FIRST NORTHERN COMMUNITY BANCORP FORWARD-LOOKING STATEMENTS
This report may include forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our forecasts and expectations. See Part I, Item 1A. "Risk Factors," and the other risks described in our 2020 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and the other risks described in our Quarterly Reports on Form 10-Q for factors to be considered when reading any forward-looking statements in this filing. This report and other reports or statements which we may release may include forward-looking statements, which are subject to the "safe harbor" created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in ourSecurities and Exchange Commission (SEC) filings, press releases, news articles and when we are speaking on behalf of the Company. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words "believe," "expect," "target," "anticipate," "intend," "plan," "seek," "strive," "estimate," "potential," "project," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could," "might," or "may." These forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information available to us at the date of these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date any forward-looking statements are made.
In this document and in other
? Our business objectives, strategies and initiatives, our organizational
structure, the growth of our business and our competitive position and
prospects, and the effect of competition on our business and strategies
? Our assessment of significant factors and developments that have affected or
may affect our results
? Legal and regulatory actions, and future legislative and regulatory
developments, including the effects of the Dodd-Frank Wall Street Reform and
Protection Act (the "Dodd-Frank Act"), the Economic Growth, Regulatory Relief
and Consumer Protection Act (the "EGRRCPA"), and other legislation and
governmental measures introduced in response to the financial crisis which
began in 2008 and the ensuing recession affecting the banking system, financial
markets and the
Aid, Relief, and Economic Security Act ("CARES Act"), enacted in
an effort to mitigate the consequences of the coronavirus pandemic and the
governmental actions in response to the pandemic
? Regulatory and compliance controls, processes and requirements and their impact
on our business
? The costs and effects of legal or regulatory actions
? Expectations regarding draws on performance letters of credit and liabilities
that may result from recourse provisions in standby letters of credit
? Our intent to sell or hold, and the likelihood that we would be required to
sell, various investment securities
? Our regulatory capital requirements, including the capital rules established
after the 2008 financial crisis by the
current intention not to elect to use the community bank leverage framework
? Expectations regarding our non-payment of a cash dividend on our common stock
in the foreseeable future
? Credit quality and provision for credit losses and management of asset quality
and credit risk, expectations regarding collections and expectations regarding
the forgiveness and SBA reimbursement and guarantee of loans made under the
Paycheck Protection Program ("PPP") and the timing thereof
33--------------------------------------------------------------------------------
Index
? Our allowances for credit losses, including the conditions we consider in
determining the unallocated allowance and our portfolio credit quality, the
adequacy of the allowance for loan losses, underwriting standards, and risk
grading
? Our assessment of economic conditions and trends and credit cycles and their
impact on our business
? The seasonal nature of our business
? The impact of changes in interest rates and our strategy to manage our interest
rate risk profile and the possible effect of changes in residential mortgage
interest rates on new originations and refinancing of existing residential
mortgage loans
? Loan portfolio composition and risk grade trends, expected charge-offs,
portfolio credit quality, our strategy regarding troubled debt restructurings
("TDRs"), delinquency rates and our underwriting standards and our expectations
regarding our recognition of interest income on loans that were provided
payment deferrals upon completion of the payment forbearance period
? Our deposit base including renewal of time deposits
? The impact on our net interest income and net interest margin from the current
low interest rate environment
? The effect of possible changes in the initiatives and policies of the federal
bank regulatory agencies, as well as the Public Company Accounting Oversight
Board, the
setters
? Tax rates and the impact of changes in the
Cuts and Jobs Act
? Our pension and retirement plan costs
? Our liquidity strategies and beliefs concerning the adequacy of our liquidity
position
? Critical accounting policies and estimates, the impact or anticipated impact of
recent accounting pronouncements or changes in accounting principles
? Expected rates of return, maturities, loss exposure, growth rates, yields, and
projected results
? The possible impact of weather-related conditions, including drought, fire or
flooding, seismic events, and related governmental responses, including related
electrical power outages, on economic conditions, especially in the
agricultural sector
? Maintenance of insurance coverages appropriate for our operations
? Threats to the banking sector and our business due to cybersecurity issues and
attacks and regulatory expectations related to cybersecurity
? Our expectations regarding the adoption of the expected loss model for
determining the allowance for credit losses
? The effects of the coronavirus pandemic on the
economies and the actions of governments to reduce the spread of the virus and
to mitigate the resulting economic consequences
? Descriptions of assumptions underlying or relating to any of the foregoing
Readers of this document should not rely on any forward-looking statements, which reflect only our management's belief as of the date of this report. There are numerous risks and uncertainties that could and will cause actual results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our financial condition and results of operations or prospects. Such risks and uncertainties include, but are not limited to those listed in Item 1A "Risk Factors" of Part II of this Form 10-Q, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of Part I of this Form 10-Q and "Risk Factors" and "Supervision and Regulation" in our 2020 Annual Report on Form 10-K, and in our other reports to theSEC . 34
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Index
INTRODUCTION
This overview of Management's Discussion and Analysis highlights selected information in this report and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire report and any other reports to theSecurities and Exchange Commission ("SEC"), together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Our subsidiary,First Northern Bank of Dixon (the "Bank"), is aCalifornia state-chartered bank that derives most of its revenues from lending and deposit taking in theSacramento Valley region ofNorthern California . Interest rates, business conditions and customer confidence all affect our ability to generate revenues. In addition, the regulatory and compliance environment and competition can present challenges to our ability to generate those revenues.
Significant results and developments during the second quarter and year-to-date 2021 included:
• Net income of
from
million for the three months ended
for the same period last year.
• Diluted income per share of
17.5% from diluted income per share of
Diluted income per share of
20.0% from diluted income per share of
• Net interest income of
1.8% from
million for the same period last year.
• Net interest margin of 2.74% for the six months ended
from 3.36% for the same period last year. Net interest margin of 2.81% for the
three months ended
last year.
• Provision for loan losses of
2021, down 79.3% from
for loan losses for the three months ended
million for the same period last year. The decrease was primarily due to the
overall improvement in economic conditions, which was partially offset by an
increase in specific reserve on impaired loans.
• Total assets of
ofDecember 31, 2020 .
• Total net loans (including loans held-for-sale) of
30, 2021, down 1.2% from
• Total investment securities of
from
• Total deposits of
as ofDecember 31, 2020 .
Recent Developments Related to COVID-19
The coronavirus pandemic and the governmental actions in response to the pandemic, detailed in our Form 10-K for the year endedDecember 31, 2020 , continue to have had an impact on our business. Our commercial real estate loan portfolio exposure to industries most affected by the stay-at-home order and subsequent limitations on business activities included 10.0% to retail properties and business; 1.5% to restaurants; and 1.1% to the hospitality/hotel sector atJune 30, 2021 . Loans to these customers are generally secured by real estate with moderate loan-to-value ratios and further supported by guarantors. InJanuary 2021 , the SBA reopened the PPP with an initial deadline ofMarch 31, 2021 . OnMarch 30, 2021 ,President Biden signed the PPP Extension Act of 2021 into law extending the PPP fromMarch 31, 2021 , toJune 30, 2021 . However, the SBA did not accept new lender applications for first draw or second draw PPP loans submitted afterMay 31, 2021 . During this extension of the PPP, the Bank approved approximately 1,030 applications for loans covering approximately$115 million in funding as ofJune 30, 2021 . These PPP loan originations resulted in approximately$5.4 million in processing fees from the SBA, which are being recognized as an adjustment to the effective yield over the loan's life. PPP processing fees totaling approximately$1.6 million and$2.0 million were recognized in interest income for the three-month periods endedJune 30, 2021 and 2020, respectively. PPP processing fees totaling approximately$2.3 million and$2.0 million were recognized in interest income for the six-month periods endedJune 30, 2021 and 2020, respectively. This includes the amortization of PPP processing fees received in 2020, which are also being recognized as an adjustment to the effective yield over the loan's life. The Bank had unearned PPP processing fees totaling$5.0 million and$1.9 million as ofJune 30, 2021 andDecember 31, 2020 , respectively. 35
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Index
During the six months endedJune 30, 2021 , the Bank received$144 million in payoffs and reimbursements on PPP loans from the SBA for the amounts forgiven pursuant to the terms of the PPP. The Bank had PPP loans outstanding totaling$126 million and$155 million as ofJune 30, 2021 andDecember 31, 2020 , respectively. Of the$126 million in PPP loans outstanding as ofJune 30, 2021 ,$24 million were originated in the first and second phase of the PPP in 2020. The Company expects that a significant portion of these loans will be forgiven during 2021 under the terms of the PPP, as borrowers satisfy the requirement of applying at least 60% of the loan proceeds to support their payroll expenses. Loans which do not qualify for the forgiveness will remain on the Bank's books, subject to the SBA's guarantee. 36
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Index
SUMMARY FINANCIAL DATA
The Company recorded net income of$6,484,000 for the six months endedJune 30, 2021 , representing an increase of$1,100,000 or 20.4% from net income of$5,384,000 for the same period in 2020. The Company recorded net income of$3,306,000 for the three months endedJune 30, 2021 , representing an increase of$601,000 , or 22.2%, from net income of$2,705,000 for the same period in 2020.
The following tables present a summary of the results for the three and six
months ended
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2021 2020 2021 2020
(dollars in thousands except for per
share amounts)
For the Period:
Net Income $ 3,306 $ 2,705 $ 6,484 $ 5,384
Basic Earnings Per Common Share $ 0.24 $ 0.20 $ 0.48 $ 0.40
Diluted Earnings Per Common Share $ 0.24 $ 0.20 $ 0.47 $ 0.40
Net Income to Average Assets
(annualized) 0.73 % 0.70 % 0.74 % 0.75 %
Net Income to Average Equity
(annualized) 8.76 % 7.56 % 8.64 % 7.73 %
Average Equity to Average Assets 8.34 % 9.27 % 8.54 % 9.76 %
June 30, 2021 December 31, 2020
(in thousands except for ratios)
At Period End:
Total Assets $ 1,834,576 $ 1,655,376
Total Investment Securities, at fair value $ 561,559 $ 435,080
Total Loans, Net (including loans held-for-sale) $ 874,056 $ 885,020
Total Deposits $ 1,663,227 $ 1,478,162
Loan-To-Deposit Ratio 52.6 % 59.9 %
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Index
FIRST NORTHERN COMMUNITY BANCORP
Distribution of Average Statements of Condition and Analysis of Net Interest
Income
(in thousands, except percentage amounts)
Three months ended Three months ended
June 30, 2021 June 30, 2020
Average Yield/ Average Yield/
Balance Interest Rate (4) Balance Interest Rate (4)
Assets
Interest-earning
assets:
Loans (1) $ 918,149 $ 10,474 4.58 % $ 919,301 $ 9,702 4.23 %
Certificate of
deposits 14,198 77 2.18 % 22,486 123 2.19 %
Interest bearing due
from banks 292,371 67 0.09 % 163,031 36 0.09 %
Investment
securities, taxable 471,995 1,491 1.27 % 324,040 1,667 2.06 %
Investment
securities,
non-taxable (2) 26,041 140 2.16 % 19,929 124 2.50 %
Other interest
earning assets 6,995 103 5.91 % 6,502 83 5.12 %
Total average
interest-earning
assets 1,729,749 12,352 2.86 % 1,455,289 11,735 3.23 %
Non-interest-earning
assets:
Cash and due from
banks 38,086 35,907
Premises and
equipment, net 6,464 6,375
Interest receivable
and other assets 41,338 50,343
Total average assets $ 1,815,637 $ 1,547,914
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits 425,200 64 0.06 % 347,261 81 0.09 %
Savings and MMDA's 437,113 116 0.11 % 386,804 218 0.23 %
Time, $250,000 or
less 40,987 35 0.34 % 38,046 57 0.60 %
Time, over $250,000 15,028 16 0.43 % 13,309 29 0.87 %
Total average
interest-bearing
liabilities 918,328 231 0.10 % 785,420 385 0.20 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank advances 2,308 5,275
Non-interest-bearing
demand deposits 725,415 595,343
Interest payable and
other liabilities 18,240 18,358
Total liabilities 1,664,291 1,404,396
Total average
stockholders' equity 151,346 143,518
Total average
liabilities and
stockholders' equity $ 1,815,637 $ 1,547,914
Net interest income
and net interest
margin (3) $ 12,121 2.81 % $ 11,350 3.13 %
(1) Average balances for loans include loans held-for-sale and non-accrual loans
and are net of the allowance for loan losses, but non-accrued interest
thereon is excluded. Loan interest income includes loan fees of approximately
respectively. Loan fees for the three months ended
30, 2020 include
(2) Interest income and yields on tax-exempt securities are not presented on
a taxable-equivalent basis.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
(4) For disclosure purposes, yield /rates are annualized by dividing the number
of days in the reported period by 365.
38--------------------------------------------------------------------------------
Index
FIRST NORTHERN COMMUNITY BANCORP
Distribution of Average Statements of Condition and Analysis of Net Interest
Income
(in thousands, except percentage amounts)
Six months ended Six months ended
June 30, 2021 June 30, 2020
Average Yield/ Average Yield/
Balance Interest Rate (4) Balance Interest Rate (4)
Assets
Interest-earning
assets:
Loans (1) $ 913,252 $ 19,711 4.35 % $ 836,798 $ 18,937 4.54 %
Certificate of
deposits 15,127 162 2.16 % 20,323 237 2.34 %
Interest bearing due
from banks 281,154 130 0.09 % 139,268 455 0.66 %
Investment
securities, taxable 448,173 2,977 1.34 % 326,667 3,424 2.10 %
Investment
securities,
non-taxable (2) 26,475 283 2.16 % 18,108 224 2.48 %
Other interest
earning assets 6,739 185 5.54 % 6,538 207 6.35 %
Total average
interest-earning
assets 1,690,920 23,448 2.80 % 1,347,702 23,484 3.49 %
Non-interest-earning
assets:
Cash and due from
banks 36,663 34,590
Premises and
equipment, net 6,468 6,452
Interest receivable
and other assets 38,315 43,216
Total average assets $ 1,772,366 $ 1,431,960
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits 412,911 120 0.06 % 339,462 239 0.14 %
Savings and MMDA's 423,168 221 0.11 % 365,943 486 0.27 %
Time, $250,000 or
less 41,780 74 0.36 % 38,475 113 0.59 %
Time, over $250,000 15,319 40 0.53 % 13,459 65 0.97 %
Total average
interest-bearing
liabilities 893,178 455 0.10 % 757,339 903 0.24 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank Advances 3,646 2,637
Non-interest-bearing
demand deposits 705,366 513,453
Interest payable and
other liabilities 18,812 18,799
Total liabilities 1,621,002 1,292,228
Total average
stockholders' equity 151,364 139,732
Total average
liabilities and
stockholders' equity $ 1,772,366 $ 1,431,960
Net interest income
and net interest
margin (3) $ 22,993 2.74 % $ 22,581 3.36 %
(1) Average balances for loans include loans held-for-sale and non-accrual loans
and are net of the allowance for loan losses, but non-accrued interest
thereon is excluded. Loan interest income includes loan fees of approximately
respectively. Loan fees for the six months ended
2020 include
(2) Interest income and yields on tax-exempt securities are not presented on a
taxable-equivalent basis.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
(4) For disclosure purposes, yield /rates are annualized by dividing the number
of days in the reported period by 365.
39--------------------------------------------------------------------------------
Index
FIRST NORTHERN COMMUNITY BANCORP
Distribution of Average Statements of Condition and Analysis of Net Interest
Income
(in thousands, except percentage amounts)
Three months ended Three months ended
June 30, 2021 March 31, 2021
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning
assets:
Loans (1) $ 918,149 $ 10,474 4.58 % $ 908,301 $ 9,237 4.12 %
Certificates of
deposit 14,198 77 2.18 % 16,065 85 2.15 %
Interest bearing due
from banks 292,371 67 0.09 % 269,813 63 0.09 %
Investment
securities, taxable 471,995 1,491 1.27 % 424,086 1,486 1.42 %
Investment
securities,
non-taxable (2) 26,041 140 2.16 % 26,915 143 2.15 %
Other interest
earning assets 6,995 103 5.91 % 6,480 82 5.13 %
Total average
interest-earning
assets 1,729,749 12,352 2.86 % 1,651,660 11,096 2.72 %
Non-interest-earning
assets:
Cash and due from
banks 38,086 35,225
Premises and
equipment, net 6,464 6,471
Interest receivable
and other assets 41,338 35,258
Total average assets $ 1,815,637 $ 1,728,614
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits 425,200 64 0.06 % 400,485 55 0.06 %
Savings and MMDA's 437,113 116 0.11 % 409,068 105 0.10 %
Time, $250,000 and
under 40,987 35 0.34 % 43,357 40 0.37 %
Time, over $250,000 15,028 16 0.43 % 14,838 24 0.66 %
Total average
interest-bearing
liabilities 918,328 231 0.10 % 867,748 224 0.10 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank Advances 2,308 5,000
Non-interest-bearing
demand deposits 725,415 684,279
Interest payable and
other liabilities 18,240 19,390
Total liabilities 1,664,291 1,576,417
Total average
stockholders' equity 151,346 152,197
Total average
liabilities and
stockholders' equity $ 1,815,637 $ 1,728,614
Net interest income
and net interest
margin (3) $ 12,121 2.81 % $ 10,872 2.67 %
(1) Average balances for loans include loans held-for-sale and non-accrual loans
and are net of the allowance for loan losses, but non-accrued interest is
excluded. Loan interest income includes loan fees of approximately
and
respectively. Loan fees for the three months ended
31, 2021 include
(2) Interest income and yields on tax-exempt securities are not presented on a
taxable equivalent basis.
(3) Net interest margin is computed by dividing net interest income by total
average interest-earning assets.
(4) For disclosure purposes, yield/rates are annualized by dividing the number of
days in the reported period by 365.
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Index
Analysis of Changes
in Interest Income and Interest Expense
(Dollars in thousands)
Following is an analysis of changes in interest income and expense (dollars in
thousands) for the three months ended June 30, 2021 over the three months ended
June 30, 2020 , the six months ended June 30, 2021 over the six months ended June
30, 2020 , and the three months ended June 30, 2021 over the three months ended
March 31, 2021 . Changes not solely due to interest rate or volume have been
allocated proportionately to interest rate and volume.
Three Months Ended Six Months Ended Three Months Ended
June 30, 2021 June 30, 2021 June 30, 2021
Over Over Over
Three Months Ended Six Months Ended Three Months Ended
June 30, 2020 June 30, 2020 March 31, 2021
Interest Interest Interest
Volume Rate Change Volume Rate Change Volume Rate Change
Increase (Decrease) in Interest Income:
Loans$ (13 ) $ 785 $ 772 $ 1,621 $ (847 ) $ 774 $ 100 $ 1,137 $ 1,237 Certificates of Deposit (45 ) (1 ) (46 ) (57 ) (18 ) (75 ) (10 ) 2 (8 ) Due From Banks 31 - 31 254 (579 ) (325 ) 4 - 4 Investment Securities - Taxable 600 (776 ) (176 ) 1,032 (1,479 ) (447 ) 162 (157 ) 5 Investment Securities - Non-taxable 35 (19 ) 16 91 (32 ) 59 (5 ) 2 (3 ) Other Assets 6 14 20 7 (29 ) (22 ) 6 15 21$ 614 $ 3 $ 617 $ 2,948 $ (2,984 ) $ (36 ) $ 257 $ 999 $ 1,256
Increase (Decrease) in Interest Expense:
Deposits: Interest-Bearing Transaction Deposits$ 14 $ (31 ) $ (17 ) $ 42 $ (161 ) $ (119 ) $ 9 $ -$ 9 Savings & MMDAs 26 (128 ) (102 ) 67 (332 ) (265 ) 5 6 11 Time Certificates 24 (59 ) (35 ) 54 (118 ) (64 ) (2 ) (11 ) (13 )$ 64 $ (218 ) $ (154 ) $ 163 $ (611 ) $ (448 ) $ 12 $ (5 ) $ 7 Increase (Decrease) in Net Interest Income:$ 550 $ 221 $ 771 $ 2,785 $ (2,373 ) $ 412 $ 245 $ 1,004 $ 1,249 41
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CHANGES IN FINANCIAL CONDITION
The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a$65,418,000 , or 24.5%, increase in cash and cash equivalents, a$3,920,000 , or 23.2%, decrease in certificates of deposit, a$126,479,000 , or 29.1%, increase in investment securities available-for-sale, a$3,080,000 , or 0.4%, decrease in net loans held-for-investment, and a$7,884,000 , or 85.8%, decrease in loans held-for-sale fromDecember 31, 2020 toJune 30, 2021 . The increase in cash and cash equivalents was primarily due to an increase in deposit balances. The decrease in certificates of deposit was due to maturities of certificates of deposit and allocating the cash flows from those maturities towards additional purchases of available-for-sale securities. The increase in investment securities was due to allocating cash flows from deposits towards purchases of investment securities. The decrease in net loans held-for-investment was primarily due to SBA forgiveness payments on PPP loans totaling$144 million , which was partially offset by originations of PPP loans totaling$115 million and commercial real estate loan purchases totaling approximately$47.3 million . The decrease in loans held-for-sale was due to the timing of funding and sale of the loans held-for-sale pipeline. The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an increase in total deposits of$185,065,000 , or 12.5%, fromDecember 31, 2020 toJune 30, 2021 . The overall increase in total deposits was primarily attributable to PPP loans originated in the first half of 2021, new customer relationships gained as a result of our PPP lending activities, and increased savings rates driven by the economic uncertainties due to the coronavirus pandemic.
CHANGES IN RESULTS OF OPERATIONS
Interest Income
The
Interest income on loans for the six months endedJune 30, 2021 was up 4.1% from the same period in 2020, increasing from$18,937,000 to$19,711,000 , and was up 8.0% for the three months endedJune 30, 2021 over the same period in 2020, increasing from$9,702,000 to$10,474,000 . The increases in interest income were primarily driven by increased PPP fee recognition, which accelerated due to the significant paydowns received to date, interest recognized on CARES Act loan forbearances that were previously not accruing interest, partially offset by lower yields earned on newly originated loans and loans repricing at lower rates. PPP processing fees totaling approximately$2.3 million and$2.0 million were recognized in interest income for the six-month periods endedJune 30, 2021 and 2020, respectively. PPP processing fees totaling approximately$1.6 million and$2.0 million were recognized in interest income for the three-month periods endedJune 30, 2021 and 2020, respectively. The Bank had unearned PPP processing fees totaling approximately$5.0 million as ofJune 30, 2021 , which will continue to be recognized over the remaining life of the PPP loans. In the second quarter of 2020, the Bank made a policy election to cease interest recognition for loans provided temporary full payment deferrals during the term of the forbearance period (generally ranging from three to six months) under Section 4013 of the CARES Act. Upon completion of the payment forbearance period, and resumption of performance under the original loan terms, the foregone interest is capitalized as deferred interest and recognized as a yield adjustment over the remaining loan term. Loans on interest-only plans continued to accrue interest income given continued payment performance over the course of the forbearance period. A majority of loans completed their forbearance period during the fourth quarter of 2020. One loan for$900,000 was on a principal and interest forbearance plan atJune 30, 2021 . The Bank recognized approximately$466,000 in deferred interest and a loss of interest income of approximately$900,000 for the six-month periods endedJune 30, 2021 and 2020, respectively. The Bank recognized approximately$289,000 in deferred interest and a loss of interest income of approximately$900,000 for the three-month periods endedJune 30, 2021 and 2020, respectively. Interest income on certificates of deposit for the six months endedJune 30, 2021 was down 31.7% from the same period in 2020, decreasing from$237,000 to$162,000 , and was down 37.4% for the three months endedJune 30, 2021 over the same period in 2020, decreasing from$123,000 to$77,000 . The decrease in interest income on certificates of deposit for the six months endedJune 30, 2021 as compared to the same period a year ago was primarily due to a decrease in average balances of certificates of deposit and an 18 basis point decrease in yield on certificates of deposit. The decrease in interest income on certificates of deposit for the three months endedJune 30, 2021 as compared to the same period a year ago was primarily due to a decrease in average balances of certificates of deposit and a 1 basis point decrease in yield on certificates of deposit. Interest income on interest-bearing due from banks for the six months endedJune 30, 2021 was down 71.4% from the same period in 2020, decreasing from$455,000 to$130,000 , and was up 86.1% for the three months endedJune 30, 2021 over the same period in 2020, increasing from$36,000 to$67,000 . This income is primarily derived from interest on excess reserves held at theFederal Reserve . The decrease in interest income on interest-bearing due from banks for the six months endedJune 30, 2021 as compared to the same period a year ago was primarily due to reductions in the Federal Funds Rate in March of 2020 resulting in a 57 basis point decrease in yield on interest-bearing due from banks, which was partially offset by an increase in average balances of interest-bearing due from banks. The increase in interest income on interest-bearing due from banks for the three months endedJune 30, 2021 as compared to the same period a year ago was primarily due to an increase in average balances of interest-bearing due from banks. 42
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Index
Interest income on investment securities available-for-sale for the six months endedJune 30, 2021 was down 10.6% from the same period in 2020, decreasing from$3,648,000 to$3,260,000 , and was down 8.9% for the three months endedJune 30, 2021 over the same period in 2020, decreasing from$1,791,000 to$1,631,000 . The decrease in interest income on investment securities for the six months endedJune 30, 2021 as compared to the same period a year ago was primarily due to a 73 basis point decrease in investment yields, which was partially offset by an increase in average investment securities. The decrease in interest income on investment securities for the three months endedJune 30, 2021 as compared to the same period a year ago was primarily due to a 78 basis point decrease in investment yields, which was partially offset by an increase in average investment securities. Interest income on other earning assets for the six months endedJune 30, 2021 was down 10.6% from the same period in 2020, decreasing from$207,000 to$185,000 , and was up 24.1% for the three months endedJune 30, 2021 over the same period in 2020, increasing from$83,000 to$103,000 . This income is primarily derived from dividends received by theFederal Home Loan Bank . The decrease in interest income on other assets for the six months endedJune 30, 2021 as compared to the same period a year ago was primarily due to an 81 basis point decrease in yield on other earning assets as a result of decreased FHLB dividend rates, which was partially offset by an increase in average balances of other earning assets. The increase in interest income on other earning assets for the three months endedJune 30, 2021 as compared to the same period a year ago was primarily due to a 79 basis point increase in yield on other earning assets and an increase in average balances of other earning assets.
The Company had no Federal Funds sold balances during the three and six months
ended
Interest Expense
Interest expense on deposits for the six months endedJune 30, 2021 was down 49.6% from the same period in 2020, decreasing from$903,000 to$455,000 , and was down 40.0% for the three months endedJune 30, 2021 over the same period in 2020, decreasing from$385,000 to$231,000 . The decrease in interest expense during the six months endedJune 30, 2021 was primarily due to a 14 basis point decrease in the Company's average cost of funds, which was partially offset by an increase in the average balance of interest-bearing liabilities. The decrease in interest expense during the three months endedJune 30,2021 was primarily due to a 10 basis point decrease in the Company's average cost of funds, which was partially offset by an increase in the average balance of interest-bearing liabilities.
Provision for Loan Losses
Provision for loan losses totaled$300,000 for the six months endedJune 30, 2021 compared to$1,450,000 for the same period in 2020. There was no provision for loan losses for the three months endedJune 30, 2021 compared to$800,000 for the same period in 2020. The allowance for loan losses was approximately$15,379,000 or 1.72% of total loans, atJune 30, 2021 , compared to$15,416,000 , or 1.73% of total loans, atDecember 31, 2020 . The allowance for loan losses is maintained at a level considered adequate by management to provide for probable loan losses inherent in the loan portfolio. The decrease in the provision for loan losses during the three and six months endedJune 30, 2021 compared to the same period in 2020 was primarily due to decreases in qualitative factors resulting from an improvement in economic conditions, which was partially offset by an increase in specific reserves on impaired loans.
Provision for Unfunded Lending Commitment Losses
Reversal of unfunded lending commitment losses totaled$300,000 for the six months endedJune 30, 2021 compared to provision for unfunded lending commitment losses of$110,000 for the same period in 2020. Reversal of unfunded lending commitment losses totaled$100,000 for the three months endedJune 30, 2021 compared to provision for unfunded lending commitment losses of$10,000 for the same period in 2020. The decrease was primarily due to a decrease in unfunded lending commitment balances coupled with decreases in qualitative factors resulting from an improvement in economic conditions
Provisions for unfunded lending commitment losses are included in non-interest expense in the Condensed Consolidated Statements of Income.
Non-Interest Income
Non-interest income was up 23.6% for the six months ended
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The increase was primarily due to increases in service charges on deposit accounts, gains on sales of loans held-for-sale, loan servicing income, and debit card income, which was partially offset by decreases in mortgage brokerage income and increases in losses on sales of available for sale securities. The increase in service charges on deposit accounts was primarily due to the Bank's decision in the prior year to waive overdraft/NSF fees for all business and consumer customers. The decision to waive overdraft/NSF fees was in response to the COVID-19 pandemic and began inMarch 2020 and expired onAugust 1, 2020 . The increase in gains on sales of loans held-for-sale was primarily due to an increase in loan origination volumes as a result of the decline in interest rates and uptick in refinancing activity. The increase in loan servicing income was primarily due to mortgage servicing assets booked coupled with the reversal of impairment expense recognized on mortgage servicing rights assets primarily due to a decrease in prepayment rates fromDecember 31, 2020 . The increase in debit card income was primarily due to an increase in transaction volumes. The decrease in mortgage brokerage income was primarily a result of decreased mortgage brokerage volume. The increase in losses on sales/calls of available-for-sale securities was primarily due to the sale of municipal and agency securities at a net loss during the first half of 2021.
Non-interest income was up 8.3% for the three months ended
The increase was primarily due to increases in service charges on deposit accounts, loan servicing income, and debit card income, which was partially offset by decreases in gains on sales of loans held-for-sale and increases in losses on sales of available for sale securities. The increase in service charges on deposit accounts was primarily due to the Bank's decision in the prior year to waive overdraft/NSF fees for all business and consumer customers as discussed above. The increase in loan servicing income was primarily due to a decrease in impairment expense recognized on mortgage servicing rights. The increase in debit card income was primarily due to an increase in transaction volumes. The decrease in gains on sales of loans held-for-sale was due to a decrease in loan origination volumes. The increase in losses on sales/calls of available-for-sale securities was primarily due to the sale of agency securities at a net loss during the second quarter of 2021.
Non-Interest Expenses
Total non-interest expenses were up 4.6% for the six months ended
The increase was primarily due to increases in salaries and employee benefits, data processing, and other expenses, which was partially offset by decreases in occupancy and equipment. The increase in salaries and employee benefits was primarily due to increased incentive compensation expense as a result of improved financial performance, which was partially offset by an increase in capitalization of loan origination costs. The increase in data processing expenses was primarily due to costs associated with enhanced IT infrastructure coupled with the implementation of a digital lending platform for PPP loans during the first half of 2021. The increase in other expenses was primarily due to increases inFDIC assessments and loan collection expenses, which was partially offset by the reversal of unfunded lending commitment losses. The decrease in occupancy and equipment expense was primarily due to the lease termination of the former trust office in the fourth quarter of 2020 and a decrease in depreciation expense.
Total non-interest expenses were up 10.0% for the three months ended
The increase was primarily due to increases in salaries and employee benefits,
data processing, and other expenses, which was partially offset by decreases in
occupancy and equipment. The increase in salaries and employee benefits was
primarily due to increased incentive compensation expense as a result of
improved financial performance. The increase in data processing expenses was
primarily due to costs associated with enhanced IT infrastructure coupled with
the implementation of a digital lending platform for PPP loans during the first
half of 2021. The increase in other expenses was primarily due to an increase
in loan collection expenses, which was partially offset by the reversal of
unfunded lending commitment losses. The decrease in occupancy and equipment
expense was primarily due to decreased rent expense as a result of the lease
termination of the former trust office in the fourth quarter of 2020 and a
decrease in depreciation expense.
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The following table sets forth other non-interest expenses by category for the
three and six months ended
(in thousands)
Three months
Three months ended ended Six months ended Six months ended
June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020
Other non-interest expenses
(Reversal of) provision for unfunded loan
commitments $ (100 ) $ 10 $ (300 ) $ 110
FDIC assessments 120 130 255 130
Contributions 36 32 80 81
Legal fees 123 125 173 209
Accounting and audit fees 115 114 230 228
Consulting fees 167 120 217 194
Postage expense 45 44 84 66
Telephone expense 38 31 68 59
Public relations 31 30 57 92
Training expense 23 16 35 43
Loan origination expense 94 65 120 110
Computer software depreciation 17 17 33 34
Sundry losses 114 15 169 79
Loan collection expense 365 68 595 102
Minibank interchange fees 141 107 270 242
Other non-interest expense 388 313 714 573
Total other non-interest expenses $ 1,717 $ 1,237 $ 2,800 $ 2,352
Income Taxes
The Company's tax rate, the Company's income before taxes and the amount of tax
relief provided by non-taxable earnings affect the Company's provision for
income taxes. Provision for income taxes increased 23.3% for the six months
ended June 30, 2021 from the same period in 2020, increasing from $1,967,000 to
$2,426,000 , and increased 26.1% for the three months ended June 30, 2021 from
the same period in 2020, increasing from $986,000 to $1,243,000 . The increase
in provision for income taxes was primarily due to an increase in pre-tax
income. The effective tax rate was 27.2% and 26.8% for the six months ended
June 30, 2021 and June 30, 2020 , respectively.
Off-Balance Sheet Commitments
The following table shows the distribution of the Company's undisbursed loan commitments at the dates indicated.
(in thousands)
June 30, 2021 December 31, 2020
Undisbursed loan commitments $ 178,389 $ 189,097
Standby letters of credit 3,122 1,731
Commitments to sell loans 190 1,052
$ 181,701 $ 191,880
The reserve for unfunded lending commitments amounted to $650,000 and $950,000
as of June 30, 2021 and December 31, 2020 , respectively. The reserve for
unfunded lending commitments is included in other liabilities on the Condensed
Consolidated Balance Sheets. See Note 7 of the Notes to Condensed Consolidated
Financial Statements of this Form 10-Q, "Financial Instruments with Off-Balance
Sheet Risk," for additional information.
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Asset Quality
The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times. Asset quality reviews of loans and other non-performing assets are administered using credit risk-rating standards and criteria similar to those employed by state and federal banking regulatory agencies. The federal bank regulatory agencies utilize the following definitions for assets adversely classified for supervisory purposes:
• Substandard Assets - A substandard asset is inadequately protected by the
current sound worth and paying capacity of the obligor or of the collateral
pledged, if any. Assets so classified must have a well-defined weakness or
weaknesses that jeopardize the liquidation of the debt. They are characterized
by the distinct possibility that the institution will sustain some loss if the
deficiencies are not corrected.
• Doubtful Assets - An asset classified doubtful has all the weaknesses inherent
in one classified substandard with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently existing
facts, conditions, and values, highly questionable or improbable.
Other Real Estate Owned and loans rated Substandard and Doubtful are deemed "classified assets". This category, which includes both performing and non-performing assets, receives an elevated level of attention regarding collection.
The following tables summarize the Company's non-accrual loans net of guarantees of theState of California andU.S. Government by loan category atJune 30, 2021 andDecember 31, 2020 : AtJune 30, 2021
At
Gross Guaranteed Net Gross Guaranteed Net
(in thousands)
Commercial $ 28 $ - $ 28 $ 363 $ 63 $ 300
Commercial real estate 6,570 28 6,542 4,875 34 4,841
Agriculture 9,130 - 9,130 9,130 - 9,130
Residential mortgage 144 - 144 153 - 153
Residential construction - - - - - -
Consumer 685 - 685 690 - 690
Total non-accrual loans $ 16,557 $ 28 $ 16,529 $ 15,211 $ 97 $ 15,114
It is generally the Company's policy to discontinue interest accruals once a
loan is past due for a period of 90 days as to interest or principal payments
unless the loan is well secured and in process of collection. When a loan is
placed on non-accrual, interest accruals cease and uncollected accrued interest
is reversed and charged against current income. Payments received on non-accrual
loans are applied against principal. A loan may only be restored to an accruing
basis when it again becomes well secured and in the process of collection or all
past due amounts have been collected or there is an extended period of positive
performance and a high probability that the loan will continue to pay according
to original terms.
Non-accrual loans amounted to $16,557,000 at June 30, 2021 and were comprised of
one commercial loan totaling $28,000 , four commercial real estate loans totaling
$6,570,000 , three agriculture loans totaling $9,130,000 , one residential
mortgage loan totaling $144,000 , and three consumer loans totaling
$685,000 . Non-accrual loans amounted to $15,211,000 at December 31, 2020 and
were comprised of four commercial loans totaling $363,000 , three commercial real
estate loans totaling $4,875,000 , three agriculture loans totaling $9,130,000 ,
one residential mortgage loan totaling $153,000 and five consumer loans totaling
$690,000 . If the loan is considered collateral dependent, it is generally the
Company's policy to charge-off the portion of any non-accrual loan that the
Company does not expect to collect by writing the loan down to the estimated net
realizable value of the underlying collateral.
Loans for which it is probable that payment of interest and principal will not
be made in accordance with the contractual terms of the loan agreement are
considered impaired. Nonaccrual loans, which are non-performing impaired loans,
totaled $16,557,000 and $15,211,000 as of June 30, 2021 and December 31, 2020 ,
respectively. A restructuring of a loan can constitute a TDR if the Company for
economic or legal reasons related to the borrower's financial difficulties
grants a concession to the borrower that it would not otherwise consider. A loan
that is restructured as a TDR is considered an impaired loan. Performing
impaired loans, which consisted of loans modified as TDRs, totaled $840,000 and
$2,260,000 at June 30, 2021 and December 31, 2020 , respectively. The Company
expects to collect all principal and interest due from performing impaired
loans. These loans are not on non-accrual status. The majority of the
non-performing impaired loans, in management's opinion, were adequately
collateralized based on recently obtained appraised property values or were
guaranteed by a governmental entity. See "Allowance for Loan Losses" below for
additional information. No assurance can be given that the existing or any
additional collateral will be sufficient to secure full recovery of the
obligations owed under these loans.
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OnMarch 22, 2020 , the Federal bank regulatory agencies issued joint guidance advising that the agencies have confirmed with the staff of theFinancial Accounting Standards Board that short-term modifications due to COVID-19, made on a good faith basis to borrowers who were current prior to relief, are not TDRs. The CARES Act also provided relief from TDR classification for certain COVID-19 loan modifications. InDecember 2020 , the Consolidated Appropriations Act, 2021 was signed into law. Section 541 of this legislation, "Extension of Temporary Relief From Troubled Debt Restructurings and Insurer Clarification," extends Section 4013 of the CARES Act to the earlier ofJanuary 1, 2022 or 60 days after the termination of the national emergency declared relating to COVID-19. The Bank elected not to classify modifications that meet the criteria under either the CARES Act or the criteria specified by the regulatory agencies as TDRs. As the following table illustrates, total non-performing assets, net of guarantees of theState of California andU.S. Government , including its agencies and its government-sponsored agencies, increased$1,415,000 , or 9.4%, to$16,529,000 during the first six months of 2021. Non-performing assets, net of guarantees, represented 0.9% of total assets atJune 30, 2021 . AtJune 30, 2021
At
Gross Guaranteed Net Gross Guaranteed Net
(dollars in
thousands)
Non-accrual loans $ 16,557 $ 28 $ 16,529 $ 15,211 $ 97 $ 15,114
Loans 90 days past
due and still
accruing - - - - - -
Total non-performing
loans 16,557 28 16,529 15,211 97 15,114
Other real estate
owned - - - - - -
Total non-performing
assets $ 16,557 $ 28 $ 16,529 $
15,211 $ 97
Non-performing loans (net of guarantees) to total loans 1.9 % 1.7 % Non-performing assets (net of guarantees) to total assets 0.9 % 0.9 % Allowance for loan and lease losses to non-performing loans (net of guarantees) 93.0 % 102.0 %
The Company had no loans 90 days or more past due and still accruing at
Excluding the non-performing loans cited previously, loans totaling$5,231,000 and$11,878,000 were classified as substandard or doubtful loans, representing potential problem loans atJune 30, 2021 andDecember 31, 2020 , respectively. In Management's opinion, the potential loss related to these problem loans was sufficiently covered by the Bank's existing loan loss reserve (Allowance for Loan Losses) atJune 30, 2021 andDecember 31, 2020 . The ratio of the Allowance for Loan Losses to total loans atJune 30, 2021 andDecember 31, 2020 was 1.72% and 1.73%, respectively. Other real estate owned ("OREO") consists of property that the Company has acquired by deed in lieu of foreclosure or through foreclosure proceedings, and property that the Company does not hold title to but is in actual control of, known as in-substance foreclosure. The estimated fair value of the property is determined prior to transferring the balance to OREO. The balance transferred to OREO is the estimated fair value of the property less estimated cost to sell. Impairment may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals or loan officer evaluations are then conducted periodically thereafter charging any additional impairment to the appropriate expense account. The Company had no OREO as ofJune 30, 2021 andDecember 31, 2020 . 47
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Allowance for Loan Losses
The Company's Allowance for Loan Losses is maintained at a level believed by management to be adequate to provide for loan and other credit losses that can be reasonably anticipated. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. The Company contracts with vendors for credit reviews of the loan portfolio as well as considers current economic conditions, loan loss experience, and other factors in determining the adequacy of the reserve balance. The allowance for loan losses is based on estimates, and actual losses may vary from current estimates.
The following table summarizes the Allowance for Loan Losses of the Company
during the six months ended
Analysis of the Allowance for Loan Losses
(Amounts in thousands, except percentage amounts)
Six months ended Year ended
June 30, December 31,
2021 2020 2020
Balance at beginning of period $ 15,416 $ 12,356 $ 12,356
Provision for loan losses 300 1,450 3,050
Loans charged-off:
Commercial (347 ) (184 ) (212 )
Commercial Real Estate - - -
Agriculture - - -
Residential Mortgage - - -
Residential Construction - - -
Consumer (6 ) (13 ) (15 )
Total charged-off (353 ) (197 ) (227 )
Recoveries:
Commercial 8 12 201
Commercial Real Estate - - -
Agriculture - - -
Residential Mortgage - - -
Residential Construction - - -
Consumer 8 10 36
Total recoveries 16 22 237
Net charge-offs (337 ) (175 ) 10
Balance at end of period $ 15,379 $ 13,631 $ 15,416
Ratio of net charge-offs to average loans
outstanding during the period (annualized) (0.07 %) (0.04 %) 0.00 %
Allowance for loan losses
To total loans at the end of the period 1.72 % 1.36 % 1.73 %
To non-performing loans, net of guarantees at the
end of the period 93.0 % 84.4 % 102.0 %
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Deposits
Deposits are one of the Company's primary sources of funds. AtJune 30, 2021 , the Company had the following deposit mix: 26.9% in savings and MMDA deposits, 3.3% in time deposits, 25.1% in interest-bearing transaction deposits and 44.7% in non-interest-bearing transaction deposits. AtDecember 31, 2020 , the Company had the following deposit mix: 26.1% in savings and MMDA deposits, 3.8% in time deposits, 26.4% in interest-bearing transaction deposits and 43.7% in non-interest-bearing transaction deposits. Non-interest-bearing transaction deposits increase the Company's net interest income by lowering its cost of funds. The Company obtains deposits primarily from the communities it serves. The Company believes that no material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company accepts deposits in excess of$250,000 from customers.
Maturities of time certificates of deposits of over
(in thousands)
June 30, 2021 December 31, 2020
Three months or less $ 4,762 $ 5,110
Over three to twelve months 3,910 5,877
Over twelve months 5,760 3,656
Total $ 14,432 $ 14,643
Liquidity and Capital Resources
In order to serve our market area and comply with banking regulations, the Company must maintain adequate liquidity and adequate capital. Liquidity is measured by various ratios, in management's opinion, the most common being the ratio of net loans to deposits (including loans held-for-sale). This ratio was 52.6% onJune 30, 2021 . In addition, onJune 30, 2021 , the Company had the following short-term investments (based on remaining maturity and/or next repricing date):$14,744,000 in securities due within one year or less; and$123,383,000 in securities due in one to five years. To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks which totaled$122,000,000 atJune 30, 2021 . Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity atJune 30, 2021 of$285,452,000 ; credit availability is subject to certain collateral requirements.
The Company's primary source of liquidity on a stand-alone basis is dividends from the Bank. Dividends from the Bank are subject to regulatory restrictions.
InJuly 2013 , the FRB and the otherU.S. federal banking agencies adopted final rules making significant changes to theU.S. regulatory capital framework forU.S. banking organizations and to conform this framework to the guidelines published by the Basel Committee known as the Basel III Global Regulatory Framework for Capital and Liquidity. The Basel Committee is a committee of banking supervisory authorities from major countries in the global financial system which formulates broad supervisory standards and guidelines relating to financial institutions for implementation on a country-by-country basis. These rules adopted by the FRB and the other federal banking agencies (theU.S. Basel III Capital Rules) replaced the federal banking agencies' general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules, in accordance with certain transition provisions. Banks, such as First Northern, became subject to the final rules onJanuary 1, 2015 . The final rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. The final rules provide for increased minimum capital ratios as follows: (a) a common equity Tier 1 capital ratio of 4.5%; (b) a Tier 1 capital ratio of 6%; (c) a total capital ratio of 8%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4%. Under these rules, in order to avoid certain limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements (equal to 2.5% of total risk-weighted assets). The capital conservation buffer is designed to absorb losses during periods of economic stress. Pursuant to the EGRRCPA, the FRB adopted a final rule, effectiveAugust 31, 2018 , amending theSmall Bank Holding Company and Savings and Loan Holding Company Policy Statement (the "policy statement") to increase the consolidated assets threshold to qualify to utilize the provisions of the policy statement from$1 billion to$3 billion . Bank holding companies, such as the Company, are subject to capital adequacy requirements of the FRB; however, bank holding companies which are subject to the policy statement are not subject to compliance with the regulatory capital requirements until they hold$3 billion or more in consolidated total assets. As a consequence, as ofDecember 31, 2018 , the Company was not required to comply with the FRB's regulatory capital requirements until such time that its consolidated total assets equal$3 billion or more or if the FRB determines that the Company is no longer deemed to be a small bank holding company. However, if the Company had been subject to these regulatory capital requirements, it would have exceeded all regulatory requirements. 49
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In August of 2020, the Federal banking agencies adopted the final version of the community bank leverage ratio framework rule (the "CBLR"), implementing two interim final rules adopted in April of 2020. The rule provides an optional, simplified measure of capital adequacy. Under the optional CBLR framework, the CBLR will be 8.5 percent through calendar year 2021 and 9 percent thereafter. The rule is applicable to all non-advanced approachesFDIC -supervised institutions with less than$10 billion in total consolidated assets. Banks not electing the CBLR framework will continue to be subject to the generally applicable risk-based capital rule. At the present time, the Company and the Bank do not intend to elect to use the CBLR framework.
As of
(amounts in thousands except percentage amounts)
Actual Well Capitalized
Ratio
Capital Ratio Requirement
Leverage $ 148,149 8.18 % 5.0 %
Common Equity Tier 1 $ 148,149 16.24 % 6.5 %
Tier 1 Risk-Based $ 148,149 16.24 % 8.0 %
Total Risk-Based $ 159,610 17.50 % 10.0 %
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