First Northern Community Bancorp — FY2021 Form 10-K
Business context and reporting period. The company is a California bank holding company operating First Northern Bank of Dixon, a community bank serving Northern California. This filing covers the fiscal year ended December 31, 2021, with comparisons to 2020; it does not provide standalone fourth-quarter results. The bank’s principal business is commercial, agricultural, and real-estate lending funded primarily by deposits.
Financial performance and position
| Metric | FY2021 / December 31, 2021 | FY2020 / December 31, 2020 |
|---|---|---|
| Net income | $14.2 million | $12.2 million |
| Diluted earnings per share | $1.00 | $0.85 |
| Net interest income | $46.3 million | $47.4 million |
| Net interest margin | 2.62% | 3.23% |
| Total assets | $1.899 billion | $1.655 billion |
| Total deposits | $1.728 billion | $1.478 billion |
| Loans, net of allowance | $852.7 million | $875.8 million |
| Available-for-sale investment securities | $632.2 million | $435.1 million |
| Stockholders’ equity | $150.9 million | $150.7 million |
- Profit and revenue drivers: Net income increased 16.7%. The $4.6 million year-over-year improvement in loan-loss provision (from a $3.05 million provision to a $1.5 million reversal) and lower deposit interest expense more than offset lower interest income and higher operating expenses. Non-interest income was $7.9 million, up 0.7%; non-interest expense was $36.2 million, up 2.0%. Income tax expense was $5.24 million, with a 27.0% effective rate.
- Margins: Net interest margin declined 61 basis points to 2.62%, reflecting lower asset yields and a larger share of low-yielding cash, partly offset by lower deposit costs. Average loan yield was 4.47%, versus 4.53%; average interest-bearing deposit cost fell to 0.10% from 0.19%.
- Cash flow: Operating activities provided $25.3 million, compared with $12.6 million in 2020. Investing activities used $186.4 million, primarily reflecting $357.2 million of security purchases, partly offset by repayments, maturities, and a net decrease in loans. Financing activities provided $239.9 million, mainly from $250.1 million of deposit growth, less $5.4 million of share repurchases and repayment of the $5.0 million FHLB advance. Cash and cash equivalents rose to $345.9 million from $267.2 million.
- Credit and loan mix: Gross loans were $867.9 million, down from $893.2 million. Commercial real estate was 60.7% of loans; agriculture was 12.3%, residential mortgage 8.8%, and commercial 15.7%. Commercial loans fell substantially, primarily as PPP loans were forgiven or repaid. The allowance was $14.0 million, or 1.61% of loans, versus $15.4 million, or 1.73%. Non-performing assets net of guarantees declined to $10.2 million (0.5% of assets) from $15.1 million (0.9%).
- Debt and liquidity: No FHLB advances or long-term borrowings remained at year-end; the $5.0 million COVID-relief advance matured in 2021. The bank reported $306.6 million of remaining FHLB collateral borrowing capacity and $122 million of unsecured correspondent-bank lines. Net loans to deposits were 49.4%, down from 59.9%; management said liquidity was strong and expected it to remain adequate in 2022.
- Capital: The bank reported a 7.9% Tier 1 leverage ratio, 15.3% common equity Tier 1 and Tier 1 risk-based ratios, and a 16.8% total risk-based capital ratio. Management reported the bank was well capitalized. The holding company’s small-bank status means it was not subject to the same FRB regulatory capital requirements while consolidated assets remain below $3 billion.
Material changes versus 2020
- Assets grew 14.7% and deposits grew 16.9%, while net loans declined; investment securities increased 45.3% as excess liquidity was invested.
- Net interest income decreased 2.4%, and net interest margin fell from 3.23% to 2.62% as low market rates pressured asset yields.
- Credit-loss expense shifted from a $3.05 million provision to a $1.5 million reversal, largely reflecting reduced specific reserves on one borrower and improved economic assumptions.
- Non-accrual loans declined to $10.2 million from $15.2 million, but reported TDR loans rose to $10.1 million from $2.3 million. The filing notes certain COVID-related modifications were not classified as TDRs under applicable relief.
- Accumulated other comprehensive income shifted from positive $5.0 million to a loss of $4.2 million, primarily due to a $10.1 million after-tax unrealized loss on available-for-sale securities. The company reported $8.7 million of gross unrealized securities losses and said it did not intend, and was not likely required, to sell the affected securities before recovery.
- The company repurchased 505,824 shares for $5.4 million. It declared a 5% stock dividend payable in March 2022 and said it did not expect to pay cash dividends in the foreseeable future.
Outlook, risks, and other notable items
- Management provided no earnings or margin guidance. It expected liquidity to remain strong in 2022 and cited core deposits and the low cost of funding as potential support if rates rise, while noting future rate effects cannot be predicted.
- Management identified inflation and potential Federal Reserve rate increases as risks to borrowers, credit quality, real-estate values, and securities valuations. The bank is highly exposed to Northern California, with a substantial portion of loans secured by real estate and significant commercial real-estate and agricultural lending.
- COVID-19, business disruption, drought, wildfires, power shutoffs, climate-related impacts, competition, regulatory changes, and cybersecurity threats could adversely affect operations, borrowers, or collateral. PPP loans outstanding fell to $37 million from $155 million; management expected a significant portion to be forgiven during 2022.
- Adoption of the expected-credit-loss standard (CECL) was scheduled for January 1, 2023. The company was evaluating the impact and could not yet reasonably estimate the adoption adjustment.
- Commitments and contingent exposures totaled $196.7 million, including $192.9 million of undisbursed loan commitments and $2.3 million of standby letters of credit. Management said commitments may expire unused and did not expect letter-of-credit draws.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting was effective; the auditor was not engaged to provide an opinion on internal-control effectiveness.
Important facts for investors to verify
- Whether the $1.5 million loan-loss reversal and improved credit trends are sustainable, particularly given the increase in reported TDR balances and concentration in real-estate-secured lending.
- How deposit growth, cash deployment, and securities reinvestment affect net interest margin as market interest rates change.
- The extent and timing of PPP forgiveness and recognition of the remaining $2.7 million in unearned PPP fees.
- Potential further changes in the fair value of the securities portfolio, including whether unrealized losses affect capital, liquidity, or the ability to hold securities through recovery.
- The eventual CECL transition effect and the sensitivity of the allowance to economic assumptions; management noted more pessimistic conditions could add $3.0 million or more to the allowance.
- Actual use and availability of credit lines, loan commitments, and regulatory restrictions on subsidiary-bank dividends, as these affect holding-company capital flexibility and shareholder distributions.