First Northern Community Bancorp — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated results. First Northern Community Bank serves Northern California, primarily the Sacramento Valley.
Key financial results
Amounts are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net interest income | $11.35 | $11.82 | $22.58 | $23.50 |
| Provision for loan losses | $0.80 | — | $1.45 | — |
| Net income | $2.71 | $3.41 | $5.38 | $7.39 |
| Diluted EPS | $0.21 | $0.26 | $0.42 | $0.57 |
| Net interest margin | 3.13% | 4.11% | 3.36% | 4.10% |
- Q2 net income fell 20.6% year over year; first-half net income fell 27.2%. Lower loan and cash-reserve yields and higher credit-loss provisioning weighed on earnings.
- Q2 non-interest income was $1.65 million, including $0.59 million of gains on loans held for sale. First-half non-interest income was $3.30 million. First-half non-interest expense rose 1.5% to $17.08 million.
- At June 30, total assets were $1.612 billion, up 24.7% from year-end 2019. Net loans, including loans held for sale, were $981.9 million, up 27.0%; deposits were $1.438 billion, up 26.3%. The loan-to-deposit ratio was 68.3%.
- The allowance for loan losses was $13.63 million, or 1.36% of loans, versus $12.36 million and 1.58% at year-end. The lower coverage ratio primarily reflects approximately $232 million in outstanding SBA-guaranteed PPP loans.
- Six-month operating cash flow was $13.8 million. Cash and cash equivalents increased $113.6 million to $225.1 million; financing cash flow included a $299.6 million deposit increase, while investing activities used $209.7 million, largely reflecting loan growth.
- Borrowings included $10 million of FHLB advances at 0% interest, maturing in 0.4–0.9 years. The company reported $122 million of unsecured correspondent-bank lines and $323.1 million of remaining FHLB borrowing capacity. The Bank’s June 30 capital ratios exceeded applicable well-capitalized thresholds: leverage 8.75%, CET1 15.43%, Tier 1 risk-based 15.43%, and total risk-based 16.69%.
Material changes and notable items
- Approximately $235 million of PPP loans were originated in Q2; about $232 million remained outstanding at quarter-end. The bank received approximately $7.8 million in SBA processing fees, recognizing about $2.0 million as loan interest income during the quarter and first half; the remainder is to be recognized over the loans’ projected lives. Management expected significant forgiveness later in 2020, with SBA reimbursement for forgiven amounts.
- COVID-19-related full-payment deferrals and interest-only relief covered approximately $94.2 million of loans at June 30. Full-payment deferrals totaled $82.7 million; the bank reported approximately $0.9 million of foregone interest during the quarter and first half under its policy election.
- Non-accrual loans rose to $16.36 million from $1.16 million at December 31, 2019, mainly due to two commercial real estate loans in one relationship and three agricultural loans in another. Net non-performing loans were 1.6% of total loans. Management said most non-performing loans were adequately collateralized or government-guaranteed, but noted recovery was not assured.
- First-half other comprehensive income was $6.31 million, principally unrealized gains on available-for-sale securities. The portfolio had no gross unrealized losses at June 30. Mortgage servicing rights included a $0.20 million valuation allowance.
Outlook, risks and contingencies
- The filing provides no specific full-year earnings or margin guidance. Management cautioned that pandemic effects and their duration were uncertain and could materially adversely affect results and financial condition.
- Key risks include recessionary conditions, unemployment, borrower defaults, additional credit-loss provisions, falling real estate collateral values, and the bank’s Northern California concentration. Commercial real estate, retail, hospitality, agriculture, construction and small-business exposures are highlighted. Retail, restaurant and hospitality-related commercial real estate exposure was 5.8%, 1.4% and 0.9%, respectively.
- Other risks include reduced interest income in the low-rate environment, customer draws on credit lines, cybersecurity and operational risks from remote work, and potential wildfire, drought and utility power-shutoff impacts. Approximately 40% of employees were working remotely at the time of the filing.
- Undisbursed loan commitments were $196.1 million; standby letters of credit were $3.0 million. These commitments are not necessarily expected to be fully drawn. The filing reports no material pending legal proceedings.
- The Bank elected not to classify qualifying COVID-19 modifications as troubled debt restructurings under applicable CARES Act and regulatory relief. The filing also states that CECL adoption was expected January 1, 2023; its impact could not yet be reasonably estimated.
Important facts for investors to verify
- Whether PPP forgiveness, timing of SBA reimbursements and recognition of remaining processing fees proceed as management expected.
- Subsequent performance, collateral support and potential losses for the loans newly placed on non-accrual, particularly the cited commercial real estate and agricultural relationships.
- How pandemic-related deferrals, delinquencies and credit-line utilization evolve, and whether further loan-loss provisions are required.
- Whether the substantial deposit and loan growth associated with PPP persists after the program-related balances run off, and the resulting effects on liquidity and net interest margin.
- Whether the filing’s stated capital ratios and borrowing availability remain adequate under worsening economic conditions.