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
31--------------------------------------------------------------------------------
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
? 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 2020 Annual Report on Form 10-K, and in our other reports to theSEC . 32
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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 first quarter 2021 included:
• Net income of
from
• Diluted earnings per share of
up 15.0% from diluted earnings per share of
• Net interest income of
down 3.2% from
• Net interest margin of 2.67% for the three months ended
26.4% from 3.63% for the same period last year.
• Provision for loan losses of
2021, down 53.9% from
• Total assets of
as ofDecember 31, 2020 .
• Total net loans (including loans held-for-sale) of
31, 2021, up 7.4% from
• Total investment securities of
from
• Total deposits of
billion as of
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 9.9% to retail properties and business; 1.4% to restaurants; and 1.0% to the hospitality/hotel sector atMarch 31, 2021 . Loans to these customers are generally secured by real estate with moderate loan-to-value ratios and further supported by guarantors. There is concern that borrowers will draw on their credit lines to support cashflow disruptions caused by the continuing governmental 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 ofMarch 31, 2021 . 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 may not accept new lender applications for first draw or second draw PPP loans submitted afterMay 31, 2021 . In this current phase of the PPP, the Bank approved approximately 850 applications for loans covering approximately$104 million in funding as ofMarch 31, 2021 . These PPP loan originations resulted in approximately$4.8 million in processing fees from the SBA, which will be recognized as an adjustment to the effective yield over the loan's life. PPP processing fees totaling approximately$760,000 and$0 were recognized in interest income for the three-month periods endedMarch 31, 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$5.9 million and$1.9 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. 33
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During the three months endedMarch 31, 2021 , the Bank received$57 million in payoffs and reimbursements on PPP loans originated in 2020 from the SBA for the amounts forgiven pursuant to the terms of the PPP. The Bank had PPP loans outstanding totaling$202 million and$155 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. Of the$202 million in PPP loans outstanding as ofMarch 31, 2021 ,$98 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. 34
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Index
SUMMARY
The Company recorded net income of$3,178,000 for the three months endedMarch 31, 2021 , representing an increase of$499,000 from net income of$2,679,000 for the same period in 2020. The following tables present a summary of the results for the three months endedMarch 31, 2021 and 2020, and a summary of our financial condition atMarch 31, 2021 andDecember 31, 2020 : Three Three months months ended endedMarch 31 ,March 31, 2021 2020
(in thousands except for per share amounts and ratios) For the Period: Net Income
$ 3,178 $ 2,679 Basic Earnings Per Common Share$ 0.24 $ 0.20 Diluted Earnings Per Common Share$ 0.23 $ 0.20 Net Income to Average Assets (annualized) 0.75 % 0.82 % Net Income to Average Equity (annualized) 8.47 % 7.91 % Average Equity to Average Assets 8.80 % 10.32 % December 31, March 31, 2021 2020 (in thousands except for ratios) At Period End: Total Assets$ 1,779,981 $ 1,655,376 Total Investment Securities$ 466,046 $ 435,080 Total Loans, Net (including loans held-for-sale)$ 950,810 $ 885,020 Total Deposits$ 1,607,037 $ 1,478,162 Loan-To-Deposit Ratio 59.2 % 59.9 % 35
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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
March 31, 2021 March 31, 2020
Average Yield/ Average Yield/
Balance Interest Rate (4) Balance Interest Rate (4)
Assets
Interest-earning
assets:
Loans (1) $ 908,301 $ 9,237 4.12 % $ 754,296 $ 9,235 4.91 %
Certificates of
deposit 16,065 85 2.15 % 18,159 114 2.52 %
Interest bearing due
from banks 269,813 63 0.09 % 115,507 419 1.45 %
Investment
securities, taxable 424,086 1,486 1.42 % 329,293 1,757 2.14 %
Investment
securities,
non-taxable (2) 26,915 143 2.15 % 16,287 100 2.46 %
Other interest
earning assets 6,480 82 5.13 % 6,574 124 7.57 %
Total average
interest-earning
assets 1,651,660 11,096 2.72 % 1,240,116 11,749 3.80 %
Non-interest-earning
assets:
Cash and due from
banks 35,225 33,271
Premises and
equipment, net 6,471 6,529
Interest receivable
and other assets 35,258 36,089
Total average assets 1,728,614 1,316,005
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits 400,485 55 0.06 % 331,663 158 0.19 %
Savings and MMDA's 409,068 105 0.10 % 345,082 268 0.31 %
Time, $250,000 and
under 43,357 40 0.37 % 38,418 56 0.58 %
Time, over $250,000 14,838 24 0.66 % 14,097 36 1.02 %
Total average
interest-bearing
liabilities 867,748 224 0.10 % 729,260 518 0.28 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank advances 5,000 -
Non-interest-bearing
demand deposits 684,279 431,675
Interest payable and
other liabilities 19,390 19,236
Total liabilities 1,576,417 1,180,171
Total average
stockholders' equity 152,197 135,834
Total average
liabilities and
stockholders' equity $ 1,728,614 $ 1,316,005
Net interest income
and net interest
margin (3) $ 10,872 2.67 % $ 11,231 3.63 %
(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
fees for the three months ended
recognized.
(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
March 31, 2021 December 31, 2020
Average Yield/ Average Yield/
Balance Interest Rate (4) Balance Interest Rate (4)
Assets
Interest-earning
assets:
Loans (1) $ 908,301 $ 9,237 4.12 % $ 924,244 $ 10,817 4.64 %
Certificates of
deposit 16,065 85 2.15 % 17,225 95 2.19 %
Interest bearing due
from banks 269,813 63 0.09 % 267,079 73 0.11 %
Investment
securities, taxable 424,086 1,486 1.42 % 373,811 1,482 1.57 %
Investment
securities,
non-taxable (2) 26,915 143 2.15 % 26,766 143 2.12 %
Other interest
earning assets 6,480 82 5.13 % 6,480 82 5.02 %
Total average
interest-earning
assets 1,651,660 11,096 2.72 % 1,615,605 12,692 3.12 %
Non-interest-earning
assets:
Cash and due from
banks 35,225 31,396
Premises and
equipment, net 6,471 6,633
Interest receivable
and other assets 35,258 36,771
Total average assets 1,728,614 1,690,405
Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits 400,485 55 0.06 % 378,804 55 0.06 %
Savings and MMDA's 409,068 105 0.10 % 411,474 134 0.13 %
Time, $250,000 and
under 43,357 40 0.37 % 43,089 50 0.46 %
Time, over $250,000 14,838 24 0.66 % 15,041 28 0.74 %
Total average
interest-bearing
liabilities 867,748 224 0.10 % 848,408 267 0.12 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank advances 5,000 7,285
Non-interest-bearing
demand deposits 684,279 663,103
Interest payable and
other liabilities 19,390 21,268
Total liabilities 1,576,417 1,540,064
Total average
stockholders' equity 152,197 150,341
Total average
liabilities and
stockholders' equity $ 1,728,614 $ 1,690,405
Net interest income
and net interest
margin (3) $ 10,872 2.67 % $ 12,425 3.05 %
(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 is
excluded. Loan interest income includes loan fees of approximately
$2,102 for the three months endedMarch 31, 2021 andDecember 31, 2020 , respectively. Loan fees for the three months endedMarch 31, 2021 andDecember 31, 2020 include$760 and$1,789 in PPP loan fees recognized, respectively.
(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 March 31, 2021 over the three months ended
March 31, 2020 and the three months ended March 31, 2021 over the three months
ended December 31, 2020 . Changes not solely due to interest rate or volume have
been allocated proportionately to interest rate and volume.
Three Months Ended March 31, 2021 Three Months Ended March 31, 2021
Over Over
Three Months Ended March 31, 2020 Three Months Ended December 31, 2020
Interest Interest
Volume Rate Change Volume Rate Change
Increase (Decrease)
in Interest Income:
Loans $ 1,668 $ (1,666 ) $ 2 $ (210 ) $ (1,370 ) $ (1,580 )
Certificates of
Deposit (13 ) (16 ) (29 ) (8 ) (2 ) (10 )
Due From Banks 253 (609 ) (356 ) 1 (11 ) (10 )
Investment Securities
- Taxable 422 (693 ) (271 ) 166 (162 ) 4
Investment Securities
- Non-taxable 58 (15 ) 43 - - -
Other Assets (2 ) (40 ) (42 ) - - -
$ 2,386 $ (3,039 ) $ (653 ) $ (51 ) $ (1,545 ) $ (1,596 )
Increase (Decrease)
in Interest Expense:
Deposits:
Interest-Bearing
Transaction Deposits $ 26 $ (129 ) $ (103 ) $ - $ - $ -
Savings & MMDAs 43 (206 ) (163 ) - (29 ) (29 )
Time Certificates 29 (57 ) (28 ) 1 (15 ) (14 )
$ 98 $ (392 ) $ (294 ) $ 1 $ (44 ) $ (43 )
Decrease in Net
Interest Income: $ 2,288 $ (2,647 ) $ (359 ) $ (52 ) $ (1,501 ) $ (1,553 )
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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$27,252,000 or 10.2% increase in cash and cash equivalents, a$2,205,000 or 13.0% decrease in certificates of deposit, a$30,966,000 or 7.1% increase in investment securities available-for-sale, a$66,574,000 or 7.6% increase in net loans held-for-investment, and a$784,000 or 8.5% decrease in loans held-for-sale fromDecember 31, 2020 toMarch 31, 2021 . The increase in cash and cash equivalents was primarily due to an increase in deposit balances. The increase in investment securities was due to allocating cash flows from deposits towards purchases of investment securities. 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 net loans held-for-investment was primarily due to PPP loans originated in the first quarter of 2021 totaling approximately$98 million , which was partially offset by SBA forgiveness payments on PPP loans received in the same period totaling approximately$50 million . Also contributing to the increase in net loans held-for-investment during the period was commercial real estate loan purchases totaling approximately$47.4 million in the first quarter of 2021. Premiums on commercial real estate loan purchases totaled$1.2 million . 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$128,875,000 or 8.7% fromDecember 31, 2020 toMarch 31, 2021 . The overall increase in total deposits was primarily attributable to PPP loans originated in the first quarter 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 three months endedMarch 31, 2021 was comparable to the same period in 2020, totaling$9,237,000 and$9,235,000 for the three-month periods endedMarch 31, 2021 andMarch 31, 2020 , respectively. Several factors contributed to loan interest income for the three months endedMarch 31, 2021 , including recognition of PPP processing fees, deferred interest on forbearance loans, and declines in yields earned. Interest income on loans for the three months endedMarch 31, 2021 included approximately$760,000 in recognition of processing fees from the SBA related to the origination of PPP loans. The Bank had unearned processing fees totaling$5.9 million as ofMarch 31, 2021 , which will be recognized over the 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. Two loans totaling$900,000 were on a principal and interest forbearance plan and one loan totaling$200,000 was on an interest only forbearance plan atMarch 31, 2021 . The Bank recognized approximately$177,000 in deferred interest for the three months endedMarch 31, 2021 . The decrease in loan yields 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; and the origination of PPP loans at an interest rate of 1%. PPP loans totaled$202 million as ofMarch 31, 2021 . Interest income on certificates of deposit for the three months endedMarch 31, 2021 was down 25.4% from the same period in 2020, decreasing from$114,000 to$85,000 . The decrease was primarily due to a 37 basis point decrease in certificates of deposit yields and a decrease in average balances of certificates of deposit. Interest income on interest-bearing due from banks for the three months endedMarch 31, 2021 was down 85.0% from the same period in 2020, decreasing from$419,000 to$63,000 . The decrease was primarily due to a 136 basis point decrease in interest-bearing due from yields, which was partially offset by an increase in average interest-bearing due from banks balance. Interest income on investment securities available-for-sale for the three months endedMarch 31, 2021 was down 12.3% from the same period in 2020, decreasing from$1,857,000 to$1,629,000 . The decrease was primarily due to a 70 basis point decrease in yields on investment securities, which was partially offset by an increase in average balances of investment securities. 39
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Index
The Company had no Federal Funds sold balances during the three months ended
Interest Expense
Interest expense on deposits for the three months endedMarch 31, 2021 was down 56.8% from the same period in 2020, decreasing from$518,000 to$224,000 . The decrease in interest expense was primarily due to an 18 basis point decrease in average interest-bearing deposits yield, which was partially offset by an increase in average deposits. The Company had an FHLB advance totaling$5 million as ofMarch 31, 2021 . The advance, received through the FHLB's COVID-19 Relief and Recovery Advances Program, is a short-term borrowing with a 0% interest rate. The Company had no FHLB advances or other borrowing balances during the three months endedMarch 31, 2020 . Provision for Loan Losses Provision for loan losses totaled$300,000 for the three months endedMarch 31, 2021 compared to$650,000 for the same period in 2020. The allowance for loan losses was approximately$15,713,000 , or 1.63% of total loans, atMarch 31, 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 ratio of allowance to total loans fromDecember 31, 2020 toMarch 31, 2021 was primarily due to PPP loans of approximately$202 million outstanding as ofMarch 31, 2021 , which are fully guaranteed by the SBA.
The decrease in the provision for loan losses during the three months ended
Provision for Unfunded Lending Commitment Losses
Reversal of unfunded lending commitment losses totaled$200,000 for the three months endedMarch 31, 2021 compared to provision for unfunded lending commitment losses of$100,000 for the same period in 2020. The decrease was primarily due to a decrease 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 38.9% for the three months ended
The increase was primarily due to increases in gains on sales of loans held-for-sale, loan servicing income, and debit card income, which were partially offset by decreases in service charges on deposit accounts, investment and brokerage income, mortgage brokerage income, and gains on sales/calls of available-for-sale securities. 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. Although interest rates experienced a decline in the first quarter of 2021 compared to the same period in 2020, there was an uptick in interest rates towards the end of the first quarter of 2021. The increase in loan servicing income was primarily due to the reversal of impairment expense recognized on mortgage servicing rights asset primarily due to a decrease in constant prepayment rates fromDecember 31, 2020 . The increase in debit card income was primarily due to an increase in transaction volumes. The decrease in service charges on deposit accounts was primarily due to a decrease in NSF fees, net of waived fees. The decrease in investment and brokerage 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 gains on sales/calls of available-for-sale securities was primarily due to the sale of municipal securities at a net loss in the first quarter of 2021. Non-Interest Expenses
Total non-interest expenses were down 0.8% for the three months ended
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Index
The decrease was primarily due to decreases in salaries and employee benefits, occupancy and equipment, and reversal of provision for unfunded commitments, which was partially offset by increases in data processing and other expenses. The decrease in salaries and employee benefits was primarily due to an increase in capitalization of loan origination costs, which was partially offset by an increase in the number of full-time equivalent employees. 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. The reversal of unfunded commitments expense was primarily due to a decrease in qualitative factors resulting from an improvement in economic conditions. 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 in the first quarter of 2021. The increase in other expenses was primarily due to increases inFDIC assessments and loan collection expenses.
The following table sets forth other non-interest expenses by category for the
three months ended
(in thousands)
Three months ended Three months ended
March 31, 2021 March 31, 2020
Other non-interest expenses
(Reversal of) provision for unfunded commitments expense $ (200 ) $ 100
FDIC assessments 135 -
Contributions 45 49
Legal fees 49 84
Accounting and audit fees 115 114
Consulting fees 50 74
Postage expense 39 22
Telephone expense 30 28
Public relations 26 62
Training expense 12 26
Loan origination expense 26 44
Computer software depreciation 16 17
Operational losses 54 64
Loan collection expense 230 34
Minibank interchange fees 128 135
Other non-interest expense 328 262
Total other non-interest expenses $ 1,083 $ 1,115
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 20.6% for the three months
ended March 31, 2021 from the same period in 2020, increasing from $981,000 to
$1,183,000 primarily due to an increase in pre-tax income. The effective tax
rate was 27.1% and 26.8% for the three months ended March 31, 2021 and March 31,
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)
March 31, 2021 December 31, 2020
Undisbursed loan commitments $ 207,589 $ 189,097
Standby letters of credit 2,878 1,731
Commitments to sell loans 3,430 1,052
$ 213,897 $ 191,880
The reserve for unfunded lending commitments amounted to $750,000 and $950,000
as of March 31, 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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Index
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 atMarch 31, 2021 andDecember 31, 2020 : AtMarch 31, 2021
At
Gross Guaranteed Net Gross Guaranteed Net
(dollars in thousands)
Commercial $ 284 $ 63 $ 221 $ 363 $ 63 $ 300
Commercial real estate 6,803 32 6,771 4,875 34 4,841
Agriculture 9,130 - 9,130 9,130 - 9,130
Residential mortgage 148 - 148 153 - 153
Residential construction - - - - - -
Consumer 687 - 687 690 - 690
Total non-accrual loans $ 17,052 $ 95 $ 16,957 $ 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 $17,052,000 at March 31, 2021 and were comprised
of three commercial loans totaling $284,000 , four commercial real estate loans
totaling $6,803,000 , three agriculture loans totaling 9,130,000, one residential
mortgage loan totaling $148,000 and four consumer loans totaling $687,000 .
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 are non-performing impaired loans
totaling $17,052,000 and $15,211,000 as of March 31, 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 $1,195,000
and $2,260,000 at March 31, 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. 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$1,843,000 or 12.2% to$16,957,000 during the first three months of 2021. Non-performing assets, net of guarantees, represented 1.0% of total assets atMarch 31, 2021 . AtMarch 31, 2021
At
Gross Guaranteed Net Gross Guaranteed Net
(dollars in
thousands)
Non-accrual loans $ 17,052 $ 95 $ 16,957 $ 15,211 $ 97 $ 15,114
Loans 90 days past
due and still
accruing - - - - - -
Total non-performing
loans 17,052 95 16,957 15,211 97 15,114
Other real estate
owned - - - - - -
Total non-performing
assets 17,052 95 16,957 15,211 97 15,114
Non-performing loans
(net of guarantees)
to total loans 1.8 % 1.7 %
Non-performing assets
(net of guarantees)
to total assets 1.0 % 0.9 %
Allowance for loan
and lease losses to
non-performing loans
(net of guarantees) 92.7 % 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$9,413,000 and$11,878,000 were classified as substandard loans, representing potential problem loans atMarch 31, 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) atMarch 31, 2021 andDecember 31, 2020 . The ratio of the Allowance for Loan Losses to total loans atMarch 31, 2021 andDecember 31, 2020 was 1.63% 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 ofMarch 31, 2021 andDecember 31, 2020 . 43
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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 three months ended
Analysis of the Allowance for Loan Losses
(Amounts in thousands, except percentage amounts)
Three months ended Year ended
March 31, December 31,
2021 2020 2020
Balance at beginning of period $ 15,416 $ 12,356 $ 12,356
Provision for loan losses 300 650 3,050
Loans charged-off:
Commercial (13 ) (145 ) (212 )
Commercial Real Estate - - -
Agriculture - - -
Residential Mortgage - - -
Residential Construction - - -
Consumer (3 ) (9 ) (15 )
Total charged-off (16 ) (154 ) (227 )
Recoveries:
Commercial 8 11 201
Commercial Real Estate - - -
Agriculture - - -
Residential Mortgage - - -
Residential Construction - - -
Consumer 5 6 36
Total recoveries 13 17 237
Net (charge-offs) recoveries (3 ) (137 ) 10
Balance at end of period $ 15,713 $ 12,869 $ 15,416
Ratio of net charge-offs to average loans
outstanding during the period (annualized) 0.00 % (0.07 %) 0.00 %
Allowance for loan losses
To total loans at the end of the period 1.63 % 1.67 % 1.73 %
To non-performing loans, net of guarantees at the
end of the period 92.7 % 1,152.1 % 102.0 %
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Deposits
Deposits are one of the Company's primary sources of funds. AtMarch 31, 2021 , the Company had the following deposit mix: 26.9% in savings and MMDA deposits, 3.6% in time deposits, 25.5% in interest-bearing transaction deposits and 44.0% 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. These deposits are priced to remain competitive.
Maturities of time certificates of deposits of over
(in thousands)
March 31, 2021 December 31, 2020
Three months or less $ 1,743 $ 5,110
Over three to twelve months 6,540 5,877
Over twelve months 6,636 3,656
Total $ 14,919 $ 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 59.2% onMarch 31, 2021 . In addition, onMarch 31, 2021 , the Company had the following short-term investments (based on remaining maturity and/or next repricing date):$17,748,000 in securities due within one year or less; and$93,114,000 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 atMarch 31, 2021 . Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity atMarch 31, 2021 of$292,864,000 ; 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. 45
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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 ofMarch 31, 2021 , 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 ofMarch 31, 2021 . (amounts in
thousands except percentage amounts)
Actual Well Capitalized
Ratio
Capital Ratio Requirement
Leverage $ 144,788 8.40 % 5.0 %
Common Equity Tier 1 $ 144,788 15.94 % 6.5 %
Tier 1 Risk-Based $ 144,788 15.94 % 8.0 %
Total Risk-Based $ 156,205 17.20 % 10.0 %
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