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 2019 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
? Pending and recent legal and regulatory actions, and future legislative and
regulatory developments, including the effects of the
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
federal Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"),
enacted in
coronavirus pandemic and the governmental actions in response thereto
? 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 financial crisis by the
intention not to elect to use the recently enacted 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 of loans made under the Paycheck
Protection Program ("PPP") and the timing thereof
32--------------------------------------------------------------------------------
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 full
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
interest rate environment
? Possible changes in the initiatives and policies of the federal bank regulatory
agencies
? 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 loan 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 2019 Annual Report on Form 10-K, and in our other reports to theSEC . 33
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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, 2019 . 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 third quarter and year-to-date 2020 included:
• Net income of
21.0% from
million for the same period last year.
• Diluted income per share of
down 20.9% from diluted income per share of
year. Diluted income per share of
30, 2020, down 6.9% from diluted income per share of
last year.
• Net interest income of
2020, down 0.7% from
was due to a decrease in interest income on due from banks, which was partially
offset by an increase in interest income on loans and investment securities and
a decrease in interest expense on deposits. Net interest income of
million for the three months ended
million for the same period last year. The increase was due to an increase in
interest income on loans and a decrease in interest expense on deposits, which
was partially offset by a decrease in interest income on due from banks and on
investment securities.
• Net interest margin of 3.29% for the nine months ended
18.8% from 4.05% for the same period last year. Net interest margin of 3.16%
for the three months ended
same period last year.
• Provision for loan losses of
30, 2020, compared to no provision for the same period last year. Provision
for loan losses of
compared to no provision for the same period last year. The increase was
largely driven by increases in qualitative factors adversely affecting our loan
portfolio due to declines in the general economic environment as a result of
the coronavirus pandemic.
• Total assets of
billion as of
• Total net loans (including loans held-for-sale) of
The
increase was largely driven by PPP loans totaling approximately
ofSeptember 30, 2020 .
• Total investment securities of
from
• Total deposits of
billion as of
• FHLB advances of
advances as of
and Recovery Advances Program and are short-term borrowings with a 0% interest
rate. SinceMarch 13, 2020 ,the United States has been operating under a state of emergency declared byPresident Trump in response to the spread of the coronavirus and the COVID-19 disease which it causes. OnMarch 4, 2020 ,California GovernorGavin Newsom declared a similar state-wide emergency. Also, early in March, a number of county and other local health agencies inCalifornia declared emergencies and issued "stay-at-home" ordinances for all persons other than workers at "essential businesses". Later in 2020, theCalifornia state government adopted a four-phase reopening plan. The ability of a county to move into a phase with fewer restrictions on economic and social activities is dependent upon the county's compliance with parameters such as the county's case rate, test positivity rate, and a health equity metric. As of this time, theCalifornia state government, as well as the county health departments in our market area, continue to limit business re-openings in certain sectors and/or with capacity and other restrictions. DuringMarch 2020 and continuing thereafter, the pandemic and governmental responses have resulted in recessionary economic, labor and financial market conditions acrossthe United States and in our markets inCalifornia , including dramatic increases in unemployment. In response, the FRB reduced its federal funds rate by 1.5 percentage points to the current target range of .00 to .25 percent. In addition, in lateMarch 2020 , theU.S. government enacted the CARES Act, a$2.2 trillion economic stimulus package, the largest inU.S. history, in an effort to lessen the impact of the pandemic on consumers and businesses. 34
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Index
These developments 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 includes 5.7% to retail properties and business; 1.3% to restaurants; and 0.9% to the hospitality/hotel sector atSeptember 30, 2020 . Loans to these customers are generally secured by real estate with relatively low loan-to-value ratios and strong guarantors. There is concern that borrowers will draw on their credit lines to support cashflow disruptions caused by the continuing restrictions on business activities. Most of the Bank's optional advance lines of credit are "controlled" with advances supported by certain assets pledged to the bank for repayment or specific budgeted expense. The Bank monitors credit line advances daily and has not noted any significant, unusual loan advances as ofSeptember 30, 2020 . We have also granted customer relief in a variety of ways, including extended grace periods on residential and commercial mortgages, commercial loans, and automobile loan and lease payments, refraining from reporting payment deferrals to credit bureaus and waiving or refunding certain fees. The increase in our provision for loan and lease losses to$800,000 and$2,250,000 for the third quarter and year to date 2020, respectively, compared to no provision for the same periods in 2019, was largely driven by increases in qualitative factors adversely affecting our loan portfolio due to declines in the general economic environment as a result of the coronavirus pandemic. The Bank, in the first part ofApril 2020 , commenced participation in the Paycheck Protection Program (PPP) of theSmall Business Administration (SBA) which is aimed at providing relief from the pandemic to small businesses through loans by banks guaranteed by the SBA. In the initial phase of the program, the Bank approved approximately 650 applications for loans under the PPP covering approximately$184 million in funding. The program was suspended after the initial Congressional appropriation of$349 billion was exhausted. A second phase of the program, involving a Congressional appropriation of some$310 billion , was initiated onApril 27, 2020 . As ofSeptember 30, 2020 , the Bank had approved approximately 670 applications for PPP loans in this second phase, covering approximately$51 million in funding. A total of approximately$235 million in PPP loans were originated year to date. These PPP loan originations resulted in approximately$7.8 million in SBA processing fees which will be recognized as an adjustment to the effective yield over the loans projected life. A total of approximately$2.1 and$4.1 million of PPP processing fees was recognized in interest income on loans for the three and nine months endedSeptember 30, 2020 , respectively. The Company expects that a significant portion of the loans it has made under the PPP will be forgiven during the remainder of 2020 under the terms of the program, as borrowers satisfy the requirement of applying at least 60% of the loan proceeds to support their payroll expenses. Thereafter, the Company expects to be reimbursed by the SBA for the amounts forgiven pursuant to the terms of the PPP. Loans which do not qualify for the forgiveness will remain on the Bank's books, subject to the SBA's guarantee. The Bank has continued to actively assist its communities by providing temporary loan relief under Section 4013 of the CARES Act to customers who have been negatively impacted by COVID-19. This relief includes loan modifications which provided temporary forbearance programs (both full payment deferrals and interest only payments). The Bank has provided temporary forbearance relief for loans totaling approximately$91.3 million atSeptember 30, 2020 , a decrease of$2.9 million compared toJune 30, 2020 , which resulted in the net deferral of interest income of approximately$0.4 million and$1.3 million for the three and nine months endedSeptember 30, 2020 , respectively. For loans that were provided full payment deferrals under Section 4013, the Bank made a policy election to cease recognizing interest income during the term of the payment suspension. 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. Of the$91.3 million in total forbearances as ofSeptember 30, 2020 , approximately$74.2 million were provided full payment deferrals for terms ranging from three to six months, which resulted in the net deferral of interest income of approximately$0.4 million and$1.3 million for the three and nine months endedSeptember 30, 2020 , respectively. Although banks inCalifornia are defined as "essential businesses" under theCalifornia governmental actions and thus are allowed to remain open, some of our employees have elected to work remotely, a majority of whom would normally be working in our branches or offices. In our branches and offices we continue to enforce the use of face coverings, social distancing and using proper hygiene practices.
For additional information on the possible effects of the pandemic on our business, see Part II., Item 1.A., "Risk Factors", in this Report on Form 10-Q.
35--------------------------------------------------------------------------------
Index
SUMMARY FINANCIAL DATA
The Company recorded net income of$8,809,000 for the nine months endedSeptember 30, 2020 , representing a decrease of$2,336,000 or 21.0% from net income of$11,145,000 for the same period in 2019. The Company recorded net income of$3,425,000 for the three months endedSeptember 30, 2020 , representing a decrease of$329,000 or 8.8% from net income of$3,754,000 for the same period in 2019. The following tables present a summary of the results for the three and nine months endedSeptember 30, 2020 and 2019, and a summary of financial condition atSeptember 30, 2020 andDecember 31, 2019 . Three Months Three Months Nine Months Nine Months Ended September Ended September Ended September Ended September 30, 2020 30, 2019 30, 2020 30, 2019 (dollars in thousands except for per share amounts) For the Period: Net Income $ 3,425 $ 3,754 $ 8,809 $ 11,145 Basic Earnings Per Common Share $ 0.27 $ 0.29 $ 0.69 $ 0.87 Diluted Earnings Per Common Share $ 0.27 $ 0.29 $ 0.68 $ 0.86 Net Income to Average Assets (annualized) 0.84 % 1.20 % 0.78 % 1.20 % Net Income to Average Equity (annualized) 9.25 % 11.76 % 8.24 % 12.26 % Average Equity to Average Assets 9.10 % 10.18 % 9.52 % 9.83 % September 30, 2020 December 31, 2019 (in thousands except for ratios) At Period End: Total Assets $ 1,677,266 $ 1,292,591 Total Investment Securities, at fair value $ 363,369 $ 342,897 Total Loans, Net (including loans held-for-sale) $ 970,497 $ 773,003 Total Deposits $ 1,499,001 $ 1,138,632 Loan-To-Deposit Ratio 64.7 % 67.9 % 36
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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
September 30, 2020 September 30, 2019
Average Yield/ Average Yield/
Balance Interest Rate (4) Balance Interest Rate (4)
Assets
Interest-earning
assets:
Loans (1) $ 979,406 $ 10,815 4.38 % $ 737,722 $ 9,642 5.19 %
Certificate of
deposits 18,992 106 2.21 % 14,420 101 2.78 %
Interest bearing due
from banks 205,410 54 0.10 % 101,375 599 2.34 %
Investment
securities, taxable 318,983 1,500 1.87 % 307,581 1,660 2.14 %
Investment
securities,
non-taxable (2) 22,624 131 2.30 % 13,440 82 2.42 %
Other interest
earning assets 6,480 82 5.02 % 6,574 114 6.88 %
Total average
interest-earning
assets 1,551,895 12,688 3.24 % 1,181,112 12,198 4.10 %
Non-interest-earning
assets:
Cash and due from
banks 31,933 29,398
Premises and
equipment, net 6,828 6,272
Other real estate
owned - 784
Interest receivable
and other assets 36,056 36,547
Total average assets $ 1,626,712 $ 1,254,113
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits 369,363 64 0.07 % 305,573 124 0.16 %
Savings and MMDA's 406,133 167 0.16 % 334,228 264 0.31 %
Time, $250,000 or
less 40,858 51 0.50 % 39,964 58 0.58 %
Time, over $250,000 13,679 32 0.93 % 17,113 41 0.95 %
Total average
interest-bearing
liabilities 830,033 314 0.15 % 696,878 487 0.28 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank advances 10,000 -
Non-interest-bearing
demand deposits 619,520 412,547
Interest payable and
other liabilities 19,095 17,007
Total liabilities 1,478,648 1,126,432
Total average
stockholders' equity 148,064 127,681
Total average
liabilities and
stockholders' equity $ 1,626,712 $ 1,254,113
Net interest income
and net interest
margin (3) $ 12,374 3.16 % $ 11,711 3.93 %
(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
include
for the three months ended
(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
FIRST NORTHERN COMMUNITY BANCORP
Distribution of Average Statements of Condition and Analysis of Net Interest
Income
(in thousands, except percentage amounts)
Nine months ended Nine months ended
September 30, 2020 September 30, 2019
Average Yield/ Average Yield/
Balance Interest Rate (4) Balance Interest Rate (4)
Assets
Interest-earning
assets:
Loans (1) $ 884,681 $ 29,752 4.48 % $ 737,304 $ 29,110 5.28 %
Certificate of
deposits 19,876 342 2.29 % 11,744 252 2.87 %
Interest bearing due
from banks 161,476 510 0.42 % 96,207 1,727 2.40 %
Investment
securities, taxable 324,087 4,924 2.02 % 300,063 4,890 2.18 %
Investment
securities,
non-taxable (2) 19,624 355 2.41 % 11,916 202 2.27 %
Other interest
earning assets 6,519 289 5.91 % 6,348 337 7.10 %
Total average
interest-earning
assets 1,416,263 36,172 3.40 % 1,163,582 36,518 4.20 %
Non-interest-earning
assets:
Cash and due from
banks 33,698 27,847
Premises and
equipment, net 6,578 6,363
Other real estate
owned - 985
Interest receivable
and other assets 40,812 34,857
Total average assets $ 1,497,351 $ 1,233,634
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits 349,501 303 0.12 % 306,534 361 0.16 %
Savings and MMDA's 379,438 652 0.23 % 330,491 673 0.27 %
Time, $250,000 or
less 39,563 165 0.56 % 41,379 170 0.55 %
Time, over $250,000 13,246 97 0.98 % 17,719 106 0.80 %
Total average
interest-bearing
liabilities 781,748 1,217 0.21 % 696,123 1,310 0.25 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank Advances 5,109 -
Non-interest-bearing
demand deposits 548,995 401,269
Interest payable and
other liabilities 18,898 15,016
Total liabilities 1,354,750 1,112,408
Total average
stockholders' equity 142,601 121,226
Total average
liabilities and
stockholders' equity $ 1,497,351 $ 1,233,634
Net interest income
and net interest
margin (3) $ 34,955 3.29 % $ 35,208 4.05 %
(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 nine months ended
nine months ended
(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
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
September 30, 2020 June 30, 2020
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
Assets
Interest-earning
assets:
Loans (1) $ 979,406 $ 10,815 4.38 % $ 919,301 $ 9,702 4.23 %
Certificates of
deposit 18,992 106 2.21 % 22,486 123 2.19 %
Interest bearing due
from banks 205,410 54 0.10 % 163,031 36 0.09 %
Investment
securities, taxable 318,983 1,500 1.87 % 324,040 1,667 2.06 %
Investment
securities,
non-taxable (2) 22,624 131 2.30 % 19,929 124 2.50 %
Other interest
earning assets 6,480 82 5.02 % 6,502 83 5.12 %
Total average
interest-earning
assets 1,551,895 12,688 3.24 % 1,455,289 11,735 3.23 %
Non-interest-earning
assets:
Cash and due from
banks 31,933 35,907
Premises and
equipment, net 6,828 6,375
Other real estate
owned - -
Interest receivable
and other assets 36,056 50,343
Total average assets $ 1,626,712 $ 1,547,914
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits 369,363 64 0.07 % 347,261 81 0.09 %
Savings and MMDA's 406,133 167 0.16 % 386,804 218 0.23 %
Time, $250,000 and
under 40,858 51 0.50 % 38,046 57 0.60 %
Time, over $250,000 13,679 32 0.93 % 13,309 29 0.87 %
Total average
interest-bearing
liabilities 830,033 314 0.15 % 785,420 385 0.20 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank Advances 10,000 5,275
Non-interest-bearing
demand deposits 619,520 595,343
Interest payable and
other liabilities 19,095 18,358
Total liabilities 1,478,648 1,404,396
Total average
stockholders' equity 148,064 143,518
Total average
liabilities and
stockholders' equity $ 1,626,712 $ 1,547,914
Net interest income
and net interest
margin (3) $ 12,374 3.16 % $ 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 is
excluded. Loan interest income includes loan fees of approximately
and
respectively. Loan fees for the three months ended
respectively. Excluding these amounts, loan fees for the three months ended
(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 September 30, 2020 over the three months
ended September 30, 2019 , the nine months ended September 30, 2020 over the nine
months ended September 30, 2019 , and the three months ended September 30, 2020
over the three months ended June 30, 2020 . Changes not solely due to interest
rate or volume have been allocated proportionately to interest rate and volume.
Three Months Ended Nine Months Ended Three Months Ended
September 30, 2020 September 30, 2020 September 30, 2020
Over Over Over
Three Months Ended Nine Months Ended Three Months Ended
September 30, 2019 September 30, 2019 June 30, 2020
Interest Interest Interest
Volume Rate Change Volume Rate Change Volume Rate Change
Increase (Decrease) in Interest Income:
Loans$ 3,756 $ (2,583 ) $ 1,173 $ 6,951 $ (6,309 ) $ 642 $ 848 $ 265 $ 1,113 Certificates of Deposit 28 (23 ) 5 149 (59 ) 90 (18 ) 1 (17 ) Due From Banks 306 (851 ) (545 ) 740 (1,957 ) (1,217 ) 13 5 18 Investment Securities - Taxable 58 (218 ) (160 ) 394 (360 ) 34 (24 ) (143 ) (167 ) Investment Securities - Non-taxable 53 (4 ) 49 139 14 153 17 (10 ) 7 Other Assets (2 ) (30 ) (32 ) 9 (57 ) (48 ) - (1 ) (1 )$ 4,199 $ (3,709 ) $ 490 $ 8,382 $ (8,728 ) $ (346 ) $ 836 $ 117 $ 953
Increase (Decrease) in Interest Expense:
Deposits:
Interest-Bearing
Transaction
Deposits$ 21 $ (81 ) $ (60 ) $ 45 $
(103 )
(110 ) (21 ) 12 (63 ) (51 )
Time
Certificates (7 ) (9 ) (16 ) (79 ) 65 (14 ) 5 (8 ) (3 )
$ 61 $ (234 ) $ (173 ) $ 55 $ (148 ) $ (93 ) $ 21 $ (92 ) $ (71 )
Increase
(decrease) in
Net Interest
Income: $ 4,138 $ (3,475 ) $ 663 $ 8,327 $ (8,580 ) $ (253 ) $ 815 $ 209 $ 1,024
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Index
CHANGES IN FINANCIAL CONDITION
The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a$164,150,000 or 147.2% increase in cash and cash equivalents, a$3,442,000 or 23.4% increase in certificates of deposit, a$20,472,000 or 6.0% increase in investment securities available-for-sale, a$196,974,000 or 25.6% increase in net loans held-for-investment, and a$520,000 or 12.6% increase in loans held-for-sale fromDecember 31, 2019 toSeptember 30, 2020 . The increase in cash and cash equivalents, certificates of deposit, and investment securities was primarily due to an increase in deposit balances.
The
increase in net loans held-for-investment was primarily due to PPP loans originated year to date totaling approximately$235 million which are classified as commercial loans. The increase 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$360,369,000 or 31.7% fromDecember 31, 2019 toSeptember 30, 2020 . The overall increase in total deposits was primarily attributable to PPP loans originated year to date, 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. During the current year, the Company requested and received advances totaling$10 million through the FHLB's COVID-19 Relief and Recovery Advances Program. The advances are short-term borrowings with a 0% interest rate.
CHANGES IN RESULTS OF OPERATIONS
Interest Income
TheFederal Open Market Committee , in response to the economic effects of the pandemic, decreased the Federal Funds rate by 150 basis points to 0.00% to 0.25% during the nine months endedSeptember 30, 2020 . Interest income on loans for the nine months endedSeptember 30, 2020 was up 2.2% from the same period in 2019, increasing from$29,110,000 to$29,752,000 , and was up 12.2% for the three months endedSeptember 30, 2020 over the same period in 2019, increasing from$9,642,000 to$10,815,000 . The increase in interest income on loans for the three and nine months endedSeptember 30, 2020 was primarily due to the recognition of processing fees from the SBA related to the origination of the PPP loans. The Company received a total of approximately$7.8 million in processing fees from the SBA during the nine months endedSeptember 30, 2020 . These fees are required to be recognized as an adjustment to the effective yield over the life of the loan. For the three and nine months endedSeptember 30, 2020 , the Bank recognized$2,138,000 and$4,119,000 , respectively, of these processing fees which are included as a component of interest income on loans. The remaining balance of approximately$3.7 million will be recognized over the remaining life of the PPP loans. The increase in interest income on loans was offset by an 81 and 80 basis point decrease in loan yields for the three and nine months endedSeptember 30, 2020 , respectively. The decrease in loan yields compared to prior periods is due to several factors: adjustable rate loans re-pricing at lower rates as a result of recent declines in interest rates and related indices, which is mitigated to some extent by the inclusion of interest rate floors on the majority of our variable rate loans; the accommodation of certain fixed rate loan customers to re-price their existing loans at lower rates to retain existing relationships in a competitive rate environment; an increase in non-accrual loan balances; our 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 (see Note 2 of the Notes to Condensed Consolidated Financial Statements) and the origination of$235 million of PPP loans at an interest rate of 1%. Loans provided temporary forbearance relief under the CARES act totaled$91.3 million onSeptember 30, 2020 which resulted in the net deferral of interest income of approximately$0.4 and$1.3 million for the three and nine months endedSeptember 30, 2020 . Interest income on certificates of deposit for the nine months endedSeptember 30, 2020 was up 35.7% from the same period in 2019, increasing from$252,000 to$342,000 , and was up 5.0% for the three months endedSeptember 30, 2020 over the same period in 2019, increasing from$101,000 to$106,000 . The increase in interest income on certificates of deposit for the nine months endedSeptember 30, 2020 as compared to the same period a year ago was primarily due to an increase in average balances of certificates of deposit, which was partially offsect by a 58 basis point decrease in yield on certificates of deposit. The increase in interest income on certificates of deposit for the three months endedSeptember 30, 2020 as compared to the same period a year ago was primarily due to an increase in average certificates of deposit, which was partially offset by a 57 basis point decrease in yield on certificates of deposit. Interest income on interest-bearing due from banks for the nine months endedSeptember 30, 2020 was down 70.5% from the same period in 2019, decreasing from$1,727,000 to$510,000 , and was down 91.0% for the three months endedSeptember 30, 2020 over the same period in 2019, decreasing from$599,000 to$54,000 . 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 nine months endedSeptember 30, 2020 as compared to the same period a year ago was primarily due to reductions in the Federal Funds Rate resulting in a 198 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 endedSeptember 30, 2020 as compared to the same period a year ago was primarily due to reductions in the Federal Funds Rate, resulting in a 224 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. 41
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Interest income on investment securities available-for-sale for the nine months endedSeptember 30, 2020 was up 3.7% from the same period in 2019, increasing from$5,092,000 to$5,279,000 , and was down 6.4% for the three months endedSeptember 30, 2020 over the same period in 2019, decreasing from$1,742,000 to$1,631,000 . The increase in interest income on investment securities for the nine months endedSeptember 30, 2020 as compared to the same period a year ago was primarily due to an increase in average investment securities, which was partially offset by a 13 basis point decrease in investment yields. The decrease in interest income on investment securities for the three months endedSeptember 30, 2020 as compared to the same period a year ago was primarily due to a 26 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 nine months endedSeptember 30, 2020 was down 14.2% from the same period in 2019, decreasing from$337,000 to$289,000 , and was down 28.1% for the three months endedSeptember 30, 2020 over the same period in 2019, decreasing from$114,000 to$82,000 . This income is primarily derived from dividends received by theFederal Home Loan Bank . The decrease in interest income on other assets for the nine months endedSeptember 30, 2020 as compared to the same period a year ago was primarily due to a 119 basis point decrease in yield on other earning assets as a result of decreased FHLB dividend rates. The decrease in interest income on other earning assets for the three months endedSeptember 30, 2020 as compared to the same period a year ago was primarily due to a 186 basis point decrease in yield on other earning assets as a result of decreased FHLB dividend rates.
The Company had no Federal Funds sold balances during the three and nine months
ended
Interest Expense
Interest expense on deposits for the nine months endedSeptember 30, 2020 was down 7.1% from the same period in 2019, decreasing from$1,310,000 to$1,217,000 , and was down 35.5% for the three months endedSeptember 30, 2020 over the same period in 2019, decreasing from$487,000 to$314,000 . The decrease in interest expense during the nine months endedSeptember 30, 2020 was primarily due to a 4 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 endedSeptember 30, 2020 was primarily due to a 13 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 Company received FHLB advances of$10 million during the nine months endedSeptember 30, 2020 through the FHLB's COVID-19 Relief and Recovery Advances Program. The advances are short-term borrowings with a 0% interest rate. The Company had no FHLB advances or other borrowing balances during the nine months endedSeptember 30, 2019 . Provision for Loan Losses Provision for loan losses totaled$2,250,000 for the nine months endedSeptember 30, 2020 compared to no provision for loan losses for the same period in 2019. Provision for loan losses totaled$800,000 for the three months endedSeptember 30, 2020 compared to no provision for loan losses for the same period in 2019. The allowance for loan losses was approximately$14,456,000 or 1.47% of total loans, atSeptember 30, 2020 , compared to$12,356,000 , or 1.58% of total loans, atDecember 31, 2019 . 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 ratio of allowance to total loans fromDecember 31, 2019 toSeptember 30, 2020 was primarily due to PPP loans of approximately$232 million outstanding as ofSeptember 30, 2020 , which are fully guaranteed by the SBA. The increase in the provision for loan losses during the three and nine months endedSeptember 30, 2020 compared to the same period in 2019 was primarily due to increases in qualitative factors adversely affecting our loan portfolio resulting from the downturn in economic conditions associated with the COVID-19 pandemic.
Provision for Unfunded Lending Commitment Losses
Provision for unfunded lending commitment losses totaled$110,000 and$40,000 for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 , respectively. There was no provision for unfunded lending commitment losses for each of the three months endedSeptember 30, 2020 andSeptember 30, 2019 . The changes in the provision for unfunded lending commitments was primarily due to increases in qualitative factors adversely affecting our loan portfolio resulting from the downturn in economic conditions associated with the COVID-19 pandemic.
The provision for unfunded lending commitment losses is included in other non-interest expense in the Condensed Consolidated Statements of Income.
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Non-Interest Income
Non-interest income was up 6.9% for the nine months endedSeptember 30, 2020 from the same period in 2019, increasing from$5,319,000 to$5,686,000 . Non-interest income was up 33.5% for the three months endedSeptember 30, 2020 from the same period in 2019, increasing from$1,789,000 to$2,389,000 . The increase was primarily due to increases in gains on sales of loans held-for-sale and gains on sales of available-for-sale securities, which was partially offset by decreases in service charges on deposit accounts, investment and brokerage services income, mortgage brokerage income, loan servicing income and other income. 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 recent decline in interest rates and uptick in refinancing activity. The increase in gains on sales of available-for-sale securities was primarily due to the sale of municipal securities during the third quarter of 2020. The decrease in service charges on deposit accounts was primarily a result of the COVID-19 pandemic and the Bank's decision to waive overdraft/NSF fees for all business and consumer customers for an initial period of 60 days which began in March and was later extended into the third quarter. The auto-waiver period expired onAugust 1, 2020 . This assistance resulted in increased fee waiver activity, reducing reported service charge income. The decrease in investment and brokerage services income was primarily due to a decrease in demand for those services. The decrease in mortgage brokerage income was primarily a result of decreased mortgage brokerage volume. The decrease in loan servicing income was primarily due to impairment expense recognized on mortgage servicing rights asset. The decrease in other income year to date was primarily due to a gain on sale of land recognized during the nine months endedSeptember 30, 2019 that was not repeated during the same period in 2020.
Non-Interest Expenses
Total non-interest expenses were up 4.7% for the nine months endedSeptember 30, 2020 from the same period in 2019, increasing from$25,138,000 to$26,327,000 . Total non-interest expenses were up 11.2% for the three months endedSeptember 30, 2020 from the same period in 2019, increasing from$8,315,000 to$9,250,000 . The increase was primarily due to increases in salaries and employee benefits, occupancy and equipment and other expenses, which was partially offset by a decrease in other real estate owned expense. The increase in salaries and employee benefits was primarily due to an increase in the number of full-time equivalent employees. The increase in occupancy and equipment expense was primarily due to rent expense and other expenses associated with the opening of an administrative office space and branch during the second half of 2019. The increase in other expenses was primarily due to increases inFDIC assessments and loan collection expense, which was partially offset by a decrease in public relations expense. The decrease in other real estate owned expense was due to a writedown on an other real estate owned property during the nine months endedSeptember 30, 2019 . 43
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The following table sets forth other non-interest expenses by category for the
three and nine months ended
(in thousands)
Three months
Three months ended ended Nine months ended Nine months ended
September 30, 2020
$ - $ - $ 110 $ 40
FDIC assessments 108 (98 ) 238 72
Contributions 18 27 99 154
Legal fees 59 51 268 282
Accounting and audit fees 114 115 342 339
Consulting fees 158 133 352 398
Postage expense 49 30 115 104
Telephone expense 32 42 92 106
Public relations 24 95 116 225
Training expense 12 54 54 135
Loan origination expense 55 59 165 141
Computer software depreciation 18 18 52 72
Sundry losses 47 35 126 153
Loan collection expense 154 26 256 (19 )
Interchange fees 123 101 366 360
Other non-interest expense 355 351 927 1,000
Total other non-interest expenses $ 1,326 $ 1,039 $ 3,678 $ 3,562
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 decreased 23.3% for the nine months
ended September 30, 2020 from the same period in 2019, decreasing from
$4,244,000 to $3,255,000 , and decreased 10.0% for the three months ended
September 30, 2020 from the same period in 2019, decreasing from $1,431,000 to
$1,288,000 . The decrease in provision for income taxes was primarily due to a
decrease in pre-tax income.
Off-Balance Sheet Commitments
The following table shows the distribution of the Company's undisbursed loan commitments at the dates indicated.
(in thousands)
September 30, 2020 December 31, 2019
Undisbursed loan commitments $ 192,765 $ 198,534
Standby letters of credit 2,898 2,455
Commitments to sell loans 2,330 1,240
$ 197,993 $ 202,229
The reserve for unfunded lending commitments amounted to $950,000 and $840,000
as of September 30, 2020 and December 31, 2019 , 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 atSeptember 30, 2020 andDecember 31, 2019 : AtSeptember 30, 2020
At
Gross Guaranteed Net Gross Guaranteed Net
(in thousands)
Commercial $ 267 $ - $ 267 $ 266 $ 170 $ 96
Commercial real estate 5,390 37 5,353 466 45 421
Agriculture 9,130 - 9,130 - - -
Residential mortgage 155 - 155 172 - 172
Residential construction - - - - - -
Consumer 695 - 695 253 - 253
Total non-accrual loans $ 15,637 $ 37 $ 15,600 $ 1,157 $ 215 $ 942 See Note 2 of the Notes to Condensed Consolidated Financial Statements for discussion on the Bank's policy election as a result of the CARES Act.
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$15,637,000 atSeptember 30, 2020 and were comprised of two commercial loans totaling$267,000 , four commercial real estate loans totaling$5,390,000 , three agriculture loans totaling$9,130,000 , one residential mortgage loan totaling$155,000 , and four consumer loans totaling$695,000 . Non-accrual loans amounted to$1,157,000 atDecember 31, 2019 and were comprised of three commercial loans totaling$266,000 , two commercial real estate loans totaling$466,000 , one residential mortgage loan totaling$172,000 and four consumer loans totaling$253,000 . 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. Non-performing impaired loans totaled$15,637,000 and$1,157,000 as ofSeptember 30, 2020 andDecember 31, 2019 , respectively. The increase in non-performing impaired loans fromDecember 31, 2019 toSeptember 30, 2020 was primarily due to two commercial real estate loans comprising one lending relationship and three agriculture loans comprising one lending relationship. 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$2,469,000 and$3,318,000 atSeptember 30, 2020 andDecember 31, 2019 , 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 as ofSeptember 30, 2020 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. 45
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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. 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$14,658,000 or 1,556% to$15,600,000 during the first nine months of 2020. Non-performing assets, net of guarantees, represented 0.9% of total assets atSeptember 30, 2020 . AtSeptember 30, 2020
At
Gross Guaranteed Net Gross Guaranteed Net
(dollars in
thousands)
Non-accrual loans $ 15,637 $ 37 $ 15,600 $ 1,157 $ 215 $ 942
Loans 90 days past
due and still
accruing - - - - - -
Total non-performing
loans 15,637 37 15,600 1,157 215 942
Other real estate
owned - - - - - -
Total non-performing
assets $ 15,637 $ 37 $ 15,600 $ 1,157$ 215 $ 942 Non-performing loans (net of guarantees) to total loans 1.6 % 0.1 % Non-performing assets (net of guarantees) to total assets 0.9 % 0.1 % Allowance for loan and lease losses to non-performing loans (net of guarantees) 92.7 % 1,311.7 %
The Company had no loans 90 days or more past due and still accruing at
Excluding the non-performing loans cited previously, loans totaling$10,045,000 and$8,749,000 were classified as substandard or doubtful loans, representing potential problem loans atSeptember 30, 2020 andDecember 31, 2019 , 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) atSeptember 30, 2020 andDecember 31, 2019 . The ratio of the Allowance for Loan Losses to total loans atSeptember 30, 2020 andDecember 31, 2019 was 1.47% and 1.58%, 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 ofSeptember 30, 2020 andDecember 31, 2019 . 46
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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 nine months ended
Analysis of the Allowance for Loan Losses
(Amounts in thousands, except percentage amounts)
Nine months ended Year ended
September 30, December 31,
2020 2019 2019
Balance at beginning of period $ 12,356 $ 12,822 $ 12,822
Provision for loan losses 2,250 - -
Loans charged-off:
Commercial (184 ) (596 ) (638 )
Commercial Real Estate - - -
Agriculture - (98 ) (98 )
Residential Mortgage - - -
Residential Construction - - -
Consumer (13 ) (29 ) (43 )
Total charged-off (197 ) (723 ) (779 )
Recoveries:
Commercial 13 85 209
Commercial Real Estate - - -
Agriculture - - -
Residential Mortgage - 72 74
Residential Construction - 21 21
Consumer 34 10 9
Total recoveries 47 188 313
Net charge-offs (150 ) (535 ) (466 )
Balance at end of period $ 14,456 $ 12,287 $ 12,356
Ratio of net charge-offs to average loans
outstanding during the period (annualized) (0.02 %) (0.10 %) (0.06 %)
Allowance for loan losses
To total loans at the end of the period 1.47 % 1.60 % 1.58 %
To non-performing loans, net of guarantees at the
end of the period 92.7 % 1,033.4 % 1,311.7 %
The decrease in the ratio of allowance to total loans from December 31, 2019 to
September 30, 2020 was primarily due to PPP loans of approximately $232 million
outstanding as of September 30, 2020 , which are fully guaranteed by the SBA.
The increase in the provision for loan losses during the three and nine months
ended September 30, 2020 compared to the same periods in 2019 was primarily due
to increases in qualitative factors resulting from the downturn in economic
conditions associated with the COVID-19 pandemic.
The decrease in the ratio of allowance for loan losses to non-performing loans,
net of guarantees from December 31, 2019 to September 30, 2020 was primarily due
to the increase in non-performing loans. The increase in non-performing
impaired loans from December 31, 2019 to September 30, 2020 was primarily due to
two commercial real estate loans comprising one lending relationship and three
agriculture loans comprising one lending relationship.
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Deposits
Deposits are one of the Company's primary sources of funds. AtSeptember 30, 2020 , the Company had the following deposit mix: 27.1% in savings and MMDA deposits, 3.9% in time deposits, 25.1% in interest-bearing transaction deposits and 43.9% in non-interest-bearing transaction deposits. AtDecember 31, 2019 , the Company had the following deposit mix: 30.2% in savings and MMDA deposits, 4.7% in time deposits, 27.9% in interest-bearing transaction deposits and 37.2% 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)
September 30, 2020 December 31, 2019
Three months or less $ 2,458 $ 4,738
Over three to twelve months 8,328 5,104
Over twelve months 3,614 6,035
Total $ 14,400 $ 15,877
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 is the ratio of net loans to deposits (including loans held-for-sale). This ratio was 64.7% onSeptember 30, 2020 . In addition, onSeptember 30, 2020 , the Company had the following short-term investments (based on remaining maturity and/or next repricing date):$18,515,000 in securities due within one year or less; and$74,320,000 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 atSeptember 30, 2020 . Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity atSeptember 30, 2020 of$309,051,000 ; 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 theBasel Committee on Banking Supervision ("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 new rules onJanuary 1, 2015 . The new 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 Economic Growth Regulatory Relief and Consumer Protection Act (the "EGRRCPA"), the FRB adopted a final rule, effectiveAugust 31, 2018 , amending theSmall Bank Holding Company andSavings 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. 48
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InNovember 2019 , the bank regulatory agencies jointly adopted a final rule, that became effectiveJanuary 1, 2020 , that provided for a simple measure of capital adequacy for certain community banking organizations, consistent with the EGRRCPA. Under the rule, depository institutions and depository institution holding companies that have less than$10 billion in total consolidated assets, such as the Company and the Bank, and that meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, are eligible to opt into the community bank leverage ratio framework. InApril 2020 , the federal bank regulatory agencies issued an interim final rule that made temporary changes to the community bank leverage ratio framework, pursuant to the CARES Act. As of the second quarter 2020, a banking organization with a leverage ratio of 8 percent or greater (and that meets other qualifying criteria) may elect to use the community bank leverage ratio framework. The temporary changes to the community bank leverage ratio framework implemented by this interim final rule will cease to be effective as of the earlier of the termination date of the national emergency concerning the coronavirus disease declared by the President onMarch 13, 2020 , orDecember 31, 2020 . Concurrently, the federal bank regulatory agencies issued an interim final rule that provides for a transition from the temporary 8 percent community bank leverage ratio requirement to the 9 percent community bank leverage ratio requirement under the final rule. Under the transition rule, the community bank leverage ratio will be 8 percent in the second quarter through fourth quarter of calendar year 2020, 8.5 percent in calendar year 2021, and 9 percent thereafter. Qualifying community banking organizations that elect to use the community bank leverage ratio framework and that maintain a leverage ratio of greater than 8 percent (subject to transition to 9 percent beginning after calendar year 2021) will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies' capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of the FDIA. At the present time, the Company does not intend to elect to use the community bank leverage framework. As ofSeptember 30, 2020 , the Bank's capital ratios exceeded applicable regulatory requirements. The following table presents the capital ratios for the Bank, compared to the regulatory standards for well-capitalized depository institutions, as ofSeptember 30, 2020 . (amounts in
thousands except percentage amounts)
Actual Well Capitalized
Ratio
Capital Ratio Requirement
Leverage $ 138,177 8.54 % 5.0 %
Common Equity Tier 1 $ 138,177 15.83 % 6.5 %
Tier 1 Risk-Based $ 138,177 15.83 % 8.0 %
Total Risk-Based $ 149,142 17.09 % 10.0 %
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