First Northern Community Bancorp — Q2 2021 Form 10-Q
Business context and reporting period. The company is a bank holding company whose subsidiary, First Northern Bank of Dixon, serves communities in California’s Sacramento Valley. This unaudited filing covers the quarter and six months ended June 30, 2021; balance-sheet comparisons are with December 31, 2020. Amounts below are in millions unless otherwise noted.
Financial performance and condition
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $12.1 | $11.4 | $23.0 | $22.6 |
| Net interest margin | 2.81% | 3.13% | 2.74% | 3.36% |
| Provision for loan losses | $0 | $0.8 | $0.3 | $1.5 |
| Non-interest income | $1.8 | $1.6 | $4.1 | $3.3 |
| Non-interest expense | $9.4 | $8.5 | $17.9 | $17.1 |
| Net income | $3.3 | $2.7 | $6.5 | $5.4 |
| Diluted EPS | $0.24 | $0.20 | $0.47 | $0.40 |
- At June 30, total assets were $1,834.6 million, up 10.8% from year-end; deposits were $1,663.2 million, up 12.5%. Cash and cash equivalents were $332.6 million, versus $267.2 million at year-end.
- Net loans, including loans held for sale, were $874.1 million, down 1.2%; available-for-sale securities were $561.6 million, up 29.1%. The loan-to-deposit ratio was 52.6%, compared with 59.9% at year-end.
- Six-month operating cash flow was $14.5 million, compared with $13.8 million in 2020; investing activities used $128.2 million and financing activities provided $179.1 million. Cash increased $65.4 million during the six months.
- FHLB advances were zero at June 30, down from $5.0 million at year-end. The bank reported $285.5 million of remaining FHLB borrowing capacity and $122 million in correspondent-bank lines. Bank capital ratios exceeded well-capitalized thresholds: leverage 8.18%, CET1 and Tier 1 risk-based 16.24%, and total risk-based 17.50%.
Material changes and management commentary
- Net income rose 22.2% in Q2 and 20.4% year to date. Lower deposit interest expense and higher loan income, including PPP fee recognition, supported net interest income; however, net interest margin declined year over year as asset yields fell.
- Non-interest income increased 23.6% year to date, helped by deposit service charges, loan sales, servicing and debit-card income. Non-interest expense rose 4.6%, including higher salaries, data-processing and loan-collection costs.
- Management attributed the lower loan-loss provision mainly to improved economic conditions, partly offset by higher specific reserves on impaired loans. The allowance was $15.4 million, or 1.72% of loans, compared with 1.73% at year-end.
- Nonaccrual loans increased to $16.6 million from $15.2 million at year-end; net nonperforming loans were $16.5 million, or 1.9% of loans. There were no loans 90 days past due and still accruing. The allowance covered 93.0% of net nonperforming loans, down from 102.0%.
- PPP lending and forgiveness materially affected balances and interest income: the bank originated approximately $115 million of PPP loans in the first half, received $144 million in forgiveness payments and had $126 million outstanding at June 30. It reported $5.0 million of unearned PPP fees remaining to be recognized over the loans’ lives.
- Available-for-sale securities increased, while accumulated other comprehensive income fell to $1.0 million from $5.0 million, reflecting a $4.0 million six-month after-tax loss. The filing attributes unrealized securities losses to market conditions, particularly interest-rate changes; management said it did not expect to be required to sell the affected securities before recovery.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management cautions that interim results are not necessarily indicative of full-year results and that forward-looking statements are subject to risks and uncertainty.
- COVID-19 effects, economic conditions, interest rates and real-estate values remain key uncertainties. Approximately 71% of loans were secured by real estate; commercial real estate exposure included retail (10.0%), restaurants (1.5%) and hospitality/hotels (1.1%). Management noted uncertainty about renewed restrictions amid COVID-19 variants.
- Credit risks include nonperforming and impaired loans, agricultural and commercial-real-estate exposures, collateral values, and the possibility of further allowance increases. The bank had $178.4 million of undisbursed loan commitments and $3.1 million of performance standby letters of credit; commitments may not be fully drawn. A $0.65 million reserve covered unfunded commitments.
- The company repurchased 82,549 shares during Q2 at an average $11.15 per share under a program permitting repurchases of up to 547,203 shares through June 14, 2023. Management stated it did not expect to pay a cash dividend in the foreseeable future.
- No material pending legal proceeding was reported, apart from ordinary-course litigation not expected to have a material adverse effect. Management concluded disclosure controls were effective at June 30, 2021.
Important facts for investors to verify
- Whether margin pressure continues and how much future earnings depend on PPP fee recognition and loan yields.
- Trends in nonaccrual loans, especially commercial real estate and agriculture, and the adequacy of the allowance relative to net nonperforming loans.
- The timing and amount of PPP forgiveness, remaining fee amortization, and resulting loan and deposit trends.
- How unrealized securities losses, interest-rate movements and any securities sales affect equity and future income.
- Whether deposit growth, liquidity facilities and capital levels remain sufficient as loan demand and credit conditions change.
- Execution and pace of the share repurchase program, alongside the company’s stated lack of near-term cash-dividend plans.