First Northern Community Bancorp — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company is a California bank holding company; its subsidiary, First Northern Bank of Dixon, primarily serves the Sacramento Valley region. Financial statements are unaudited.
Financial performance and condition
| Metric | Q1 2021 / March 31, 2021 | Comparison |
|---|---|---|
| Net income | $3.18 million | Up 18.6% from $2.68 million in Q1 2020 |
| Diluted EPS | $0.23 | Up from $0.20 in Q1 2020 |
| Net interest income / margin | $10.87 million / 2.67% | Net interest income down 3.2%; margin down from 3.63% in Q1 2020 |
| Provision for loan losses | $0.30 million | Down from $0.65 million in Q1 2020 |
| Non-interest income / expense | $2.29 million / $8.50 million | Income up 38.9%; expense down 0.8% year over year |
| Total assets | $1.780 billion | Up 7.5% from December 31, 2020 |
| Loans, including held-for-sale | $950.81 million | Up 7.4% from December 31, 2020 |
| Deposits | $1.607 billion | Up 8.7% from December 31, 2020 |
| Cash and cash equivalents | $294.43 million | Up from $267.18 million at year-end |
| FHLB advances | $5.0 million | Unchanged; 0% COVID-relief advance, maturing in Q2 2021 |
Quarterly cash flows were $1.46 million provided by operations, $103.08 million used in investing, and $128.87 million provided by financing, principally reflecting deposit growth. The loan-to-deposit ratio was 59.2%, versus 59.9% at year-end. Available additional funding included $292.86 million of FHLB borrowing capacity, subject to collateral, and $122 million in unsecured correspondent-bank lines.
Annualized return on average assets was 0.75% (0.82% in Q1 2020); return on average equity was 8.47% (7.91%). The Bank reported capital ratios of 8.40% leverage, 15.94% CET1 and Tier 1 risk-based, and 17.20% total risk-based, exceeding stated well-capitalized thresholds.
Material changes and drivers
- Higher earnings reflected increased loan-sale gains, servicing and debit-card income, a lower loan-loss provision, and reduced deposit interest expense. Loan-sale gains were $639,000 versus $164,000 a year earlier.
- Net interest margin compressed as asset yields fell in the low-rate environment; loan yield was 4.12% versus 4.91% a year earlier. Deposit costs also declined, with interest expense falling 56.8%.
- Loan growth included approximately $98 million of new PPP lending and $47.4 million of commercial real estate loan purchases; SBA forgiveness/payoffs on prior PPP loans also reduced balances.
- Unrealized securities losses reduced other comprehensive income by $4.17 million, lowering accumulated other comprehensive income to $866,000 from $5.04 million at year-end. Management reported no other-than-temporary impairment and said it did not expect to be required to sell the affected securities before recovery.
Outlook, commentary, and risks
- The filing provides no formal earnings or financial guidance. Management cautions that interim results are not necessarily indicative of full-year results.
- PPP lending: $202 million of PPP loans were outstanding at quarter-end, including $104 million approved in the 2021 phase. The Bank had $5.9 million of unearned PPP fees; $760,000 was recognized in Q1 interest income. Management expected a significant portion of outstanding PPP loans to be forgiven during 2021, subject to program requirements and SBA processing.
- Credit quality warrants monitoring: non-accrual loans rose to $17.05 million from $15.21 million at year-end; net non-performing loans were $16.96 million, or 1.8% of loans. The allowance was $15.71 million, 1.63% of loans and 92.7% of net non-performing loans. Net charge-offs were minimal at $3,000.
- COVID-19, economic conditions, and real estate collateral values remain risks. Approximately 68% of loans were secured by real estate; commercial real estate exposure included retail, restaurants, and hospitality. Management noted no significant unusual credit-line draws by March 31.
- Other exposures include $207.59 million in undisbursed loan commitments and $2.88 million in performance letters of credit. The reserve for unfunded commitments was $750,000. No material pending legal proceedings were reported; routine litigation was not expected to have a material adverse effect.
- The allowance for loan losses is a key area of management judgment. The company expected to adopt the CECL credit-loss standard in 2023 and said it could not yet reasonably estimate its impact.
Important facts for investors to verify
- Whether PPP forgiveness and fee recognition occur on the expected schedule, and how the resulting loan mix affects reported yields and margin.
- Trends in non-accrual loans, especially commercial real estate and agriculture, and the adequacy of collateral, guarantees, and allowance coverage.
- Whether deposit growth and available borrowing capacity remain sufficient as loans and securities expand.
- The sensitivity of earnings and securities values to interest rates, prepayments, and continued margin compression.
- The impact of pandemic-related conditions and the eventual CECL adoption on credit provisions and capital.