First Northern Community Bancorp — Q3 2020 Form 10-Q
Business context and period. The company is a bank holding company whose subsidiary, First Northern Bank of Dixon, serves Northern California, principally the Sacramento Valley. This unaudited report covers the quarter and nine months ended September 30, 2020; balance-sheet comparisons are with December 31, 2019. Amounts below are in millions except per-share data and ratios.
Key financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $12.4 | $11.7 | $35.0 | $35.2 |
| Provision for loan losses | $0.8 | — | $2.25 | — |
| Non-interest income | $2.4 | $1.8 | $5.7 | $5.3 |
| Non-interest expense | $9.25 | $8.32 | $26.3 | $25.1 |
| Net income | $3.43 | $3.75 | $8.81 | $11.15 |
| Diluted EPS | $0.27 | $0.29 | $0.68 | $0.86 |
| Net interest margin | 3.16% | 3.93% | 3.29% | 4.05% |
- Balance sheet at September 30: Total assets were $1.68 billion, up 29.8% from year-end 2019. Deposits were $1.50 billion, up 31.7%; net loans including held-for-sale loans were $970.5 million, up 25.6%; and available-for-sale securities were $363.4 million, up 6.0%.
- Cash flow: Cash and cash equivalents rose $164.2 million to $275.6 million. Nine-month operating cash flow was $14.2 million; investing activities used $220.5 million, largely reflecting loan growth and securities purchases; financing activities provided $370.4 million, primarily from deposit growth.
- Debt and liquidity: The company had $10 million of short-term FHLB advances at 0% interest, compared with none at year-end 2019. It reported $309.1 million of remaining FHLB borrowing capacity and $122 million of unsecured correspondent-bank lines. The loan-to-deposit ratio was 64.7%, versus 67.9% at year-end.
- Capital: The Bank’s reported leverage, common equity Tier 1, Tier 1 risk-based, and total risk-based capital ratios were 8.54%, 15.83%, 15.83%, and 17.09%, respectively; each exceeded the stated well-capitalized threshold.
Material changes versus comparable periods
- Net income declined 8.8% in Q3 and 21.0% year to date. Net interest income rose 5.7% in Q3 but fell 0.7% year to date; margin contracted in both comparisons as market rates fell.
- Loan growth included approximately $235 million of PPP originations year to date; about $232 million remained outstanding at quarter-end and was SBA-guaranteed. PPP processing fees contributed $2.1 million to Q3 and $4.1 million to nine-month loan interest income.
- Deposits increased $360.4 million from year-end, with management attributing growth partly to PPP-related customer relationships and pandemic-driven deposit balances. Cash and cash equivalents also increased substantially.
- Non-accrual loans rose to $15.6 million from $1.2 million at year-end, primarily from two commercial real estate loans in one relationship and three agricultural loans in one relationship. Net charge-offs were $0.15 million year to date.
- The allowance for loan losses increased to $14.5 million from $12.4 million, while declining to 1.47% of total loans from 1.58%; management said PPP loans, fully guaranteed by the SBA, contributed to the lower ratio.
Outlook, management commentary, risks, and unusual items
- COVID-19 and credit: Management cited pandemic-related economic deterioration as the reason for increased qualitative loss factors and the loan-loss provision. It warned that prolonged restrictions, business distress, unemployment, line-of-credit draws, and weaker collateral values could further increase nonperforming assets, provisions, and charge-offs.
- Borrower relief: Approximately $91.3 million of loans had temporary forbearance relief at September 30, including $74.2 million with full payment deferrals. The company deferred net interest income of approximately $0.4 million in Q3 and $1.3 million year to date. Eligible COVID-19 modifications were not classified as TDRs under the company’s CARES Act/regulatory policy election.
- PPP outlook: Management expected a significant portion of PPP loans to be forgiven during the remainder of 2020 and anticipated SBA reimbursement for amounts forgiven. These are expectations, not reported outcomes; remaining PPP fees are recognized over the loans’ projected lives.
- Earnings pressures and offsets: Lower rates reduced yields on loans, bank balances, and securities, while PPP fees and lower deposit costs supported interest income. Non-interest income benefited from loan-sale gains and securities-sale gains; fee waivers, including deposit overdraft/NSF waivers through August 1, reduced service-charge income. Expenses increased, including compensation, occupancy, FDIC assessments, and loan collection costs.
- Other risks and items: The loan portfolio has significant commercial and real-estate exposure; management highlighted pandemic and regional economic risks, agriculture and weather exposure, wildfires and power shutoffs, and cybersecurity risks associated with remote work. The filing reports no material pending legal proceeding and no OREO. Management provided no specific financial guidance. It stated that it did not expect to pay a cash dividend in the foreseeable future.
Important facts for investors to verify
- Progress of PPP forgiveness and SBA reimbursement, and the timing and amount of remaining PPP fee recognition.
- Whether non-accrual loans—particularly the identified commercial real estate and agricultural relationships—stabilize, and whether collateral values support recovery.
- Changes in forbearance balances, borrower performance after deferrals, and any later reclassification or credit deterioration.
- Adequacy of the allowance as PPP balances run off and pandemic-related economic conditions and credit losses evolve.
- Sustainability of the reported margin, deposit growth, liquidity, and capital ratios amid low interest rates and changing funding needs.