
|
|
|
|
|
Total average assets
|
|
$
|
1,909,271
|
|
|
|
|
|
|
|
|
|
|
$
|
1,877,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing transaction deposits
|
|
|
452,708
|
|
|
|
69
|
|
|
|
0.06
|
%
|
|
|
440,466
|
|
|
|
67
|
|
|
|
0.06
|
%
|
Savings and MMDA’s
|
|
|
447,797
|
|
|
|
171
|
|
|
|
0.15
|
%
|
|
|
446,890
|
|
|
|
115
|
|
|
|
0.10
|
%
|
Time, $250,000 and under
|
|
|
36,456
|
|
|
|
23
|
|
|
|
0.25
|
%
|
|
|
38,235
|
|
|
|
22
|
|
|
|
0.23
|
%
|
Time, over $250,000
|
|
|
10,504
|
|
|
|
8
|
|
|
|
0.30
|
%
|
|
|
10,542
|
|
|
|
7
|
|
|
|
0.27
|
%
|
Total average interest-bearing liabilities
|
|
|
947,465
|
|
|
|
271
|
|
|
|
0.11
|
%
|
|
|
936,133
|
|
|
|
211
|
|
|
|
0.09
|
%
|
Non-interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing demand deposits
|
|
|
814,300
|
|
|
|
|
|
|
|
|
|
|
|
793,243
|
|
|
|
|
|
|
|
|
|
Interest payable and other liabilities
|
|
|
18,662
|
|
|
|
|
|
|
|
|
|
|
|
17,730
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,780,427
|
|
|
|
|
|
|
|
|
|
|
|
1,747,106
|
|
|
|
|
|
|
|
|
|
Total average stockholders’ equity
|
|
|
128,844
|
|
|
|
|
|
|
|
|
|
|
|
130,419
|
|
|
|
|
|
|
|
|
|
Total average liabilities and stockholders’ equity
|
|
$
|
1,909,271
|
|
|
|
|
|
|
|
|
|
|
$
|
1,877,525
|
|
|
|
|
|
|
|
|
|
Net interest income and net interest margin (3)
|
|
|
|
|
|
$
|
14,213
|
|
|
|
3.12
|
%
|
|
|
|
|
|
$
|
13,008
|
|
|
|
2.94
|
%
|
(1) |
Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest is excluded. Loan interest income includes net loan fees
of approximately $223 and $1,174 for the three months ended September 30, 2022 and June 30, 2022, respectively. Net loan fees for the three months ended September 30, 2022 and June 30, 2022 include $154 and $1,185 in PPP loan fees
recognized, respectively.
|
(2) |
Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.
|
(3) |
Net interest margin is computed by dividing net interest income by total average interest-earning assets.
|
(4) |
For disclosure purposes, yield/rates are annualized by dividing the number of days in the reported period by 365.
|
Analysis of Changes
in Interest Income and Interest Expense
(Dollars in thousands)
Following is an analysis of changes in interest income and expense (dollars in thousands) for the three months ended September 30, 2022 over the three months ended September 30, 2021, the nine
months ended September 30, 2022 over the nine months ended September 30, 2021, and the three months ended September 30, 2022 over the three months ended June 30, 2022. Changes not solely due to interest rate or volume have been allocated
proportionately to interest rate and volume.
|
|
Three Months Ended
September 30, 2022
|
|
|
Nine Months Ended
September 30, 2022
|
|
|
Three Months Ended
September 30, 2022
|
|
|
|
|
|
|
|
|
|
Over
|
|
|
|
Three Months Ended
September 30, 2021
|
|
|
Nine Months Ended
September 30, 2021
|
|
|
Three Months Ended
June 30, 2022
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
|
Volume
|
|
|
Interest
Rate
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
672
|
|
|
$
|
(280
|
)
|
|
$
|
392
|
|
Certificates of Deposit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
Due From Banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
620
|
|
|
|
605
|
|
Investment Securities - Taxable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(46
|
)
|
|
|
235
|
|
|
|
189
|
|
Investment Securities - Non-taxable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
|
|
11
|
|
|
|
44
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
|
|
|
|
25
|
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
652
|
|
|
$
|
613
|
|
|
$
|
1,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Interest Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-Bearing Transaction Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Savings & MMDAs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
|
56
|
|
|
|
56
|
|
Time Certificates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
5
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1
|
)
|
|
$
|
61
|
|
|
$
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Net Interest Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
653
|
|
|
$
|
552
|
|
|
$
|
1,205
|
|
CHANGES IN FINANCIAL CONDITION
The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $81,526,000, or 23.6%, decrease in cash and cash equivalents, a $2,181,000, or
16.4%, decrease in certificates of deposit, a $24,228,000, or 3.8%, decrease in investment securities available-for-sale, a $118,532,000, or 13.9%, increase in net loans held-for-investment, and a $1,063,000, or 100.0%, decrease in loans
held-for-sale from December 31, 2021 to September 30, 2022. The decrease in cash and cash equivalents was primarily due to originations of loans held-for-investment and purchases of investment securities, which was partially offset by increases
in deposit liabilities. The decrease in certificates of deposit was due to maturities of certificates of deposit and allocating the cash flows from those maturities towards additional purchases of available-for-sale securities. The decrease in investment securities was primarily due to the increase in unrealized losses on the investment portfolio due to the increases in market interest rates over the yields available at the time
the underlying securities were purchased. The increase in net loans held-for-investment was primarily due to commercial real estate loan, agriculture, and residential mortgage loan originations, which was partially offset by SBA forgiveness
payments on PPP loans. The decrease in loans held-for-sale was due to a decrease in originations of loans held-for-sale due to rising interest rates coupled with the timing of funding and sale of the loans held-for-sale pipeline.
The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an increase in total deposits of $71,303,000, or 4.1%, from December 31,
2021 to September 30, 2022. The overall increase in total deposits was largely due to seasonal fluctuations.
CHANGES IN RESULTS OF OPERATIONS
Interest Income
The Federal Open Market Committee increased the Federal Funds rate by 300 basis points to a target range of 3.00% to 3.25% during the nine months ended September 30, 2022.
Interest income on loans for the nine months ended September 30, 2022 was up 4.6% from the same period in 2021, increasing from $29,616,000 to $30,979,000, and was up 9.6% for the
three months ended September 30, 2022 over the same period in 2021, increasing from $9,905,000 to $10,857,000. The increase in interest income on loans for the nine months ended September 30, 2022 as compared to the same period a year ago was
primarily due to an increase in average balance of loans and an 18 basis point increase in yield on loans, which was partially offset by a decrease in PPP fee recognition. The increase in interest income on loans for the three months ended
September 30, 2022 as compared to the same period a year ago was primarily due to an increase in average balance of loans, which was partially offset by an 8 basis point decrease in yield on loans and a decrease in PPP fee recognition. PPP
processing fees received from the SBA for PPP loans originated in 2020 and 2021 are being recognized as an adjustment to the effective yield over the loan’s life and fully recognized in income upon repayment or SBA forgiveness of the loan. PPP
processing fees totaling approximately $2.7 million and $3.5 million were recognized in interest income for the nine-month periods ended September 30, 2022 and 2021, respectively. PPP processing fees totaling approximately $0.2 million and $1.1
million were recognized in interest income for the three-month periods ended September 30, 2022 and 2021, respectively. The Bank had unearned PPP processing fees totaling $0 and $2.7 million as of September 30,
2022 and December 31, 2021, respectively. The Bank had PPP loans outstanding totaling $0.5 million and $37 million as of September 30, 2022 and December 31, 2021, respectively.
Interest income on certificates of deposit for the nine months ended September 30, 2022 was down 27.7% from the same period in 2021, decreasing from $231,000 to $167,000, and was down 17.4% for
the three months ended September 30, 2022 over the same period in 2021, decreasing from $69,000 to $57,000. The decrease in interest income on certificates of deposit for the nine months ended September 30, 2022 as compared to the same period a
year ago was primarily due to a decrease in average balances of certificates of deposit and a 21 basis point decrease in yield on certificates of deposit. The decrease in interest income on certificates of deposit for the three months ended
September 30, 2022 as compared to the same period a year ago was primarily due to a decrease in average balances of certificates of deposit and a 7 basis point decrease in yield on certificates of deposit.
Interest income on interest-bearing due from banks for the nine months ended September 30, 2022 was up 497.8% from the same period in 2021, increasing from $272,000 to $1,626,000, and was up
647.2% for the three months ended September 30, 2022 over the same period in 2021, increasing from $142,000 to $1,061,000. This income is primarily derived from interest on excess reserves held at the Federal Reserve. The increase in interest
income on interest-bearing due from banks for the nine months ended September 30, 2022 as compared to the same period a year ago was primarily due to increases in the Federal Funds rate in 2022 resulting in an 82 basis point increase in yield on
interest-bearing due from banks, which was partially offset by a decrease in average balances of interest-bearing due from banks. The increase in interest income on interest-bearing due from banks for the three months ended September 30, 2022 as
compared to the same period a year ago was primarily due to a 186 basis point increase in yield on interest-bearing due from banks, which was partially offset by a decrease in average balances of interest-bearing due from banks.
Interest income on investment securities available-for-sale for the nine months ended September 30, 2022 was up 27.1% from the same period in 2021, increasing from $5,048,000 to $6,417,000, and
was up 32.7% for the three months ended September 30, 2022 over the same period in 2021, increasing from $1,788,000 to $2,372,000. The increase in interest income on investment securities for the nine months ended September 30, 2022 as compared
to the same period a year ago was primarily due to an increase in average investment securities coupled with a 3 basis point increase in investment yields. The increase in interest income on investment securities for the three months ended
September 30, 2022 as compared to the same period a year ago was primarily due to an increase in average investment securities coupled with a 29 basis point increase in investment yields.
Interest income on other earning assets for the nine months ended September 30, 2022 was up 24.9% from the same period in 2021, increasing from $289,000 to $361,000, and was up 31.7% for the
three months ended September 30, 2022 over the same period in 2021, increasing from $104,000 to $137,000. This income is primarily derived from dividends received by the Federal Home Loan Bank. The increase in interest income on other earning
assets for the nine months ended September 30, 2022 as compared to the same period a year ago was primarily due to an increase in average balances of other earning assets coupled with a 4 basis point increase in yield on other earning assets. The
increase in interest income on other earning assets for the three months ended September 30, 2022 as compared to the same period a year ago was primarily due to an increase in average balances of other earning assets, which was partially offset
by a 5 basis point decrease in yield on other earning assets.
The Company had no Federal Funds sold balances during the three and nine months ended September 30, 2022 and September 30, 2021.
Interest Expense
Interest expense on deposits for the nine months ended September 30, 2022 was up 0.7% from the same period in 2021, increasing from $686,000 to $691,000, and was up 17.3% for the three months
ended September 30, 2022 over the same period in 2021, increasing from $231,000 to $271,000. The increase in interest expense for the nine months ended September 30, 2022 as compared to the same period a year ago was primarily due to an increase
in average balance of interest-bearing liabilities. The increase in interest expense for the three months ended September 30, 2022 as compared to the same period a year ago was primarily due to an increase in average balance of interest-bearing
liabilities coupled with a 1 basis point increase in the Company’s average cost of funds.
Provision for Loan Losses
Provision for loan losses totaled $900,000 for the nine months ended September 30, 2022 compared to a reversal of provision for loan losses of $1,500,000 for the same period in
2021. Provision for loan losses totaled $300,000 for the three months ended September 30, 2022 compared to a reversal of provision for loan losses of $1,800,000 for the same period in 2021. The provision for loan loss for the three and nine
months ended September 30, 2022 was primarily due to current year loan growth. The reversal of provision for loan loss for the three and nine months ended September 30, 2021 was primarily due to a decrease in specific reserves on loans to one
borrower. The allowance for loan losses was approximately $14,771,000 or 1.50% of total loans, at September 30, 2022, compared to $13,952,000, or 1.61% of total loans, at December 31, 2021. The decrease in the allowance for loan losses
to total loans from December 31, 2021 to September 30, 2022 was primarily due to current year loan growth. The allowance for loan losses is maintained at a level considered adequate by management to provide for
probable loan losses inherent in the loan portfolio.
Provision for Unfunded Lending Commitment Losses
Provision for unfunded lending commitment losses was $50,000 for the nine months ended September 30, 2022 compared to a reversal of unfunded lending commitment losses of $300,000 for the same
period in 2021. There was no provision for unfunded lending commitment losses for the three-month periods ended September 30, 2022 and September 30, 2021.
Provisions for unfunded lending commitment losses are included in other non-interest expense in the Condensed Consolidated Statements of Income.
Non-Interest Income
Non-interest income was down 8.4% for the nine months ended September 30, 2022 from the same period in 2021, decreasing from $5,982,000 to $5,480,000.
The decrease was primarily due to decreases in gains on sales of loans held-for-sale, which was partially offset by increases in other income. The decrease in gains on sales of loans
held-for-sale was primarily due to a decrease in loan origination volumes due to an increase in interest rates and slowdown in refinancing activity. The increase in other income was primarily due to non-taxable income from a bank owned life
insurance policy.
Non-interest income was up 8.5% for the three months ended September 30, 2022 from the same period in 2021, increasing from $1,908,000 to $2,070,000.
The increase was primarily due to increases in other income, which was partially offset by a decrease in gains on sales of loans held-for-sale. The increase in other income was primarily due to
non-taxable income from a bank owned life insurance policy. The decrease in gains on sales of loans held-for-sale was primarily due to a decrease in loan origination volumes due to an increase in interest rates and slowdown in refinancing
activity.
Non-Interest Expenses
Total non-interest expenses were up 4.6% for the nine months ended September 30, 2022 from the same period in 2021, increasing from $27,091,000 to $28,339,000.
The increase was primarily due to increases in salaries and employee benefits expense and other expenses. The increase in salaries and employee benefits expense was primarily due to increases
in contingent compensation and deferred compensation expenses, and a decrease in capitalization of loan origination costs, which was partially offset by a decrease in commissions expense. The increase in other expenses was primarily due to
increases in the provision for unfunded commitments and legal fees, which was partially offset by a decrease in loan collection expense.
Total non-interest expenses were up 7.3% for the three months ended September 30, 2022 from the same period in 2021, increasing from $9,234,000 to $9,909,000.
The increase was primarily due to increases in salaries and employee benefits expense and other expenses. The increase in salaries and employee benefits expense was primarily due to an increase
in contingent compensation expense and a decrease in capitalization of loan origination costs, which was partially offset by a decrease in commissions and profit-sharing expense.
The following table sets forth other non-interest expenses by category for the three and nine months ended September 30, 2022 and 2021.
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(in thousands)
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Three months ended
September 30, 2022
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Three months ended
September 30, 2021
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Nine months ended
September 30, 2022
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Nine months ended
September 30, 2021
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Other non-interest expenses
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(Reversal of) provision for unfunded loan commitments
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Accounting and audit fees
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Computer software depreciation
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Other non-interest expense
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Total other non-interest expenses
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Income Taxes
The Company’s tax rate, the Company’s income before taxes and the amount of tax relief provided by non-taxable earnings affect the Company’s provision for income taxes. Provision for income
taxes decreased 5.4% for the nine months ended September 30, 2022 from the same period in 2021, decreasing from $4,168,000 to $3,945,000, and decreased 13.6% for the three months ended September 30, 2022 from the same period in 2021, decreasing
from $1,742,000 to $1,506,000. The decrease in provision for income taxes was primarily due to non-taxable income from a bank owned life insurance policy totaling $548,000. The effective tax rate was 26.1% and 27.5% for the nine months ended
September 30, 2022 and September 30, 2021, respectively. The effective tax rate was 24.8% and 27.9% for the three months ended September 30, 2022 and September 30, 2021, respectively.
Off-Balance Sheet Commitments
The following table shows the distribution of the Company’s undisbursed loan commitments at the dates indicated.
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(in thousands)
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September 30, 2022
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December 31, 2021
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Undisbursed loan commitments
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Standby letters of credit
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Commitments to sell loans
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The reserve for unfunded lending commitments amounted to $700,000 and $650,000 as of September 30, 2022 and December 31, 2021, respectively. The reserve for unfunded lending commitments is
included in other liabilities on the Condensed Consolidated Balance Sheets. See Note 7 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q, "Financial Instruments with Off-Balance Sheet Risk," for additional information.
Asset Quality
The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing
examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly
based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times. Asset quality reviews of loans and other non-performing assets are administered using credit
risk-rating standards and criteria similar to those employed by state and federal banking regulatory agencies. The federal bank regulatory agencies utilize the following definitions for assets adversely classified for supervisory purposes:
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• |
Substandard Assets – A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a
well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
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• |
Doubtful Assets – An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the
basis of currently existing facts, conditions, and values, highly questionable or improbable.
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Other Real Estate Owned and loans rated Substandard and Doubtful are deemed "classified assets". This category, which includes both performing and non-performing assets, receives an elevated
level of attention regarding collection.
The following table summarizes the Company’s non-accrual loans net of guarantees of the State of California and U.S. Government by loan category at September 30, 2022 and December 31, 2021:
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At September 30, 2022
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At December 31, 2021
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Gross
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Guaranteed
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Net
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Gross
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Guaranteed
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Net
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(in thousands)
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It is generally the Company’s policy to discontinue interest accruals once a loan is past due for a period of 90 days as to interest or principal payments unless the loan is well
secured and in process of collection. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against
principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected or there is an extended period of positive performance and a
high probability that the loan will continue to pay according to original terms.
Non-accrual loans amounted to $8,474,000 at September 30, 2022 and were comprised of three agriculture loans totaling $7,625,000, one residential mortgage loan totaling $126,000, and five
consumer loans totaling $723,000. Non-accrual loans amounted to $10,197,000 at December 31, 2021 and were comprised of two commercial loans totaling $133,000, one commercial real estate loan totaling $555,000, three agriculture loans totaling
$8,712,000, one residential mortgage loan totaling $138,000 and four consumer loans totaling $659,000. If the loan is considered collateral dependent, it is generally the Company’s policy to charge-off the portion of any non-accrual loan that the
Company does not expect to collect by writing the loan down to the estimated net realizable value of the underlying collateral.
Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Non-performing
impaired loans are non-accrual loans and loans that are 90 days or more past due and still accruing. Non-performing impaired loans at September 30, 2022 and December 31, 2021 totaled $8,877,000 and $10,197,000, respectively. A restructuring of a
loan can constitute a troubled debt restructuring (TDR) if the Company for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider. The Company had
$8,698,000 and $10,103,000 in TDR loans as of September 30, 2022 and December 31, 2021, respectively. A loan that is restructured in a TDR is considered an impaired loan. Performing impaired loans, which solely consisted of loans modified as
TDRs, totaled $567,000 and $822,000 at September 30, 2022 and December 31, 2021, respectively. The Company expects to collect all principal and interest due from performing impaired loans. These loans are not on non-accrual status. No assurance
can be given that the existing or any additional collateral will be sufficient to secure full recovery of the obligations owed under these loans.
As the following table illustrates, total non-performing assets, net of guarantees of the State of California and U.S. Government, including its agencies and its government-sponsored agencies,
decreased $1,287,000, or 12.7%, to $8,877,000 during the first nine months of 2022. Non-performing assets, net of guarantees, represented 0.5% of total assets at September 30, 2022.
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At September 30, 2022
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At December 31, 2021
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Gross
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Guaranteed
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Net
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Gross
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Guaranteed
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Net
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(dollars in thousands)
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Loans 90 days past due and still accruing
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Total non-performing loans
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Total non-performing assets
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Non-performing loans (net of guarantees) to total loans
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Non-performing assets (net of guarantees) to total assets
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Allowance for loan and lease losses to non-performing loans (net of guarantees)
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The Company had one loan totaling $403,000 that was 90 days or more past due and still accruing at September 30, 2022. The Company had no loans 90 days past due and still accruing at December
31, 2021.
Excluding the non-performing loans cited previously, loans totaling $3,329,000 and $4,687,000 were classified as substandard loans, representing potential problem loans at September 30, 2022
and December 31, 2021, respectively. In Management’s opinion, the potential loss related to these problem loans was sufficiently covered by the Bank’s existing loan loss reserve (Allowance for Loan Losses) at September 30, 2022 and December 31,
2021. The ratio of the Allowance for Loan Losses to total loans at September 30, 2022 and December 31, 2021 was 1.50% and 1.61%, respectively.
Other real estate owned (“OREO”) consists of property that the Company has acquired by deed in lieu of foreclosure or through foreclosure proceedings, and property that the Company does not
hold title to but is in actual control of, known as in-substance foreclosure. The estimated fair value of the property is determined prior to transferring the balance to OREO. The balance transferred to OREO is the estimated fair value of the
property less estimated cost to sell. Impairment may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals or loan officer evaluations are then conducted periodically thereafter charging any additional
impairment to the appropriate expense account. The Company had no OREO as of September 30, 2022 and December 31, 2021.
Allowance for Loan Losses
The Company's Allowance for Loan Losses is maintained at a level believed by management to be adequate to provide for loan and other credit losses that can be estimated based upon specific and
general conditions. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Company contracts with vendors for credit reviews of the loan portfolio as well as considers current economic
conditions, loan loss experience, and other factors in determining the adequacy of the reserve balance. The allowance for loan losses is based on estimates, and actual losses may vary from current estimates.
The following table summarizes the Allowance for Loan Losses of the Company during the nine months ended September 30, 2022 and 2021, and for the year ended December 31, 2021:
Analysis of the Allowance for Loan Losses
(Amounts in thousands, except percentage amounts)
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Nine months ended
September 30,
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Year ended
December 31,
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2022
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2021
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2021
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Balance at beginning of period
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Provision for (reversal of) loan losses
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Net (charge-offs) recoveries
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Ratio of net charge-offs to average loans outstanding during the period (annualized)
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Allowance for loan losses to total loans
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Nonaccrual loans to total loans
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Allowance for loan losses to nonaccrual loans
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Deposits
Deposits are one of the Company’s primary sources of funds. At September 30, 2022, the Company had the following deposit mix: 25.1% in savings and MMDA deposits, 2.6% in time deposits, 25.3% in
interest-bearing transaction deposits and 47.0% in non-interest-bearing transaction deposits. At December 31, 2021, the Company had the following deposit mix: 24.6% in savings and MMDA deposits, 2.9% in time deposits, 25.0% in interest-bearing
transaction deposits and 47.5% in non-interest-bearing transaction deposits. Non-interest-bearing transaction deposits increased the Company’s net interest income by lowering its cost of funds.
The Company obtains deposits primarily from the communities it serves. The Company believes that no material portion of its deposits has been obtained from or is dependent on any one person or
industry. The Company accepts deposits in excess of $250,000 from customers. These deposits are priced to remain competitive.
Maturities of time certificates of deposits of over $250,000 outstanding at September 30, 2022 and December 31, 2021 are summarized as follows:
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September 30, 2022
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December 31, 2021
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Over six to twelve months
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Liquidity and Capital Resources
In order to serve our market area and comply with banking regulations, the Company must maintain adequate liquidity and adequate capital. Liquidity is measured by various ratios, in
management’s opinion, the most common being the ratio of net loans to deposits (including loans held-for-sale). This ratio was 54.0% on September 30, 2022. In addition, on September 30, 2022, the Company had the following short-term investments
(based on remaining maturity and/or next repricing date): $31,950,000 in securities due within one year or less; and $188,535,000 in securities due in one to five years.
To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks which totaled $122,000,000 at September 30, 2022. Additionally, the
Company has a line of credit with the FHLB, with a remaining borrowing capacity at September 30, 2022 of $356,741,000; credit availability is subject to certain collateral requirements.
The Company’s primary source of liquidity on a stand-alone basis is dividends from the Bank. Dividends from the Bank are subject to regulatory restrictions.
In July 2013, the FRB and the other U.S. federal banking agencies adopted final rules making significant changes to the U.S. regulatory capital framework for U.S. banking organizations and to conform this framework
to the guidelines published by the Basel Committee known as the Basel III Global Regulatory Framework for Capital and Liquidity. The Basel Committee is a committee of banking supervisory authorities from major countries in the global financial
system which formulates broad supervisory standards and guidelines relating to financial institutions for implementation on a country-by-country basis. These rules adopted by the FRB and the other federal banking agencies (the U.S. Basel III
Capital Rules) replaced the federal banking agencies’ general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules, in accordance with certain transition provisions.
Banks, such as First Northern, became subject to the final rules on January 1, 2015. The final rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and
establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. The final rules provide for increased minimum capital ratios as follows: (a) a common equity Tier
1 capital ratio of 4.5%; (b) a Tier 1 capital ratio of 6%; (c) a total capital ratio of 8%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4%. Under these rules, in order to avoid certain limitations on capital distributions,
including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements
(equal to 2.5% of total risk-weighted assets). The capital conservation buffer is designed to absorb losses during periods of economic stress.
Pursuant to the EGRRCPA, the FRB adopted a final rule, effective August 31, 2018, amending the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (the “policy statement”) to increase
the consolidated assets threshold to qualify to utilize the provisions of the policy statement from $1 billion to $3 billion. Bank holding companies, such as the Company, are subject to capital adequacy requirements of the FRB; however, bank
holding companies which are subject to the policy statement are not subject to compliance with the regulatory capital requirements until they hold $3 billion or more in consolidated total assets. As a consequence, the Company is not required to
comply with the FRB’s regulatory capital requirements until such time that its consolidated total assets equal $3 billion or more or if the FRB determines that the Company is no longer deemed to be a small bank holding company. However, if the
Company had been subject to these regulatory capital requirements, it would have exceeded all regulatory requirements.
In August of 2020, the Federal banking agencies adopted the final version of the community bank leverage ratio framework rule (the “CBLR”), implementing two interim final rules adopted in April of 2020. The rule
provides an optional, simplified measure of capital adequacy. Under the optional CBLR framework, the CBLR was 8.5 percent through calendar year 2021 and 9 percent thereafter. The rule is applicable to all non-advanced approaches FDIC-supervised
institutions with less than $10 billion in total consolidated assets. Banks not electing the CBLR framework will continue to be subject to the generally applicable risk-based capital rule. At the present time, the Company and the Bank do not
intend to elect to use the CBLR framework.
As of September 30, 2022, the Bank’s capital ratios exceeded applicable regulatory requirements. The following table presents the capital ratios for the Bank, compared to the regulatory
standards for well-capitalized depository institutions, as of September 30, 2022.
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(amounts in thousands except percentage amounts)
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Actual
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Well Capitalized
Ratio
Requirement
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Capital
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Ratio
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