UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark one)
 
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 20222023
 
OR
 
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
 
Commission File Number 000-30707
 
First Northern Community Bancorp
(Exact name of registrant as specified in its charter)
 
California 68-0450397
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
 
195 N. First Street, Dixon, California 95620
(Address of principal executive offices) (Zip Code)

707 -678-3041
(Registrant’s telephone number including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbols(s) Name of each exchange on which registered
None Not Applicable Not Applicable

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
Yes ☒
No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
Yes ☒
No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ☐
No  ☒
 
The number of shares of Common Stock outstanding as of November 7, 20226, 2023 was 13,918,905.14,730,761.

FIRST NORTHERN COMMUNITY BANCORP

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Index
PART I – FINANCIAL INFORMATION
 
FIRST NORTHERN COMMUNITY BANCORP
 
ITEM I.    – FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
(in thousands, except share amounts) September 30, 2022  
December 31, 2021
  September 30, 2023  
December 31, 2022
 
            
Assets            
            
Cash and cash equivalents $264,403  $345,929  $197,105  $187,417 
Certificates of deposit  11,091   13,272   20,696   20,948 
Investment securities – available-for-sale  607,985   632,213 
Loans, net of allowance for loan losses of $14,771 at September 30, 2022 and $13,952 at December 31, 2021
  971,249   852,717 
Investment securities – available-for-sale, at estimated fair value, net of allowance for credit losses of $0; amortized cost of $636,903 at September 30, 2023 and $683,784 at December 31, 2022
  567,409   618,092 
Loans, net of allowance for credit losses of $16,149 at September 30, 2023 and $14,792 at December 31, 2022
  1,037,066   970,138 
Loans held-for-sale  —   1,063   369   — 
Stock in Federal Home Loan Bank and other equity securities, at cost  9,440   7,097   10,518   9,440 
Premises and equipment, net  6,018   6,552   10,058   6,122 
Core deposit intangible  4,367   — 
Interest receivable and other assets  62,527   40,244   54,740   59,204 
                
Total Assets $1,932,713  $1,899,087  $1,902,328  $1,871,361 
                
Liabilities and Stockholders’ Equity                
                
Liabilities:                
                
Demand deposits $846,037  $820,412  $770,620  $775,173 
Interest-bearing transaction deposits  455,365   432,479   405,980   448,039 
Savings and MMDA's  452,696   426,026 
Savings and MMDA’s  444,646   459,307 
Time, $250,000 or less  35,328   38,388   106,241   35,115 
Time, over $250,000  10,179   10,997   18,857   9,240 
Total deposits  1,799,605   1,728,302   1,746,344   1,726,874 
                
Interest payable and other liabilities  19,748   19,874   19,498   19,447 
                
Total Liabilities  1,819,353   1,748,176   1,765,842   1,746,321 
                
Commitments and contingencies (Note 7)            
                
Stockholders' Equity:        
Common stock, no par value; 16,000,000 shares authorized; 13,922,049 shares issued and outstanding at September 30, 2022 and 13,848,904 shares issued and outstanding at December 31, 2021
  110,557   109,793 
Stockholders’ Equity:
        
Common stock, no par value; 32,000,000 shares authorized at September 30, 2023, 16,000,000 shares authorized at December 31, 2022; 14,732,351 shares issued and outstanding at September 30, 2023 and 14,652,584 shares issued and outstanding at December 31, 2022
  116,768   116,099 
Additional paid-in capital  977   977   977   977 
Retained earnings  55,119   44,338   67,945   54,492 
Accumulated other comprehensive loss, net  (53,293)  (4,197)  (49,204)  (46,528)
Total Stockholders’ Equity  113,360   150,911   136,486   125,040 
                
Total Liabilities and Stockholders’ Equity $1,932,713  $1,899,087  $1,902,328  $1,871,361 
 
See notes to unaudited condensed consolidated financial statements.

3
Index
FIRST NORTHERN COMMUNITY BANCORP
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per share amounts) 
Three months
ended
September 30, 2022
  
Three months
ended
September 30, 2021
  
Nine months
ended
September 30, 2022
  
Nine months
ended
September 30, 2021
  
Three months
ended
September 30, 2023
  
Three months
ended
September 30, 2022
  
Nine months
ended
September 30, 2023
  
Nine months
ended
September 30, 2022
 
Interest and dividend income:                        
Loans
 
$
10,857
  
$
9,905
  
$
30,979
  
$
29,616
  
$
13,098
  
$
10,857
  
$
38,197
  
$
30,979
 
Due from banks interest bearing accounts
  
1,118
   
211
   
1,793
   
503
   
2,064
   
1,118
   
6,967
   
1,793
 
Investment securities
                                
Taxable
  
2,122
   
1,635
   
5,783
   
4,612
   
2,685
   
2,122
   
8,041
   
5,783
 
Non-taxable
  
250
   
153
   
634
   
436
   
199
   
250
   
692
   
634
 
Other earning assets
  
137
   
104
   
361
   
289
   
214
   
137
   
557
   
361
 
Total interest and dividend income
  
14,484
   
12,008
   
39,550
   
35,456
   
18,260
   
14,484
   
54,454
   
39,550
 
Interest expense:
                                
Deposits
  
271
   
231
   
691
   
686
   
2,386
   
271
   
4,817
   
691
 
Total interest expense
  
271
   
231
   
691
   
686
   
2,386
   
271
   
4,817
   
691
 
Net interest income
  
14,213
   
11,777
   
38,859
   
34,770
   
15,874
   
14,213
   
49,637
   
38,859
 
Provision (reversal of provision) for loan losses
  
300
   
(1,800
)
  
900
   
(1,500
)
Net interest income after provision for loan losses
  
13,913
   
13,577
   
37,959
   
36,270
 
Provision for credit losses
  
500
   
300
   
3,100
   
900
 
Net interest income after provision for credit losses
  
15,374
   
13,913
   
46,537
   
37,959
 
Non-interest income:
                                
Service charges on deposit accounts
  
414
   
437
   
1,308
   
1,203
   
436
   
414
   
1,259
   
1,308
 
Gains on sales of loans held-for-sale
  
27
   
305
   
145
   
1,351
   
62
   
27
   
93
   
145
 
Investment and brokerage services income
  
137
   
174
   
443
   
470
   
136
   
137
   
387
   
443
 
Mortgage brokerage income
  
10
   
53
   
21
   
67
   
11
   
10
   
21
   
21
 
Loan servicing income
  
78
   
78
   
569
   
538
   
79
   
78
   
209
   
569
 
Debit card income
  
635
   
658
   
1,915
   
1,929
   
713
   
635
   
2,094
   
1,915
 
Losses on sales/calls of available-for-sale securities
  
—
   
(20
)
  
(152
)
  
(221
)
  
—
  
—
  
(64
)
  
(152
)
Gain on bargain purchase
  —   —   1,405   — 
Other income
  
769
   
223
   
1,231
   
645
   
339
   
769
   
751
   
1,231
 
Total non-interest income
  
2,070
   
1,908
   
5,480
   
5,982
   
1,776
   
2,070
   
6,155
   
5,480
 
Non-interest expenses:
                                
Salaries and employee benefits
  
6,164
   
5,995
   
17,578
   
17,223
   
6,377
   
6,164
   
19,653
   
17,578
 
Occupancy and equipment
  
896
   
841
   
2,645
   
2,547
   
1,064
   
896
   
3,138
   
2,645
 
Data processing
  
912
   
839
   
2,587
   
2,557
   
933
   
912
   
2,949
   
2,587
 
Stationery and supplies
  
75
   
60
   
203
   
193
   
103
   
75
   
272
   
203
 
Advertising
  
99
   
100
   
276
   
250
   
111
   
99
   
322
   
276
 
Directors’ fees
  
60
   
88
   
196
   
210
   
83
   
60
   
234
   
196
 
Amortization of core deposit intangible
  226   —   603   — 
Other expense
  
1,703
   
1,311
   
4,854
   
4,111
   
1,986
   
1,703
   
5,363
   
4,854
 
Total non-interest expenses
  
9,909
   
9,234
   
28,339
   
27,091
   
10,883
   
9,909
   
32,534
   
28,339
 
Income before provision for income taxes
  
6,074
   
6,251
   
15,100
   
15,161
   
6,267
   
6,074
   
20,158
   
15,100
 
Provision for income taxes
  
1,506
   
1,742
   
3,945
   
4,168
   
1,648
   
1,506
   
5,486
   
3,945
 
                                
Net income
 
$
4,568
  
$
4,509
  
$
11,155
  
$
10,993
  
$
4,619
  
$
4,568
  
$
14,672
  
$
11,155
 
                                
Basic earnings per common share
 
$
0.33
  
$
0.32
  
$
0.81
  
$
0.78
  
$
0.32
  
$
0.32
  
$
1.01
  
$
0.77
 
Diluted earnings per common share
 
$
0.33
  
$
0.32
  
$
0.80
  
$
0.77
  
$
0.32
  
$
0.31
  
$
1.01
  
$
0.77
 

See notes to unaudited condensed consolidated financial statements.

4
Index
FIRST NORTHERN COMMUNITY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)
 
Three months
ended
September 30, 2022
  
Three months
ended
September 30, 2021
  
Nine months
ended
September 30, 2022
  
Nine months
ended
September 30, 2021
  
Three months
ended
September 30, 2023
  
Three months
ended
September 30, 2022
  
Nine months
ended
September 30, 2023
  
Nine months
ended
September 30, 2022
 
Net income
 
$
4,568
  
$
4,509
  
$
11,155
  
$
10,993
  
$
4,619
  
$
4,568
  
$
14,672
  
$
11,155
 
Other comprehensive loss, net of tax:
                                
Unrealized holding losses arising during the period, net of tax effect of $(7,461) and $(463) for the three months ended September 30, 2022 and September 30, 2021, respectively, and $(19,850) and $(2,145) for the nine months ended September 30, 2022 and September 30, 2021, respectively
  
(18,492
)
  
(1,147
)
  
(49,204
)
  
(5,316
)
Less: reclassification adjustment due to losses realized on sales of securities, net of tax effect of $— and $6 for the three months ended September 30, 2022 and September 30, 2021, respectively, and $44 and $64 for the nine months ended September 30, 2022 and September 30, 2021, respectively
  
—
   
14
   
108
   
157
 
Unrealized holding losses arising during the period, net of tax effect of $(2,097) and $(7,461) for the three months ended September 30, 2023 and September 30, 2022, respectively, and $(1,145) and $(19,850) for the nine months ended September 30, 2023 and September 30, 2022, respectively
  
(4,999
)
  
(18,492
)
  
(2,721
)
  
(49,204
)
Less: reclassification adjustment due to losses realized on sales of securities, net of tax effect of $0 for each of the three months ended September 30, 2023 and September 30, 2022, and $19 and $44 for the nine months ended September 30, 2023 and September 30, 2022, respectively
  
—
   
—
   
45
   
108
 
Other comprehensive loss, net of tax
 
$
(18,492
)
 
$
(1,133
)
 
$
(49,096
)
 
$
(5,159
)
 
$
(4,999
)
 
$
(18,492
)
 
$
(2,676
)
 
$
(49,096
)
                                
Comprehensive income (loss)
 
$
(13,924
)
 
$
3,376
  
$
(37,941
)
 
$
5,834
 
Comprehensive (loss) income
 
$
(380
)
 
$
(13,924
)
 
$
11,996
  
$
(37,941
)

See notes to unaudited condensed consolidated financial statements.

5
Index
FIRST NORTHERN COMMUNITY BANCORP
 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data)

 Common Stock  
Additional
Paid-in
  Retained  
Accumulated
Other
Comprehensive
Income (Loss),
     Common Stock  
Additional
Paid-in
  Retained  
Accumulated
Other
Comprehensive
    
 Shares  Amounts  Capital  Earnings  net of tax  Total  Shares  Amounts  Capital  Earnings  Loss, net of tax  Total 
                                    
Balance at December 31, 2020
  13,634,463  $107,527  $977  $37,115  $5,038  $150,657 
Net income              3,178       3,178 
Other comprehensive loss, net of taxes                  (4,172)  (4,172)
Stock dividend adjustment  1,282   329       (329)      — 
Cash in lieu of fractional shares  (168)          (8)      (8)
Stock-based compensation      144               144 
Common shares issued related to restricted stock grants  38,400   —               — 
Stock options exercised, net  6,108   —               — 
Balance at March 31, 2021
  13,680,085  $108,000  $977  $39,956  $866  $149,799 
Net income              3,306       3,306 
Other comprehensive income, net of taxes                  146   146 
Stock-based compensation      148               148 
Common shares issued related to restricted stock grants
  3,000                   — 
Stock repurchase and retirement
  (82,549)  (925)              (925)
Balance at June 30, 2021
  13,600,536  $107,223  $977  $43,262  $1,012  $152,474 
Net income
              4,509       4,509 
Other comprehensive loss, net of taxes
                  (1,133)  (1,133)
Stock-based compensation
      148               148 
Restricted stock forfeited
  (468)                  — 
Stock repurchase and retirement
  (132,334)  (1,454)              (1,454)
Balance at September 30, 2021  13,467,734  $105,917  $977  $
47,771  $
(121) $
154,544 
                        
Balance at December 31, 2021
  13,848,904  $109,793  $977  $44,338  $(4,197) $150,911 
Balance at December 31, 2021
  13,848,904  $109,793  $977  $44,338  $(4,197) $150,911 
Net income              3,041       3,041               3,041       3,041 
Other comprehensive loss, net of taxes                  (19,963)  (19,963)                  (19,963)  (19,963)
Stock dividend adjustment  3,276   366       (366)      —   3,276   366       (366)      — 
Cash in lieu of fractional shares  (161)          (8)      (8)  (161)          (8)      (8)
Stock-based compensation      164               164       164               164 
Common shares issued related to restricted stock grants  67,596   —               —   67,596   —               — 
Stock options exercised, net  11,615   —               —   11,615   —               — 
Stock repurchase and retirement
  (1,401)  (15)              (15)  (1,401)  (15)              (15)
Balance at March 31, 2022
  13,929,829  $110,308  $977  $47,005  $(24,160) $134,130   13,929,829  $110,308  $977  $47,005  $(24,160) $134,130 
Net income              3,546       3,546               3,546       3,546 
Other comprehensive loss, net of taxes                  (10,641)  (10,641)                  (10,641)  (10,641)
Stock-based compensation      168               168       168               168 
Common shares issued related to restricted stock grants  1,500   —               —   1,500   —               — 
Stock repurchase and retirement  (7,280)  (69)              (69)  (7,280)  (69)              (69)
Balance at June 30, 2022
  13,924,049  $110,407  $977  $50,551  $(34,801) $127,134   13,924,049  $110,407  $977  $50,551  $(34,801) $127,134 
Net income
              4,568       4,568               4,568       4,568 
Other comprehensive loss, net of taxes
                  (18,492)  (18,492)                  (18,492)  (18,492)
Stock-based compensation
      168               168       168               168 
Stock repurchase and retirement
  (2,000)  (18)              (18)  (2,000)  (18)              (18)
Balance at September 30, 2022  13,922,049  $
110,557  $
977  $
55,119  $
(53,293) $
113,360   13,922,049  $
110,557  $
977  $
55,119  $
(53,293) $
113,360 
                        
Balance at December 31, 2022
  14,652,584  $116,099  $977  $54,492  $(46,528) $125,040 
Cumulative change from adoption of ASU 2016-13 on January 1, 2023
              (916)      (916)
Balance at January 1, 2023 (as adjusted for adoption of accounting standard)  14,652,584   116,099   977   53,576   (46,528)  124,124 
Net income              5,489       5,489 
Other comprehensive income, net of taxes                  6,013   6,013 
Stock dividend adjustment  3,525   296       (296)      — 
Cash in lieu of fractional shares  (164)          (7)      (7)
Stock-based compensation      192               192 
Common shares issued related to restricted stock grants  72,242   —               — 
Stock options exercised, net of swapped shares  11,000   —               — 
Stock repurchase and retirement
  (3,580)  (26)              (26)
Balance at March 31, 2023
  14,735,607  $116,561  $977  $58,762  $(40,515) $135,785 
Net income              4,564       4,564 
Other comprehensive loss, net of taxes                  (3,690)  (3,690)
Stock-based compensation      188               188 
Common shares issued related to restricted stock grants  1,500                   — 
Stock repurchase and retirement  (16,474)  (117)              (117)
Balance at June 30, 2023
  14,720,633  $116,632  $977  $63,326  $(44,205) $136,730 
Net income              4,619       4,619 
Other comprehensive loss, net of taxes                  (4,999)  (4,999)
Stock-based compensation      136               136 
Restricted stock cancelled, net of common shares issued related to restricted stock grants  (10,209)                  —
 
Stock options exercised, net
  21,927   —               — 
Balance at September 30, 2023
  14,732,351  $
116,768  $
977  $
67,945  $
(49,204) $
136,486 

See notes to unaudited condensed consolidated financial statements.

6
Index
FIRST NORTHERN COMMUNITY BANCORP
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 (in thousands)  (in thousands) 
 
Nine months ended
September 30, 2022
  
Nine months ended
September 30, 2021
  
Nine months ended
 September 30, 2023
  
Nine months ended
 September 30, 2022
 
Cash Flows From Operating Activities            
Net income $11,155  $10,993  $14,672  $11,155 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation  571   562   730   571 
Accretion and amortization of investment securities premiums and discounts, net  3,545   3,039   1,591   3,545 
Valuation adjustment on mortgage servicing rights  (276)  24   —   (276)
(Decrease) increase in deferred loan origination fees and costs, net  (2,259)  49 
Provision (reversal of provision) for loan losses  900   (1,500)
Increase (decrease) in deferred loan origination fees and costs, net  759   (2,259)
Amortization of core deposit intangible
  603   — 
Provision for credit losses  3,100   900 
Stock-based compensation  500   440   516   500 
Losses on sales/calls of available-for-sale securities  152   221   64   152 
Amortization of operating lease right-of-use asset  835   781   806   835 
Gains on sales of loans held-for-sale  (145)  (1,351)  (93)  (145)
Proceeds from sales of loans held-for-sale  10,206   58,529   5,277   10,206 
Originations of loans held-for-sale  (8,998)  (51,914)  (5,553)  (8,998)
Gain on bargain purchase
  (1,405)  — 
Changes in assets and liabilities:                
(Increase) decrease in interest receivable and other assets  (2,167)  1,019 
Decrease (increase) in interest receivable and other assets  4,128   (2,167)
Decrease in interest payable and other liabilities  (995)  (1,587)  (196)  (995)
Net cash provided by operating activities  13,024   19,305   24,999   13,024 
                
Cash Flows From Investing Activities                
Proceeds from calls or maturities of available-for-sale securities  11,090   15,190   30,766   11,090 
Proceeds from sales of available-for-sale securities  6,349   21,917   16,987   6,349 
Principal repayments on available-for-sale securities  77,635   68,753   54,864   77,635 
Purchases of available-for-sale securities  (143,445)  (298,390)  (57,391)  (143,445)
Proceeds from maturities of certificates of deposit  4,416   5,145   3,687   4,416 
Proceeds from sales of certificates of deposit
  493   —   —   493 
Purchases of certificates of deposit
  (2,728)  (1,733)  (3,435)  (2,728)
Net (increase) decrease in loans
  (117,173)  55,576 
Net increase in loans
  (66,781)  (117,173)
Purchases of Federal Home Loan Bank stock and other equity securities, at cost  (2,343)  (617)  (1,078)  (2,343)
Purchases of premises and equipment  (37)  (803)  (1,045)  (37)
Net cash used in investing activities  (165,743)  (134,962)
Cash and cash equivalents acquired in acquisition
  103,425   — 
Net cash provided by (used in) investing activities  79,999   (165,743)
                
Cash Flows From Financing Activities                
Net increase in deposits  71,303   271,495 
Principal payments on Federal Home Loan Bank advances  —   (5,000)
Net (decrease) increase in deposits  (95,160)  71,303 
Cash dividends paid in lieu of fractional shares  (8)  (8)  (7)  (8)
Repurchases of common stock  (102)  (2,379)  (143)  (102)
Net cash provided by financing activities  71,193   264,108 
Net cash (used in) provided by financing activities  (95,310)  71,193 
                
Net (decrease) increase in Cash and Cash Equivalents  (81,526)  148,451 
Net increase (decrease) in Cash and Cash Equivalents  9,688   (81,526)
Cash and Cash Equivalents, beginning of period
  345,929   267,177   187,417   345,929 
Cash and Cash Equivalents, end of period
 $264,403  $415,628  $197,105  $264,403 
                
Supplemental Disclosures of Cash Flow Information:                
Cash paid during the period for:                
Interest $644  $679  $3,699  $644 
Income taxes
 $3,810  $3,270   —   3,810 
Supplemental disclosures of non-cash investing and financing activities:                
Stock dividend distributed $6,992  $6,636   5,652   6,992 
Unrealized holding losses on available for sale securities, net of taxes $(49,096) $(5,159)  (2,676)  (49,096)
Transfer of loans held-for-sale to loans held-for-investment $—  $1,765 
Market value of shares tendered in-lieu of cash to pay for exercise of options $65  $32   361   65 
Recognition of right-of-use assets obtained in exchange for operating lease liabilities
 $869  $285   245   869 
Non-cash assets acquired (liabilities assumed) in acquisition:        
Total assets acquired
  12,612   — 
Total liabilities assumed
  (115,916)  — 

See notes to unaudited condensed consolidated financial statements.

7
Index
FIRST NORTHERN COMMUNITY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 20222023 and 20212022 and December 31, 2021

2022
1.BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of First Northern Community Bancorp (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of results expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 20212022 as filed with the Securities and Exchange Commission ("SEC"(“SEC”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. All material intercompany balances and transactions have been eliminated in consolidation.


2.ACCOUNTING POLICIES


The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on



The following accounting policies were updated from those disclosed in the valuation techniques usedForm 10-K for the year ended December 31, 2022 and were effective as of January 1, 2023.



Allowance for Credit Losses – Available-For-Sale Securities

For available-for-sale debt securities in an unrealized loss position, the sensitivityCompany first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of financial statement amountsits amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the methods, assumptions,rating of the security by a rating agency, and estimates underlying those amounts, Managementadverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has identifiednot been recorded through an allowance for credit losses is recognized in other comprehensive income.



Changes in the allowance for loancredit losses accounting to beare recorded as provision for (or reversal of) credit loss expense. Losses are charged against the accounting area requiringallowance when management believes the most subjectiveuncollectibility of an available-for-sale security is confirmed or complex judgments, and as such the accounting area that could be most subject to revision as new information becomes available. A discussionwhen either of the factors affecting accounting forcriteria regarding intent or requirement to sell is met.



Accrued interest receivable on available-for-sale debt securities is excluded from the allowance for loan lossesestimate of credit losses. Accrued interest receivable on available-for-sale debt securities totaled $1,991,000 and $2,151,000 as of September 30, 2023 and December 31, 2022, respectively, and is included in the “Asset Quality”interest receivable and “Allowance for Loan Losses” discussions below.


Application of these principles requires the Company to make certain estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain accounting policies inherently have a greater relianceother assets on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment writedown or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.Condensed Consolidated Balance Sheet.


Recently Issued Accounting Pronouncements:
Allowance for Credit Losses – Loans


In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).  This ASU adds an SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119 on loanThe allowance for credit losses to the FASB Codification Topic 326. This ASU also updates the SEC section of the Codification for the change in the effective date of Topic 842.  This ASU was effective upon addition to the FASB Codification. ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), is effective on January 1, 2023 for smaller reporting companies with less than $250 million in public float as defined in the SEC's rules.  The Company presently(ACL) is a smaller reporting company.  The Company will apply the amendment's provisions as a cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective.  The Company has formed a teamvaluation account that is workingdeducted from the loan’s amortized cost basis to present the net amount expected to be collected on an implementation planthe loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to adopt the amendment.  The implementation plan will include developing policies, procedures and internal controls over the model.  The Company is also working with a software vendor to measure expected losses required by the amendment.  The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements and expects that the portfolio composition and economic conditions at the time of adoption will influence the accounting adjustment made at the time the amendment is adopted.be charged-off.


8

Management estimates the ACL using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. In March 2020,determining the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848).  This ASU provides temporary optional guidanceACL, accruing loans with similar risk characteristics are generally evaluated collectively. To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to easedetermine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators, including historical credit losses, have been statistically correlated with various econometrics, including California unemployment rate, and California gross domestic product. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. The Company utilized a reasonable and supportable forecast period of approximately eight quarters and obtained the potential burdenforecast data from Moody’s Analytics. The Company also considered the impact of portfolio concentrations, changes in accounting for reference rate reform.  This ASU provides optional expedients and exceptions for contracts, hedging relationships,underwriting practices, imprecision in its economic forecasts, and other transactionsrisk factors that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform.  This ASU was effective for all entities as of March 12, 2020 through December 31, 2022.  As of January 1, 2022, the Company is no longer originating LIBOR-based loans and is originating new variable rate loans using the Secured Overnight Financing Rate (SOFR).  For existing LIBOR based loans, the Company is monitoring the development and reporting of fallback indices.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.might influence its loss estimation process.



In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848).  This ASU applies
Loans that do not share similar risk characteristics are individually evaluated by management for potential impairment. Included in loans individually evaluated are collateral dependent loans. A loan is considered to contracts, hedging relationships and other transactions that reference LIBOR or other rate referencesbe collateral dependent when repayment is expected to be discontinued becauseprovided substantially through the operation or sale of reference rate reform.the collateral. Collateral dependent loans are considered to have unique risk characteristics and are individually evaluated. The amendments in this ASU are elective and applyACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to all entities that have derivative instruments that use an interest rate thatsell when applicable, less the amortized cost basis of the financial asset. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be modified by reference rate reform. This ASU provides implementation guidance to clarify that certain optional expedients and exceptions in Topic 848 may be applied to derivative instruments. This ASU may be elected on a full retrospective basis for any interim period subsequent to March 12, 2020, or on a prospective basis to new modifications from any date subsequent to the date of issuance.  The Company is evaluating the optional election of this ASU for the transition from LIBOR to a new reference rate.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.taken.



In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification representsThe ACL is measured on a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.  For public business entities, these amendments require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20.  This ASU is effective on January 1, 2023, the same effective date as ASU 2016-13.collective (pool) basis when similar risk characteristics exist. The Company is currently evaluatinghas identified the effects thatfollowing portfolio segments to evaluate and measure the adoption of these amendments will have on its consolidated financial statements.ACL:



In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.  These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.   This ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

9
IndexCommercial
3. INVESTMENT SECURITIES

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at September 30, 2022 are summarized as follows::

(in thousands) 
Amortized
cost
  
Unrealized
gains
  
Unrealized
losses
  
Estimated
fair value
 
             
Investment securities available-for-sale:            
U.S. Treasury securities $115,583  $—  $(6,385) $109,198 
Securities of U.S. government agencies and corporations  120,824   —   (10,457)  110,367 
Obligations of states and political subdivisions  59,263   3   (7,710)  51,556 
Collateralized mortgage obligations  117,695   —   (19,553)  98,142 
Mortgage-backed securities  267,401   —   (28,679)  238,722 
                 
Total debt securities $680,766  $3  $(72,784) $607,985 

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2021 are summarized as follows:

(in thousands) 
Amortized
cost
  
Unrealized
gains
  
Unrealized
losses
  
Estimated
fair value
 
             
Investment securities available-for-sale:            
U.S. Treasury securities $86,534  $388  $(711) $86,211 
Securities of U.S. government agencies and corporations  104,106   330   (1,826)  102,610 
Obligations of states and political subdivisions  44,842   1,444   (301)  45,985 
Collateralized mortgage obligations  137,872   665   (2,885)  135,652 
Mortgage-backed securities  262,738   1,971   (2,954)  261,755 
                 
Total debt securities $636,092  $4,798  $(8,677) $632,213 

The Company had $0 and $2,470,000 in proceeds from sales of available-for-sale securities for the three-month periods ended September 30, 2022 and 2021, respectively.  The Company had $6,349,000 and $21,917,000 in proceeds from sales of available-for-sale securities for the nine-month periods ended September 30, 2022 and 2021, respectively.  There were no gross realized gains on sales of available-for-sale securities for each of the three-month periods ended September 30, 2022 and 2021. Gross realized losses on sales of available-for-sale securities were $0 and $20,000 for the three-month periods ended September 30, 2022 and 2021, respectively.  Gross realized gains on sales of available-for-sale securities were $0 and $322,000 for the nine-month periods ended September 30, 2022 and 2021, respectively.  Gross realized losses on sales of available-for-sale securities were $152,000 and $543,000 for the nine-month periods ended September 30, 2022 and 2021, respectively.

The amortized cost and estimated fair value of debt and other securities at September 30, 2022, by contractual maturity, are shown in the following table:

(in thousands) 
Amortized
cost
  
Estimated
fair value
 
       
Maturity in years:      
Due in one year or less $33,806  $33,355 
Due after one year through five years  188,827   175,412 
Due after five years through ten years  39,515   34,802 
Due after ten years  33,522   27,552 
Subtotal  295,670   271,121 
Mortgage-backed securities & Collateralized mortgage obligations  385,096   336,864 
Total $680,766  $607,985 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  In addition, factors such as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities.

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Index
An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of September 30, 2022, follows:


 Less than 12 months  12 months or more  Total 
(in thousands) Fair Value  
Unrealized
losses
  Fair Value  
Unrealized
losses
  Fair Value  
Unrealized
losses
 
                   
U.S. Treasury securities $66,255  $(2,844) $42,943  $(3,541) $109,198  $(6,385)
Securities of U.S. government agencies and corporations  43,768   (1,913)  62,099   (8,544)  105,867   (10,457)
Obligations of states and political subdivisions  42,252   (5,103)  7,598   (2,607)  49,850   (7,710)
Collateralized mortgage obligations  44,515   (5,086)  51,469   (14,467)  95,984   (19,553)
Mortgage-backed securities  127,156   (11,660)  105,959   (17,019)  233,115   (28,679)
                         
Total $323,946  $(26,606) $270,068  $(46,178) $594,014  $(72,784)

No decline in value related to investment securities was considered “other-than-temporary” during the first nine months of 2022. Four hundred sixteen securities, all considered investment grade, which had an aggregate fair value of $323,946,000 and a total unrealized loss of $26,606,000, have been in an unrealized loss position for less than twelve months as of September 30, 2022.  One hundred forty-six securities, all considered investment grade, which had an aggregate fair value of $270,068,000 and a total unrealized loss of $46,178,000, have been in an unrealized loss position for more than twelve months as of September 30, 2022.  The unrealized losses on the Company's investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates.The Company does not intend to sell the securities and has concluded it is not more likely than not that the Company will be required to sell these securities prior to recovery of their anticipated cost basis. Therefore, the Company does not consider these investments to be other than temporarily impaired as of September 30, 2022.

The fair value of investment securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuer's financial condition deteriorates, or the liquidity for securities declines. As a result, other than temporary impairments may occur in the future. The coronavirus pandemic and the impact of governmental health measures in response thereto may increase the likelihood of such other than temporary impairments.

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of December 31, 2021, follows:


 Less than 12 months  12 months or more  Total 
(in thousands) Fair Value  
Unrealized
losses
  Fair Value  
Unrealized
losses
  Fair Value  
Unrealized
losses
 
                   
U.S. Treasury Securities $63,254  $(673) $2,066  $(38) $65,320  $(711)
Securities of U.S. government agencies and corporations  48,288   (942)  30,158   (884)  78,446   (1,826)
Obligations of states and political subdivisions  11,680   (233)  934   (68)  12,614   (301)
Collateralized Mortgage obligations  90,299   (2,850)  1,298   (35)  91,597   (2,885)
Mortgage-backed securities  175,943   (2,816)  6,997   (138)  182,940   (2,954)
                         
Total $389,464  $(7,514) $41,453  $(1,163) $430,917  $(8,677)

Investment securities carried at $50,540,000 and $39,695,000 at September 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.

11
Index
4. LOANS

The composition of the Company’s loan portfolio, by loan class, as of September 30, 2022  and December 31, 2021 was as follows:

($ in thousands) 
September 30,
2022
  
December 31,
2021
 
       
Commercial $107,958  $135,894 
Commercial Real Estate  646,365   526,924 
Agriculture  118,929   107,183 
Residential Mortgage  88,765   76,160 
Residential Construction  7,407   4,482 
Consumer  15,569   17,258 
   984,993   867,901 
         
Allowance for loan losses  (14,771)  (13,952)
Net deferred origination fees and costs  1,027   (1,232)
         
Loans, net $971,249  $852,717 

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.

Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses.  These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above.  Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower'sborrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.  Paycheck Protection Program (“PPP”) loans outstanding included in Commercial loans totaled $0.5 million and $37.3 million as of September 30, 2022 and December 31, 2021, respectively.



Commercial Real Estate:

Commercial real estate loans generally fall into two categories,categories: owner-occupied and non-owner occupied.  Loans secured by owner-occupied real estate are primarily susceptible to changes in the market conditions of the related business.  This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles. These same risks apply to commercial loans whether secured by equipment, receivables or other personal property or unsecured.  Problem commercial real estate loans are generally identified by periodic review of financial information that may include financial statements, tax returns, payment history of the borrower, and site inspections.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower'sborrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral.  When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default.  Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resulting over-supply of space.  Losses are dependent on the value of underlying collateral at the time of default.  Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means.



Agriculture:
12
Index
Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock.  Repayment is primarily from the sale of an agricultural product or service.  Agricultural loans are generally secured by inventory, receivables, equipment, and other real property.  Agricultural loans primarily are susceptible to changes in market demand for specific commodities.  This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as adverse weather conditions such as drought, fire, or floods.  Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower'sborrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.


9
Index

Residential mortgage loans:  Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks:risks; non-payment due to diminished or lost income, over-extension of credit, a lack of borrower'sborrower’s cash flow to sustain payments, and shortfalls in collateral value.  In general, non-payment is usually due to loss of employment and follows general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts.



Residential construction loans:  Construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the risks related risks described aboveto residential mortgage loans, but the added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion.  Losses are primarily related to underlying collateral value and changes therein as described above.  Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.



Consumer:

Consumer loans, whether unsecured or secured, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower'sborrower’s cash flow to sustain payments, and shortfall in collateral value.  In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly the upward movements in the unemployment rate, loss of collateral value, inflation and demand shifts.


Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or

Unfunded commitments: The estimated credit losses associated with these unfunded lending commitments is calculated using the same models and methodologies noted above and incorporate utilization assumptions at time of default. The reserve for unfunded commitments is maintained on the condensed consolidated balance sheet in other appropriate documentation. Collateral valuations are obtained at originationliabilities.



Accrued interest receivable on loans is not included in the calculation of the credit. Once repaymentallowance for credit losses. Accrued interest receivable on loans totaled $5,194,000 and $3,594,000 as of September 30, 2023 and December 31, 2022, respectively, and is questionable,included in interest receivable and the loan has been deemed classified, collateral valuations are obtained periodically (generally annually but may be more frequent dependingother assets on the collateral type).Condensed Consolidated Balance Sheet.

Business Combinations
The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase consideration over the fair value of acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill and a deficit is recognized as a bargain purchase gain.

AsGoodwill and intangible assets acquired in a business combination and that are determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate the necessity for such impairment tests to be performed. The Company has no goodwill arising from business combinations. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Core deposit intangible assets arising from business combinations are amortized on an accelerated basis reflecting the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. The estimated life of the core deposit intangible is approximately 10 years.


Accounting Standards Adopted in 2023



On January 1, 2023, the Company adopted ASU 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities, based on management’s intent to sell the security, or likelihood the Company will be required to sell the security, before recovery of the amortized cost basis.
10
Index
Upon adoption of ASU 2016-13, the Company made the accounting policy election to not measure an estimate of credit losses on accrued interest receivable as the Company writes off any uncollectible accrued interest receivable in a timely manner.


Results for the reporting periods beginning January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. Upon adoption of CECL, the Company recognized an increase in the ACL for loans and reserve for unfunded commitments totaling $1,300,000 as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings of $916,000, net of deferred taxes of $384,000.



On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  These amendments eliminate the troubled debt restructuring (TDR) recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.  For public business entities, these amendments require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20.  Results for the reporting periods beginning January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP.



Recently Issued Accounting Pronouncements



In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope.  This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition.  An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued.   An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020.  In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848.  This ASU extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848.  ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848.  The Company is in the process of evaluating the provisions of this ASU but does not expect it to have a material impact on the Company’s consolidated financial statements.



In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.  These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.  This ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

11
Index
3. INVESTMENT SECURITIES

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at September 30, 2023 are summarized as follows:

(in thousands) 
Amortized
 cost
  
Unrealized
 gains
  
Unrealized
 losses
  
Estimated fair
value
 
             
Investment securities available-for-sale:            
U.S. Treasury securities $101,564  $1  $(4,587) $96,978 
Securities of U.S. government agencies and corporations  123,822   —   (8,858)  114,964 
Obligations of states and political subdivisions  51,386   1   (6,903)  44,484 
Collateralized mortgage obligations  112,079   1   (20,780)  91,300 
Mortgage-backed securities  248,052   1   (28,370)  219,683 
                 
Total debt securities $636,903  $4  $(69,498) $567,409 

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2022 are summarized as follows:

(in thousands) 
Amortized
cost
  
Unrealized
gains
  
Unrealized
losses
  
Estimated fair
value
 
             
Investment securities available-for-sale:            
U.S. Treasury securities $119,644  $13  $(5,842) $113,815 
Securities of U.S. government agencies and corporations  128,697   20   (9,806)  118,911 
Obligations of states and political subdivisions  58,955   13   (5,642)  53,326 
Collateralized mortgage obligations  114,983   —   (19,633)  95,350 
Mortgage-backed securities  261,505   56   (24,871)  236,690 
                 
Total debt securities $683,784  $102  $(65,794) $618,092 

The Company had no proceeds from sales of available-for-sale securities for the three-month periods ended September 30, 2023 and 2022, respectively. The Company had $16,987,000 and $6,349,000 in proceeds from sales of available-for-sale securities for the nine-month periods ended September 30, 2023 and 2022, respectively.  There were no gross realized gains on sales of available-for-sale securities for the three-month periods ended September 30, 2023 and 2022. Gross realized gains on sales of available-for-sale securities were $96,000 and $0 for the nine-month periods ended September 30, 2023 and 2022, respectively. There were no gross realized losses on sales of available-for-sale securities for the three-month periods ended September 30, 2023 and 2022. Gross realized losses on sales of available-for-sale securities were $160,000 and $152,000 for the nine-month periods ended September 30, 2023 and 2022, respectively.

The amortized cost and estimated fair value of debt and other securities at September 30, 2023, by contractual maturity, are shown in the following table:

(in thousands) 
Amortized
cost
  
Estimated
fair value
 
       
Maturity in years:      
Due in one year or less $89,660  $87,943 
Due after one year through five years  135,601   125,056 
Due after five years through ten years  24,901   21,549 
Due after ten years  26,610   21,878 
Subtotal  276,772   256,426 
Mortgage-backed securities & Collateralized mortgage obligations  360,131   310,983 
Total $636,903  $567,409 
12
Index

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  In addition, factors such as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities.

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of September 30, 2022, approximately 11%2023, follows:

(in thousands) Less than 12 months  12 months or more  Total 

 Fair Value  
Unrealized
losses
  Fair Value  
Unrealized
losses
  Fair Value  
Unrealized
losses
 
                   
U.S. Treasury securities $10,775  $(53) $83,726  $(4,534) $94,501  $(4,587)
Securities of U.S. government agencies and corporations  17,526   (183)  97,438   (8,675)  114,964   (8,858)
Obligations of states and political subdivisions  9,900   (430)  34,011   (6,473)  43,911   (6,903)
Collateralized mortgage obligations  11,689   (244)  77,729   (20,536)  89,418   (20,780)
Mortgage-backed securities  31,322   (1,081)  185,973   (27,289)  217,295   (28,370)
                         
Total $81,212  $(1,991) $478,877  $(67,507) $560,089  $(69,498)

Sixty-eight securities, all considered investment grade, which had an aggregate fair value of $81,212,000 and a total unrealized loss of $1,991,000, have been in principal amountan unrealized loss position for less than twelve months as of the Company's loans wereSeptember 30, 2023. Four hundred and ninety-six securities, all considered investment grade, which had an aggregate fair value of $478,877,000 and a total unrealized loss of $67,507,000, have been in an unrealized loss position for general commercial uses, including professional, retail and small businesses. Approximately 65% in principal amountmore than twelve months as of September 30, 2023.  The unrealized losses on the Company’s loansinvestment securities were securedcaused by commercial real estate, consisting primarilymarket conditions for these types of loans secured by commercial propertiesinvestments, particularly changes in risk-free interest rates.  The decline in fair value is attributable to changes in interest rates and constructionnot credit quality, and land development loans. Approximately 12%the Company does not intend to sell the securities.  The Company has concluded it is not more likely than not that the Company will be required to sell these securities prior to recovery of their anticipated cost basis. Therefore, as of September 30, 2023, the Company has not recorded an allowance for credit losses on these securities and the unrecognized or unrealized losses on these securities have not been recognized into income.

The fair value of investment securities could decline in principal amount of the Company's loans werefuture if the general economy deteriorates, inflation and interest rate increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for agriculture, approximately 9%securities declines. As a result, an allowance for credit loss may occur in principal amount of the Company’s loans were residential mortgage loans, approximately 1% in principal amount of the Company’s loans were residential construction loans and approximately 2% in principal amount of the Company’s loans were consumer loans.future.

Once a loan becomes delinquent or repayment becomes questionable, a Company collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral or a principal payment. If this is not forthcoming and payment
An analysis of principal and interest in accordance with the contractual termsgross unrealized losses of the loan agreement becomes unlikely, the Company will consider the loan to be impaired and will estimate its probable loss, using the present valueavailable-for-sale investment securities portfolio as of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. For collateral dependent loans, the Company will utilize a recent valuation of the underlying collateral less estimated costs of sale, and charge-off the loan down to the estimated net realizable amount. Depending on the length of time until final collection, the Company may periodically revalue the estimated loss and take additional charge-offs or specific reserves as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when the collateral is liquidated and the actual loss is confirmed. Unpaid balances on loans after or during collection and liquidation may also be pursued through legal action and attachment of wages or judgment liens on the borrower's other assets.December 31, 2022, follows:

(in thousands) Less than 12 months  12 months or more  Total 

 Fair Value  
Unrealized
losses
  Fair Value  
Unrealized
losses
  Fair Value  
Unrealized
losses
 
                   
U.S. Treasury Securities $54,574  $(1,680) $56,872  $(4,162) $111,446  $(5,842)
Securities of U.S. government agencies and corporations  45,261   (1,341)  69,635   (8,465)  114,896   (9,806)
Obligations of states and political subdivisions  40,479   (3,022)  10,049   (2,620)  50,528   (5,642)
Collateralized Mortgage obligations  36,040   (2,586)  59,310   (17,047)  95,350   (19,633)
Mortgage-backed securities  99,250   (6,131)  131,951   (18,740)  231,201   (24,871)
                         
Total $275,604  $(14,760) $327,817  $(51,034) $603,421  $(65,794)

Investment securities carried at $45,366,000 and $44,319,000 at September 30, 2023 and December 31, 2022, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.

13
Index
4. 
LOANS AND ALLOWANCE FOR CREDIT LOSSES

The composition of the Company’s loan portfolio, by loan class, as of September 30, 2023 and December 31, 2022 was as follows:
($ in thousands) 
September 30,
2023
  
December 31,
2022
 
       
Commercial $93,753  $106,771 
Commercial Real Estate  718,847   645,166 
Agriculture  109,942   114,040 
Residential Mortgage  101,755   92,669 
Residential Construction  14,021   10,167 
Consumer  14,826   15,287 
   1,053,144   984,100 
Allowance for credit losses  (16,149)  (14,792)
Deferred origination fees and costs, net
  71   830 
Loans, net $1,037,066  $970,138 


At September 30, 20222023 and December 31, 2021,2022, all loans were pledged under a blanket collateral lien to secure actual or potential borrowings from the Federal Home Loan Bank (“FHLB”).



Allowance for Credit Losses


For the periods indicated, the following tables summarize the activity in the allowance for credit losses on loans which is recorded as a contra asset, and the reserve for unfunded commitments which is recorded on the balance sheet within other liabilities:

  Allowance for credit losses – Three months ended September 30, 2023 
($ in thousands) Beginning balance  Charge-offs  Recoveries  
Provision
(recovery)
  Ending Balance 
Commercial 
$
1,775

  
$
(91

)

 
$
20

  
$
32

  
$
1,736

 
Commercial Real Estate  
10,050

   
—

   
—

   
526

   
10,576

 
Agriculture  
939

   
—

   
—

   
80

   
1,019

 
Residential Mortgage  
1,824

   
—

   
—

   
79

   
1,903

 
Residential Construction  
487

   
—

   
—

   
(155

)

  
332

 
Consumer  
367

   
(9

)

  
—

   
4

   
362

 
Unallocated  
137

   
—

   
—

   
84

   
221

 
Allowance for credit losses on loans  
15,579

   
(100

)

  
20

   
650

   
16,149

 
Reserve for unfunded commitments  
1,200

   
—

   
—

   
(150

)

  
1,050

 
Total 
$
16,779

  
$
(100

)

 
$
20

  
$
500

  
$
17,199

 

  Allowance for credit losses – Nine months ended September 30, 2023 
($ in thousands) Beginning balance  Adoption of CECL  Charge-offs  Recoveries  
Provision
(recovery)
  Ending Balance 
Commercial 
$
1,463

  
$
623

  
$
(269

)

 
$
155

  
$
(236

)

 
$
1,736

 
Commercial Real Estate  
10,073

   
(464

)

  
—

   
—

   
967

   
10,576

 
Agriculture  
1,757

   
(671

)

  
(2,567

)

  
—

   
2,500

   
1,019

 
Residential Mortgage  
880

   
834

   
(3

)

  
—

   
192

   
1,903

 
Residential Construction  
178

   
200

   
—

   
—

   
(46

)

  
332

 
Consumer  
173

   
201

   
(10

)

  
1

   
(3

)

  
362

 
Unallocated  
268

   
77

   
—

   —
   
(124

)

  
221

 
Allowance for credit losses on loans  
14,792

   
800

   
(2,849

)

  
156

   
3,250

   
16,149

 
Reserve for unfunded commitments  
700

   
500

   
—

   
—

   
(150

)

  
1,050

 
Total 
$
15,492

  
$
1,300

  
$
(2,849

)

 
$
156

  
$
3,100

  
$
17,199

 

1314
During the quarter ended September 30, 2023, the levels of forecasted California unemployment remained relatively unchanged and forecasted gross domestic product decreased from the prior quarter. During the nine months ended September 30, 2023, the Company experienced a credit event related to suspected customer fraud on a single agricultural relationship that required a charge-off of $2,567,000 against the allowance for credit losses (ACL). Loan growth was the primary driver for provision expense of $500,000 recognized for the three months ended September 30, 2023. The reduction in the ACL resulting from the charge-off coupled with our loan growth were the primary drivers for provision expense of $3,100,000 recognized for the nine months ended September 30, 2023. Management believes that the allowance for credit losses at September 30, 2023 appropriately reflected expected credit losses in the loan portfolio at that date.



The following tables summarize the activity in the allowance for loan losses by loan class for the three and nine months ended September 30, 2022:

Three Months Ended September 30, 2022 
($ in thousands) Commercial  
Commercial
Real Estate
  Agriculture  
Residential
Mortgage
  
Residential
Construction
  Consumer  Unallocated  Total 
Balance as of June 30, 2022 $1,650  $9,571  $1,694  $802  $151  $179  $228  $14,275 
Provision for (reversal of) loan losses  (385)  566   128   45   (21)  26   (59)  300 
                                 
Charge-offs  —   —   —   —   —   (30)  —   (30)
Recoveries  225   —   —   —   —   1   —   226 
Net (charge-offs)/recoveries  225   —   —   —   —   (29)  —   196 
Balance as of September 30, 2022 $1,490  $10,137  $1,822  $847  $130  $176  $169  $14,771 

Nine Months Ended September 30, 2022 
($ in thousands) Commercial  
Commercial
Real Estate
  Agriculture  
Residential
Mortgage
  
Residential
Construction
  Consumer  Unallocated  Total 
Balance as of December 31, 2021 $1,604  $8,808  $1,482  $742  $74  $167  $1,075  $13,952 
Provision for (reversal of) loan losses  (66)  1,329   340   105   56   42   (906)  900 
                                 
Charge-offs  (297)  —   —   —   —   (39)  —   (336)
Recoveries  249   —   —   —   —   6   —   255 
Net (charge-offs)/recoveries  (48)  —   —   —   —   (33)  —   (81)
Balance as of September 30, 2022 $1,490  $10,137  $1,822  $847  $130  $176  $169  $14,771 
15
Index

Collateral-Dependent Loans



In accordance with ASC 326, a loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. All loans individually analyzed were collateral-dependent loans as of September 30, 2023 and December 31, 2022.  The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses as of September 30, 2023 and December 31, 2022:

September 30, 2023 
($ in thousands) 
Secured by 1-4
Family
Residential
Properties-1st
lien
  
Secured by 1-4
Family
Residential
Properties-junior
lien
  
Secured by 1-4
Family
Residential
Properties-
revolving
  Commercial  Construction and land development  Secured by farmland  Agriculture production loans  Total 
Commercial $—  $—  $—  $—  $—  $—  $—  $— 
Commercial Real Estate  —   —   —   —   —   —   —   — 
Agriculture  —   —   —   —   —   1,008   4,012   5,020 
Residential Mortgage  400   —   —   —   —   —   —   400 
Residential Construction  —   —   —   —   —   —   —   — 
Consumer  —   372   327   —   —   —   —   699 
Total $400  $372  $327  $—  $—  $1,008  $4,012  $6,119
 

December 31, 2022 
($ in thousands) 
Secured by 1-4
Family
Residential
Properties-1st
lien
  
Secured by 1-4
Family
Residential
Properties-junior
lien
  
Secured by 1-4
Family
Residential
Properties-
revolving
  Commercial  Construction and land development  Secured by farmland  Agriculture production loans  Total 
Commercial $—  $—  $—  $—  $—  $—  $—  $— 
Commercial Real Estate  —   —   —   —   —   —   —   — 
Agriculture  —   —   —   —   —   1,148   6,268   7,416 
Residential Mortgage  123   —   —   —   —   —   —   123 
Residential Construction  —   —   —   —   —   —   —   — 
Consumer  —   —   637   —   —   —   —   637 
Total $123  $—  $637  $—  $—  $1,148  $6,268  $8,176 


Foreclosure Proceedings



The Company had no residential real estate property in the process of foreclosure at September 30, 2023 and December 31, 2022.

16
Non-accrual and Past Due Loans

The Company’s loans by delinquency and non-accrual status, as of September 30, 20222023 and December 31, 2021, were2022, was as follows:

($ in thousands) 
30-59 days
Past Due
&
Accruing
  
60-89 days
Past Due
&
Accruing
  
90 days or
More Past
Due &
Accruing
  
Nonaccrual
Loans
  
Total Past
Due
& Nonaccrual
Loans
  
Current &
Accruing
Loans
  Total Loans  
Nonaccrual
loans with
No ACL
 
September 30, 2023
                        
Commercial $7  $47  $—  $—  $54  $93,699  $93,753  $— 
Commercial Real Estate  1,910   1,956   —   —   3,866   714,981   718,847   — 
Agriculture  —   —   —   5,020   5,020   104,922   109,942   5,020 
Residential Mortgage  636   —   —   400   1,036   100,719   101,755   400 
Residential Construction  3,420   —   —   —   3,420   10,601   14,021   — 
Consumer  45   —   —   699   744   14,082   14,826   699 
Total $6,018  $2,003  $—  $6,119  $14,140  $1,039,004  $1,053,144  $6,119 
                                 
December 31, 2022
                                
Commercial $41  $—  $403  $—  $
444  $
106,327  $106,771  $
— 
Commercial Real Estate  —   —   —   —   —   645,166   645,166   — 
Agriculture  —   —   —   7,416   7,416   106,624   114,040   7,416 
Residential Mortgage  —   —   —   123   123   92,546   92,669   123 
Residential Construction  —   —   —   —   —   10,167   10,167   — 
Consumer  —   —   —   637   637   14,650   15,287   637 
Total $41  $—  $403  $8,176  $8,620  $975,480  $984,100  $8,176 

($ in thousands) Current & Accruing  30-59 Days Past Due & Accruing  60-89 Days Past Due & Accruing  
90 Days or
More Past
Due &
Accruing
  Nonaccrual  Total Loans 
September 30, 2022
                  
Commercial $106,987  $164  $404  $403  $—  $107,958 
Commercial Real Estate  646,365   —   —   —   —   646,365 
Agriculture  111,304   —   —   —   7,625   118,929 
Residential Mortgage  88,520   78   41   —   126   88,765 
Residential Construction  7,260   147   —   —   —   7,407 
Consumer  14,846   —   —   —   723   15,569 
Total $975,282  $389  $445  $403  $8,474  $984,993 
                         
December 31, 2021
                        
Commercial $134,890  $394  $477  $—  $133  $135,894 
Commercial Real Estate  526,337   32   —   —   555   526,924 
Agriculture  98,471   —   —   —   8,712   107,183 
Residential Mortgage  75,861   161   —   —   138   76,160 
Residential Construction  4,482   —   —   —   —   4,482 
Consumer  16,523   —   76   —   659   17,258 
Total $856,564  $587  $553  $—  $10,197  $867,901 

Non-accrual loans amounted to $8,474,000 at September 30, 2022The Company recognized $4,000 and were comprised of three agriculture loans totaling $7,625,000, one residential mortgage loan totaling $126,000, and five consumer loans totaling $723,000. Non-accrual loans amounted to $10,197,000 at December 31, 2021 and were comprised of two commercial loans totaling $133,000, one commercial real estate loan totaling $555,000, three agriculture loans totaling $8,712,000, one residential mortgage loan totaling $138,000, and four consumer loans totaling $659,000.

14
Index
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Loans to be considered for impairment include non-accrual loans, troubled debt restructurings and loans with a risk rating of 5 (special mention) or worse and an aggregate exposure of $500,000 or more. Once identified, impaired loans are measured individually for impairment using one of three methods: present value of expected cash flows discounted at the loan's effective interest rate; the loan's observable market price; or fair value of collateral if the loan is collateral dependent. If the measurement of a non-accrual loan is less than the recorded investment in the loan, an impairment is recognized through the establishment of a specific reserve sufficient to cover expected losses and/or a charge-off against the allowance for loan losses. In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is, therefore, deemed a confirmed loss, is promptly charged-off against the allowance for loan losses.

Impaired loans, segregated by loan class, as of September 30, 2022 and December 31, 2021 were as follows:

($ in thousands) 
Unpaid Contractual
Principal Balance
  
Recorded
Investment
with
No Allowance
  
Recorded
Investment with
Allowance
  
Total
Recorded
Investment
  Related Allowance 
September 30, 2022
               
Commercial $—  $—  $—  $—  $— 
Commercial Real Estate  —   —   —   —   — 
Agriculture  10,127   7,625   —   7,625   — 
Residential Mortgage  680   126   503   629   76 
Residential Construction  —   —   —   —   — 
Consumer  902   723   64   787   4 
Total $11,709  $8,474  $567  $9,041  $80 
                     
December 31, 2021
                    
Commercial $142  $133  $—  $133  $— 
Commercial Real Estate  555   555   —   555   — 
Agriculture  10,680   8,712   —   8,712   — 
Residential Mortgage  701   138   517   655   81 
Residential Construction  241   —   241   241   10 
Consumer  815   659   64   723   2 
Total $13,134  $10,197  $822  $11,019  $93 

The average recorded investment in impaired loans and the amount$19,000 of interest income recognized on impairednonaccrual loans during the three months ended September 30, 20222023 and September 30, 2021 was as follows:

($ in thousands) 
Three Months Ended
September 30, 2022
  
Three Months Ended
September 30, 2021
 
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
Commercial $17  $—  $30  $— 
Commercial Real Estate  681   19   4,297   466 
Agriculture  7,855   —   9,130   — 
Residential Mortgage  634   5   666   5 
Residential Construction  —   —   248   4 
Consumer  741   1   747   3 
Total $9,928  $25  $15,118  $478 

15
Index
2022, respectively. The average recorded investment in impaired loansCompany recognized $1,289,000 and the amount$46,000 of interest income recognized on impairednonaccrual loans during the nine months ended September 30, 20222023 and September 30, 2021 was2022, respectively.

Loan Modifications
On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan.
Occasionally, the Company modifies loans to borrowers in financial difficulty by providing principal forgiveness, term extension, payment delays or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.

In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, an other-than-insignificant payment delay and/or an interest rate reduction.

17
The following tables present the amortized cost basis of loans that were experiencing both financial difficulty and modification during the periods indicated, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below.

The amortized cost basis of loans that were experiencing both financial difficulty and modification during the three months ended September 30, 2023 were as follows:

($ in thousands) Term Extension  
Combination Term Extension
and Interest Rate Reduction
  
Total Class of Financing
Receivable
 

         
Commercial $—  $—   — 
Commercial Real Estate  —   —   — 
Agriculture  —   —   — 
Residential Mortgage  —   —   — 
Residential Construction  3,420   —   24.39%
Consumer  —   —   — 
Total $3,420  $—   24.39%

The amortized cost basis of loans that were experiencing both financial difficulty and modification during the nine months ended September 30, 2023 were as follows:

($ in thousands) Term Extension  
Combination Term Extension
and Interest Rate Reduction
  
Total Class of Financing
Receivable
 
          
Commercial $—  $44   0.05%
Commercial Real Estate  —   398   0.06%
Agriculture  4,005   —   3.64%
Residential Mortgage  —   —   — 
Residential Construction  3,420   —   24.39%
Consumer  —   —   — 
Total $7,425  $442   28.14%

The Company had commitments to lend additional funds totaling $580,000 to borrowers whose loans were modified at September 30, 2023.

The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the three-month period ended September 30, 2023:

($ in thousands) 
Weighted-Average
Interest Rate
Reduction
  
Weighted-Average
Term Extension (in
months)
 
Commercial  —  $— 
Commercial Real Estate  —  — 
Agriculture  —   — 
Residential Mortgage  —   — 
Residential Construction  —   1 
Consumer  —   — 
Total  — $1 

18
The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the nine-month period ended September 30, 2023:

($ in thousands) 
Weighted-Average
Interest Rate
Reduction
  
Weighted-Average
Term Extension (in
months)
 
Commercial  0.50% $38 
Commercial Real Estate  0.25%  26 
Agriculture  —   4 
Residential Mortgage  —   — 
Residential Construction  —   1 
Consumer  —   — 
Total  0.27% $4 

($ in thousands) 
Nine Months Ended
September 30, 2022
  
Nine Months Ended
September 30, 2021
 
  
Average
Recorded
Investment
  
Interest
Income
Recognized
  
Average
Recorded
Investment
  
Interest
Income
Recognized
 
Commercial $50  $2  $342  $7 
Commercial Real Estate  479   32   5,068   466 
Agriculture  8,205   —   9,130   — 
Residential Mortgage  643   14   848   18 
Residential Construction  60   —   351   11 
Consumer  746   16   750   5 
Total $10,183  $64  $16,489  $507 

Troubled Debt RestructuringsThere were no loans modified within the previous twelve months and for which there was a payment default during the three months ended September 30, 2023. There were two agricultural loans totaling $4,005,000 that were modified within the previous twelve months and for which there was a payment default during the nine months ended September 30, 2023. The Company recorded charge-offs on these two agricultural loans totaling $2,567,000 during the nine months ended September 30, 2023.

The Company'sUpon the Company’s determination that a modified loan portfolio includes certain loans that have been modified in(or portion of a Troubled Debt Restructuring ("TDR"), which are loans on which concessions in terms have been granted becauseloan) has subsequently become uncollectible, the loan (or a portion of the borrowers' financial difficulties and, as a result,loan) is written off.  Therefore, the Company receives less than the current market-based compensation for the loan. These concessions may include reductions in the interest rate, payment extensions, forgivenessamortized cost basis of principal, forbearance, or other actions. Certain TDRs are placed on non-accrual status at the time of restructure and may be returned to accruing status after considering the borrower's sustained repayment performance for a reasonable period, generally six months.

When a loan is modified, it is measured based upon the present value of future cash flows discounted at the contractual interest rate of the original loan agreement, or the fair value of collateral less selling costs if the loan is collateral dependent. Ifreduced by the value ofuncollectible amount and the modified loanACL is less thanadjusted by the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off of the loan.
same amount.

Troubled Debt Restructurings Prior to the Adoption of ASU 2022-02

Prior to the adoption of ASU 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulties as a TDR.  The Company had $8,698,000 and $10,103,000$8,399,000 in TDR loans as of September 30, 2022 and December 31, 2021, respectively.2022. Specific reserves for TDR loans totaled $80,000 and $93,000$77,000 as of September 30, 2022 and December 31, 2021, respectively.2022.  TDR loans performing in compliance with modified terms totaled $8,623,000 and $10,006,000$8,399,000 as of September 30, 2022 and December 31, 2021, respectively. There were no commitments to advance additional funds on existing TDR loans as of September 30, 2022.

There were no loans modified as TDRs during the three months ended September 30, 2022.

Loans modified as TDRs during the nine months ended September 30, 2022 were as follows:

($ in thousands) Nine months ended September 30, 2022 
  
Number of
Contracts
  
Pre-
modification
outstanding
recorded
investment
  
Post-
modification
outstanding
recorded
investment
 
Consumer
  
1
  
$
75
  
$
75
 
Total
  
1
  
$
75
  
$
75
 

($ in thousands) Nine Months Ended September 30, 2022 
  
Number of
Contracts
  
Pre-modification
outstanding
recorded
investment
  
Post-
modification
outstanding
recorded
investment
 
Consumer  1  $
75  $
75 
Total  1  $75  $75 

16
Index
Loans modified as TDRs during the three months ended September 30, 2021There were as follows:

($ in thousands) Three Months Ended September 30, 2021 
  
Number of
Contracts
  
Pre-modification
outstanding
recorded
investment
  
Post-
modification
outstanding
recorded
investment
 
Agriculture  3   9,130   9,130 
Consumer  1  $
494  $
494 
Total  4  $9,624  $9,624 

Loans modified as TDRs during the nine months ended September 30, 2021 were as follows:

($ in thousands) Nine Months Ended September 30, 2021 
  
Number of
 Contracts
  
Pre-modification
  outstanding  
recorded
 investment
  
Post- 
modification 
outstanding 
recorded 
investment
 
Agriculture  3   9,130   9,130 
Consumer  2  $
593  $
593 
Total  5  $9,723  $9,723 

Loan modifications generally involve reductions in the interest rate, payment extensions, forgiveness of principal, or forbearance.  Nono loans were modified as a TDR within the previous 12twelve months that subsequently defaulted during the three and nine monthsmonth periods ended September 30, 2022 and September 30, 2021.2022.

19

Credit Quality Indicators



All loans are rated using the credit risk ratings and criteria adopted by the Company.  Risk ratings are adjusted as future circumstances warrant.  All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State bank regulatory agencies; a 5 equates to a Special Mention; a 6 equates to Substandard; a 7 equates to Doubtful; and an 8 equates to a Loss.  For the definitions of each risk rating, see Note 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
2022.


The following tables present the loan portfolio by loan class, origination year, and internal risk rating as of September 30, 2023. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to permanent loans, are presented by year of origination. Revolving loans converted to term loans totaled $80,000 as of September 30, 2023.


(in thousands)                        
  Term Loans Amortized Cost Basis by Origination Year - As of September 30, 2023       
  2023  2022  2021  2020  2019  Prior  
Revolving
Loans
Amortized
Cost Basis
  Total 
Commercial                        
Pass $7,398  $18,546  $22,473  $5,829  $7,999  $6,764  $20,995  $90,004 
Special Mention  —   —   —   258   326   —   945   1,529 
Substandard  44   —   1,576   553   —   —   47   2,220 
Doubtful/Loss
  —   —   —   —   —   —   —   — 
Total Commercial loans $7,442  $18,546  $24,049  $6,640  $8,325  $6,764  $21,987  $93,753 
Year-to-date Period Charge-offs  —   (146)  (36)  —   (87)  —   —   (269)
Year-to-date Recoveries  —   —   —   —   87   68   —   155 
Year-to-date Net Charge-offs  —   (146)  (36)  —   —   68   —   (114)
                                 
Commercial Real Estate                                
Pass $98,815  $171,601  $197,873  $50,758  $52,652  $121,005  $6,953  $699,657 
Special Mention  —   —   2,219   846   2,898   1,291   —   7,254 
Substandard  398   —   1,728   2,117   6,671   1,022   —   11,936 
Doubtful/Loss  —   —   —   —   —   —   —   — 
Total Commercial Real Estate loans $99,213  $171,601  $201,820  $53,721  $62,221  $123,318  $6,953  $718,847 
Year-to-date Charge-offs  —   —   —   —   —   —   —   — 
Year-to-date Recoveries  —   —   —   —   —   —   —   — 
Year-to-date Net Charge-offs  —   —   —   —   —   —   —   — 
                                 
Agriculture                                
Pass $6,836  $21,080  $23,854  $8,868  $4,459   11,712  $27,050  $103,859 
Special Mention  —   —   —   —   —   1,064   —   1,064 
Substandard  —   —   1,525   —   —   —   3,494   5,019 
Doubtful/Loss  —   —   —   —   —   —   —   — 
Total Agriculture loans $6,836  $21,080  $25,379  $8,868  $4,459  $12,776  $30,544  $109,942 
Year-to-date Charge-offs  (1,825)  —   —   —   —   —   (742)  (2,567)
Year-to-date Recoveries  —   —   —   —   —   —   —   — 
Year-to-date Net Charge-offs  (1,825)  —   —   —   —   —   (742)  (2,567)
20
(in thousands)                        
  Term Loans Amortized Cost Basis by Origination Year - As of September 30, 2023       
  2023  2022  2021  2020  2019  Prior  
Revolving
Loans
Amortized
Cost Basis
  Total 
Residential Mortgage                        
Pass $14,581  $23,310  $26,725  $15,053  $6,073  $15,574  $—  $101,316 
Special Mention  —   —   —   —   —   —   —   — 
Substandard  —   —   39   —   —   400   —   439 
Doubtful/Loss  —   —   —   —   —   —   —   — 
Total Residential Mortgage loans $14,581  $23,310  $26,764  $15,053  $6,073  $15,974  $—  $101,755 
Year-to-date Charge-offs  —   —   —   —   —   (3)  —   (3)
Year-to-date Recoveries  —   —   —   —   —   —   —   — 
Year-to-date Net Charge-offs  —   —   —   —   —   (3)  —   (3)
                                 
Residential Construction                                
Pass $3,086  $4,521  $2,994  $—  $—  $—  $—  $10,601 
Special Mention  —   —   —   —   —   —   —   — 
Substandard  —   3,420   —   —   —   —   —   3,420 
Doubtful/Loss  —   —   —   —   —   —   —   — 
Total Residential Construction loans $3,086  $7,941  $2,994  $—  $—  $—  $—  $14,021 
Year-to-date Charge-offs  —   —   —   —   —   —   —   — 
Year-to-date Recoveries  —   —   —   —   —   —   —   — 
Year-to-date Net Charge-offs  —   —   —   —   —   —   —   — 
                                 
Consumer                                
Pass $357  $801  $138  $172  $64  $433  $12,162  $14,127 
Special Mention  —   —   —   —   —   —   —   — 
Substandard  —   —   —   —   —   —   699   699 
Doubtful/Loss  —   —   —   —   —   —   —   — 
Total Consumer loans $357  $801  $138  $172  $64  $433  $12,861  $14,826 
Year-to-date Charge-offs  (10)  —   —   —   —   —   —   (10)
Year-to-date Recoveries  —   —   —   —   —   1   —   1 
Year-to-date Net Charge-offs  (10)  —   —   —   —   1   —   (9)
                                 
Total Loans                                
Pass $131,073  $239,859  $274,057  $80,680  $71,247  $155,488  $67,160  $1,019,564 
Special Mention  —   —   2,219   1,104   3,224   2,355   945   9,847 
Substandard  442   3,420   4,868   2,670   6,671   1,422   4,240   23,733 
Doubtful/Loss  —   —   —   —   —   —   —   — 
Total Loans $131,515  $243,279  $281,144  $84,454  $81,142  $159,265  $72,345  $1,053,144 
Year-to-date Charge-offs $(1,835) $(146) $(36) $—  $(87) $(3) $(742) $(2,849)
Year-to-date Recoveries $—  $—  $—  $—  $87  $69  $—  $156 
Year-to-date Net Charge-offs $(1,835) $(146) $(36) $—  $—  $66  $(742) $(2,693)

21
The following table presents the risk ratings by loan class as of September 30, 2022 and December 31, 2021:
2022.

  Pass  Special
Mention		  Substandard  Doubtful  Loss  Total 
December 31, 2022                  
Commercial
 
$
106,643
  
$
—
  
$
128
  
$
—
  
$
—
  
$
106,771
 
Commercial Real Estate
  
631,693
   
6,748
   
6,725
   
—
   
—
   
645,166
 
Agriculture
  
105,560
   
1,064
   
7,416
   
—
   
—
   
114,040
 
Residential Mortgage
  
92,299
   
207
   
163
   
—
   
—
   
92,669
 
Residential Construction
  
10,167
   
—
   
—
   
—
   
—
   
10,167
 
Consumer
  
14,650
   
—
   
637
   
—
   
—
   
15,287
 
Total
 
$
961,012
  
$
8,019
  
$
15,069
  
$
—
  
$
—
  
$
984,100
 
($ in thousands) Pass  
Special
Mention
  Substandard  Doubtful  Loss  Total 
September 30, 2022                  
Commercial $105,357  $2,376  $225  $—  $—  $107,958 
Commercial Real Estate  628,377   14,927   3,061   —   —   646,365 
Agriculture  109,005   2,299   7,625   —   —   118,929 
Residential Mortgage  88,376   220   169   —   —   88,765 
Residential Construction  7,407   —   —   —   —   7,407 
Consumer  14,846   —   723   —   —   15,569 
Total $953,368  $19,822  $11,803  $—  $—  $984,993 
                         
December 31, 2021                        
Commercial $132,425  $2,376  $1,093  $—  $—  $135,894 
Commercial Real Estate  516,120   6,524   4,280   —   —   526,924 
Agriculture  98,471   —   8,712   —   —   107,183 
Residential Mortgage  76,020   —   140   —   —   76,160 
Residential Construction  4,482   —   —   —   —   4,482 
Consumer  16,599   —   659   —   —   17,258 
Total $844,117  $8,900  $14,884  $—  $—  $867,901 

17
Index
Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by loan class for the three and nine months ended September 30, 2022.

Three months ended September 30, 2022
 
($ in thousands) Commercial  
Commercial
Real Estate
  Agriculture  
Residential
Mortgage
  
Residential
Construction
  Consumer  Unallocated  Total 
Balance as of June 30, 2022
 $1,650  $9,571  $1,694  $802  $151  $179  $228  $14,275 
Provision for loan losses  (385)  566   128   45   (21)  26   (59)  300 
                                 
Charge-offs  —   —   —   —   —   (30)  —   (30)
Recoveries  225   —   —   —   —   1   —   226 
Net charge-offs
  225   —   —   —   —   (29)  —   196 
Balance as of September 30, 2022 $1,490  $10,137  $1,822  $847  $130  $176  $169  $14,771 

Nine months ended September 30, 2022 
($ in thousands) Commercial  
Commercial
Real Estate
  Agriculture  
Residential
Mortgage
  
Residential
Construction
  Consumer  Unallocated  Total 
Balance as of December 31, 2021
 $1,604  $8,808  $1,482  $742  $74  $167  $1,075  $13,952 
Provision for loan losses  (66)  1,329   340   105   56   42   (906)  900 
                                 
Charge-offs  (297)  —   —   —   —   (39)  —   (336)
Recoveries  249   —   —   —   —   6   —   255 
Net charge-offs  (48)  —   —   —   —   (33)  —   (81)
Balance as of September 30, 2022
 $1,490  $10,137  $1,822  $847  $130  $176  $169  $14,771 

The following table details the allowance for loan losses allocated to loans individually and collectively evaluated for impairment by loan class as of September 30, 2022.

($ in thousands) Commercial  
Commercial
Real Estate
  Agriculture  
Residential
Mortgage
  
Residential
Construction
  Consumer  Unallocated  Total 
Period-end amount allocated to:                        
Loans individually evaluated for impairment $—  $—  $—  $76  $—  $4  $—  $80 
Loans collectively evaluated for impairment  1,490   10,137   1,822   771   130   172   169   14,691 
Ending Balance $1,490  $10,137  $1,822  $847  $130  $176  $169  $14,771 

18
Index
The following table details activity in the allowance for loan losses by loan class for the three and nine months ended September 30, 2021.

Three months ended September 30, 2021 
($ in thousands) Commercial  
Commercial
Real Estate
  Agriculture  
Residential
Mortgage
  
Residential
Construction
  Consumer  Unallocated  Total 
Balance as of June 30, 2021
 $1,555  $7,338  $5,259  $634  $55  $186  $352  $15,379 
Provision for loan losses  119   797   (3,227)  91   26   (55)  449   (1,800)
                                 
Charge-offs  (36)  —   —   —   —   (6)  —   (42)
Recoveries  415   —   —   —   —   49   —   464 
Net charge-offs  379   —   —   —   —   43   —   422 
Balance as of September 30, 2021
 $2,053  $8,135  $2,032  $725  $81  $174  $801  $14,001 

Nine months ended September 30, 2021 
($ in thousands) Commercial  
Commercial
Real Estate
  Agriculture  
Residential
Mortgage
  
Residential
Construction
  Consumer  Unallocated  Total 
Balance as of December 31, 2020
 
$
2,252
  
$
7,915
  
$
3,834
  
$
635
  
$
128
  
$
214
  
$
438
  
$
15,416
 
Provision for loan losses
  
(239
)
  
220
   
(1,802
)
  
90
   
(47
)
  
(85
)
  
363
   
(1,500
)
 
                                
Charge-offs
  
(383
)
  
—
   
—
   
—
   
—
   
(12
)
  
—
   
(395
)
Recoveries
  
423
   
—
   
—
   
—
   
—
   
57
   
—
   
480
 
Net charge-offs
  
40
   
—
   
—
   
—
   
—
   
45
   
—
   
85
 
Balance as of September 30, 2021
 
$
2,053
  
$
8,135
  
$
2,032
  
$
725
  
$
81
  
$
174
  
$
801
  
$
14,001
 

The following table details the allowance for loan losses allocated to loans individually and collectively evaluated for impairment by loan class as of September 30, 2021.

($ in thousands) Commercial  
Commercial
Real Estate
  Agriculture  
Residential
Mortgage
  
Residential
Construction
  Consumer  Unallocated  Total 
Period-end amount allocated to:                        
Loans individually evaluated for impairment
 
$
—
  
$
—
  
$
818
  
$
82
  
$
7
  
$
3
  
$
—
  
$
910
 
Loans collectively evaluated for impairment
  
2,053
   
8,135
   
1,214
   
643
   
74
   
171
   
801
   
13,091
 
Ending Balance
 
$
2,053
  
$
8,135
  
$
2,032
  
$
725
  
$
81
  
$
174
  
$
801
  
$
14,001
 

19
Index
The Company’s investment in loans as of September 30, 2022 and December 31, 2021 related to each balance in the allowance for loan losses by loan class and disaggregated on the basis of the Company’s impairment methodology was as follows:

($ in thousands) Commercial  
Commercial
Real Estate
  Agriculture  
Residential
Mortgage
  
Residential
Construction
  Consumer  Total 
September 30, 2022 
Loans individually evaluated for impairment $—  $—  $7,625  $629  $—  $787  $9,041 
Loans collectively evaluated for impairment  107,958   646,365   111,304   88,136   7,407   14,782   975,952 
Ending Balance $107,958  $646,365  $118,929  $88,765  $7,407  $15,569  $984,993 
                             
December 31, 2021 
Loans individually evaluated for impairment $133  $555  $8,712  $655  $241  $723  $11,019 
Loans collectively evaluated for impairment  135,761   526,369   98,471   75,505   4,241   16,535   856,882 
Ending Balance $135,894  $526,924  $107,183  $76,160  $4,482  $17,258  $867,901 

2022
5. MORTGAGE OPERATIONS

Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control.  Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings.  Retained servicing rights on loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer.  Fair values are estimated using discounted cash flows based on a current market interest rate.

The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold.Thesold. The Company sold a substantial portion of its portfolio of conforming long-term residential mortgage loans originated during the nine months ended September 30, 20222023 for cash proceeds equal to the fair value of the loans.  The Company serviced real estate mortgage loans for others totaling $200,435,000$186,373,000 and $208,169,000$194,818,000 at September 30, 20222023 and December 31, 2021,2022, respectively.

The recorded value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues.  The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates.  Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions.  The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value.  Impairment, if any, is recognized through a valuation allowance for each individual stratum.  Changes in the carrying amount of mortgage servicing rights are reported in earnings under other operating income on the condensed consolidated statements of income.

Key assumptions used in measuring the fair value of mortgage servicing rights as of September 30, 20222023 and December 31, 20212022 were as follows:

 September 30, 2022  December 31, 2021  September 30, 2023  December 31, 2022 
            
Constant prepayment rate 
8.18%  15.73%  7.58%  7.55%
Discount rate  9.00%  9.50%  9.50%  9.50%
Weighted average life (years)  6.99   4.95   7.10   7.20 

The following table summarizes the Company’s mortgage servicing rights assets as of September 30, 20222023 and December 31, 2021.2022. Mortgage servicing rights are included in Interest Receivable and Other Assets on the condensed consolidated balance sheets:sheets.

 (in thousands)  (in thousands) 
 December 31, 2021  Additions  Reductions  September 30, 2022  December 31, 2022  Additions  Reductions  September 30, 2023 
                        
Mortgage servicing rights $1,807  $129  $(221) $1,715  $1,650  $35  $(182) $1,503 
Valuation allowance  (276)  —  276   —  —  —  —   —
Mortgage servicing rights, net of valuation allowance $1,531  $129  $55 $1,715  $1,650  $35  $(182) $1,503 

At September 30, 20222023 and December 31, 2021,2022, the estimated fair market value of the Company’s mortgage servicing rights assets was $2,137,000$2,031,000 and $1,531,000,$2,101,000, respectively. The changeschange in fair value of mortgage servicing rights during 20222023 was primarily due to a decrease in the amount of mortgage loans serviced coupled with changes in prepayment speeds.speeds and weighted average life.

The Company received contractually specified servicing fees of $126,000$117,000 and $136,000$126,000 for the three months ended September 30, 20222023 and September 30, 2021,2022, respectively.  The Company received contractually specified servicing fees of $385,000$357,000 and $399,000$385,000 for the nine months ended September 30, 20222023 and September 30, 2021,2022, respectively. Loan servicing income on the condensed consolidated statements of income include contractually specified servicing fees, mortgage servicing rights additions, amortization and changes in the valuation allowance.

2123
6. FAIR VALUE MEASUREMENTS
 
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and trading securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a non-recurring basis, such as loans held-for-sale, loans held-for-investment and certain other assets. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process.

Assets Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 20222023 and December 31, 2021.2022.


 (in thousands)  (in thousands) 
September 30, 2022
 Fair Value  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
September 30, 2023
 Fair Value  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
U.S. Treasury securities $109,198  $109,198  $—  $—  $96,978  $96,978  $—  $— 
Securities of U.S. government agencies and corporations  110,367   —   110,367   —   114,964   —   114,964   — 
Obligations of states and political subdivisions  51,556   —   51,556   —   44,484   —   44,484   — 
Collateralized mortgage obligations  98,142   —   98,142   —   91,300   —   91,300   — 
Mortgage-backed securities  238,722   —   238,722   —   219,683   —   219,683   — 
Total investments at fair value $607,985  $109,198  $498,787  $—  $567,409  $96,978  $470,431  $— 


 (in thousands)  (in thousands) 
December 31, 2021
 Fair Value  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
December 31, 2022
 Fair Value  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
 
U.S. Treasury securities $86,211  $86,211  $—  $—  $113,815  $113,815  $—  $— 
Securities of U.S. government agencies and corporations  102,610   —   102,610   —   118,911   —   118,911   — 
Obligations of states and political subdivisions  45,985   —   45,985   —   53,326   —   53,326   — 
Collateralized mortgage obligations  135,652   —   135,652   —   95,350   —   95,350   — 
Mortgage-backed securities  261,755   —   261,755   —   236,690   —   236,690   — 
Total investments at fair value $632,213  $86,211  $546,002  $—  $618,092  $113,815  $504,277  $— 

2224
Assets Recorded at Fair Value on a Non-Recurring Basis

The table below presents the recorded amount of assets measured at fair value on a nonrecurring basis that had a write-down or an additional allowance provided during the nine months ended September 30, 2023.

  (in thousands) 
September 30, 2023 
Carrying
Value
  Level 1  Level 2  Level 3 
Individually evaluated loans $1,439  $—  $—  $1,439 
Total assets at fair value $1,439  $—  $—  $1,439 

There were no assets measured at fair value on a non-recurring basis as of September 30,December 31, 2022.

Assets measured at fair value on a non-recurring basis are included in the table below by level within the fair value hierarchy as of December 31, 2021:


  (in thousands) 
December 31, 2021
 
Carrying
Value
  Level 1  Level 2  Level 3 
Impaired loans $33  $—  $—  $33 
Mortgage servicing rights  1,531   —   —   1,531 
Total assets at fair value $1,564  $—  $—  $1,564 
There were no liabilities measured at fair value on a recurring or non-recurring basis at September 30, 20222023 and December 31, 2021.
2022.

Key methods and assumptions used in measuring the fair value of impairedcollateral dependent loans and mortgage servicing rights as of December 31, 2021September 30, 2023 were as follows:

 Method Assumption Inputs
    
ImpairedIndividually evaluated loansCollateral, market, income, enterprise, liquidation, and discounted cash flows External appraised values, management assumptions regarding market trends or other relevant factors, selling costs generallyof 8% (generally ranging from 6% to 10%), or the amount and timing of cash flows based on the loan'sloan’s effective interest rate.
Mortgage servicing rightsDiscounted cash flowsPresent value of expected future cash flows was estimated using a weighted average discount rate factor of 9.50% as of December 31, 2021. A weighted average constant prepayment rate of 15.73% as of December 31, 2021 was utilized.

The following section describes the valuation methodologies used for assets and liabilities recorded at fair value.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value on a recurring basis.  Fair value measurement is based upon quoted market prices, if available.  If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions.  Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds.  Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities.  Securities classified as Level 3 include asset-backed securities in less liquid markets where valuations include significant unobservable assumptions.

Individually Evaluated Loans

Impaired Loans

The Company does not record loans at fair value on a recurring basis.  However, from time to time, aLoans that do not share similar risk characteristics are individually evaluated by management for potential impairment.  Included in loans individually evaluated are collateral dependent loans.  A loan is considered impaired. Loans for which itto be collateral dependent when repayment is probable that payment of interest and principal will notexpected to be made in accordance withprovided substantially through the contractual termsoperation or sale of the loan agreementcollateral. Collateral dependent loans are considered impaired. Once a loan is identified asto have unique risk characteristics and are individually impaired, the Company measures impairment.evaluated. The fair value of impairedACL on collateral dependent loans is estimatedmeasured using one of several methods, including the present value of expected cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent. Those impaired loans not requiring charge-off or specific allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

Certain impaired loans were considered collateral dependent and were evaluated based on the fair value of the underlying collateral, securingadjusted for costs to sell when applicable, less the loan. Impairedamortized cost basis of the financial asset. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken.  Collateral dependent loans where a charge-off is recorded based on the fair value of collateral require classification in the fair value hierarchy.  When a loan is evaluated based on the fair value of the underlying collateral securing the loan, the Company records the impairedcollateral dependent loan as non-recurring Level 3 given the valuation includes significant unobservable assumptions.assumptions.

2325
Mortgage Servicing Rights

Mortgage servicing rights (MSRs) are subject to impairment testing. All mortgage servicing rights are initially measured and recorded at fair value at the time loans are sold. The fair value of MSRs is determined based on the price that would be received to sell the MSRs in an orderly transaction between market participants at the measurement date. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the mortgage servicing rights, the present value of expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.

The model used to calculate the fair value of the Company’s MSRs is periodically validated. The model assumptions and the MSRs fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. If the valuation model reflects a value less than the carrying value, MSRs are adjusted to fair value through a valuation allowance as determined by the model. As such, the Company classifies MSRs subjected to non-recurring fair value adjustments as Level 3.

Disclosures about Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments for the periods ended September 30, 20222023 and December 31, 20212022 were approximately as follows:

(in thousands)    September 30, 2022  December 31, 2021     September 30, 2023  December 31, 2022 
 Level  
Carrying
amount
  Fair value  
Carrying
amount
  Fair value  Level  
Carrying
amount
  Fair value  
Carrying
amount
  Fair value 
                              
Financial assets:                              
Cash and cash equivalents  1  $264,403  $264,403  $345,929  $345,929   1  $197,105  $197,105  $187,417  $187,417 
Certificates of deposit  2   11,091   10,699   13,272   13,443   2   20,696   20,311   20,948   20,560 
Stock in Federal Home Loan Bank and other equity securities  3   9,440   9,440   7,097   7,097   3   10,518   10,518   9,440   9,440 
Loans receivable:                                        
Net loans  3   971,249   922,116   852,717   830,967   3   1,037,066   933,513   970,138   929,163 
Loans held-for-sale  2   —   —   1,063   1,089   2   369   371   —   — 
Interest receivable  2   5,543   5,543   4,571   4,571   2   7,185   7,185   5,745   5,745 
Mortgage servicing rights
   3   1,503
   2,031
   1,650
   2,101
 
Financial liabilities:                                        
Deposits  3   1,799,605   1,423,719   1,728,302   1,678,658 
Time deposits  3   125,098   124,671   44,355   43,987 
Interest payable  2   89   89   42   42   2   1,211   1,211   93   93 

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument and expected exit prices. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.

2426
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
 
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.Thesecustomers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Financial instruments, whose contract amounts represent credit risk at the indicated periods, were as follows:

(in thousands) September 30, 2022  December 31, 2021  
September 30,
2023
  
December 31,
2022
 
            
Undisbursed loan commitments $203,324  $192,874  $197,710  $205,610 
Standby letters of credit  2,714   2,305   1,251   1,930 
Commitments to sell loans  —   1,500   765   — 
 $206,038  $196,679  $199,726  $207,540 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. The types of collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Bank issues both financial and performance standby letters of credit.  The financial standby letters of credit are primarily to guarantee payment to third parties.  At September 30, 20222023 and December 31, 2021,2022, there were no financial standby letters of credit outstanding.  The performance standby letters of credit are typically issued to municipalities as specific performance bonds.  Performance standby letters of credit totaled $2,714,000$1,251,000 and $2,305,000$1,930,000 at September 30, 20222023 and December 31, 2021,2022, respectively.  The Bank had experienced no draws on outstanding letters of credit, resulting in no related liability included on its balance sheet; however, should a triggering event occur, the Bank either has collateral in excess of the letter of credit or imbedded agreements of recourse from the customer.  The Bank has set aside a reserve for unfunded commitments in the amount of $700,000$1,050,000 and $650,000$700,000 at September 30, 20222023 and December 31, 2021,2022, respectively, which is recorded in "interest“interest payable and other liabilities"liabilities” on the   Condensed Consolidated Balance Sheets.

Commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans. As of September 30, 20222023 and December 31, 2021,2022, the Company had no off-balance sheet derivatives requiring additional disclosure.

The Company may enter into interest rate lock commitments in connection with its mortgage banking activities to fund residential mortgage loans within specified times in the future. Interest rate lock commitments totaled $310,000 and $0 at September 30, 2023 and December 31, 2022, respectively. These commitments expose the Company to the risk that the price of the loan underlying the interest rate lock commitment might decline from the inception of the interest rate lock commitment to the funding of the mortgage loan. To protect against this risk, the Company may enter into commitments to sell loans at specified prices to economically hedge the risk of potential changes in the value of the loans that would result from the commitment. These commitments totaled $0$765,000 and $1,500,000$0 at September 30, 20222023 and December 31, 2021,2022, respectively.  Mortgage loans sold to investors may be sold with servicing rights retained, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards. During 2021 and year to date 2022,In the past two years, the Company has not had to repurchase any loans due to deficiencies in underwriting or loan documentation.  Management believes that any liabilities that may result from such recourse provisions are not significant.
2527
8. STOCK PLANS

On January 27, 2022,26, 2023, the Board of Directors of the Company declared a 5% stock dividend payable as of March 25, 202224, 2023 to shareholders of record as of February 28, 2022.2023. All stock options and restricted stock amounts outstanding have been adjusted to give retroactive effect to stock dividends.

The following table presents the activity related to stock options for the three months ended September 30, 2022.2023.

 
Number of
Shares
  
Weighted
Average
Exercise
Price
  
Aggregate
Intrinsic
Value
  
Weighted
Average
Remaining
Contractual
Term (in
years)
  
Number of
Shares
  
Weighted
Average
Exercise Price
  
Aggregate
Intrinsic
Value
  
Weighted
Average
Remaining
Contractual
Term (in
years)
 
Options outstanding at Beginning of Period  652,255  $8.83         663,678  $8.56       
Granted  —   —         —   —       
Expired  —   —         —   —       
Cancelled / Forfeited  —   —         —   —       
Exercised  —   —         (51,485)  5.44       
Options outstanding at End of Period  652,255  $8.83  $488,177   5.53   612,193  $8.82  $523,161   4.95 
Exercisable (vested) at End of Period  488,666  $8.41  $488,177   4.77   526,829  $8.67  $523,161   4.58 

The following table presents the activity related to stock options for the nine months ended September 30, 2022.2023.

 
Number of
Shares
  
Weighted
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
Weighted
Average
Remaining
Contractual
Term (in
years)
  
Number of
Shares
  
Weighted
Average
Exercise
Price
  
Aggregate
Intrinsic
Value
  
Weighted
Average
Remaining
Contractual
Term (in
years)
 
Options outstanding at Beginning of Period
  
627,814
  
$
8.58
       
684,837
  
$
8.41
       
Granted
  
42,965
  

10.25
       
—
   
—
       
Expired
  
—
  

—
       
—
   
—
       
Cancelled / Forfeited
  
—
   
—
       
—
   
—
       
Exercised
  
(18,524
)
  
3.51
       
(72,644
)
  
4.97
       
Options outstanding at End of Period
  
652,255
  
$
8.83
  
$
488,177
   
5.53
   
612,193
  
$
8.82
  
$
523,161
   
4.95
 
Exercisable (vested) at End of Period
  
488,666
  
$
8.41
  
$
488,177
   
4.77
   
526,829
  
$
8.67
  
$
523,161
   
4.58
 

The weighted average grant date fair value per share of options granted during the nine months ended September 30, 2022 was $2.33 per share.

The intrinsic value of options exercised was $125,000$305,000 and $63,000$125,000 during the nine months ended September 30, 20222023 and September 30, 2021,2022, respectively. The fair value of awards vested was $142,000$123,000 and $182,000$142,000 during the nine months ended September 30, 20222023 and September30, 2021,2022, respectively.
26
Index
As of September 30, 2022,2023, there was $188,000$87,000 of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted average period of approximately 2.281.90 years.

There was $32,000$22,000 and $91,000$71,000 of recognized compensation cost related to stock options granted for the three and nine months ended September 30, 2022,2023, respectively.

28
A summary of the weighted average assumptions used in valuing stock options during the three and nine months ended SeptemberIndex 30, 2022 is presented below:


Three Months Ended
September 30, 2022*
Nine Months Ended
September 30, 2022
Risk Free Interest Rate
—
2.54
%
Expected Dividend Yield
—
0.00
%
Expected Life in Years
—
5
Expected Price Volatility
—
19.70
%



* There were no stock options granted during the three months ended September 30, 2022.

The following table presents the activity related to non-vested restricted stock for the three months ended September 30,2022.30,2023.

 
Number of
Shares
  
Weighted
Average
Grant Date
Fair Value
  
Aggregate
Intrinsic
Value
 
Weighted
Average
Remaining
Contractual
Term (in years)
  
Number of
Shares
  
Weighted
Average
Grant Date
Fair Value
  
Aggregate
Intrinsic
Value
 
Weighted
Average
Remaining
Contractual
Term (in
years)
 
Non-vested Restricted stock outstanding at Beginning of Period 
209,725  $9.99  
 
  
275,473  $9.17  
 
 
Granted  —   —         1,000   9.55       
Cancelled / Forfeited  —  —         (11,209)  9.46       
Exercised/Released/Vested  —  —         (2,428)  9.31       
Non-vested restricted stock outstanding at End of Period  209,725  $9.99 $
1,772,176 2.74   262,836  $9.56 $
2,494,314 2.76 

The following table presents the activity related to non-vested restricted stock for the nine months ended September 30, 2022.2023.

 
Number of
Shares
  
Weighted
Average
Grant Date
Fair Value
  
Aggregate
Intrinsic
Value
 
Weighted
Average
Remaining
Contractual
Term (in years)
  
Number of
Shares
  
Weighted
Average
Grant Date
Fair Value
  
Aggregate
Intrinsic
Value
 
Weighted
Average
Remaining
Contractual
Term (in
years)
 
Non-vested Restricted stock outstanding at Beginning of Period
  
167,397
  
$
9.97
  

 

   
248,418
  
$
9.34
  

 

 
Granted
  
72,473
   
10.31
  
 
 
  
   
78,351
   
8.51
  
 
 
  
 
Cancelled / Forfeited
  
—
  
—
  
 
 
  
   
(11,209
)
  
9.46
  
 
 
  
 
Exercised/Released/Vested
  
(30,145
)
  
10.68
  
 
 
  
   
(52,724
)
  
8.98
  
 
 
  
 
Non-vested restricted stock outstanding at End of Period
  
209,725
  
$
9.99
 $
1,772,176
 
2.74
   
262,836
  
$
9.56
 $
2,494,314
 
2.76
 

The weighted average fair value of restricted stock granted during the nine months ended September 30, 20222023 was $10.31$8.51 per share.

As of September 30, 2022,2023, there was $1,105,000$1,335,000 of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a weighted average period of approximately 2.742.76 years.

There was $128,000$106,000 and $384,000$421,000 of recognized compensation cost related to restricted stock awards for the three and nine months ended September 30, 2022,2023, respectively.

2729
The Company has an Employee Stock Purchase Plan (“ESPP”). There are 341,820358,911 shares authorized for issuance under the ESPP. The total number of shares authorized has been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 27, 2022,26, 2023, payable March 25, 202224, 2023 to shareholders of record as of February 28, 2022.2023. The ESPP will expire on March 16, 2026.

The ESPP is implemented by participation periods of not more than 27twenty-seven months each. The Board of Directors determines the commencement date and duration of each participation period. The Board of Directors approved the current participation period of November 24, 20212022 to November 23, 2022.2023. An eligible employee is one who has been continually employed for at least 90 days prior to commencement of a participation period. Under the terms of the ESPP, employees can choose to have up to 10 percent of their compensation withheld to purchase the Company’s common stock each participation period. The purchase price of the stock is 85 percent of the lower of the fair value on the last trading day before the date of participation or the fair value on the last trading day during the participation period.

As of September 30, 2022,2023, there was $9,000$7,000 of unrecognized compensation cost related to ESPP issuances. This cost is expected to be recognized over a weighted average period of approximately 0.25 years.

There was $8,000 and $25,000$24,000 of recognized compensation cost related to ESPP issuances for the three and nine months ended September 30, 2022,2023, respectively.

The weighted average fair value option at issuance date during the nine months ended September 30, 20222023 was $2.50$1.83 per share.

A summary of the weighted average assumptions used in valuing ESPP issuances during the three and nine months ended September 30, 20222023 is presented below.


 
Three Months Ended
September 30, 2022
  
Nine Months Ended
September 30, 2022
  
Three Months Ended
September 30, 2023
  
Nine Months Ended
September 30, 2023
 
Risk Free Interest Rate
  
0.21
%
  
0.21
%
  
4.75
%
  
4.75
%
                
Expected Dividend Yield
  
0.00
%
  
0.00
%
  
0.00
%
  
0.00
%
                
Expected Life in Years
  
1.00
   
1.00
   
1.00
   
1.00
 
                
Expected Price Volatility
  
25.73
%
  
25.73
%
  
16.58
%
  
16.58
%

2830
9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table details activity in accumulated other comprehensive loss for the three months ended September 30, 2023.

(in thousands) 
Unrealized
losses on
securities
  
Officers’
retirement
plan
  
Directors’
retirement
plan
  
Accumulated
other
comprehensive
loss
 
Balance as of June 30, 2023
 $(43,950) $(308) $53  $(44,205)
Current period other comprehensive loss
  (4,999)  —   —   (4,999)
Balance as of September 30, 2023
 $(48,949) $(308) $53  $(49,204)


The following table details activity in accumulated other comprehensive loss for the nine months ended September 30, 2023.
(in thousands) 
Unrealized
losses on
securities
  
Officers’
retirement
plan
  
Directors’
retirement
plan
  
Accumulated
other
comprehensive
loss
 
Balance as of December 31, 2022
 
$
(46,273
)
 
$
(308
)
 
$
53
  
$
(46,528
)
Current period other comprehensive income
  
(2,676
)
  
—
   
—
   
(2,676
)
Balance as of September 30, 2023
 
$
(48,949
)
 
$
(308
)
 
$
53
  
$
(49,204
)

The following table details activity in accumulated other comprehensive loss for the three months ended September 30, 2022.

(in thousands) 
Unrealized
losses on
securities
  
Officers’
retirement
plan
  
Directors’
retirement
plan
  
Accumulated
other
comprehensive
loss
  
Unrealized
gains on
securities
  
Officers’
retirement
plan
  
Directors’
retirement
plan
  
Accumulated
other
comprehensive
loss
 
Balance as of June 30, 2022
 $(33,368) $(1,420) $(13) $(34,801) $(33,368) $(1,420) $(13) $(34,801)
Current period other comprehensive loss
  (18,492)  —   —   (18,492)  (18,492)  —   —   (18,492)
Balance as of September 30, 2022
 $(51,860) $(1,420) $(13) $(53,293) $(51,860) $(1,420) $(13) $(53,293)

The following table details activity in accumulated other comprehensive loss for the nine months ended September 30, 2022.

(in thousands) 
Unrealized
losses on
securities
  
Officers’
retirement
plan
  
Directors’
retirement
plan
  
Accumulated
other
comprehensive
loss
 
Balance as of December 31, 2021
 
$
(2,764
)
 
$
(1,420
)
 
$
(13
)
 
$
(4,197
)
Current period other comprehensive loss
  
(49,096
)
  
—
   
—
   
(49,096
)
Balance as of September 30, 2022
 
$
(51,860
)
 
$
(1,420
)
 
$
(13
)
 
$
(53,293
)

The following table details activity in accumulated other comprehensive loss for the three months ended September 30, 2021.

(in thousands) 
Unrealized
gains on
securities
  
Officers’
retirement
plan
  
Directors’
retirement
plan
  
Accumulated
other
comprehensive
loss
 
Balance as of June 30, 2021
 $3,170  $(2,105) $(53) $1,012 
Current period other comprehensive loss
  (1,133)  —   —   (1,133)
Balance as of September 30, 2021
 $2,037  $(2,105) $(53) $(121)

The following table details activity in accumulated other comprehensive loss for the nine months ended September 30, 2021.

(in thousands) 
Unrealized
gains on
securities
  
Officers’
retirement
plan
  
Directors’
retirement
plan
  
Accumulated
other
comprehensive
loss
  
Unrealized
gains on
securities
  
Officers’
retirement
plan
  
Directors’
retirement
plan
  
Accumulated
other
comprehensive
loss
 
Balance as of December 31, 2020
 
$
7,196
  
$
(2,105
)
 
$
(53
)
 
$
5,038
 
Balance as of December 31, 2021
 
$
(2,764
)
 
$
(1,420
)
 
$
(13
)
 
$
(4,197
)
Current period other comprehensive loss
  
(5,159
)
  
—
   
—
   
(5,159
)
  
(49,096
)
  
—
   
—
   
(49,096
)
Balance as of September 30, 2021
 
$
2,037
  
$
(2,105
)
 
$
(53
)
 
$
(121
)
Balance as of September 30, 2022
 
$
(51,860
)
 
$
(1,420
)
 
$
(13
)
 
$
(53,293
)

2931
10. OUTSTANDING SHARES AND EARNINGS PER SHARE

On January 27, 2022,26, 2023, the Board of Directors of the Company declared a 5% stock dividend payable March 25, 202224, 2023 to shareholders of record as of February 28, 2022.2023. All income per share amounts have been adjusted to give retroactive effect to stock dividends.

Earnings Per Share (EPS)

Basic EPS includes no dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the respective period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding plus dilutive shares for the quarter. Diluted shares include all common stock equivalents (“in-the-money” stock options, unvested restricted stock, stock units, warrants and rights, convertible bonds and preferred stock), which reflects the potential dilution of securities that could share in the earnings of the Company.

The following table presents a reconciliation of basic and diluted EPS for the three and nine months ended September 30, 20222023 and 20212022 (dollars in thousands except per share amounts):

 
Three months ended
September 30,
  
Nine months ended
September 30,
  
Three months ended
September 30,
  
Nine months ended
September 30,
 
 2022  2021  2022  2021  2023  2022  2023  2022 
Basic earnings per share:                        
Net income
 
$
4,568
  
$
4,509
  
$
11,155
  
$
10,993
  
$
4,619
  
$
4,568
  
$
14,672
  
$
11,155
 
                                
Weighted average common shares outstanding
  
13,713,657
   
14,018,259
   
13,704,178
   
14,115,162
   
14,465,191
   
14,404,438
   
14,455,772
   
14,394,959
 
Basic EPS
 
$
0.33
  
$
0.32
  
$
0.81
  
$
0.78
  
$
0.32
  
$
0.32
  
$
1.01
  
$
0.77
 
                                
Diluted earnings per share:
                                
Net income
 
$
4,568
  
$
4,509
  
$
11,155
  
$
10,993
  
$
4,619
  
$
4,568
  
$
14,672
  
$
11,155
 
                                
Weighted average common shares outstanding
  
13,713,657
   
14,018,259
   
13,704,178
   
14,115,162
   
14,465,191
   
14,404,438
   
14,455,772
   
14,394,959
 
                                
Effect of dilutive shares
  
143,497
   
188,615
   
154,998
   
178,363
   
160,012
   
150,672
   
129,448
   
162,748
 
                                
Adjusted weighted average common shares outstanding
  
13,857,154
   
14,206,874
   
13,859,176
   
14,293,525
   
14,625,203
   
14,555,110
   
14,585,220
   
14,557,707
 
Diluted EPS
 
$
0.33
  
$
0.32
  
$
0.80
  
$
0.77
  
$
0.32
  
$
0.31
  
$
1.01
  
$
0.77
 

Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 488,627338,346 shares and 267,950513,058 shares for the three months ended September 30, 20222023 and 2021,2022, respectively. Unvested restricted stock which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 70,9730 shares and 074,522 shares for the three months ended September 30, 20222023 and 2021,2022, respectively. Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 393,652454,174 shares and 288,774413,335 shares for the nine months ended September 30, 20222023 and 2021,2022, respectively. Unvested restricted stock which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 59,01544,982 shares and 13,95761,966 shares for the nine months ended September 30, 20222023 and 2021,2022, respectively.

3032
11. LEASES

The Company leases 11eleven branch and administrative locations under operating leases expiring on various dates through 2031. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842,ASU 2016-02, Leases (Topic 842), the Company combines lease and nonlease components. The Company had no financing leases as of September 30, 2022.2023.

Most leases include options to renew, with renewal terms that can extend the lease term from 3 to 10 years. The exercise of lease renewal options is at the Company’s sole discretion. Most leases are currently in the extension period. For the remaining leases with options to renew, the Company has not included the extended lease terms in the calculation of lease liabilities as the options are not reasonably certain of being exercised. Certain lease agreements include rental payments that are adjusted periodically for inflation. The Company'sCompany’s lease agreements do not contain any residual value guarantees or restrictive covenants.

The Company uses its FHLB advance fixed rates, which are its incremental borrowing rates for secured borrowings, as the discount rates to calculate lease liabilities.

The Company had right-of-use assets totaling $5,172,000$4,345,000 and $5,138,000$4,905,000 as of September 30, 20222023 and December 31, 2021,2022, respectively. The Company had lease liabilities totaling $5,692,000$4,854,000 and $5,664,000$5,422,000 as of September 30, 20222023 and December 31, 2021,2022, respectively. The Company recognized lease expense totaling $286,000$315,000 and $293,000$286,000 for the three-month periods ended September 30, 20222023 and 2021,2022, respectively, and $874,000$916,000 and $878,000$874,000 for the nine-month periods ended September 30, 20222023 and 2021,2022, respectively. Lease expense includes operating lease costs, short termshort-term lease costs and variable lease costs.  Lease expense is included in Occupancyoccupancy and equipment expense on the Condensed Consolidated Statementscondensed consolidated statements of Income.income.

The table below summarizes the maturity of remaining lease liabilities at September 30, 2022:2023:

(in thousands) September 30, 2022  September 30, 2023 
2022 (remaining 3 months)
 $283 
2023  1,097 
2023 (remaining 3 months)
 $297 
2024  1,000   1,040 
2025  962   1,052 
2026  672   672 
2027 and thereafter
  2,131 
2027  611 
2028 and thereafter
  1,520 
Total lease payments  6,145   5,192 
Less: interest  (453)  (338)
Present value of lease liabilities $5,692  $4,854 

The following table presents supplemental cash flow information related to leases for the three and nine months ended September 30, 2022:
2023:


 
Three months ended
September 30,
  
Nine months ended
September 30,
 
(in thousands) 2022  2021  2022  2021 
             
Cash paid for amounts included in the measurement of lease liabilities            
Operating cash flows from operating leases $345  $318  $948  $901 
Right-of-use assets obtained in exchange for new operating lease liabilities  162   285   869   285 

 
Three months ended
September 30,
  
Nine months ended
September 30,
 
(in thousands) 2023  2022  2023  2022 
             
Cash paid for amounts included in the measurement of lease liabilities            
Operating cash flows from operating leases $296  $345  $910  $948 
Right-of-use assets obtained in exchange for new operating lease liabilities  —   162   245   869 

The following table presents the weighted average operating lease term and discount rate as of September 30, 20222023 and December 31, 2021:2022:


September 30, 2022 
December 31, 2021
 September 30, 2023 December 31, 2022 
        
Weighted-average remaining lease term – operating leases, in years  6.30   6.32   5.55   6.14 
Weighted-average discount rate – operating leases  2.37%  2.36%  2.43%  2.37%

3133
12. SUBSEQUENT EVENTS
12. BUSINESS COMBINATIONS

On November 5, 2022, First NorthernJanuary 20, 2023, the Company completed the acquisition from Columbia State Bank of Dixon (the “Bank”), a wholly-owned subsidiarythree branches located in the California cities of the Company, entered intoColusa, Willows, and Orland, in accordance with a Purchase and Assumption Agreement (the “Purchase Agreement”)dated as of November 5, 2022. The acquired assets included all the real property, cash on hand, personal property, safe deposit agreements, books and records along with certain loans (including accrued interest and fees) booked at the branches or allocated by the seller to the acquired branches. The assumed liabilities primarily consisted of the deposits booked in the branches or allocated by the seller to the acquired branches.

In accordance with ASC 805, Business Combinations, the Company recorded a bargain purchase gain of $1,405,000 and $4,970,000 of core deposit intangibles on the acquisition date. The core deposit intangible will be amortized using the sum of the year’s digits method over the expected life of 10 years with no significant residual value. For tax purposes, acquisition accounting adjustments including the core deposit intangible are all non-taxable and/or non-deductible. Acquisition related costs of approximately $0 and $154,000 are included in the income statement for the three months ended September 30, 2023 and September 30, 2022, respectively. Acquisition related costs of approximately $204,000 and $154,000 are included in the income statement for the nine months ended September 30, 2023 and September 30, 2022, respectively.

The Company recorded the fair values based on the valuations available as of reporting date. In accordance with business combination accounting guidance, we will continue to evaluate these fair values for up to one year following the acquisition date of January 20, 2023. While management believes the information available and presented below provide a reasonable basis for estimating fair value, we may obtain additional information and evidence during the measurement period that could result in changes to the estimated fair value amounts. Valuations subject to change include, but are not limited to, loans, deposits and certain other assets and liabilities.

This acquisition enabled the Company to extend its existing footprint and provided additional core deposit funding for future growth and liquidity and is expected to enhance profitability by introducing existing products and services to the acquired customer base as well as add new customers in the expanded region.

The following table summarizes the consideration paid for the acquired branches and amounts of assets acquired and liabilities assumed that were recorded at the acquisition date (in thousands):

  
Acquired Branches
January 20, 2023
 
Fair value of consideration received:   
Cash consideration
 $103,425 
Total fair value of consideration received
  103,425 
Assets acquired:    
Cash and cash equivalents  1,284 
Loans  4,006 
Premises and equipment  3,621 
Core deposit intangible  4,970 
Other assets  15 
Total assets acquired  13,896 
Liabilities assumed:    
Deposits  115,914 
Other liabilities  2 
Total liabilities assumed  115,916 
Total net liabilities assumed  102,020 
Bargain purchase gain recognized $1,405 
A summary of the estimated fair value adjustments resulting in the bargain purchase gain recorded in the branch acquisition are presented below (in thousands):

  
Acquired Branches
January 20, 2023
 
    
Cash consideration received $103,425 
Less:    
Cost basis of net liabilities assumed  (107,097)
Fair Value Adjustments:    
Loans  (363)
Premises and equipment  307 
Core deposit intangible  4,970 
Deposits  163 
Bargain purchase gain recognized $1,405 

The loan portfolio of the acquired branches was recorded at fair value at the date of acquisition. For the purposes of the valuation analysis, the loan portfolio was segmented based on loan type and credit quality. None of the acquired loans were considered purchased credit deteriorated (PCD) at acquisition. The fair value of the acquired loans was calculated on a loan-level basis using the discounted cash flow method.

The Company recorded a core deposit intangible of $4,970,000 at acquisition. A core deposit intangible refers to the intangible asset that represents the cost savings derived from available core deposits to an alternative funding source. The fair value of the core deposit intangible was calculated using a net cost savings method based on the present value of the estimated net cost savings attributable to the core deposit base over the expected remaining life of the deposits (plus the present value of the tax amortization benefit). The cost savings derived from the core deposit balance was calculated as the difference between the prevailing alternative cost of funds and the estimated cost of the core deposits.

The Company assumed net liabilities, at fair value, of $102,020,000 at acquisition in exchange for cash consideration received of $103,425,000. Under accounting guidance, a bargain purchase gain results if the fair value of consideration received is more than the fair value of the liabilities assumed. Because the cash consideration received exceeded the fair value of liabilities assumed, the Company recorded a bargain purchase gain of $1,405,000 related to the branch acquisitions during the first quarter of 2023. The bargain purchase gain is separately reported as a component of non-interest income in our Condensed Consolidated Statements of Income for the nine months ended September 30, 2023.

We believe that we were able to negotiate a bargain purchase price primarily as a result of Columbia State Bank being required to divest of certain branches  (along with the associated deposits and loans) for competitive reasons in accordance with a Washington state-chartered commercial bank (“Columbia”)Letter of Agreement between Columbia State Bank, Umpqua and a wholly-owned subsidiarythe Department of Justice Antitrust Division. This agreement was reached in conjunction with the Department of Justice’s required approval of the merger of Columbia Banking System, Inc.,State Bank and Umpqua. The required divestiture, in conjunction with the rural location of the branches acquired, allowed the Company to acquire three branchesnegotiate a favorable purchase price that, when combined with changes in market conditions between the date of Columbia located at: 558 Market Street, Colusa, California; 328 Walker Street, Orland, California;agreement and 155 N. Tehama Street, Willows, California.the closing date, resulted in the recognition of the bargain purchase gain.

Pursuant to the Purchase Agreement, the Bank will acquire these branches for consideration totaling 3.15% of the average daily closing balance of certain deposit accounts plus the net book values of certain assets of Columbia and accrued interest and fees with respect to certain loans.  At the closing of the acquisition, and subject to the terms of the Purchase Agreement, the Bank will assume the deposit liabilities related to certain accounts. The aggregate deposits to be assumed totaled approximately $128 million, and the aggregate principal balance of the loans to be acquired totaled approximately $4 million. The final consideration will be based on balances at closing.
3235

The following unaudited pro forma summary presents consolidated information of the Company as if the business combination had occurred on January 1, 2022 (in thousands):

  
Three months
ended
September 30,
2023
  
Three months
ended
September 30,
2022
  
Nine months
ended
September 30,
2023
  
Nine months
ended
September 30,
2022
 
Summarized proforma income statement data:            
Net interest income $15,874  $14,622  $49,875  $40,073 
Provision for loan losses  500   300   3,100   900 
Non-interest income  1,776   2,244   6,194   6,002 
Non-interest expense  10,883   10,568   32,705   30,315 
Income before taxes  6,267   5,998   20,264   14,860 
Provision for income taxes  1,648   1,487   5,515   3,882 
Net income $4,619  $4,511  $14,749  $10,978 
Basic earnings per share $0.32  $0.31  $1.02  $0.76 
Diluted earnings per share $0.32  $0.31  $1.01  $0.75 

It is impractical to separately provide information regarding the revenue and earnings of the acquired branches included in the Company’s condensed consolidated statements of income from the January 20, 2023 acquisition date to September 30, 2023 because the operations of the acquired branches were substantially commingled with the operations of the Company as of the system conversion date of January 20, 2023.

36
FIRST NORTHERN COMMUNITY BANCORP
 
ITEM 2.   – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 20212022 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors"“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 our Securities 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 SEC filings or other public statements, for example, we make forward-looking statements relating to the following topics, among others:


●
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 U.S. economy, as well as the effect of the federal Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), enacted in March 2020, 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 U.S. federal banking agencies and our current intention not to elect to use the community bank leverage ratio framework


●
Expectations regarding our non-payment of a cash dividend on our common stock in the foreseeable future


●
Credit quality and provision for credit losses and management of asset quality and credit risk, expectations regarding collections and expectations regarding the forgiveness and SBA reimbursement and guarantee of loans made under the Paycheck Protection Program ("PPP") and the timing thereof

33
Index

●
Our allowances for loancredit losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, the adequacy of the allowance for loancredit losses, underwriting standards, and risk grading

37

●
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, loan demand, our strategy regarding troubled debt restructurings (“TDRs”),loan modifications, 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 and the outlook for deposit balances


●
The impact on our net interest income and net interest margin of changes in interest rates


●
The effect of possible changes in the initiatives and policies of the federal and state bank regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, the Securities and Exchange Commission and other standard setters


●
Tax rates and the impact of changes in the U.S. tax laws including the Tax 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, including expectations about the results of the Company’s acquisition of these branches from Columbia State Bank, completed in January 2023


●
The possible impact of weather-related or other natural 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
Possible changes in the implementationfair values recorded on our financial statements of the expected loss model for determining the allowance for credit lossesassets acquired and liabilities assumed in our business combination completed in January 2023


●
The effects of the coronavirus pandemic on the U.S., California and global economies and the actions of governments to reduce the spread of the virus and to mitigate the resulting economic consequences

●
The possible effects on community banks and our business from the recent failures of other banks


●
The possible adverse impacts on the banking industry and our business from a period of significant, prolonged inflation


●
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"“Risk Factors” and “Supervision and Regulation” in our 20212022 Annual Report on Form 10-K, and in our other reports to the SEC.
 
3438
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 policies and estimates, you should carefully read this entire report and any other reports to the Securities 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 ended December 31, 2021.2022.

Our subsidiary, First Northern Bank of Dixon (the “Bank”), is a California state-chartered bank that derives most of its revenues from lending and deposit taking in the Sacramento Valley region of Northern 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 20222023 included:

Net income of $11.2$14.7 million for the nine months ended September 30, 2022,2023, up 1.5%31.5% from $11.0$11.2 million earned for the same period last year. Net income of $4.6 million for each of the three monthsthree-month periods ended September 30, 2022, up 1.3% from $4.5 million for the same period last year.2023 and September 30, 2022.
 
Diluted income per share of $0.80$1.01 for the nine months ended September 30, 2022,2023, up 3.9%31.2% from diluted income per share of $0.77 in the same period last year. Diluted income per share of $0.33$0.32 for the three months ended September 30, 2022,2023, up 3.1%3.2% from diluted income per share of $0.32$0.31 for the same period last year.

Net interest income of $38.9$49.6 million for the nine months ended September 30, 2022,2023, up 11.8%27.7% from $34.8$38.9 million for the same period last year. Net interest income of $14.2$15.9 million for the three months ended September 30, 2022,2023, up 20.7%11.7% from $11.8$14.2 million for the same period last year.

Net interest margin of 2.92%3.68% for the nine months ended September 30, 2022,2023, up 9.0%26.0% from 2.68%2.92% for the same period last year. Net interest margin of 3.12%3.51% for the three months ended September 30, 2022,2023, up 20.9%12.5% from 2.58%3.12% for the same period last year.

Provision for loancredit losses of $0.9$3.1 million for the nine months ended September 30, 2022, compared to reversal of provision for loan losses of $1.52023, up 244.4% from $0.9 million for the same period last year. Provision for loancredit losses of $0.3$0.5 million for the three months ended September 30, 2022, compared to reversal of provision for loan losses of $1.82023, up 66.7% from $0.3 million for the same period last year. The increase in provision for credit losses was primarily due to an agricultural relationship that required a charge-off of $2.6 million during the second quarter of 2023, coupled with loan growth during the nine months ended September 30, 2023.

Total assets of $1.9$1.90 billion as of September 30, 2022 and2023, up 1.7% from $1.87 billion as of December 31, 2021.2022.
 
Total net loans (including loans held-for-sale) of $971.2$1.04 billion as of September 30, 2023, up 6.9% from $970.1 million as of December 31, 2022.

Total investment securities of $567.4 million as of September 30, 2022, up 13.8%2023, down 8.2% from $853.8$618.1 million as of December 31, 2021.2022.

•
Total investment securities of $608.0 million as of September 30, 2022, down 3.8% from $632.2 million as of December 31, 2021. The decrease in investment securities was primarily due to the increase in unrealized losses on the investment portfolio due to the increases in market interest rates over the yields available at the time the underlying securities were purchased.

Total deposits of $1.8$1.75 billion as of September 30, 2022,2023, up 4.1%1.1% from $1.7$1.73 billion as of December 31, 2021.2022.

35The Company adopted and implemented ASU 2016-13, more commonly referred to as the Current Expected Credit Loss (“CECL”) methodology, on January 1, 2023, which resulted in an increase to the allowance for credit losses (“ACL”) and reserve for unfunded commitments totaling $1,300,000 as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in opening retained earnings of $916,000, net of deferred taxes of $384,000.

On January 20, 2023, the Company completed the acquisition from Columbia State Bank of three branches in the California cities of Colusa, Willows, and Orland. The acquisition resulted in the assumption of $115.9 million of deposits and acquisition of loans totaling $4.0 million, fixed assets totaling $3.6 million and cash on hand of $1.3 million.  The Company also recognized a core deposit intangible of $5.0 million.  The Bank received cash consideration totaling approximately $103.4 million, resulting in a bargain purchase gain totaling approximately $1.4 million recognized during the nine months ended September 30, 2023.  On an after-tax basis, the bargain purchase gain contributed $1.0 million to net income for the nine months ended September 30, 2023.

39
SUMMARY FINANCIAL DATA

The Company recorded net income of $11,155,000$14,672,000 for the nine months ended September 30, 2022,2023, representing an increase of $162,000$3,517,000, or 1.5%31.5%, from net income of $10,993,000$11,155,000 for the same period in 2021.2022. The Company recorded net income of $4,568,000$4,619,000 for the three months ended September 30, 2022,2023, representing an increase of $59,000,$51,000, or 1.3%1.1%, from net income of $4,509,000$4,568,000 for the same period in 2021.2022.
 
The following tables present a summary of the results for the three and nine months ended September 30, 20222023 and 2021,2022, and a summary of financial condition at September 30, 20222023 and December 31, 2021.2022.

 
Three Months
Ended September
30, 2022
  
Three Months
Ended September
30, 2021
  
Nine Months
Ended September
30, 2022
  
Nine Months
Ended September
30, 2021
  
Three Months
Ended September
30, 2023
  
Three Months
Ended September
30, 2022
  
Nine Months
Ended September
30, 2023
  
Nine Months
Ended September
30, 2022
 
(dollars in thousands except for per share amounts)                        
For the Period:                        
Net Income
 
$
4,568
  
$
4,509
  
$
11,155
  
$
10,993
  
$
4,619
  
$
4,568
  
$
14,672
  
$
11,155
 
Basic Earnings Per Common Share
 
$
0.33
  
$
0.32
  
$
0.81
  
$
0.78
  
$
0.32
  
$
0.32
  
$
1.01
  
$
0.77
 
Diluted Earnings Per Common Share
 
$
0.33
  
$
0.32
  
$
0.80
  
$
0.77
  
$
0.32
  
$
0.31
  
$
1.01
  
$
0.77
 
Net Income to Average Assets (annualized)
 
0.95
%
 
0.94
%
 
0.79
%
 
0.81
%
Net Income to Average Equity (annualized)
 
14.07
%
 
11.62
%
 
11.00
%
 
9.71
%
Return on Average Assets (annualized)
 
0.96
%
 
0.95
%
 
1.02
%
 
0.79
%
Return on Average Equity (annualized)
 
13.11
%
 
14.07
%
 
14.41
%
 
11.00
%
Average Equity to Average Assets
 
6.75
%
 
8.11
%
 
7.19
%
 
8.34
%
 
7.30
%
 
6.75
%
 
7.09
%
 
7.19
%

 September 30, 2022  December 31, 2021  September 30, 2023  December 31, 2022 
            
(in thousands except for ratios)(in thousands except for ratios)    
(in thousands except for ratios)
    
At Period End:            
Total Assets $1,932,713  $1,899,087  
$
1,902,328
  
$
1,871,361
 
Total Investment Securities, at fair value $607,985  $632,213  
$
567,409
  
$
618,092
 
Total Loans, Net (including loans held-for-sale) $971,249  $853,780  
$
1,037,435
  
$
970,138
 
Total Deposits $1,799,605  $1,728,302  
$
1,746,344
  
$
1,726,874
 
Loan-To-Deposit Ratio 54.0% 49.4% 
59.4
%
 
56.2
%

3640
FIRST NORTHERN COMMUNITY BANCORP
 
Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)

 
Three months ended
September 30, 2022
  
Three months ended
September 30, 2021
  
Three months ended
September 30, 2023
  
Three months ended
September 30, 2022
 
 
Average
Balance
  Interest  
Yield/
Rate (4)
  
Average
Balance
  Interest  
Yield/
Rate (4)
  
Average
Balance
  Interest  
Yield/
Rate (4)
  
Average
Balance
  Interest  
Yield/
Rate (4)
 
Assets                                    
Interest-earning assets:                                    
Loans (1)
 
$
949,424
  
$
10,857
   
4.54
%
 
$
851,221
  
$
9,905
   
4.62
%
 
$
1,031,647
  
$
13,098
  
5.04
%
 
$
949,424
  
$
10,857
  
4.54
%
Certificate of deposits
  
11,423
   
57
   
1.98
%
  
13,358
   
69
   
2.05
%
 
20,794
  
194
  
3.70
%
 
11,423
  
57
  
1.98
%
Interest bearing due from banks
  
208,059
   
1,061
   
2.02
%
  
353,891
   
142
   
0.16
%
 
148,250
  
1,870
  
5.00
%
 
208,059
  
1,061
  
2.02
%
Investment securities, taxable
  
589,082
   
2,122
   
1.43
%
  
558,317
   
1,635
   
1.16
%
 
551,555
  
2,685
  
1.93
%
 
589,082
  
2,122
  
1.43
%
Investment securities, non-taxable (2)
  
40,272
   
250
   
2.46
%
  
28,569
   
153
   
2.12
%
 
31,765
  
199
  
2.49
%
 
40,272
  
250
  
2.46
%
Other interest earning assets
  
9,440
   
137
   
5.76
%
  
7,097
   
104
   
5.81
%
  
10,518
   
214
   
8.07
%
  
9,440
   
137
   
5.76
%
Total average interest-earning assets
  
1,807,700
   
14,484
   
3.18
%
  
1,812,453
   
12,008
   
2.63
%
 
1,794,529
  
18,260
  
4.04
%
 
1,807,700
  
14,484
  
3.18
%
Non-interest-earning assets:
                                          
Cash and due from banks
  
41,157
           
41,600
          
49,630
        
41,157
       
Premises and equipment, net
  
6,125
           
6,441
          
9,704
        
6,125
       
Interest receivable and other assets
  
54,289
           
38,869
           
59,579
         
54,289
       
Total average assets
 
$
1,909,271
          
$
1,899,363
          
$
1,913,442
        
$
1,909,271
       
                                          
Liabilities and Stockholders’ Equity:
                                          
Interest-bearing liabilities:
                                          
Interest-bearing transaction deposits
  
452,708
   
69
   
0.06
%
  
428,485
   
64
   
0.06
%
 
415,232
  
472
  
0.45
%
 
452,708
  
69
  
0.06
%
Savings and MMDA’s
  
447,797
   
171
   
0.15
%
  
451,340
   
124
   
0.11
%
 
443,536
  
819
  
0.73
%
 
447,797
  
171
  
0.15
%
Time, $250,000 or less
  
36,456
   
23
   
0.25
%
  
39,509
   
27
   
0.27
%
 
98,898
  
968
  
3.88
%
 
36,456
  
23
  
0.25
%
Time, over $250,000
  
10,504
   
8
   
0.30
%
  
13,572
   
16
   
0.47
%
  
17,554
   
127
   
2.87
%
  
10,504
   
8
   
0.30
%
Total average interest-bearing liabilities
  
947,465
   
271
   
0.11
%
  
932,906
   
231
   
0.10
%
 
975,220
  
2,386
  
0.97
%
 
947,465
  
271
  
0.11
%
Non-interest-bearing liabilities:
                                          
Non-interest-bearing demand deposits
  
814,300
           
792,951
          
779,615
        
814,300
       
Interest payable and other liabilities
  
18,662
           
19,560
           
18,858
         
18,662
       
Total liabilities
  
1,780,427
           
1,745,417
          
1,773,693
        
1,780,427
       
Total average stockholders’ equity
  
128,844
           
153,946
           
139,749
         
128,844
       
Total average liabilities and stockholders’ equity
 
$
1,909,271
          
$
1,899,363
          
$
1,913,442
         
$
1,909,271
        
Net interest income and net interest margin (3)
     
$
14,213
   
3.12
%
     
$
11,777
   
2.58
%
    
$
15,874
   
3.51
%
    
$
14,213
   
3.12
%
 
(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 generally excluded. Loan interest income includes net loan fees, net of deferred costs of approximately $223$(50) and $1,194$223 for the three months ended September 30, 20222023 and 2021,2022, respectively.  Net loan fees for the three months ended September 30, 20222023 and September 30, 20212022 include $154$0 and $1,134$154 in PPP loan fees recognized, respectively. Also included in loan interest income is interest income recognized on nonaccrual loans paid off totaling $4 and $19 for the three months ended September 30, 2023 and 2022, 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.
 
3741
FIRST NORTHERN COMMUNITY BANCORP
 
Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)

  
Nine months ended
September 30, 2023
  
Nine months ended
September 30, 2022
 
  
Average
Balance
  Interest  
Yield/
Rate (4)
  
Average
Balance
  Interest  
Yield/
Rate (4)
 
Assets                  
Interest-earning assets:                  
Loans (1)
 
$
994,504
  
$
38,197
   
5.14
%
 
$
896,708
  
$
30,979
   
4.62
%
Certificate of deposits
  
21,115
   
556
   
3.52
%
  
11,659
   
167
   
1.92
%
Interest bearing due from banks
  
174,391
   
6,411
   
4.92
%
  
231,712
   
1,626
   
0.94
%
Investment securities, taxable
  
568,322
   
8,041
   
1.89
%
  
597,040
   
5,783
   
1.30
%
Investment securities, non-taxable  (2)
  
36,092
   
692
   
2.56
%
  
36,656
   
634
   
2.31
%
Other interest earning assets
  
9,985
   
557
   
7.46
%
  
8,513
   
361
   
5.67
%
Total average interest-earning assets
  
1,804,409
   
54,454
   
4.03
%
  
1,782,288
   
39,550
   
2.97
%
Non-interest-earning assets:
                        
Cash and due from banks
  
47,135
           
46,737
         
Premises and equipment, net
  
8,713
           
6,298
         
Interest receivable and other assets
  
58,805
           
49,547
         
Total average assets
 
$
1,919,062
          
$
1,884,870
         
                         
Liabilities and Stockholders’ Equity:
                        
Interest-bearing liabilities:
                        
Interest-bearing transaction deposits
  
432,741
   
1,107
   
0.34
%
  
441,819
   
205
   
0.06
%
Savings and MMDA’s
  
460,198
   
1,926
   
0.56
%
  
443,063
   
395
   
0.12
%
Time, $250,000 or less
  
73,485
   
1,542
   
2.81
%
  
37,374
   
68
   
0.24
%
Time, over $250,000
  
13,043
   
242
   
2.48
%
  
10,769
   
23
   
0.29
%
Total average interest-bearing liabilities
  
979,467
   
4,817
   
0.66
%
  
933,025
   
691
   
0.10
%
Non-interest-bearing liabilities:
                        
Non-interest-bearing demand deposits
  
785,634
           
797,890
         
Interest payable and other liabilities
  
17,837
           
18,380
         
Total liabilities
  
1,782,938
           
1,749,295
         
Total average stockholders’ equity
  
136,124
           
135,575
         
Total average liabilities and stockholders’ equity
 
$
1,919,062
          
$
1,884,870
         
Net interest income and net interest margin (3)
     
$
49,637
   
3.68
%
     
$
38,859
   
2.92
%
  
Nine months ended
September 30, 2022
  
Nine months ended
September 30, 2021
 
  
Average
Balance
  Interest  
Yield/
Rate (4)
  
Average
Balance
  Interest  
Yield/
Rate (4)
 
Assets                  
Interest-earning assets:                  
Loans (1)
 
$
896,708
  
$
30,979
   
4.62
%
 
$
892,348
  
$
29,616
   
4.44
%
Certificate of deposits
  
11,659
   
167
   
1.92
%
  
14,531
   
231
   
2.13
%
Interest bearing due from banks
  
231,712
   
1,626
   
0.94
%
  
305,667
   
272
   
0.12
%
Investment securities, taxable
  
597,040
   
5,783
   
1.30
%
  
485,291
   
4,612
   
1.27
%
Investment securities, non-taxable  (2)
  
36,656
   
634
   
2.31
%
  
27,181
   
436
   
2.14
%
Other interest earning assets
  
8,513
   
361
   
5.67
%
  
6,860
   
289
   
5.63
%
Total average interest-earning assets
  
1,782,288
   
39,550
   
2.97
%
  
1,731,878
   
35,456
   
2.74
%
Non-interest-earning assets:
                        
Cash and due from banks
  
46,737
           
38,326
         
Premises and equipment, net
  
6,298
           
6,458
         
Interest receivable and other assets
  
49,547
           
38,502
         
Total average assets
 
$
1,884,870
          
$
1,815,164
         
 
                        
Liabilities and Stockholders’ Equity:
                        
Interest-bearing liabilities:
                        
Interest-bearing transaction deposits
  
441,819
   
205
   
0.06
%
  
418,159
   
184
   
0.06
%
Savings and MMDA’s
  
443,063
   
395
   
0.12
%
  
432,662
   
345
   
0.11
%
Time, $250,000 or less
  
37,374
   
68
   
0.24
%
  
41,492
   
101
   
0.33
%
Time, over $250,000
  
10,769
   
23
   
0.29
%
  
14,253
   
56
   
0.53
%
Total average interest-bearing liabilities
  
933,025
   
691
   
0.10
%
  
906,566
   
686
   
0.10
%
Non-interest-bearing liabilities:
                        
Federal Home Loan Bank Advances
  
—
           
2,418
         
Non-interest-bearing demand deposits
  
797,890
           
735,777
         
Interest payable and other liabilities
  
18,380
           
19,064
         
Total liabilities
  
1,749,295
           
1,663,825
         
Total average stockholders’ equity
  
135,575
           
151,339
         
Total average liabilities and stockholders’ equity
 
$
1,884,870
          
$
1,815,164
         
Net interest income and net interest margin (3)
     
$
38,859
   
2.92
%
     
$
34,770
   
2.68
%

(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 generally excluded. Loan interest income includes net loan fees, net of deferred costs of approximately $2,703$(17) and $4,202$2,703 for the nine months ended September 30, 20222023 and 2021,2022, respectively.  Net loan fees for the nine months ended September 30, 20222023 and September 30, 20212022 include $2,706$0 and $3,478$2,706 in PPP loan fees recognized, respectively. Also included in loan interest income is interest income recognized on nonaccrual loans paid off totaling $1,289 and $46 for the nine months ended September 30, 2023 and 2022, respectively.
(2) 
Interest income and yields on tax-exempt securities are not presented on a taxable-equivalent basis.
(3)(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.
 
3842
FIRST NORTHERN COMMUNITY BANCORP
 
Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)

 
Three months ended
September 30, 2022
  
Three months ended
June 30, 2022
  
Three months ended
September 30, 2023
  
Three months ended
June 30, 2023
 
 
Average
Balance
  Interest  
Yield/
Rate
  
Average
Balance
  Interest  
Yield/
Rate
  
Average
Balance
  Interest  
Yield/
Rate
  
Average
Balance
  Interest  
Yield/
Rate (4)
 
Assets                                    
Interest-earning assets:                                    
Loans (1) $949,424  $10,857  4.54% $897,608  $10,465  4.68% 
$
1,031,647
  
$
13,098
  
5.04
%
 
$
988,094
  
$
13,722
  
5.57
%
Certificates of deposit 11,423  57  1.98% 11,056  53  1.92% 
20,794
  
194
  
3.70
%
 
21,491
  
188
  
3.51
%
Interest bearing due from banks 208,059  1,061  2.02% 215,098  456  0.85% 
148,250
  
1,870
  
5.00
%
 
169,071
  
2,315
  
5.49
%
Investment securities, taxable 589,082  2,122  1.43% 603,796  1,933  1.28% 
551,555
  
2,685
  
1.93
%
 
571,381
  
2,673
  
1.88
%
Investment securities, non-taxable (2) 40,272  250  2.46% 35,190  206  2.35% 
31,765
  
199
  
2.49
%
 
34,953
  
220
  
2.52
%
Other interest earning assets  9,440   137   5.76%  8,976   106   4.74%  
10,518
   
214
   
8.07
%
  
9,985
   
165
   
6.63
%
Total average interest-earning assets 1,807,700  14,484  3.18% 1,771,724  13,219  2.99% 
1,794,529
  
18,260
  
4.04
%
 
1,794,975
  
19,283
  
4.31
%
Non-interest-earning assets:                                    
Cash and due from banks 41,157        47,651        
49,630
        
46,004
       
Premises and equipment, net 6,125        6,294        
9,704
        
9,804
       
Interest receivable and other assets  54,289         51,856         
59,579
         
59,479
       
Total average assets $1,909,271        $1,877,525        
$
1,913,442
        
$
1,910,262
       
                                    
Liabilities and Stockholders’ Equity:                                    
Interest-bearing liabilities:                                    
Interest-bearing transaction deposits 452,708  69  0.06% 440,466  67  0.06% 
415,232
  
472
  
0.45
%
 
425,903
  
377
  
0.36
%
Savings and MMDA’s 447,797  171  0.15% 446,890  115  0.10% 
443,536
  
819
  
0.73
%
 
455,943
  
582
  
0.51
%
Time, $250,000 and under 36,456  23  0.25% 38,235  22  0.23% 
98,898
  
968
  
3.88
%
 
78,378
  
470
  
2.41
%
Time, over $250,000  10,504   8   0.30%  10,542   7   0.27%  
17,554
   
127
   
2.87
%
  
11,373
   
72
   
2.54
%
Total average interest-bearing liabilities 947,465  271  0.11% 936,133  211  0.09% 
975,220
  
2,386
  
0.97
%
 
971,597
  
1,501
  
0.62
%
Non-interest-bearing liabilities:                                    
Non-interest-bearing demand deposits 814,300        793,243        
779,615
        
783,045
       
Interest payable and other liabilities  18,662         17,730         
18,858
         
17,210
       
Total liabilities 1,780,427        1,747,106        
1,773,693
        
1,771,852
       
Total average stockholders’ equity  128,844         130,419         
139,749
         
138,410
       
Total average liabilities and stockholders’ equity $1,909,271         $1,877,525         
$
1,913,442
         
$
1,910,262
        
Net interest income and net interest margin (3)    $14,213   3.12%    $13,008   2.94%    
$
15,874
   
3.51
%
    
$
17,782
   
3.97
%
 
(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 generally excluded.  Loan interest income includes net loan fees, net of deferred costs of approximately $223$(50) and $1,174$69 for the three months ended September 30, 20222023 and June 30, 2022,2023, respectively. NetAlso included in loan feesinterest income is interest income recognized on nonaccrual loans paid off totaling $4 and $1,285 for the three months ended September 30, 20222023 and June 30, 2022 include $154 and $1,185 in PPP loan fees recognized,2023, 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.

3943
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, 20222023 over the three months ended September 30, 2021,2022, the nine months ended September 30, 2023 over the nine months ended September 30, 2022, over the nine months ended September 30, 2021, and the three months ended September 30, 20222023 over the three months ended June 30, 2022.2023.  Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume.

 
Three Months Ended
September 30, 2022
  
Nine Months Ended
September 30, 2022
  
Three Months Ended
September 30, 2022
  
Three Months Ended
September 30, 2023
Over
Three Months Ended
September 30, 2022
  
Nine Months Ended
September 30, 2023
Over
Nine Months Ended
September 30, 2022
  
Three Months Ended
September 30, 2023
Over
Three Months Ended
June 30, 2023
 
 
Over
  
Over
  Over  
Volume
  
Interest
Rate
  
Change
  
Volume
  
Interest
Rate
  
Change
  Volume  
Interest
Rate
  Change 
 
Three Months Ended
September 30, 2021
  
Nine Months Ended
September 30, 2021
  
Three Months Ended
June 30, 2022
                        
 
Volume
  
Interest
Rate
  
Change
  
Volume
  
Interest
Rate
  
Change
  Volume  
Interest
Rate
  Change 
                      
Increase (Decrease) in Interest Income:
                      
Increase in Interest Income:
Increase in Interest Income:
                      
                                             
Loans 
$
1,124
  
$
(172
)
 
$
952
  
$
147
  
$
1,216
  
$
1,363
  
$
672
  
$
(280
)
 
$
392
  
$
986
  
$
1,255
  
$
2,241
  
$
3,552
  
$
3,666
  
$
7,218
  
$
631
  
$
(1,255
)
 
$
(624
)
Certificates of Deposit 
(10
)
 
(2
)
 
(12
)
 
(43
)
 
(21
)
 
(64
)
 
2
  
2
  
4
  
67
  
70
  
137
  
192
  
197
  
389
  
(5
)
 
11
  
6
 
Due From Banks 
(82
)
 
1,001
  
919
  
(83
)
 
1,437
  
1,354
  
(15
)
 
620
  
605
  
(374
)
 
1,183
  
809
  
(500
)
 
5,285
  
4,785
  
(258
)
 
(187
)
 
(445
)
Investment Securities - Taxable 
93
  
394
  
487
  
1,061
  
110
  
1,171
  
(46
)
 
235
  
189
  
(140
)
 
703
  
563
  
(290
)
 
2,548
  
2,258
  
(75
)
 
87
  
12
 
Investment Securities - Non-taxable 
70
  
27
  
97
  
161
  
37
  
198
  
33
  
11
  
44
  
(54
)
 
3
  
(51
)
 
(10
)
 
68
  
58
  
(18
)
 
(3
)
 
(21
)
Other Assets  
34
   
(1
)
  
33
   
70
   
2
   
72
   
6
   
25
   
31
   
18
   
59
   
77
   
69
   
127
   
196
   
10
   
39
   
49
 
 
$
1,229
  
$
1,247
  
$
2,476
  
$
1,313
  
$
2,781
  
$
4,094
  
$
652
  
$
613
  
$
1,265
  
$
503
  
$
3,273
  
$
3,776
  
$
3,013
  
$
11,891
  
$
14,904
  
$
285
  
$
(1,308
)
 
$
(1,023
)
                                                      
Increase (Decrease) in Interest Expense:
                      
Increase in Interest Expense:
Increase in Interest Expense:
                      
                                                      
Deposits:                                                      
Interest-Bearing Transaction Deposits 
$
5
  
$
—
  
$
5
  
$
21
  
$
—
  
$
21
  
$
2
  
$
—
  
$
2
  
$
(6
)
 
$
409
  
$
403
  
$
(4
)
 
$
906
  
$
902
  
$
(9
)
 
$
104
  
$
95
 
Savings & MMDAs 
(1
)
 
48
  
47
  
10
  
40
  
50
  
—
  
56
  
56
  
(1
)
 
649
  
648
  
16
  
1,515
  
1,531
  
(16
)
 
253
  
237
 
Time Certificates  
(4
)
  
(8
)
  
(12
)
  
(17
)
  
(49
)
  
(66
)
  
(3
)
  
5
   
2
   
123
   
941
   
1,064
   
138
   
1,555
   
1,693
   
249
   
304
   
553
 
                                                      
 
$
—
  
$
40
  
$
40
  
$
14
  
$
(9
)
 
$
5
  
$
(1
)
 
$
61
  
$
60
  
$
116
  
$
1,999
  
$
2,115
  
$
150
  
$
3,976
  
$
4,126
  
$
224
  
$
661
  
$
885
 
                                                      
Increase in Net Interest Income: 
$
1,229
  
$
1,207
  
$
2,436
  
$
1,299
  
$
2,790
  
$
4,089
  
$
653
  
$
552
  
$
1,205
  
$
387
  
$
1,274
  
$
1,661
  
$
2,863
  
$
7,915
  
$
10,778
  
$
61
  
$
(1,969
)
 
$
(1,908
)

4044
CHANGES IN FINANCIAL CONDITION

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $81,526,000,$9,688,000, or 23.6%5.2%, decreaseincrease in cash and cash equivalents, a $2,181,000,$252,000, or 16.4%1.2%, decrease in certificates of deposit, a $24,228,000,$50,683,000, or 3.8%8.2%, decrease in investment securities available-for-sale, a $118,532,000,$66,928,000, or 13.9%6.9%, increase in net loans held-for-investment, and a $1,063,000,$369,000, or 100.0%, decreaseincrease in loans held-for-sale from December 31, 20212022 to September 30, 2022.2023. The decreaseincrease in cash and cash equivalents was primarily due to originationsan increase in deposit balances, primarily due to the purchase of loans held-for-investment and purchasesbrokered deposits coupled with deposits assumed from the branch acquisition during the first quarter of investment securities,2023, which was partially offset by increasesseasonal fluctuations and deposit outflows due to changes in deposit liabilities. market conditions and monetary policy and originations of loans held-for-investment. The decrease in certificates of deposit was due to maturities, net of purchases of certificates of deposit and allocating the cash flows from those maturities towards additional purchases of available-for-sale securities.deposit. The decrease in investment securities was primarily due to the increase in unrealized lossesmaturities and principal repayments on the investment portfolio due to the increases in market interest rates over the yields available at the time the underlyingavailable-for-sale securities, were purchased.which was partially offset by purchases of available-for-sale securities. The increase in net loans held-for-investment was primarily due todriven by growth in commercial real estate, loan, agriculture,residential mortgage and residential mortgage loan originations, which wasconstruction loans, partially offset by SBA forgiveness payments on PPPnet reductions in commercial and agricultural loans. The decreaseincrease in loans held-for-sale was due to a decrease in originations of loans held-for-sale due to rising interest rates coupled with the timing of funding and sale of the loans held-for-sale pipeline. Loans held-for-sale as of September 30, 2023 were subsequently sold in October 2023.

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an increase in total deposits of $71,303,000,$19,470,000, or 4.1%1.1%, from December 31, 20212022 to September 30, 2022. 2023. The overall increase in total deposits was largelyprimarily due to the purchase of brokered deposits during the second quarter, coupled with the assumption of $115.9 million of deposits as part of the acquisition of three branches in the California cities of Colusa, Willows, and Orland during the first quarter, which was partially offset by seasonal fluctuations.fluctuations and deposit outflows due to changes in market conditions and monetary policy.

CHANGES IN RESULTS OF OPERATIONS

Interest Income

The Federal Open Market Committee increased the Federal Funds rate by 300100 basis points to a target range of 3.00%5.25% to 3.25%5.50% during the nine months ended September 30, 2022.2023.

Interest income on loans for the nine months ended September 30, 20222023 was up 4.6%23.3% from the same period in 2021,2022, increasing from $29,616,000$30,979,000 to $30,979,000,$38,197,000, and was up 9.6%20.6% for the three months ended September 30, 20222023 over the same period in 2021,2022, increasing from $9,905,000$10,857,000 to $10,857,000.$13,098,000. The increase in interest income on loans for the nine months ended September 30, 20222023 as compared to the same period a year ago was primarily due to an increase in average balance of loans, and an 18a 52 basis point increase in yield on loans and recognition of interest on a non-performing loan, which was partially offset by a decrease in PPP fee recognition. The increase in interest income on loans for the three months ended September 30, 20222023 as compared to the same period a year ago was primarily due to an increase in average balance of loans and a 50 basis point increase in yield on loans, which was partially offset by an 8 basis point decrease in yield on loans and a decrease in PPP fee recognition. The Company recognized a paydown during the nine months ended September 30, 2023 on a non-performing agricultural loan relationship, resulting in the recognition of interest totaling $1.3 million included in interest income on loans for the nine months ended September 30, 2023. PPP processing fees received from the SBA for PPP loans originated in 2020 and 2021 are beingwere recognized as an adjustment to the effective yield over the loan’s life and fully recognized in income upon repayment or SBA forgiveness of the loan. The Company recognized the remaining balance of PPP loan fees during 2022. The Company recognized PPP processing fees totaling $0 and approximately $2.7 million and $3.5 million were recognized in interest income for the nine-month periods ended September 30, 2023 and September 30, 2022, and 2021, respectively. The Company recognized PPP processing fees totaling $0 and approximately $0.2 million and $1.1 million were recognized in interest income for the three-month periods ended September 30, 20222023 and 2021, respectively. The Bank had unearned PPP processing fees totaling $0 and $2.7 million as of September 30, 2022, and December 31, 2021, respectively. The Bank had PPP loans outstanding totaling $0.5 million and $37 million as of September 30, 2022 and December 31, 2021, respectively.

Interest income on certificates of deposit for the nine months ended September 30, 20222023 was down 27.7%up 232.9% from the same period in 2021, decreasing2022, increasing from $231,000$167,000 to $167,000,$556,000, and was down 17.4%up 240.4% for the three months ended September 30, 20222023 over the same period in 2021, decreasing2022, increasing from $69,000$57,000 to $57,000.$194,000. The decreaseincrease in interest income on certificates of deposit for the nine months ended September 30, 20222023 as compared to the same period a year ago was primarily due to a decrease160 basis point increase in yield on certificates of deposit coupled with an increase in average balances of certificates of deposit and a 21 basis point decrease in yield on certificates of deposit. The decreaseincrease in interest income on certificates of deposit for the three months ended September 30, 20222023 as compared to the same period a year ago was primarily due to a decrease172 basis point increase in yield on certificates of deposit coupled with an increase in average balances of certificates of deposit and a 7 basis point decrease in yield on certificates of deposit.

Interest income on interest-bearing due from banks for the nine months ended September 30, 20222023 was up 497.8%294.3% from the same period in 2021,2022, increasing from $272,000$1,626,000 to $1,626,000,$6,411,000, and was up 647.2%76.3% for the three months ended September 30, 20222023 over the same period in 2021,2022, increasing from $142,000$1,061,000 to $1,061,000.$1,870,000. This income is primarily derived from interest on excess reserves held at the Federal Reserve. The increase in interest income on interest-bearing due from banks for the nine months ended September 30, 20222023 as compared to the same period a year ago was primarily due to increases in the Federal Funds rate in 2022 resulting in an 82a 398 basis point increase in yield on interest-bearing due from banks, which was partially offset by a decrease in average balances of interest-bearing due from banks. The increase in interest income on interest-bearing due from banks for the three months ended September 30, 20222023 as compared to the same period a year ago was primarily due to a 186298 basis point increase in yield on interest-bearing due from banks, which was partially offset by a decrease in average balances of interest-bearing due from banks.

4145
Interest income on investment securities available-for-sale for the nine months ended September 30, 20222023 was up 27.1%36.1% from the same period in 2021,2022, increasing from $5,048,000$6,417,000 to $6,417,000,$8,733,000, and was up 32.7%21.6% for the three months ended September 30, 20222023 over the same period in 2021,2022, increasing from $1,788,000$2,372,000 to $2,372,000.$2,884,000. The increase in interest income on investment securities for the nine months ended September 30, 20222023 as compared to the same period a year ago was primarily due to an increase in average investment securities coupled with a 358 basis point increase in investment yields.yields, which was partially offset by a decrease in average investment securities. The increase in interest income on investment securities for the three months ended September 30, 20222023 as compared to the same period a year ago was primarily due to an increase in average investment securities coupled with a 2946 basis point increase in investment yields.yields, which was partially offset by a decrease in average investment securities.

Interest income on other earning assets for the nine months ended September 30, 20222023 was up 24.9%54.3% from the same period in 2021,2022, increasing from $289,000$361,000 to $361,000,$557,000, and was up 31.7%56.2% for the three months ended September 30, 20222023 over the same period in 2021,2022, increasing from $104,000$137,000 to $137,000.$214,000. This income is primarily derived from dividends received by the Federal Home Loan Bank. The increase in interest income on other earning assets for the nine months ended September 30, 20222023 as compared to the same period a year ago was primarily due to a 179 basis point increase in yield on other earning assets coupled with an increase in average balances of other earning assets coupled with a 4 basis point increase in yield on other earning assets. The increase in interest income on other earning assets for the three months ended September 30, 20222023 as compared to the same period a year ago was primarily due to a 231 basis point increase in yield on other earning assets coupled with an increase in average balances of other earning assets, which was partially offset by a 5 basis point decrease in yield on other earning assets.

The Company had no Federal Funds sold balances during the three and nine months ended September 30, 20222023 and September 30, 2021.2022.
 
Interest Expense

Interest expense on deposits for the nine months ended September 30, 20222023 was up 0.7%597.1% from the same period in 2021,2022, increasing from $686,000$691,000 to $691,000,$4,817,000, and was up 17.3%780.4% for the three months ended September 30, 20222023 over the same period in 2021,2022, increasing from $231,000$271,000 to $271,000.$2,386,000. The increase in interest expense for the nine months ended September 30, 20222023 as compared to the same period a year ago was primarily due to a 56 basis point increase in average interest-bearing deposit yield coupled with an increase in average balance of interest-bearing liabilities. The increase in interest expense for the three months ended September 30, 20222023 as compared to the same period a year ago was primarily due to an 86 basis point increase in average interest-bearing deposit yield coupled with an increase in average balance of interest-bearing liabilities coupled with a 1 basis point increase in the Company’s average cost of funds.liabilities.

Provision for LoanCredit Losses

Provision for loancredit losses totaled $900,000 for the nine months ended September 30, 2022 compared to a reversal of provision for loan losses of $1,500,000 for2023 was up 244.4% from the same period in 2021. Provision for loan losses totaled $300,0002022, increasing from $900,000 to $3,100,000, and was up 66.7% for the three months ended September 30, 2022 compared to a reversal of provision for loan losses of $1,800,000 for2023 over the same period in 2021.2022, increasing from $300,000 to $500,000. The increase in provision for loan losscredit losses was driven by the need to replenish the ACL for the three and nine months ended September 30, 2022 was primarily duenet charge-off activity as well as to current yearprovide reserves for our quarterly loan growth. The reversal of provision for loan loss for the three and nine months ended September 30, 2021 was primarily due to a decrease in specific reserves on loans to one borrower. The allowance for loan losses was approximately $14,771,000 or 1.50% of total loans, at September 30, 2022, compared to $13,952,000, or 1.61% of total loans, at December 31, 2021. The decrease in the allowance for loan losses to total loans from December 31, 2021 to September 30, 2022 was primarily due to current year loan growth. 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.

Provision for Unfunded Lending Commitment Losses

Provision for unfunded lending commitment losses was $50,000 forDuring the nine months ended September 30, 2022 compared2023, the Company experienced a credit event related to suspected customer fraud on a reversalsingle agricultural relationship that required a charge-off of unfunded lending commitment$2,567,000 against the ACL. Management believes that the allowance for credit losses of $300,000 for the same period in 2021.  There was no provision for unfunded lending commitment losses for the three-month periods endedat September 30, 2022 and September 30, 2021.

Provisions for unfunded lending commitment2023 appropriately reflected expected credit losses are included in other non-interest expense in the Condensed Consolidated Statements of Income.loan portfolio at that date.
 
Non-Interest Income
 
Non-interest income was down 8.4%up 12.3% for the nine months ended September 30, 20222023 from the same period in 2021, decreasing2022, increasing from $5,982,000$5,480,000 to $5,480,000.

$6,155,000. The decreaseincrease was primarily due to decreasesdriven by a bargain purchase gain and an increase in gains on sales of loans held-for-sale,debit card income, which was partially offset by increasesdecreases in loan servicing income and other income. The Company recognized a bargain purchase gain totaling approximately $1.4 million as a result of the acquisition of the Colusa, Willows, and Orland branches located in California in the first quarter of 2023.  The decrease in gains on sales of loans held-for-saleloan servicing income was primarily due to the prior year reversal of impairment expense on the Company’s mortgage servicing rights asset coupled with a decrease in loan origination volumes due to an increase in interest rates and slowdown in refinancing activity.mortgage servicing assets booked.  The increasedecrease in other income was primarily due to the prior year recognition of non-taxable income from a bank owned life insurance policy.

42
Index
Non-interest income was up 8.5%down 14.2% for the three months ended September 30, 20222023 from the same period in 2021, increasing2022, decreasing from $1,908,000$2,070,000 to $2,070,000.

$1,776,000. The increasedecrease was primarily due to increases in other income, which was partially offset by a decrease in gains on salesthe prior year recognition of loans held-for-sale. The increase in other income was primarily due to non-taxable income from a bank owned life insurance policy. The decrease in gains on sales of loans held-for-sale was primarily due to a decrease in loan origination volumes due to an increase in interest rates and slowdown in refinancing activity.

46
Non-Interest Expenses

Total non-interest expenses were up 4.6%14.8% for the nine months ended September 30, 20222023 from the same period in 2021,2022, increasing from $27,091,000$28,339,000 to $28,339,000.

$32,534,000. The increase was primarily due to increases in salaries and employee benefits expense, occupancy and equipment, data processing, amortization of core deposit intangibles and other expenses. The increase in salaries and employee benefits expense was primarily due to increases in contingent compensation and deferred compensation expenses, and a decrease in capitalization of loan origination costs, which was partially offset by a decrease in commissions expense. The increase in other expenses was primarily due to increases in the provision for unfunded commitments and legal fees, which was partially offset by a decrease in loan collection expense.

Total non-interest expenses were up 7.3% for the three months ended September 30, 2022 from the same period in 2021, increasing from $9,234,000 to $9,909,000.

The increase was primarily due to increases in salaries and employee benefits expense and other expenses. The increase in salaries and employee benefits expense was primarily due to an increase in contingent compensation expensefull-time-equivalent employees. The increases in occupancy and a decreaseequipment, data processing and amortization of core deposit intangibles are primarily due to the branch acquisitions in capitalizationthe first quarter of loan origination costs, which2023. The increase in non-interest expenses was primarily due to increases in consulting fees and training expenses as part of the branch acquisitions, FDIC assessments and debit card expense.  The increase in non-interest expenses was partially offset by the recovery of loan collection expenses due to the recognition of a decreasepaydown on a non-performing agricultural loan relationship, resulting in commissionsthe recovery of back interest and profit-sharing expense.$0.7 million in loan collection expense recoveries.

Total non-interest expenses were up 9.8% for the three months ended September 30, 2023 from the same period in 2022, increasing from $9,909,000 to $10,883,000. The increase was primarily due to increases in salaries and employee benefits expense, occupancy and equipment, amortization of core deposit intangibles and FDIC assessments. The increase in salaries and employee benefits expense was primarily due to an increase in full-time-equivalent employees. The increases in occupancy and equipment and amortization of core deposit intangibles was primarily due to the branch acquisitions in the first quarter of 2023. The increase in FDIC assessments was due to a base rate increase.

The following table sets forth other non-interest expenses by category for the three and nine months ended September 30, 20222023 and 2021.2022.
 
 (in thousands)  (in thousands) 
 
Three months ended
September 30, 2022
  
Three months ended
September 30, 2021
  
Nine months ended
September 30, 2022
  
Nine months ended
September 30, 2021
  
Three months ended
September 30, 2023
  
Three months ended
September 30, 2022
  
Nine months ended
September 30, 2023
  
Nine months ended
September 30, 2022
 
Other non-interest expenses                        
(Reversal of) provision for unfunded loan commitments
 
$
—
  
$
—
  
$
50
  
$
(300
)
FDIC assessments
 
126
  
170
  
401
  
425
  
$
231
  
$
126
  
$
681
  
$
401
 
Contributions
 
66
  
29
  
148
  
109
  
79
  
66
  
190
  
148
 
Legal fees
 
151
  
53
  
474
  
226
  
88
  
151
  
428
  
474
 
Accounting and audit fees
 
135
  
115
  
404
  
346
  
134
  
135
  
451
  
404
 
Consulting fees
 
239
  
123
  
428
  
340
  
163
  
239
  
599
  
428
 
Postage expense
 
36
  
35
  
129
  
120
  
27
  
36
  
123
  
129
 
Telephone expense
 
36
  
36
  
109
  
104
  
37
  
36
  
124
  
109
 
Public relations
 
52
  
32
  
183
  
89
  
87
  
52
  
230
  
183
 
Training expense
 
34
  
26
  
115
  
61
  
37
  
34
  
165
  
115
 
Loan origination expense
 
29
  
29
  
178
  
149
  
120
  
29
  
248
  
178
 
Computer software depreciation
 
9
  
17
  
32
  
50
  
1
  
9
  
17
  
32
 
Sundry losses
 
80
  
34
  
184
  
202
  
80
  
80
  
203
  
184
 
Loan collection expense
 
114
  
85
  
292
  
680
 
Loan collection expense (recovery)
 
160
  
114
  
(294
)
 
292
 
Debit card expense
 
246
  
238
  
722
  
646
  
305
  
246
  
902
  
722
 
Other non-interest expense
  
350
   
289
   
1,005
   
864
   
437
   
350
   
1,296
   
1,055
 
                        
Total other non-interest expenses
 
$
1,703
  
$
1,311
  
$
4,854
  
$
4,111
  
$
1,986
  
$
1,703
  
$
5,363
  
$
4,854
 
 
4347
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 5.4%increased 39.1% for the nine months ended September 30, 20222023 from the same period in 2021, decreasing2022, increasing from $4,168,000$3,945,000 to $3,945,000,$5,486,000, and decreased 13.6%increased 9.4% for the three months ended September 30, 20222023 from the same period in 2021, decreasing2022, increasing from $1,742,000$1,506,000 to $1,506,000.$1,648,000. The decreaseincrease in provision for income taxes was primarily due to non-taxable income from a bank owned life insurance policy totaling $548,000.an increase in pre-tax income. The effective tax rate was 26.1%27.2% and 27.5%26.1% for the nine months ended September 30, 20222023 and September 30, 2021,2022, respectively. The effective tax rate was 24.8%26.3% and 27.9%24.8% for the three months ended September 30, 20222023 and September 30, 2021,2022, respectively.

Off-Balance Sheet Commitments

The following table shows the distribution of the Company’s undisbursed loan commitments at the dates indicated.

 (in thousands)  (in thousands) 
            
 September 30, 2022  December 31, 2021  September 30, 2023  December 31, 2022 
            
Undisbursed loan commitments
 
$
203,324
  
$
192,874
  
$
197,710
  
$
205,610
 
Standby letters of credit
 
2,714
  
2,305
  
1,251
  
1,930
 
Commitments to sell loans
  
—
   
1,500
   
765
   
—
 
 
$
206,038
  
$
196,679
  
$
199,726
  
$
207,540
 
 
The reserve for unfunded lending commitments amounted to $700,000$1,050,000 and $650,000$700,000 as of September 30, 20222023 and December 31, 2021,2022, 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“Financial Instruments with Off-Balance Sheet Risk,"” for additional information.

4448
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"“classified assets”. This category, which includes both performing and non-performing assets, receives an elevated level of attention regarding collection.

The following table summarizes the Company’s non-accrual loans net of guarantees of the State of California and U.S. Government by loan category at September 30, 20222023 and December 31, 2021:2022:

 At September 30, 2022  At December 31, 2021  At September 30, 2023  At December 31, 2022 
 Gross  Guaranteed  Net  Gross  Guaranteed  Net  Gross  Guaranteed  Net  Gross  Guaranteed  Net 
(in thousands)                                    
                                    
Commercial
 
$
—
  
$
—
  
$
—
  
$
133
  
$
33
  
$
100
  
$
—
  
$
—
  
$
—
  
$
—
  
$
—
  
$
—
 
Commercial real estate
 
—
  
—
  
—
  
555
  
—
  
555
  
—
  
—
  
—
  
—
  
—
  
—
 
Agriculture
 
7,625
  
—
  
7,625
  
8,712
  
—
  
8,712
  
5,020
  
—
  
5,020
  
7,416
  
—
  
7,416
 
Residential mortgage
 
126
  
—
  
126
  
138
  
—
  
138
  
400
  
—
  
400
  
123
  
—
  
123
 
Residential construction
 
—
  
—
  
—
  
—
  
—
  
—
  
—
  
—
  
—
  
—
  
—
  
—
 
Consumer
  
723
   
—
   
723
   
659
   
—
   
659
   
699
   
—
   
699
   
637
   
—
   
637
 
Total non-accrual loans
 
$
8,474
  
$
—
  
$
8,474
  
$
10,197
  
$
33
  
$
10,164
  
$
6,119
  
$
—
  
$
6,119
  
$
8,176
  
$
—
  
$
8,176
 

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 $8,474,000$6,119,000 at September 30, 2023 and were comprised of four agriculture loans totaling $5,020,000, two residential mortgage loans totaling $400,000, and four consumer loans totaling $699,000. Non-accrual loans amounted to $8,176,000 at December 31, 2022 and were comprised of three agriculture loans totaling $7,625,000,$7,416,000, one residential mortgage loan totaling $126,000, and five consumer loans totaling $723,000. Non-accrual loans amounted to $10,197,000 at December 31, 2021 and were comprised of two commercial loans totaling $133,000, one commercial real estate loan totaling $555,000, three agriculture loans totaling $8,712,000, one residential mortgage loan totaling $138,000$123,000 and four consumer loans totaling $659,000. If the$637,000. 

A loan is considered to be collateral dependent itwhen repayment is expected to be provided substantially through the operation or sale of the collateral. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. It is generally the Company’s policy to charge-offthat if 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 itcollateral is probable that payment of interest and principal will notdetermined to be made in accordance withless than the contractual termsrecorded amount of the loan, agreement are considered impaired. Non-performing impaired loans are non-accrual loans and loans that are 90 days or more past due and still accruing. Non-performing impaired loans at September 30, 2022 and December 31, 2021 totaled $8,877,000 and $10,197,000, respectively. A restructuring of a loan can constitute a troubled debt restructuring (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. The Company had $8,698,000 and $10,103,000 in TDR loans as of September 30, 2022 and December 31, 2021, respectively. A loan that is restructured in a TDR is considered an impaired loan. Performing impaired loans, which solely consisted of loans modified as TDRs, totaled $567,000 and $822,000 at September 30, 2022 and December 31, 2021, respectively. The Company expects to collect all principal and interest due from performing impaired loans. These loans are not on non-accrual status. No assurance can be given that the existing or any additional collateralcharge-off will be sufficient to secure full recovery of the obligations owed under these loans.  taken.

4549
As the following table illustrates, total non-performing assets, net of guarantees of the State of California and U.S. Government, including its agencies and its government-sponsored agencies, decreased $1,287,000,$2,460,000, or 12.7%28.7%, to $8,877,000$6,119,000 during the first nine months of 2022.2023. Non-performing assets, net of guarantees, represented 0.5%0.3% of total assets at September 30, 2022.2023.

 At September 30, 2022  At December 31, 2021  At September 30, 2023  At December 31, 2022 
 Gross  Guaranteed  Net  Gross  Guaranteed  Net  Gross  Guaranteed  Net  Gross  Guaranteed  Net 
(dollars in thousands)                                    
                                    
Non-accrual loans
 
$
8,474
  
$
—
  
$
8,474
  
$
10,197
  
$
33
  
$
10,164
  
$
6,119
  
$
—
  
$
6,119
  
$
8,176
  
$
-
  
$
8,176
 
Loans 90 days past due and still accruing
  
403
   
—
   
403
   
—
   
—
   
—
   
—
   
—
   
—
   
403
   
—
   
403
 
                                    
Total non-performing loans
  
8,877
   
—
   
8,877
   
10,197
   
33
   
10,164
   
6,119
   
—
   
6,119
   
8,579
   
—
   
8,579
 
Other real estate owned
  
—
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
—
   
—
 
Total non-performing assets
 
$
8,877
  
$
—
  
$
8,877
  
$
10,197
  
$
33
  
$
10,164
  
$
6,119
  
$
—
  
$
6,119
  
$
8,579
  
$
—
  
$
8,579
 
                                    
Non-performing loans (net of guarantees) to total loans
       
0.9
%
       
1.2
%
       
0.6
%
       
0.9
%
Non-performing assets (net of guarantees) to total assets
       
0.5
%
       
0.5
%
       
0.3
%
       
0.5
%
Allowance for loan and lease losses to non-performing loans (net of guarantees)
       
166.4
%
       
137.3
%
Allowance for credit losses to non-performing loans (net of guarantees)
       
263.9
%
       
172.4
%

The Company had no loans that were 90 days or more past due and still accruing as of September 30, 2023. The Company had one loan totaling $403,000 that was 90 days or more past due and still accruing at September 30, 2022. The Company had no loans 90 days past due and still accruing atas of December 31, 2021.2022.

Excluding the non-performing loans cited previously, loansLoans totaling $3,329,000$23,733,000 and $4,687,000$15,069,000 were classified as substandard loans representing potential problem loansas of September 30, 2023 and December 31, 2022, respectively.  Management believes that the allowance for credit losses at September 30, 20222023 and December 31, 2021, respectively. In Management’s opinion,2022 appropriately reflected expected credit losses in the potential loss related to these problem loans was sufficiently covered by the Bank’s existing loan loss reserve (Allowance for Loan Losses)portfolio at September 30, 2022 and December 31, 2021.that date.  The ratio of the Allowanceallowance for Loan Lossescredit losses to total loans at September 30, 20222023 and December 31, 20212022 was 1.50%1.53% and 1.61%1.50%, respectively. The Company adopted and implemented CECL on January 1, 2023. The ratio of the allowance for credit losses to total loans as of September 30, 2023 is based on the expected loss methodology, and the ratio of allowance for credit losses to total loans as of December 31, 2022 is based on the incurred loss methodology.
 
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 of September 30, 20222023 and December 31, 2021.2022.

4650
Allowance for LoanCredit Losses (ACL)

The Company's Allowance for Loan LossesCompany’s ACL is maintained at a level believed by management to be adequate to provide for loan and otherappropriately reflect expected credit losses that can be estimated based upon specific and general conditions.inherent in the loan portfolio.  The allowanceACL 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, loanand utilizes historical loss experience,trends and other factors in determining the adequacyremaining contractual lives of the reserve balance.loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period.  The allowance for loan lossesACL is based on estimates, and actual losses may vary from current estimates.

The following table summarizes the Allowance for Loan LossesACL of the Company during the nine months ended September 30, 20222023 and 2021,2022, and for the year ended December 31, 2021:2022:
 
Analysis of the Allowance for LoanCredit Losses
(Amounts in thousands, except percentage amounts)

 
Nine months ended
September 30,
  
Year ended
December 31,
  
Nine months ended
September 30,
  
Year ended
December 31,
 
 2022  2021  2021  2023  2022  2022 
                  
Balance at beginning of period
 
$
13,952
  
$
15,416
  
$
15,416
  
$
14,792
  
$
13,952
  
$
13,952
 
Provision for (reversal of) loan losses
 
900
  
(1,500
)
 
(1,500
)
Impact of adopting ASC 326
 
800
  
—
  
—
 
Provision for credit losses
 
3,250
  
900
  
900
 
Loans charged-off:
                  
Commercial
 
(297
)
 
(383
)
 
(502
)
 
(269
)
 
(297
)
 
(297
)
Commercial Real Estate
 
—
  
—
  
—
  
—
  
—
  
—
 
Agriculture
 
—
  
—
  
—
  
(2,567
)
 
—
  
—
 
Residential Mortgage
 
—
  
—
  
(5
)
 
(3
)
 
—
  
—
 
Residential Construction
 
—
  
—
  
—
  
—
  
—
  
—
 
Consumer
  
(39
)
  
(12
)
  
(12
)
  
(10
)
  
(39
)
  
(48
)
                  
Total charged-off
  
(336
)
  
(395
)
  
(519
)
  
(2,849
)
  
(336
)
  
(345
)
                  
Recoveries:
                  
Commercial
 
249
  
423
  
429
  
155
  
249
  
275
 
Commercial Real Estate
 
—
  
—
  
14
  
—
  
—
  
—
 
Agriculture
 
—
  
—
  
—
  
—
  
—
  
—
 
Residential Mortgage
 
—
  
—
  
—
  
—
  
—
  
—
 
Residential Construction
 
—
  
—
  
—
  
—
  
—
  
—
 
Consumer
  
6
   
57
   
112
   
1
   
6
   
10
 
                  
Total recoveries
  
255
   
480
   
555
   
156
   
255
   
285
 
                  
Net (charge-offs) recoveries
 
(81
)
 
85
  
36
 
Net charge-offs
 
(2,693
)
 
(81
)
 
(60
)
                  
Balance at end of period
 
$
14,771
  
$
14,001
  
$
13,952
  
$
16,149
  
$
14,771
  
$
14,792
 
                  
Ratio of net charge-offs to average loans outstanding during the period (annualized)
 
(0.01
%)
 
0.01
%
 
0.00
%
 
(0.36
%)
 
(0.01
%)
 
(0.01
%)
Allowance for loan losses to total loans
 
1.50
%
 
1.67
%
 
1.61
%
Allowance for credit losses to total loans
 
1.53
%
 
1.50
%
 
1.50
%
Nonaccrual loans to total loans
 
0.9
%
 
1.4
%
 
1.2
%
 
0.6
%
 
0.9
%
 
0.8
%
Allowance for loan losses to nonaccrual loans
 
174.3
%
 
116.6
%
 
136.8
%
Allowance for credit losses to nonaccrual loans
 
263.9
%
 
174.3
%
 
180.9
%

4751
Deposits

Deposits are one of the Company’s primary sources of funds.  At September 30, 2023 and December 31, 2022, the Company had the following deposit mix: 25.1% in savings and MMDA deposits, 2.6% in time deposits, 25.3% in interest-bearing transaction deposits and 47.0% in non-interest-bearing transaction deposits. At December 31, 2021, the Company had the following deposit mix: 24.6% in savings and MMDA deposits, 2.9% in time deposits, 25.0% in interest-bearing transaction deposits and 47.5% in non-interest-bearing transaction deposits. Non-interest-bearing transaction deposits increased the Company’s net interest income by lowering its cost of funds.

  
September 30,
2023
  
December 31,
2022
 
       
Non-interest bearing transaction  
44.1
%
  
44.9
%
Interest-bearing transaction  
23.2
%
  
25.9
%
Savings and MMDA  
25.5
%
  
26.6
%
Time  
7.2
%
  
2.6
%

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 depositsdeposit of over $250,000 outstanding at September 30, 20222023 and December 31, 20212022 are summarized as follows:

 (in thousands)  (in thousands) 
 September 30, 2022  December 31, 2021  September 30, 2023  December 31, 2022 
Three months or less
 
$
2,255
  
$
1,400
  
$
1,652
  
$
1,211
 
Over three to six months
 
1,210
  
1,940
  
3,294
  
1,012
 
Over six to twelve months
 
3,157
  
3,253
  
8,159
  
3,769
 
Over twelve months
  
3,557
   
4,404
   
5,752
   
3,248
 
Total
 
$
10,179
  
$
10,997
  
$
18,857
  
$
9,240
 

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 refers to the Company’s ability to provide funds an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either the asset or liability side of the balance sheet.   

Asset liquidity sources consist of the repayments and maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Condensed Consolidated Statement of Cash Flows. For the nine months ended September 30, 2023 net liquidity provided by investing activities totaled $79,999,000.

The Company’s available-for-sale investment securities plus cash and cash equivalents and certificates of deposit totaled $785,210,000 on September 30, 2023, which was 41.3% of assets at that time. This was a decrease of $41,247,000 from $826,457,000 and 44.2% of assets as of December 31, 2022. The Company’s investment securities are generally shorter term in nature to provide ongoing cash flows for liquidity needs and/or reinvestment for interest rate risk management. On September 30, 2023, the effective duration of our investment securities was 3.05 with projected principal cashflow of $52,260,000 for the remainder of 2023 available for reinvestment or liquidity needs. The Company had no held-to-maturity securities as of September 30, 2023 and December 31, 2022.

Liquidity may also be impacted from liabilities through changes in deposits and borrowings outstanding. These activities are included under financing activities in the Condensed Consolidated Statement of Cash Flows. As of September 30, 2023 the Company had no borrowings outstanding. For the nine months ended September 30, 2023 net liquidity used in financing activities totaled $95,310,000. While these sources of funds are expected to continue to provide significant amounts of funds in the future, their mix, as well as the possible use of other sources, will depend on future economic and market conditions.

Liquidity is also provided or used through the results of operating activities. For the nine months ended September 30, 2023 operating activities provided cash of $24,999,000, primarily from net income of $14,672,000.

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 54.0% on59.4% and 56.2% as of September 30, 2022. In addition,2023 and December 31, 2022, respectively.  

52
Loan demand during the remainder of 2023 will depend in part on September 30, 2022,economic and competitive conditions. The Company emphasizes the Company hadsolicitation of non-interest-bearing demand deposits and money market checking accounts, which are the following short-term investments (based on remaining maturity and/or next repricing date):  $31,950,000 in securities due within one year or less;least sensitive to interest rates. The outlook for deposit balances during the remainder of 2023 is subject to actions by the Federal Reserve and $188,535,000 in securities due in one to five years.heightened competition.

To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks which totaled $122,000,000 at September 30, 2022.2023.  Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity at September 30, 20222023 of $356,741,000;$405,614,000; credit availability is subject to certain collateral requirements. In addition, the Bank is eligible for participation in the newly created Bank Term Funding Program at the Federal Reserve which is intended to provide liquidity to U.S. depository institutions using one-year advances, prepayable without penalty, provided at the one-year overnight index swap rate plus 10 basis points limited to the value of eligible collateral. Eligible collateral includes any collateral eligible for purchase by the Federal Reserve Bank, at par value, provided such collateral was owned by the borrower at March 12, 2023. As of September 30, 2023, the Company had $569,071,000 in par value of unpledged securities available to pledge to secure advances under the newly created Bank Term Funding Program.

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.

In July 2013, the FRB and the other U.S. federal banking agencies adopted final rules making significant changes to the U.S. regulatory capital framework for U.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 (the U.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 on January 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.

48
Index
Pursuant to the EGRRCPA, the FRB adopted a final rule, effective August 31, 2018, amending the Small 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 of December 31, 2018, the Company iswas 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.

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 was 8.5 percent through calendar year 2021 and is 9 percent thereafter.  The rule is applicable to all non-advanced approaches FDIC-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.

53
As of September 30, 2022,2023, 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 of September 30, 2022.2023.

 (amounts in thousands except percentage amounts)  (amounts in thousands except percentage amounts) 
 Actual  
Well Capitalized
Ratio
Requirement
  Actual  Well Capitalized 
 Capital  Ratio    Capital  Ratio  
Ratio
Requirement
 
Leverage
 
$
165,756
  
8.50
%
 
5.0
%
 
$
180,092
  
9.21
%
 
5.0
%
Common Equity Tier 1
 
$
165,756
  
14.29
%
 
6.5
%
 
$
180,092
  
14.31
%
 
6.5
%
Tier 1 Risk-Based
 
$
165,756
  
14.29
%
 
8.0
%
 
$
180,092
  
14.31
%
 
8.0
%
Total Risk-Based
 
$
180,266
  
15.54
%
 
10.0
%
 
$
195,844
  
15.56
%
 
10.0
%

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ITEM 3.   – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company believes that there have been no material changes in the quantitative and qualitative disclosures about market risk as of September 30, 2022,2023, from those presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, which are incorporated by reference herein.
 
ITEM 4.   – CONTROLS AND PROCEDURES
 
(a)  We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2022.2023.  This conclusion is based on an evaluation conducted under the supervision and with the participation of management.

(b)  During the quarter ended September 30, 2022,2023, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
PART II   – OTHER INFORMATION
 
ITEM 1. – LEGAL PROCEEDINGS
 
Neither the Company nor the Bank is a party to any material pending legal proceeding, nor is any of their property the subject of any material pending legal proceeding, except ordinary routine litigation arising in the ordinary course of the Bank’s business and incidental to its business, none of which is expected to have a material adverse impact upon the Company’s or the Bank’s business, financial position or results of operations.
 
ITEM 1A. – RISK FACTORS
 
For a discussion of risk factors relating to our business, please refer to Part I, Item 1A of our 20212022 Form 10-K, which is incorporated by reference herein, and to the following:

Recent negative developments in the banking industry, and any legislative and/or bank regulatory actions that may result, could adversely affect our business operations, results of operations and financial condition.
The high-profile bank failures of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year, and related negative media attention, generated significant market trading volatility among publicly-traded bank holding companies and, in particular, regional and community banks, such as the Company. These developments negatively impacted customer confidence in the safety and soundness of regional and community banks. The FDIC took steps to ensure that depositors of these failed banks would have access to their deposits, including uninsured deposit accounts.  U.S. bank regulators have taken action in an effort to further strengthen public confidence in the banking system through the creation of a new Bank Term Funding Program. There can be no assurance that these actions will be successful in restoring customer confidence in regional and community banks and the banking system more broadly.  While we currently do not anticipate liquidity constraints of the kind that caused these other financial services institutions to fail or require external support, constraints on our liquidity could occur as a result of customers choosing to maintain their deposits with larger financial institutions or to invest in higher yielding short-term fixed income securities, which could materially adversely impact our liquidity, cost of funding, loan funding capacity, net interest margin, capital and results of operations. If we were required to sell a portion of our securities portfolio to address liquidity needs, we may incur losses, including as a result of the negative impact of rising interest rates on the value of our securities portfolio, which could negatively affect our earnings and our capital. While the Company has taken actions to maintain adequate and diversified sources of funding and management believes that its liquidity measures are reasonable in light of the nature of the Bank’s customer base, there can be no assurance that such actions will be sufficient in the event of a sudden liquidity crisis.
55
These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies, enhanced regulatory supervision and examination policies and priorities, and/or the imposition of restrictions through regulatory supervisory or enforcement activities, including higher capital requirements and/or an increase in the Bank’s deposit insurance assessments. Although these legislative and regulatory actions cannot be predicted with certainty, any of these potential legislative or regulatory actions could, among other things, subject us to additional costs, limit the types of financial services and products we may offer, and reduce our profitability, any of which could materially and adversely affect our business, results of operations or financial condition. The FDIC has recently proposed that Congress consider various changes in the FDIC insurance program, including possible increases in the deposit insurance limit for certain types of accounts, such as business payment accounts. 

Economic Conditions in the U.S. May Soften or Become Recessionary with Resultant Adverse Consequences for the U.S. Financial Services Industry and for the Bank
Following the financial crisis of 2008, adverse financial and economic developments impacted U.S. and global economies and financial markets and presented challenges for the banking and financial services industry and for us. These developments included a general recession both globally and in the U.S. accompanied by substantial volatility in the financial markets.
In response, various significant economic and monetary stimulus measures were implemented by the U.S. government. The FRB also pursued a highly accommodative monetary policy aimed at keeping interest rates at historically low levels although the FRB has more recently modified certain aspects of this policy by gradually increasing short-term interest rates and reducing its balance sheet. The U.S. economy has experienced a period of significant expansion in recent years; however, this expansion is not likely to continue indefinitely and, at some point, economic conditions in the U.S. are likely to soften or become recessionary. We, and other financial services companies, are impacted to a significant degree by current economic conditions. The U.S. government continues to face significant fiscal and budgetary challenges which, if not resolved, could result in renewed adverse U.S. economic conditions. These challenges may be intensified over time if federal budget deficits were to increase and Congress and the Administration cannot effectively work to address them.
The overall level of the federal government’s debt, the extensive political disagreements regarding the government’s statutory debt limit and the continuing substantial federal budget deficits led to a downgrade from “AAA” to “AA+” of the long-term sovereign credit rating of United States debt by one credit rating agency.  On August 1, 2023, a second credit rating agency downgraded certain of the United States’ long-term debt ratings to AA+ from AAA citing an expected fiscal deterioration over the next three years, a high and growing general government debt burden and the erosion of governance relative to other highly rated peers over the last two decades resulting in repeated debt limit standoffs and last-minute resolutions.   This risk could be exacerbated over time.
If substantial federal budget deficits were to continue in the years ahead, further downgrades by the credit rating agencies with respect to the obligations of the U.S. federal government could occur. Any such further downgrades could increase over time the U.S. federal government’s cost of borrowing, which may worsen its fiscal challenges, as well as generate upward pressure on interest rates generally in the U.S. which could, in turn, have adverse consequences for borrowers and the level of business activity. It is also possible that the federal government’s fiscal and budgetary challenges could be intensified over time as a result of the federal tax legislation signed into law in December of 2017 if the reductions in tax rates along with greater government spending result in increased federal budget deficits. The long-term impact of this situation, including the impact to the Bank’s investment securities portfolio and other assets, cannot be predicted.

Increases in the Allowance for LoanCredit Losses Would Adversely Affect the Bank’s Financial Condition and Results of Operations

The Bank’s allowance for estimatedcredit losses on loans was approximately $16.1 million, or 1.53% of total loans, at September 30, 2023, compared to allowance for loan losses of approximately $14.8 million, or 1.50% of total loans, at September 30, 2022, compared to $14.0 million, or 1.61% of total loans, at December 31, 2021,2022, and 166.4%263.9% of total non-performing loans net of guaranteed portions at September 30, 2022,2023, compared to 137.3%172.4% of total non-performing loans, net of guaranteed portions at December 31, 2021. 2022.  Provision for loancredit losses totaled $900,000$3.1 million for the nine months ended September 30, 2022 and reversal of provision for loan losses totaled $1,500,0002023, compared to $0.9 million for the nine months ended September 30, 2021.2022. Provision for loancredit losses totaled $300,000$0.5 million for the three months ended September 30, 2022 and reversal of provision for loan losses totaled $1,800,002023, compared to $0.3 for the three months ended September 30, 2021.2022. The increase in provision for credit losses was primarily due to an agricultural relationship that required a charge-off of $2.6 million in the second quarter of 2023, coupled with loan growth during the nine months ended September 30, 2023.

56
The COVID-19 pandemic and related responses to the pandemic by federal, state and local governments have negatively impacted the U.S., California and global economies, significantly increased economic uncertainty, reduced economic activity, increased unemployment levels, and resulted in temporary and permanent closures of many businesses and restrictions on business and social activities in many states and communities, including many markets where we have operations. The extent to which the Company’s business will continue to be affected will depend on a variety of factors, many of which are outside of our control, including the persistence of the pandemic, the actions of governmental authorities, changes in customer preferences, impacts on economic activity, and the possibility of recession or continued financial market instability. The pandemic has resulted and can be expected tomay continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses.  Material future additions to the allowance for estimated losses on loans may be necessary if such material adverse changes in economic conditions were to continue to occur and the performance of the Bank’s loan portfolio deteriorates.were to deteriorate.
 
50
Index
In addition, the pandemic may significantly affect the commercial and residential real estate markets in the U.S. generally, and in California in particular, decreasing property values, increasing the risk of defaults and reducing the value of real estate collateral.  An allowance for losses on other real estate owned may also be required in order to reflect changes in the markets for real estate in which the Bank’s other real estate owned is located and other factors which may result in adjustments which are necessary to ensure that the Bank’s foreclosed assets are carried at the lower of cost or fair value, less estimated costs to dispose of the properties.  Moreover, the FDIC and the California Department of Financial Protection and Innovation,DFPI, as an integral part of their examination process, periodically review the Bank’s allowance for estimated losses on loans and the carrying value of its assets.  Increases in the provisions for estimated losses on loans and foreclosed assets would adversely affect the Bank’s financial condition and results of operations.
 
The Bank’s Dependence on Real Estate Lending Increases Our Risk of Losses Particularly Given the Continuing or Worsening Economic and Financial Market Conditions Caused by the COVID-19 Pandemic
 
At September 30, 2022, approximately 85% of the Bank’s loans in principal amount (excluding loans held-for-sale) were secured by real estate.  We do not yet know the full extent of the impacts of the COVID-19 pandemic on the U.S., California or global economies, or our market areas in particular.  In 2021, the widespread availability in the U.S. of new vaccines began to moderate the impact of the pandemic, but various new strains of the virus emerged, some with a higher rate of infectiousness even in vaccinated persons, that have continued the pandemic.  There can be no assurance that further vaccine-resistant strains of the virus will not emerge.  In addition, a significant portion of the population in California remains unvaccinated and therefore exposed to the pandemic.  Accordingly, the risk remains that the pandemic could again worsen and result in prolonged recessionary economic and financial market conditions in the market areas we serve.  If this were to occur, the value of our real estate loan portfolio and the collateral supporting it could be adversely and materially impacted.

The Bank’s primary lending focus has historically been commercial (including agricultural), construction, and real estate mortgage.  At September 30, 2022,2023, real estate mortgage (excluding loans held-for-sale) and construction loans (residential and other) comprised approximately 83%86% and 2%, respectively, of the total loans in the Bank’s portfolio.  At September 30, 2022,2023, all of the Bank’s real estate mortgage and construction loans and approximately 2% of its commercial loans were secured fully or in part by deeds of trust on underlying real estate.  The Company’s dependence on real estate increases the risk of loss in both the Bank’s loan portfolio and its holdings of other real estate owned if economic conditions in Northern California were to deteriorate. Deterioration of the real estate market in Northern California would have a material adverse effect on the Company’s business, financial condition, and results of operations.

The CFPB has adopted various regulations which have impacted, and will continue to impact, our residential mortgage lending business.

5157
ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Repurchases of Equity SecuritiesNone.

On May 20, 2021, the Company approved a stock repurchase program effective June 15, 2021.  The stock repurchase program, which will remain in effect until June 14, 2023, allows repurchases by the Company in an aggregate amount of no more than 4% of the Company’s 13,680,085 outstanding shares of common stock as of March 31, 2021. This represents total shares of 547,203 eligible for repurchase. The Company repurchased 10,765 shares of the Company's outstanding common stock during the nine month period ended September 30, 2022.

The Company made the following purchases of its common stock during the three months ended September 30, 2022:
  (a)  (b)  (c)  (d) 
Period 
Total number of
shares purchased
  
Average price
paid per share
  
Number of shares
purchased as part of
publicly announced
plans or programs
  
Maximum number of
shares that may yet be
purchased under the
plans or programs
 
July 1 - July 31, 2022  —   —   —   32,614 
August 1 - August 31, 2022  —   —   —   32,614 
September 1 - September 30, 2022  2,000  $8.77   2,000   30,614 
Total  2,000       2,000     

A 5% stock dividend was declared on January 27, 2022 with a record date of February 28, 2022 and is reflected in the number of shares purchased and average price paid per share.
ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

None.
 
ITEM 4. – MINE SAFETY DISCLOSURES

Not applicable.
 
ITEM 5. – OTHER INFORMATION

None.
 
ITEM 6.   – EXHIBITS
 
Exhibit
Number
Description of Document
Rule 13a — 14(a) Certification of Chief Executive Officer
Rule 13a — 14(a) Certification of Chief Financial Officer
Statement of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
Statement of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
101.INS
 
101.INS
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH
 Inline XBRL Taxonomy Extension Schema Document.
101.CAL
 Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
 
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
 
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
 
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
 
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
 
**  Management contract or compensatory plan, contract, or arrangement.

****  In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
 
5258
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

FIRST NORTHERN COMMUNITY BANCORP
Date:November 9, 20222023By:/s/  Kevin Spink
 
Kevin Spink, Executive Vice President / Chief Financial Officer
(Principal Financial Officer and Duly Authorized Officer)


5359