FIRST NORTHERN COMMUNITY BANCORP annual report, FY2020

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Business Context and Reporting Period

First Northern Community Bancorp is a California bank holding company whose subsidiary provides community banking services in Northern California. This Form 10-K covers the fiscal year ended December 31, 2020; figures are compared primarily with 2019. The filing does not provide a clear standalone fourth-quarter results summary.

Key Financial Metrics

  • Earnings: Net income was $12.2 million, or $0.90 per diluted share. Income before taxes was $16.7 million.
  • Interest income and margin: Net interest income was $47.4 million; net interest margin was 3.23%, down from 4.00% in 2019.
  • Other income and expenses: Non-interest income was $7.8 million and non-interest expense was $35.5 million. The loan-loss provision was $3.1 million.
  • Balance sheet: Total assets were $1.655 billion, including $875.8 million in loans, net of allowance, and $435.1 million in investment securities. Deposits were $1.478 billion; total liabilities were $1.505 billion and equity was $150.7 million.
  • Credit quality: The allowance for loan losses was $15.4 million, or 1.73% of loans. Non-performing loans, net of guarantees, were $15.1 million (1.7% of loans), versus $0.9 million (0.1%) a year earlier. The allowance covered 102.0% of non-performing loans, net of guarantees.
  • Liquidity and cash flow: Cash and cash equivalents were $267.2 million. Operating cash flow was $12.6 million; investing cash flow was negative $201.5 million and financing cash flow was positive $344.6 million, producing a $155.7 million increase in cash. Net loans to deposits were 59.9%, compared with 67.9% in 2019.
  • Borrowings and capital: Year-end borrowing consisted of a $5.0 million FHLB advance, bearing 0% interest and maturing in 0.4 years; there were no long-term borrowings. The Bank’s Tier 1 leverage, common equity Tier 1, Tier 1 risk-based and total risk-based capital ratios were 8.4%, 16.2%, 16.2% and 17.5%, respectively; management reported the Bank as well capitalized.

Material Changes Versus 2019

  • Net income fell 17.4%, from $14.7 million; diluted EPS declined from $1.08 to $0.90. The lower result primarily reflected the $3.1 million loan-loss provision and $1.5 million increase in non-interest expense.
  • Net interest income edged up 0.5%, but margin contracted as market rates fell and average cash balances increased. The 2020 total included $5.9 million of PPP processing fees recognized in loan interest income.
  • Assets rose 28.1%, deposits 29.8%, and loans, including loans held-for-sale, 14.5%. Year-end PPP loans were approximately $155 million; PPP originations were approximately $235 million during 2020.
  • Non-performing loans, net of guarantees, increased to $15.1 million from $0.9 million, principally reflecting new agricultural and commercial real estate problem credits. The allowance increased from $12.4 million to $15.4 million.
  • Non-interest income rose 8.5%, supported by gains on mortgage loan sales and securities sales, partly offset by a $608,000 decline in deposit service charges after pandemic-related fee waivers. Non-interest expense increased 4.5%, including higher staffing and occupancy costs.

Outlook, Commentary, Risks and Unusual Items

  • Management expected liquidity to remain strong in 2021 and anticipated continued growth in existing markets. The filing gives no numerical earnings, margin or credit-loss guidance.
  • Management reported approximately $102 million of loans received temporary forbearance relief during 2020, with about $1.2 million of interest income deferred. Most borrowers had completed forbearance by year-end. The Bank expected significant forgiveness of remaining PPP loans during 2021; unforgiven loans remain SBA-guaranteed.
  • COVID-19, economic weakness, low interest rates and borrower stress remain key uncertainties. The Bank is concentrated in Northern California and real-estate-related lending; pandemic effects, industry weakness, wildfires, drought and power shutoffs could impair borrowers, collateral values and loan performance.
  • The filing identifies possible further allowance increases, deposit and interest-rate pressures, cybersecurity and operational risks, and regulatory or privacy compliance costs. Management’s allowance estimate involves substantial judgment; the auditor identified loan risk ratings and qualitative allowance factors as a critical audit matter.
  • The company does not expect to pay a cash dividend in the foreseeable future; it declared a 5% stock dividend payable in March 2021. Its shares trade over the counter and have a limited public market.
  • The audited financial statements received an unqualified opinion. Management concluded internal control over financial reporting was effective; the auditor did not issue an opinion on internal control.

Important Facts for Investors to Verify

  1. Whether the sharp rise in non-accrual loans—especially agricultural and commercial real estate exposures—leads to additional losses, charge-offs or reserve needs.
  2. PPP forgiveness and fee recognition: the remaining loan balance, SBA reimbursement timing and effect of fee income on future net interest income.
  3. Whether the reduced net interest margin persists as low-rate assets reprice and the enlarged deposit base is deployed.
  4. Deposit growth, cash deployment, available borrowing capacity and the Bank’s ability to fund commitments without weakening liquidity or capital.
  5. The sensitivity of real estate collateral and local borrowers to ongoing pandemic disruption, regional industry conditions and natural disasters.
  6. Future allowance effects from adoption of the expected-credit-loss standard, scheduled for 2023 for the company, and any further impairment of mortgage servicing rights or securities.