First Northern Community Bancorp (FNRN) 10-Q 2023 Q1 Quarterly report

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 March 31, 2023

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 May 8, 2023 was 14,735,407.

FIRST NORTHERN COMMUNITY BANCORP

INDEX

	Page
PART I – Financial Information	3
ITEM I. – Financial Statements (Unaudited)	3
Condensed Consolidated Balance Sheets (Unaudited)	3
Condensed Consolidated Statements of Income (Unaudited)	4
Condensed Consolidated Statements of Comprehensive Income/Loss (Unaudited)	5
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)	6
Condensed Consolidated Statements of Cash Flows (Unaudited)	7
Notes to Condensed Consolidated Financial Statements	8
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	32
ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	48
ITEM 4. – CONTROLS AND PROCEDURES	48
PART II – OTHER INFORMATION	48
ITEM 1. – LEGAL PROCEEDINGS	48
ITEM 1A. – RISK FACTORS	48
ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	50
ITEM 3. – DEFAULTS UPON SENIOR SECURITIES	50
ITEM 4. – MINE SAFETY DISCLOSURES	50
ITEM 5. – OTHER INFORMATION	50
ITEM 6. – EXHIBITS	50
SIGNATURES	51

2

PART I – FINANCIAL INFORMATION

FIRST NORTHERN COMMUNITY BANCORP

ITEM I.    – FINANCIAL STATEMENTS (UNAUDITED) 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share amounts)	March 31, 2023			December 31, 2022
Assets
Cash and cash equivalents	$	206,110		$	187,417
Certificates of deposit		21,695			20,948
Investment securities – available-for-sale		623,795			618,092
Loans, net of allowance for credit losses of $15,484 at March 31, 2023 and $14,792 at December 31, 2022		974,215			970,138
Loans held-for-sale		415			—
Stock in Federal Home Loan Bank and other equity securities, at cost		9,440			9,440
Premises and equipment, net		9,798			6,122
Core deposit intangible		4,819			—
Interest receivable and other assets		53,004			59,204
Total Assets	$	1,903,291		$	1,871,361
Liabilities and Stockholders’ Equity
Liabilities:
Demand deposits	$	775,522		$	775,173
Interest-bearing transaction deposits		442,863			448,039
Savings and MMDA’s		472,683			459,307
Time, $250,000 or less		47,583			35,115
Time, over $250,000		12,424			9,240
Total deposits		1,751,075			1,726,874
Interest payable and other liabilities		16,431			19,447
Total Liabilities		1,767,506			1,746,321
Commitments and contingencies (Note 7)
Stockholders’ Equity:
Common stock, no par value; 16,000,000 shares authorized; 14,735,607 shares issued and outstanding at March 31, 2023 and 14,652,584 shares issued and outstanding at December 31, 2022		116,561			116,099
Additional paid-in capital		977			977
Retained earnings		58,762			54,492
Accumulated other comprehensive loss, net		(40,515	)		(46,528	)
Total Stockholders’ Equity		135,785			125,040
Total Liabilities and Stockholders’ Equity	$	1,903,291		$	1,871,361

See notes to unaudited condensed consolidated financial statements.

3

FIRST NORTHERN COMMUNITY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(in thousands, except per share amounts)	Three months ended March 31, 2023		Three months ended March 31, 2022
Interest and dividend income:
Loans	$	11,377	$	9,657
Due from banks interest bearing accounts		2,400		166
Investment securities
Taxable		2,683		1,728
Non-taxable		273		178
Other earning assets		178		118
Total interest and dividend income		16,911		11,847
Interest expense:
Deposits		930		209
Total interest expense		930		209
Net interest income		15,981		11,638
Provision for credit losses		—		300
Net interest income after provision for credit losses		15,981		11,338
Non-interest income:
Service charges on deposit accounts		412		443
Gains on sales of loans held-for-sale		18		68
Investment and brokerage services income		121		161
Mortgage brokerage income		10		—
Loan servicing income		64		384
Debit card income		654		623
Gains on sales/calls of available-for-sale securities		2		—
Gain on bargain purchase		1,405		—
Other income		187		239
Total non-interest income		2,873		1,918
Non-interest expenses:
Salaries and employee benefits		6,805		5,683
Occupancy and equipment		1,017		866
Data processing		1,019		839
Stationery and supplies		100		64
Advertising		146		103
Directors’ fees		66		63
Amortization of core deposit intangible		151		—
Other expense		1,980		1,484
Total non-interest expenses		11,284		9,102
Income before provision for income taxes		7,570		4,154
Provision for income taxes		2,081		1,113
Net income	$	5,489	$	3,041
Basic earnings per common share	$	0.38	$	0.21
Diluted earnings per common share	$	0.38	$	0.21

See notes to unaudited condensed consolidated financial statements.

4

FIRST NORTHERN COMMUNITY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/LOSS (UNAUDITED)

(in thousands)	Three months ended March 31, 2023			Three months ended March 31, 2022
Net income	$	5,489		$	3,041
Other comprehensive gains (losses), net of tax:
Unrealized holding gains (losses) on securities:
Unrealized holding gains (losses) arising during the period, net of tax effect of $2,522 and $(8,054) for the three-month periods ended March 31, 2023 and March 31, 2022, respectively		6,014			(19,963	)
Less: reclassification adjustment due to gains realized on sales of securities, net of tax effect of $(1) and $0 for the three-month periods ended March 31, 2023 and March 31, 2022, respectively		(1	)		—
Other comprehensive income (loss)	$	6,013		$	(19,963	)
Comprehensive income (loss)	$	11,502		$	(16,922	)

See notes to unaudited condensed consolidated financial statements.

5

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
	Shares			Amounts			Capital		Earnings			Income (Loss)			Total
Balance at December 31, 2021		13,848,904		$	109,793		$	977	$	44,338		$	(4,197	)	$	150,911
Net income										3,041						3,041
Other comprehensive loss, net of tax													(19,963	)		(19,963	)
Stock dividend adjustment		3,276			366					(366	)					—
Cash in lieu of fractional shares		(161	)							(8	)					(8	)
Stock-based compensation					164											164
Common shares issued related to restricted stock grants		67,596			—											—
Stock options exercised, net of swapped shares		11,615			—											—
Stock repurchase and retirement		(1,401	)		(15	)										(15	)
Balance at March 31, 2022		13,929,829		$	110,308		$	977	$	47,005		$	(24,160	)	$	134,130
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 change in accounting principal)		14,652,584			116,099			977		53,576			(46,528	)		124,124
Net income										5,489						5,489
Other comprehensive income, net of tax													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

See notes to unaudited condensed consolidated financial statements.

6

FIRST NORTHERN COMMUNITY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	(in thousands)
	Three months ended March 31, 2023			Three months ended March 31, 2022
Cash Flows From Operating Activities
Net income	$	5,489		$	3,041
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		230			192
Accretion and amortization of investment securities premiums and discounts, net		612			1,292
Valuation adjustment on mortgage servicing rights		—			(276	)
Increase (decrease)  in deferred loan origination fees and costs, net		424			(801	)
Amortization of core deposit intangible		151			—
Provision for credit losses		—			300
Stock-based compensation		192			164
Gain on sales/calls of available-for-sale securities		(2	)		—
Amortization of operating lease right-of-use asset		268			279
Gain on sales of loans held-for-sale		(18	)		(68	)
Proceeds from sales of loans held-for-sale		420			6,499
Originations of loans held-for-sale		(817	)		(5,718	)
Gain on bargain purchase		(1,405	)		—
Changes in assets and liabilities:
Decrease  in interest receivable and other assets		2,755			129
Net decrease in interest payable and other liabilities		(3,263	)		(3,038	)
Net cash provided by operating activities		5,036			1,995
Cash Flows From Investing Activities
Proceeds from calls or maturities of available-for-sale securities		8,750			5,590
Proceeds from sales of available-for-sale securities		7,201			—
Principal repayments on available-for-sale securities		17,317			27,822
Purchase of available-for-sale securities		(31,047	)		(75,663	)
Proceeds from maturities of certificates of deposit		980			2,453
Purchase of certificates of deposit		(1,727	)		(248	)
Net increase in loans		(495	)		(20,787	)
Purchases of premises and equipment		(285	)		(12	)
Cash and cash equivalents acquired in acquisition		103,425			—
Net cash provided by (used in) investing activities		104,119			(60,845	)
Cash Flows From Financing Activities
Net decrease in deposits		(90,429	)		(12,306	)
Cash dividends paid in lieu of fractional shares		(7	)		(8	)
Repurchases and retirements of common stock		(26	)		(15	)
Net cash provided by (used in) financing activities		(90,462	)		(12,329	)
Net increase (decrease) in Cash and Cash Equivalents		18,693			(71,179	)
Cash and Cash Equivalents, beginning of period		187,417			345,929
Cash and Cash Equivalents, end of period	$	206,110		$	274,750
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	870		$	192
Supplemental disclosures of non-cash investing and financing activities:
Stock dividend distributed		5,652			6,992
Unrealized holding gains (losses) on available for sale securities, net of taxes		6,013			(19,963	)
Market value of shares tendered in-lieu of cash to pay for exercise of options		81			65
Recognition of right-of-use assets obtained in exchange for operating lease liabilities		245			707
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

FIRST NORTHERN COMMUNITY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 (GAAP) for interim financial information and with the instructions to Form 10-Q and Articles 9 and 10 of Regulation S-X.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial 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, 2022 as filed with the Securities and Exchange Commission. 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, 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.

The following accounting policies were updated from those disclosed in the Form 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 Company 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 its 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 rating of the security by a rating agency, and adverse 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 not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses.

Allowance for Credit Losses – Loans

The allowance for credit losses (ACL) is a valuation account that is deducted from the loan’s amortized cost basis to present the net amount expected to be collected on the 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 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 determining the ACL, 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 determine 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 forecast data from Moody’s Analytics. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process.

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 be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. Collateral dependent loans are considered to have unique risk characteristics and are individually evaluated. 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. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken.

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the following portfolio segments to evaluate and measure the ACL:

Commercial:

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’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.

Commercial Real Estate:

Commercial real estate loans generally fall into two 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’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:

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’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.

9

Residential mortgage loans:  Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks; non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’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 to 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’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.

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 liabilities.

Accrued interest receivable on loans is not included in the calculation of the allowance for credit losses.

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 price consideration over the fair value of acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill and any deficit is recognized as a bargain purchase gain.

Goodwill 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 2016-03 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.

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.

10

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. 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

3.  INVESTMENT SECURITIES

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at March 31, 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	$	116,448	$	31	$	(4,599	)	$	111,880
Securities of U.S. government agencies and corporations		121,863		16		(8,380	)		113,499
Obligations of states and political subdivisions		58,858		184		(4,419	)		54,623
Collateralized mortgage obligations		118,431		3		(17,691	)		100,743
Mortgage-backed securities		265,353		67		(22,370	)		243,050
Total debt securities	$	680,953	$	301	$	(57,459	)	$	623,795

The Company had no allowance for credit losses on available-for-sale securities as of March 31, 2023.

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

Amortized cost and fair value exclude accrued interest receivable of $2,119,000 and $2,151,000 at March 31, 2023 and December 31, 2022, respectively, which is included in interest receivable and other assets in the consolidated statements of condition.

The Company had $7,201,000 and $0 proceeds from sales of available-for-sale securities for the three months ended March 31, 2023 and March 31, 2022, respectively.  Gross realized gains on sales/calls of available-for-sale securities were $58,000 and $0 for the three months ended March 31, 2023 and March 31, 2022, respectively.  Gross realized losses on sales of available-for-sale securities were $56,000 and $0 for the three months ended March 31, 2023 and March 31, 2022, respectively.

The amortized cost and estimated fair value of debt and other securities at March 31, 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	$	61,211	$	60,021
Due after one year through five years		174,052		163,665
Due after five years through ten years		31,938		29,358
Due after ten years		29,968		26,958
Subtotal		297,169		280,002
MBS & CMO		383,784		343,793
Total	$	680,953	$	623,795

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.

12

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of March 31, 2023, 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	$	29,470	$	(427	)	$	75,554	$	(4,172	)	$	105,024	$	(4,599	)
Securities of U.S. government agencies and corporations		24,970		(460	)		85,102		(7,920	)		110,072		(8,380	)
Obligations of states and political subdivisions		10,994		(216	)		29,773		(4,203	)		40,767		(4,419	)
Collateralized mortgage obligations		13,424		(190	)		86,644		(17,501	)		100,068		(17,691	)
Mortgage-backed securities		58,152		(1,999	)		178,961		(20,371	)		237,113		(22,370	)
Total	$	137,010	$	(3,292	)	$	456,034	$	(54,167	)	$	593,044	$	(57,459	)

One hundred fifty-eight securities, all considered investment grade, which had an aggregate fair value of $137,010,000 and a total unrealized loss of $3,292,000, have been in an unrealized loss position for less than twelve months as of March 31, 2023. Three hundred ninety-nine securities, all considered investment grade, which had an aggregate fair value of $456,034,000 and a total unrealized loss of $54,167,000, have been in an unrealized loss position for more than twelve months as of March 31, 2023.  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 decline in fair value is attributable to changes in interest rates and not credit quality and 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 March 31, 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 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.

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of December 31, 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	$	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 $41,552,000 and $44,319,000 at March 31, 2023 and December 31, 2022, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.

13

4.  LOANS AND ALLOWANCE FOR CREDIT LOSSES

The composition of the Company’s loan portfolio, by loan class, as of March 31, 2023 and December 31, 2022 was as follows:

($ in thousands)	March 31, 2023			December 31, 2022
Commercial	$	103,290		$	106,771
Commercial Real Estate		661,545			645,166
Agriculture		103,364			114,040
Residential Mortgage		93,339			92,669
Residential Construction		12,551			10,167
Consumer		15,204			15,287
		989,293			984,100
Allowance for credit losses		(15,484	)		(14,792	)
Net deferred origination fees and costs		406			830
Loans, net	$	974,215		$	970,138

At March 31, 2023 and December 31, 2022, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank (“FHLB”).

Allowance for Credit Losses (ACL)

The following table summarizes the activity in the ACL on loans by loan class for the three months ended March 31, 2023.

Three months ended March 31, 2023
($ in thousands)	Commercial			Commercial Real Estate			Agriculture			Residential Mortgage			Residential Construction		Consumer			Unallocated		Total
Balance as of December 31, 2022, prior to adoption of ASC 326	$	1,463		$	10,073		$	1,757		$	880		$	178	$	173		$	268	$	14,792
Impact of adopting ASC 326		623			(464	)		(671	)		834			200		201			77		800
Balance as of January 1, 2023, post adoption of ASC 326		2,086			9,609			1,086			1,714			378		374			345		15,592
Provision for credit losses		(232	)		(454	)		(213	)		(33	)		39		(8	)		901		—
Charge-offs		(127	)		—			—			(3	)		—		(1	)		—		(131	)
Recoveries		23			—			—			—			—		—			—		23
Net (charge-offs)/recoveries		(104	)		—			—			(3	)		—		(1	)		—		(108	)
Balance as of March 31, 2023	$	1,750		$	9,155		$	873		$	1,678		$	417	$	365		$	1,246	$	15,484

During the quarter ended March 31, 2023, the levels of forecasted California unemployment remained relatively stable and forecasted gross domestic product improved slightly from the prior quarter. Those factors, in conjunction with a stable portfolio level, were the primary reason for no provision for loan loss recorded for the quarter ended March 31, 2023.  Management believes that the allowance for credit losses at March 31, 2023 appropriately reflected expected credit losses in the loan portfolio at that date.

14

The following table summarizes the activity in the ACL by loan class for the three months ended March 31, 2022:

Three months ended March 31, 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		136		572		125		12		61		25			(631	)		300
Charge-offs		—		—		—		—		—		(4	)		—			(4	)
Recoveries		7		—		—		—		—		3			—			10
Net (charge-offs)/recoveries		7		—		—		—		—		(1	)		—			6
Balance as of March 31, 2022	$	1,747	$	9,380	$	1,607	$	754	$	135	$	191		$	444		$	14,258

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 March 31, 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, and the related ACL allocated to these loans as of March 31, 2023 and December 31, 2022:

March 31, 2023
($ in thousands)	Secured by 1-4 Family Residential Properties-1st lien		Secured by 1-4 Family Residential Properties-revolving		Secured by farmland		Agriculture production loans		Total
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		—		—		—		—		—
Agriculture		—		—		1,148		6,268		7,416
Residential Mortgage		119		—		—		—		119
Residential Construction		—		—		—		—		—
Consumer		—		620		—		—		620
Total	$	119	$	620	$	1,148	$	6,268	$	8,155

December 31, 2022
($ in thousands)	Secured by 1-4 Family Residential Properties-1st lien		Secured by 1-4 Family Residential Properties-revolving		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 one consumer loan totaling $0.4 million secured by residential real estate property that was in the process of foreclosure at March 31, 2023.  The Company had no consumer loans secured by residential real estate property that were in the process of foreclosure at December 31, 2022.

15

Non-accrual and Past Due Loans

The Company’s loans by delinquency and non-accrual status, as of March 31, 2023 and December 31, 2022, 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
March 31, 2023
Commercial	$	747	$	49	$	403	$	—	$	1,199	$	102,091	$	103,290	$	—
Commercial Real Estate		—		—		—		—		—		661,545		661,545		—
Agriculture		—		—		—		7,416		7,416		95,948		103,364		7,416
Residential Mortgage		887		—		—		119		1,006		92,333		93,339		119
Residential Construction		—		—		—		—		—		12,551		12,551		—
Consumer		775		—		—		620		1,395		13,809		15,204		620
Total	$	2,409	$	49	$	403	$	8,155	$	11,016	$	978,277	$	989,293	$	8,155
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

The Company recognized $0 and $15,000 of interest income on nonaccrual loans during the three months ended March 31, 2023 and March 31, 2022, 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 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.

Occasionally, the Company modifies loans to borrowers in financial distress 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.

16

The following table presents the amortized cost basis of loans at March 31, 2023 that were both experiencing financial difficulty and modified during the period ended March 31, 2023, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial distress as compared to the amortized cost basis of each class of financing receivable is also presented below.

($ in thousands)	Term Extension		Combination Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
March 31, 2023
Commercial	$	250	$	50		0.29	%
Commercial Real Estate		—		—		—
Agriculture		—		—		—
Residential Mortgage		—		—		—
Residential Construction		—		—		—
Consumer		—		—		—
Total	$	250	$	50		0.29	%

The Company had no commitments to lend additional funds to borrowers whose loans were modified at March 31, 2023.

The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty for the three-month period ended March 31, 2023:

($ in thousands)	Weighted-Average Interest Rate Reduction			Weighted-Average Term Extension (in months)
Commercial		0.50	%	$	9
Commercial Real Estate		—			—
Agriculture		—			—
Residential Mortgage		—			—
Residential Construction		—			—
Consumer		—			—
Total		0.50	%	$	9

There were no loans modified within the previous twelve months and for which there was a payment default during the three-month period ended March 31, 2023.

Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or a portion of the loan) is written off.  Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the 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 troubled debt restructuring (TDR).  The Company had $8,399,000 in TDR loans as of December 31, 2022. Specific reserves for TDR loans totaled $77,000 as of December 31, 2022.  TDR loans performing in compliance with modified terms totaled $8,399,000 as of December 31, 2022.

Loans modified as TDRs during the three months ended March 31, 2022 were as follows:

($ in thousands)	Three months ended March 31, 2022
	Number of Contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment
Consumer		1	$	75	$	75
Total		1	$	75	$	75

There were no loans modified as a TDR within the previous twelve months and for which there was a payment default during the three-month period ended March 31, 2022.

17

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, 2022.

The following tables present the loan portfolio by loan class, origination year, and internal risk rating as of March 31, 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.

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of March 31, 2023
	2023		2022			2021		2020		2019			Prior		Revolving Loans Amortized Cost Basis		Total
Commercial
Pass	$	1,178	$	21,990		$	25,632	$	7,214	$	9,538		$	10,088	$	24,307	$	99,947
Special Mention		—		—			—		—		—			—		—		—
Substandard		50		—			2,411		583		—			—		299		3,343
Doubtful/Loss		—		—			—		—		—			—		—		—
Total Commercial loans	$	1,228	$	21,990		$	28,043	$	7,797	$	9,538		$	10,088	$	24,606	$	103,290
Current Period Write-offs		—		(41	)		—		—		(86	)		—		—		(127	)
Current Period Recoveries		—		—			—		—		—			23		—		23
Current Period Net Write-offs		—		(41	)		—		—		(86	)		23		—		(104	)
Commercial Real Estate
Pass	$	26,972	$	171,926		$	203,578	$	46,080	$	61,457		$	129,969	$	7,116	$	647,098
Special Mention		—		—			—		863		3,692			—		—		4,555
Substandard		—		—			173		2,622		6,064			1,033		—		9,892
Doubtful/Loss		—		—			—		—		—			—		—		—
Total Commercial Real Estate loans	$	26,972	$	171,926		$	203,751	$	49,565	$	71,213		$	131,002	$	7,116	$	661,545
Current Period Write-offs		—		—			—		—		—			—		—		—
Current Period Recoveries		—		—			—		—		—			—		—		—
Current Period Net Write-offs		—		—			—		—		—			—		—		—
Agriculture
Pass	$	5,292	$	20,525		$	24,483	$	9,082	$	4,483			12,114	$	18,905	$	94,884
Special Mention		—		—			—		—		—			1,064		—		1,064
Substandard		—		—			1,148		—		—			—		6,268		7,416
Doubtful/Loss		—		—			—		—		—			—		—		—
Total Agriculture loans	$	5,292	$	20,525		$	25,631	$	9,082	$	4,483		$	13,178	$	25,173	$	103,364
Current Period Write-offs		—		—			—		—		—			—		—		—
Current Period Recoveries		—		—			—		—		—			—		—		—
Current Period Net Write-offs		—		—			—		—		—			—		—		—

18

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of March 31, 2023
	2023			2022			2021		2020		2019			Prior			Revolving Loans Amortized Cost Basis		Total
Residential Mortgage
Pass	$	3,643		$	24,392		$	27,350	$	14,680	$	6,205		$	16,716		$	—	$	92,986
Special Mention		—			—			—		—		—			195			—		195
Substandard		—			39			—		—		—			119			—		158
Doubtful/Loss		—			—			—		—		—			—			—		—
Total Residential Mortgage loans	$	3,643		$	24,431		$	27,350	$	14,680	$	6,205		$	17,030		$	—	$	93,339
Current Period Write-offs		—			—			—		—		—			(3	)		—		(3	)
Current Period Recoveries		—			—			—		—		—			—			—		—
Current Period Net Write-offs		—			—			—		—		—			(3	)		—		(3	)
Residential Construction
Pass	$	115		$	8,378		$	3,594	$	464	$	—		$	—		$	—	$	12,551
Special Mention		—			—			—		—		—			—			—		—
Substandard		—			—			—		—		—			—			—		—
Doubtful/Loss		—			—			—		—		—			—			—		—
Total Residential Construction loans	$	115		$	8,378		$	3,594	$	464	$	—		$	—		$	—	$	12,551
Current Period Write-offs		—			—			—		—		—			—			—		—
Current Period Recoveries		—			—			—		—		—			—			—		—
Current Period Net Write-offs		—			—			—		—		—			—			—		—
Consumer
Pass	$	234		$	897		$	173	$	207	$	82		$	443		$	12,548	$	14,584
Special Mention		—			—			—		—		—			—			—		—
Substandard		—			—			—		—		—			—			620		620
Doubtful/Loss		—			—			—		—		—			—			—		—
Total Consumer loans	$	234		$	897		$	173	$	207	$	82		$	443		$	13,168	$	15,204
Current Period Write-offs		(1	)		—			—		—		—			—			—		(1	)
Current Period Recoveries		—			—			—		—		—			—			—		—
Current Period Net Write-offs		(1	)		—			—		—		—			—			—		(1	)
Total Loans
Pass	$	37,434		$	248,108		$	284,810	$	77,727	$	81,765		$	169,330		$	62,876	$	962,050
Special Mention		—			—			—		863		3,692			1,259			—		5,814
Substandard		50			39			3,732		3,205		6,064			1,152			7,187		21,429
Doubtful/Loss		—			—			—		—		—			—			—		—
Total Loans	$	37,484		$	248,147		$	288,542	$	81,795	$	91,521		$	171,741		$	70,063	$	989,293
Current Period Write-offs	$	(1	)	$	(41	)	$	—	$	—	$	(86	)	$	(3	)	$	—	$	(131	)
Current Period Recoveries	$	—		$	—		$	—	$	—	$	—		$	23		$	—	$	23
Current Period Net Write-offs	$	(1	)	$	(41	)	$	—	$	—	$	(86	)	$	20		$	—	$	(108	)

The following table presents the risk ratings by loan class as of December 31, 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

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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 or loss and a related asset for the fair value of the rights to service loans for others when loans are sold and servicing is retained.  The Company sold a substantial portion of its portfolio of conforming long-term residential mortgage loans originated during the three months ended March 31, 2023 on a servicing retained basis, for cash proceeds equal to the fair value of the loans.  At March 31, 2023, and December 31, 2022, the Company serviced real estate mortgage loans for others totaling $191,063,000 and $194,818,000, 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 March 31, 2023 and December 31, 2022 were as follows:

	March 31, 2023			December 31, 2022
Constant prepayment rate		7.45	%		7.55	%
Discount rate		9.50	%		9.50	%
Weighted average life (years)		7.23			7.20

The following table summarizes the Company’s mortgage servicing rights assets as of March 31, 2023 and December 31, 2022. Mortgage servicing rights are included in Interest Receivable and Other Assets on the condensed consolidated balance sheets:

	(in thousands)
	December 31, 2022		Additions		Reductions			March 31, 2023
Mortgage servicing rights	$	1,650	$	6	$	(62	)	$	1,594
Valuation allowance		—		—		—			—
Mortgage servicing rights, net of valuation allowance	$	1,650	$	6	$	(62	)	$	1,594

At March 31, 2023 and December 31, 2022, the estimated fair market value of the Company’s mortgage servicing rights asset was $2,127,000 and $2,101,000, respectively.  The changes in fair value of mortgage servicing rights during 2023 was primarily due to changes in prepayment speeds.

The Company received contractually specified servicing fees of $121,000 and $130,000 for the three months ended March 31, 2023 and March 31, 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.

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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 tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022.

	(in thousands)
March 31, 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	$	111,880	$	111,880	$	—	$	—
Securities of U.S. government agencies and corporations		113,499		—		113,499		—
Obligations of states and political subdivisions		54,623		—		54,623		—
Collateralized mortgage obligations		100,743		—		100,743		—
Mortgage-backed securities		243,050		—		243,050		—
Total investments at fair value	$	623,795	$	111,880	$	511,915	$	—

	(in thousands)
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	$	113,815	$	113,815	$	—	$	—
Securities of U.S. government agencies and corporations		118,911		—		118,911		—
Obligations of states and political subdivisions		53,326		—		53,326		—
Collateralized mortgage obligations		95,350		—		95,350		—
Mortgage-backed securities		236,690		—		236,690		—
Total investments at fair value	$	618,092	$	113,815	$	504,277	$	—

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.

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Assets Recorded at Fair Value on a Non-Recurring Basis

There were no assets measured at fair value on a non-recurring basis as of March 31, 2023 and December 31, 2022.

There were no liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2023 and December 31, 2022.

Disclosures about Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments for the periods ended March 31, 2023 and December 31, 2022 were approximately as follows:

			March 31, 2023				December 31, 2022
	Level		Carrying amount		Fair value		Carrying amount		Fair value
Financial assets:
Cash and cash equivalents		1	$	206,110	$	206,110	$	187,417	$	187,417
Certificates of deposit		2		21,695		21,233		20,948		20,560
Stock in Federal Home Loan Bank and other equity securities		3		9,440		9,440		9,440		9,440
Loans receivable:
Net loans		3		974,215		932,512		970,138		929,163
Loans held-for-sale		2		415		422		—		—
Interest receivable		2		5,774		5,774		5,745		5,745
Mortgage servicing rights		3		1,594		2,127		1,650		2,101
Financial liabilities:
Deposits		3		1,751,075		1,359,467		1,726,874		1,372,411
Interest payable		2		153		153		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.

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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.These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit in addition to entering into commitments to sell loans in conjunction with our mortgage banking activities. 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)	March 31, 2023		December 31, 2022
Undisbursed loan commitments	$	211,880	$	205,610
Standby letters of credit		1,023		1,930
Commitments to sell loans		415		—
	$	213,318	$	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. 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 March 31, 2023 and December 31, 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 $1,023,000 and $1,930,000 at March 31, 2023 and December 31, 2022, respectively.  The Bank has 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 $1,200,000 and $700,000 at March 31, 2023 and December 31, 2022, respectively, which is recorded in “interest payable and other 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 March 31, 2023 and December 31, 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. 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 to the funding of the mortgage loan. To protect against this risk, the Company may enter into commitments to sell loans to economically hedge the risk of potential changes in the value of the loans that would result from the commitment. These commitments totaled $415,000 and $0 at March 31, 2023 and December 31, 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. 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.

23

8.  STOCK PLANS

On January 26, 2023, the Board of Directors of the Company declared a 5% stock dividend paid on March 24, 2023 to shareholders of record as of February 28, 2023. All stock options and restricted stock 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 March 31, 2023:

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term (in years)
Options outstanding at Beginning of Period		684,837		$	8.41
Granted		—			—
Expired		—			—
Cancelled / Forfeited		—			—
Exercised		(21,159	)		3.83
Options outstanding at End of Period		663,678			8.56	$	299,238		5.20
Exercisable (vested) at End of Period		578,314		$	8.39	$	299,238		4.83

The intrinsic value of options exercised was $97,000 and $125,000 during the three months ended March 31, 2023 and March 31, 2022, respectively.  The fair value of awards vested was $123,000 and $142,000 during the three months ended March 31, 2023 and March 31, 2022, respectively.

As of March 31, 2023, there was $131,000 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 2.09 years.

There was $27,000 of recognized compensation cost related to stock options granted for the three months ended March 31, 2023.

The following table presents the activity related to non-vested restricted stock for the three months ended March 31, 2023:

	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		248,418		$	9.34
Granted		75,851			8.52
Cancelled/Forfeited		—			—
Exercised/Released/Vested		(50,296	)		8.96
Non-vested restricted stock outstanding at End of Period		273,973		$	9.18	$	2,024,660		3.13

The weighted average fair value of restricted stock granted during the three months ended March 31, 2023 was $8.52 per share.

As of March 31, 2023, there was $1,685,000 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 3.13 years.

There was $157,000 of recognized compensation cost related to restricted stock awards for the three months ended March 31, 2023.

24

The Company has an Employee Stock Purchase Plan (“ESPP”).  There are 358,911 shares authorized 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 26, 2023, payable March 24, 2023 to shareholders of record as of February 28, 2023. The ESPP will expire on March 16, 2026.

The ESPP is implemented by participation periods of not more than twenty-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, 2022 to November 23, 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 March 31, 2023, there was $23,000 of unrecognized compensation cost related to ESPP issuances. This cost is expected to be recognized over a weighted average period of approximately 0.75 years.

There was $8,000 of recognized compensation cost related to ESPP issuances for the three months ended March 31, 2023.

The weighted average fair value at issuance date during the three months ended March 31, 2023 was $1.83.

A summary of the weighted average assumptions used in valuing ESPP issuances during the three months ended March 31, 2023 is presented below:

	Three Months Ended March 31, 2023
Risk Free Interest Rate		4.75	%
Expected Dividend Yield		0.00	%
Expected Life in Years		1.00
Expected Price Volatility		16.58	%

25

9.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table details activity in accumulated other comprehensive income (loss) for the three months ended March 31, 2023:

($ in thousands)	Unrealized gains (losses) on securities			Officers’ retirement plan			Directors’ retirement plan		Accumulated other comprehensive income (loss)
Balance as of December 31, 2022	$	(46,273	)	$	(308	)	$	53	$	(46,528	)
Current period other comprehensive income		6,013			—			—		6,013
Balance as of March 31, 2023	$	(40,260	)	$	(308	)	$	53	$	(40,515	)

The following table details activity in accumulated other comprehensive income for the three months ended March 31, 2022:

($ in thousands)	Unrealized gains (losses) on securities			Officers’ retirement plan			Directors’ retirement plan			Accumulated other comprehensive income (loss)
Balance as of December 31, 2021	$	(2,764	)	$	(1,420	)	$	(13	)	$	(4,197	)
Current period other comprehensive loss		(19,963	)		—			—			(19,963	)
Balance as of March 31, 2022	$	(22,727	)	$	(1,420	)	$	(13	)	$	(24,160	)

26

10.  OUTSTANDING SHARES AND EARNINGS PER SHARE

On January 26, 2023, the Board of Directors of the Company declared a 5% stock dividend payable on March 24, 2023 to shareholders of record as of February 28, 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 months ended March 31, 2023 and 2022 (dollars in thousands except per share amounts):

	Three months ended March 31,
	2023		2022
Basic earnings per share:
Net income	$	5,489	$	3,041
Weighted average common shares outstanding		14,423,553		14,373,555
Basic EPS	$	0.38	$	0.21
Diluted earnings per share:
Net income	$	5,489	$	3,041
Weighted average common shares outstanding		14,423,553		14,373,555
Effect of dilutive shares		135,165		183,270
Adjusted weighted average common shares outstanding		14,558,718		14,556,825
Diluted EPS	$	0.38	$	0.21

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 513,058 shares and 313,255 shares for the three months ended March 31, 2023 and March 31, 2022, respectively. 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 31,184 shares and 36,433 shares for the three months ended March 31, 2023 and March 31, 2022, respectively.

27

11.  LEASES

The Company leases eleven 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 ASU 2016-02, Leases (Topic 842), the Company combines lease and nonlease components. The Company had no financing leases as of March 31, 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’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 $4,883,000 and $4,905,000 as of March 31, 2023 and December 31, 2022, respectively. Right-of-use assets are included in Interest receivable and other assets on the condensed consolidated balance sheets. The Company had lease liabilities totaling $5,388,000 and $5,422,000 as of March 31, 2023 and December 31, 2022, respectively. Lease liabilities are included in interest payable and other liabilities on the condensed consolidated balance sheets. The Company recognized lease expenses totaling $308,000 and $294,000 for the three months ended March 31, 2023 and March 31, 2022, respectively. Lease expense is included in Occupancy and equipment expense on the condensed consolidated statements of income.

The table below summarizes the maturity of remaining lease liabilities:

(in thousands)	March 31, 2023
2023 (remaining 9 months)	$	894
2024		1,040
2025		1,052
2026		672
2027		611
2028 and thereafter		1,520
Total lease payments		5,789
Less: interest		(401	)
Present value of lease liabilities	$	5,388

The following table presents supplemental cash flow information related to leases for the three months ended March 31, 2023 and March 31, 2022:

(in thousands)	Three Months Ended March 31, 2023		Three Months Ended March 31, 2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	313	$	299
Right-of-use assets obtained in exchange for new operating lease liabilities	$	245	$	707

The following table presents the weighted average operating lease term and discount rate as of March 31, 2023 and December 31, 2022:

(in thousands)	March 31, 2023			December 31, 2022
Weighted-average remaining lease term – operating leases, in years	$	5.84		$	6.14
Weighted-average discount rate – operating leases	$	2.45	%	$	2.37	%

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12.  BUSINESS COMBINATIONS

On January 20, 2023, the Company completed the acquisition from Columbia State Bank of three branches located in the California cities of Colusa, Willows, and Orland, in accordance with the Purchase and Assumption 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 accounting for 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, purchase price accounting adjustments including the core deposit intangible are all non-taxable and/or non-deductible. Acquisition related costs of approximately $204,000 are included in the income statement for the three months ended March 31, 2023. During the three months ended March 31, 2022, there were no acquisition costs incurred.

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

29

A summary of the estimated fair value adjustments resulting in the bargain purchase gain recorded in the branch acquisition are presented below:

	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 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. The bargain purchase gain is separately reported as a component of non-interest income in our Condensed Consolidated Statement of Income for the three months ended March 31, 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 for competitive reasons (along with the associated deposits and loans) in accordance with a Letter of Agreement between Columbia State Bank, Umpqua and the Department of Justice Antitrust Division. This agreement was reached in conjunction with the Department of Justice’s required approval of the merger of Columbia State Bank and Umpqua. The required divestiture, in conjunction with the rural location of the branches acquired, allowed the Company to negotiate a favorable purchase price that, when combined with changes in market conditions between the date of agreement and the closing date, resulted in the recognition of the bargain purchase gain.

30

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 March 31, 2023		Three months ended March 31, 2022
Summarized proforma income statement data:
Net interest income	$	16,219	$	12,038
Provision for loan losses		—		300
Non-interest income		2,912		2,092
Non-interest expense		11,455		9,760
Income before taxes		7,676	$	4,070
Provision for income taxes		2,110		1,090
Net income	$	5,566	$	2,980
Basic earnings per share	$	0.39	$	0.21
Diluted earnings per share	$	0.38	$	0.20

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 March 31, 2023 because the operations of the acquired branches were substantially comingled with the operations of the Company as of the system conversion date of January 20, 2023.

31

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 2022 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and the other risks described in our Quarterly Reports on Form 10-Q for factors to be considered when reading any forward-looking statements in this filing.

This report and other reports or statements which we may release may include forward-looking statements, which are subject to the “safe harbor” created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in 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

32

● Our allowances for credit losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, the adequacy of the allowance for credit losses, underwriting standards, and risk grading, and the expected impact of changes in the methodology for determining the allowance for credit losses effective as to the Company on January 1, 2023

● Our assessment of economic conditions and trends and credit cycles and their impact on our business

● The seasonal nature of our business

● The impact of changes in interest rates and our strategy to manage our interest rate risk profile and the possible effect of changes in residential mortgage interest rates on new originations and refinancing of existing residential mortgage loans

● Loan portfolio composition and risk grade trends, expected charge-offs, portfolio credit quality, our strategy regarding 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

● 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

● 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

● Possible changes in the fair values recorded on our financial statements of the assets 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" and “Supervision and Regulation” in our 2022 Annual Report on Form 10-K, and in our other reports to the SEC.

33

INTRODUCTION

This overview of Management’s Discussion and Analysis highlights selected information in this report and may not contain all of the information that is important to you.  For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire report and any other reports to 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, 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 first quarter 2023 included:

• Net income of $5.5 million for the three months ended March 31, 2023, up 80.5% from $3.0 million earned for the same period last year. Net income for the three months ended March 31, 2023 includes a pre-tax bargain purchase gain totaling approximately $1.4 million.

• Diluted earnings per share of $0.38 for the three months ended March 31, 2023, up 81.0% from $0.21 for the three months ended March 31, 2022.

• Net interest income of $16.0 million for the three months ended March 31, 2023, up 37.3% from $11.6 million in the same period last year.

• Net interest margin of 3.55% for the three months ended March 31, 2023, up 33.0% from 2.67% for the three months ended March 31, 2022.

• No provision for credit losses for the three months ended March 31, 2023, compared to provision for loan losses of $0.3 million for the three months ended March 31, 2022.

• Total assets of $1.90 billion as of March 31, 2023, up 1.7% from $1.87 billion as of December 31, 2022.

• Total net loans (including loans held-for-sale) of $974.6 million as of March 31, 2023, up 0.5% from $970.1 million as of December 31, 2022.

• Total investment securities of $623.8 million as of March 31, 2023, up 0.9% from $618.1 million as of December 31, 2022.

• Total deposits of $1.75 billion as of March 31, 2023, up 1.4% from $1.73 billion as of December 31, 2022.

• The 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 three months ended March 31, 2023.  On an after-tax basis the bargain purchase gain contributed $1.0 million to net income for the three months ended March 31, 2023.

34

SUMMARY

The Company recorded net income of $5,489,000 for the three months ended March 31, 2023, representing an increase of $2,448,000 from net income of $3,041,000 for the same period in 2022.

The following tables present a summary of the results for the three months ended March 31, 2023 and 2022, and a summary of our financial condition at March 31, 2023 and December 31, 2022:

	Three months ended March 31, 2023			Three months ended March 31, 2022
(in thousands except for per share amounts and ratios)
For the Period:
Net Income	$	5,489		$	3,041
Basic Earnings Per Common Share	$	0.38		$	0.21
Diluted Earnings Per Common Share	$	0.38		$	0.21
Net Income to Average Assets (annualized)		1.15	%		0.66	%
Net Income to Average Equity (annualized)		17.07	%		8.37	%
Average Equity to Average Assets		6.74	%		7.89	%

	March 31, 2023			December 31, 2022
(in thousands except for ratios)
At Period End:
Total Assets	$	1,903,291		$	1,871,361
Total Investment Securities	$	623,795		$	618,092
Total Loans, Net (including loans held-for-sale)	$	974,630		$	970,138
Total Deposits	$	1,751,075		$	1,726,874
Loan-To-Deposit Ratio		55.7	%		56.2	%

35

FIRST NORTHERN COMMUNITY BANCORP

Distribution of Average Statements of Condition and Analysis of Net Interest Income

(in thousands, except percentage amounts)

	Three months ended March 31, 2023							Three months ended March 31, 2022
	Average Balance		Interest		Yield/ Rate (4)			Average Balance		Interest		Yield/ Rate (4)
Assets
Interest-earning assets:
Loans (1)	$	963,015	$	11,377		4.79	%	$	841,910	$	9,657		4.65	%
Certificates of deposit		21,063		175		3.37	%		12,510		57		1.85	%
Interest bearing due from banks		206,490		2,225		4.37	%		272,690		109		0.16	%
Investment securities, taxable		582,370		2,683		1.87	%		598,345		1,728		1.17	%
Investment securities, non-taxable (2)		41,668		273		2.66	%		34,441		178		2.10	%
Other interest earning assets		9,440		178		7.65	%		7,097		118		6.74	%
Total average interest-earning assets		1,824,046		16,911		3.76	%		1,766,993		11,847		2.72	%
Non-interest-earning assets:
Cash and due from banks		45,730							51,517
Premises and equipment, net		6,595							6,479
Interest receivable and other assets		57,333							42,365
Total average assets		1,933,704							1,867,354
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing transaction deposits		457,551		258		0.23	%		432,055		68		0.06	%
Savings and MMDA’s		481,534		525		0.44	%		434,357		110		0.10	%
Time, $250,000 and under		41,774		104		1.01	%		37,964		23		0.25	%
Time, over $250,000		10,907		43		1.60	%		10,746		8		0.30	%
Total average interest-bearing liabilities		991,766		930		0.38	%		915,122		209		0.09	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		794,122							786,064
Interest payable and other liabilities		17,429							18,751
Total liabilities		1,803,317							1,719,937
Total average stockholders’ equity		130,387							147,417
Total average liabilities and stockholders’ equity	$	1,933,704						$	1,867,354
Net interest income and net interest margin (3)			$	15,981		3.55	%			$	11,638		2.67	%

(1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest is excluded.  Loan interest income includes loan fees, net of deferred costs of approximately $(36) and $1,306 for the three months ended March 31, 2023 and 2022, respectively.  Loan fees for the three months ended March 31, 2023 and March 31, 2022 include $0 and $1,367 in PPP loan fees recognized, respectively.

(2) Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis.

(3) Net interest margin is computed by dividing net interest income by total average interest-earning assets.

(4) For disclosure purposes, yield/rates are annualized by dividing the number of days in the reported period by 365.

36

FIRST NORTHERN COMMUNITY BANCORP

Distribution of Average Statements of Condition and Analysis of Net Interest Income

(in thousands, except percentage amounts)

	Three months ended March 31, 2023							Three months ended December 31, 2022
	Average Balance		Interest		Yield/ Rate (4)			Average Balance		Interest		Yield/ Rate (4)
Assets
Interest-earning assets:
Loans (1)	$	963,015	$	11,377		4.79	%	$	970,381	$	11,337		4.64	%
Certificates of deposit		21,063		175		3.37	%		16,201		116		2.84	%
Interest bearing due from banks		206,490		2,225		4.37	%		194,511		1,920		3.92	%
Investment securities, taxable		582,370		2,683		1.87	%		576,993		2,513		1.73	%
Investment securities, non-taxable (2)		41,668		273		2.66	%		40,455		275		2.70	%
Other interest earning assets		9,440		178		7.65	%		9,440		171		7.19	%
Total average interest-earning assets		1,824,046		16,911		3.76	%		1,807,981		16,332		3.58	%
Non-interest-earning assets:
Cash and due from banks		45,730							42,648
Premises and equipment, net		6,595							6,170
Interest receivable and other assets		57,333							61,265
Total average assets		1,933,704							1,918,064
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing transaction deposits		457,551		258		0.23	%		440,726		133		0.12	%
Savings and MMDA’s		481,534		525		0.44	%		467,285		321		0.27	%
Time, $250,000 and under		41,774		104		1.01	%		34,592		29		0.33	%
Time, over $250,000		10,907		43		1.60	%		9,103		12		0.52	%
Total average interest-bearing liabilities		991,766		930		0.38	%		951,706		495		0.21	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		794,122							829,289
Interest payable and other liabilities		17,429							20,391
Total liabilities		1,803,317							1,801,386
Total average stockholders’ equity		130,387							116,678
Total average liabilities and stockholders’ equity	$	1,933,704						$	1,918,064
Net interest income and net interest margin (3)			$	15,981		3.55	%			$	15,837		3.48	%

(1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest is excluded.  Loan interest income includes loan fees, net of deferred costs of approximately $(36) and $(99) for the three months ended March 31, 2023 and December 31, 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.

37

Analysis of Changes

in Interest Income and Interest Expense

(Dollars in thousands)

Following is an analysis of changes in interest income and expense (dollars in thousands) for the three months ended March 31, 2023 over the three months ended March 31, 2022 and the three months ended March 31, 2023 over the three months ended December 31, 2022.  Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume.

	Three Months Ended March 31, 2023 Over Three Months Ended March 31, 2022							Three Months Ended March 31, 2023 Over Three Months Ended December 31, 2022
	Volume			Interest Rate		Change		Volume			Interest Rate			Change
Increase in Interest Income:
Loans	$	1,422		$	298	$	1,720	$	(131	)	$	171		$	40
Certificates of Deposit		53			65		118		36			23			59
Due From Banks		(33	)		2,149		2,116		106			199			305
Investment Securities - Taxable		(49	)		1,004		955		18			152			170
Investment Securities - Non-taxable		42			53		95		4			(6	)		(2	)
Other Assets		43			17		60		—			7			7
	$	1,478		$	3,586	$	5,064	$	33		$	546		$	579
Increase in Interest Expense:
Deposits:
Interest-Bearing Transaction Deposits	$	4		$	186	$	190	$	5		$	120		$	125
Savings & MMDAs		13			402		415		10			194			204
Time Certificates		3			113		116		13			93			106
	$	20		$	701	$	721	$	28		$	407		$	435
Increase in Net Interest Income:	$	1,458		$	2,885	$	4,343	$	5		$	139		$	144

38

CHANGES IN FINANCIAL CONDITION

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $18,693,000 or 10.0% increase in cash and cash equivalents, a $747,000 or 3.6% increase in certificates of deposit, a $5,703,000 or 0.9% increase in investment securities available-for-sale, a $4,077,000 or 0.4% increase in net loans held-for-investment, and a $415,000 or 100.0% increase in loans held-for-sale from December 31, 2022 to March 31, 2023.  The increase in cash and cash equivalents was primarily due to an increase in deposit balances, primarily due to the branch acquisition during the first quarter of 2023. The increases in investment securities and certificates of deposit were due to allocating cash flows towards purchases of investment securities and certificates of deposit. The increase in net loans held-for-investment was primarily due to commercial real estate and residential construction loan originations, which was partially offset by payoffs of commercial and agriculture loans.  The increase in loans held-for-sale was due to the timing of funding and sale of the loans held-for-sale pipeline. Loans held-for-sale as of March 31, 2023 were subsequently sold in April 2023.

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an increase in total deposits of $24,201,000 or 1.4% from December 31, 2022 to March 31, 2023.  The overall increase in total deposits was primarily due to 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 quarter, which was partially offset by seasonal 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 50 basis points to a target range of 4.75% to 5.00% during the three months ended March 31, 2023.

Interest income on loans for the three months ended March 31, 2023 was up 17.8% from the same period in 2022, increasing from $9,657,000 to $11,377,000. The increase in interest income on loans for the three months ended March 31, 2023 as compared to the same period a year ago was primarily due to an increase in average balance of loans and a 14 basis point increase in yield on loans, which was partially offset by a decrease in PPP fee recognition. PPP processing fees received from the SBA for PPP loans originated in 2020 and 2021 were 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 $1.4 million for the three-month periods ended March 31, 2023 and March 31, 2022, respectively.

Interest income on certificates of deposit for the three months ended March 31, 2023 was up 207.0% from the same period in 2022, increasing from $57,000 to $175,000.  The increase was primarily due to a 152 basis point increase in certificates of deposit yields coupled with an increase in average balances of certificates of deposit.

Interest income on interest-bearing due from banks for the three months ended March 31, 2023 was up 1,941.3% from the same period in 2022, increasing from $109,000 to $2,225,000.  The increase was primarily due to a 421 basis point increase in interest-bearing due from yields, which was partially offset by a decrease in average interest-bearing due from banks balance.

Interest income on investment securities available-for-sale for the three months ended March 31, 2023 was up 55.1% from the same period in 2022, increasing from $1,906,000 to $2,956,000. The increase was primarily due to a 70 basis point increase in yields on investment securities.

The Company had no Federal Funds sold balances during the three months ended March 31, 2023 and March 31, 2022.

Interest Expense

Interest expense on deposits for the three months ended March 31, 2023 was up 345.0% from the same period in 2022, increasing from $209,000 to $930,000.  The increase in interest expense was primarily due to a 29 basis point increase in average interest-bearing deposits yield coupled with an increase in average deposits.

39

Provision for Credit Losses

Provision for credit losses totaled $0 and $300,000 for the three months ended March 31, 2023 and March 31, 2022 respectively. The allowance for credit losses was approximately $15,484,000, or 1.56% of total loans, at March 31, 2023, compared to $14,792,000, or 1.50% of total loans, at December 31, 2022.  The Company adopted and implemented CECL on January 1, 2023. Upon adoption of CECL, the Company recognized an increase in the ACL relating to loans totaling $800,000 as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in opening retained earnings of $564,000, net of deferred taxes of $236,000.  During the quarter ended March 31, 2023 the levels of forecasted California unemployment remained relatively stable and forecasted gross domestic product improved slightly from the prior quarter.  Those factors, in conjunction with a stable portfolio level, were the primary reasons that no provision for credit loss was recorded for the quarter ended March 31, 2023.

Provision for Unfunded Lending Commitment Losses

Provision for unfunded lending commitment losses totaled $0 and $50,000 for the three months ended March 31, 2023 and March 31, 2022, respectively. Upon adoption of CECL, the Company recognized an increase in the reserve for unfunded commitments totaling $500,000 as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in opening retained earnings of $352,000, net of deferred taxes of $148,000.

Provisions for unfunded lending commitment losses are included in provision for credit losses in the Condensed Consolidated Statements of Income.

Non-Interest Income

Non-interest income was up 49.8% for the three months ended March 31, 2023 from the same period in 2022, increasing from $1,918,000 to $2,873,000.

The increase was primarily due to a bargain purchase gain, which was partially offset by a decrease in loan servicing income.  The Company recognized a bargain purchase gain totaling approximately $1.4 million during the three months ended March 31, 2023, as a result of the acquisition of the Colusa, Willows, and Orland branches in the first quarter of 2023. The decrease in loan servicing income was primarily due to the prior year reversal of impairment expense on the Company’s mortgage servicing rights asset.

Non-Interest Expenses

Total non-interest expenses were up 24.0% for the three months ended March 31, 2023 from the same period in 2022, increasing from $9,102,000 to $11,284,000.

The increase was primarily due to an increase in salaries and employee benefits, occupancy and equipment, data processing and other non-interest expenses. The increase in salaries and employee benefits was primarily due to increases in full-time equivalent employees, partially due to the branch acquisitions in the first quarter of 2023, and profit sharing expense. The increases in occupancy and equipment and data processing expenses were partially due to the branch acquisitions in the first quarter of 2023. The branch acquisitions also contributed to the increase in other non-interest expenses such as legal expenses, consulting fees and training expenses. Other non-interest expense increases included loan collection expenses and debit card expenses.

40

The following table sets forth other non-interest expenses by category for the three months ended March 31, 2023 and 2022.

	(in thousands)
	Three months ended March 31, 2023		Three months ended March 31, 2022
Other non-interest expenses
FDIC assessments		140		165
Contributions		45		37
Legal fees		193		144
Accounting and audit fees		135		117
Consulting fees		252		77
Postage expense		41		44
Telephone expense		48		36
Public relations		71		51
Training expense		83		26
Loan origination expense		71		32
Computer software depreciation		9		14
Operational losses		58		54
Loan collection expense		141		95
Debit card expense		291		230
Other non-interest expense		402		362
Total other non-interest expenses	$	1,980	$	1,484

Income Taxes

The Company’s tax rate, the Company’s income before taxes and the amount of tax relief provided by non-taxable earnings affect the Company’s provision for income taxes.  Provision for income taxes increased 87.0% for the three months ended March 31, 2023 from the same period in 2022, increasing from $1,113,000 to $2,081,000 primarily due to an increase in pre-tax income.  The effective tax rate was 27.5% and 26.8% for the three months ended March 31, 2023 and March 31, 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)
	March 31, 2023		December 31, 2022
Undisbursed loan commitments	$	211,880	$	205,610
Standby letters of credit		1,023		1,930
Commitments to sell loans		415		—
	$	213,318	$	207,540

The reserve for unfunded lending commitments amounted to $1,200,000 and $700,000 as of March 31, 2023 and December 31, 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 Instruments with Off-Balance Sheet Risk," for additional information.

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Asset Quality

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix.  The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times.   Asset quality reviews of loans and other non-performing assets are administered using credit risk-rating standards and criteria similar to those employed by state and federal banking regulatory agencies.  The Federal bank regulatory agencies utilize the following definitions for assets adversely classified for supervisory purposes:

• Substandard Assets – A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

• Doubtful Assets – An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable.

Other Real Estate Owned and loans rated Substandard and Doubtful are deemed "classified assets".  This category, which includes both performing and non-performing assets, receives an elevated level of attention regarding collection.

The following tables summarize the Company’s non-accrual loans net of guarantees of the State of California and U.S. Government by loan category at March 31, 2023 and December 31, 2022:

	At March 31, 2023						At December 31, 2022
	Gross		Guaranteed		Net		Gross		Guaranteed		Net
(dollars in thousands)
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		—		—		—
Agriculture		7,416		—		7,416		7,416		—		7,416
Residential mortgage		119		—		119		123		—		123
Residential construction		—		—		—		—		—		—
Consumer		620		—		620		637		—		637
Total non-accrual loans	$	8,155	$	—	$	8,155	$	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 $8,155,000 at March 31, 2023 and were comprised of three agriculture loans totaling $7,416,000, one residential mortgage loan totaling $119,000 and four consumer loans totaling $620,000.  Non-accrual loans amounted to $8,176,000 at December 31, 2022 and were comprised of three agriculture loans totaling $7,416,000, one residential mortgage loan totaling $123,000 and four consumer loans totaling $637,000.

A loan is considered to be collateral dependent when 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 that if the value of the underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken.

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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 $21,000 or 0.2% to $8,558,000 during the first three months of 2023.  Non-performing assets, net of guarantees, represented 0.4% of total assets at March 31, 2023.

	At March 31, 2023							At December 31, 2022
	Gross		Guaranteed		Net			Gross		Guaranteed		Net
(dollars in thousands)
Non-accrual loans	$	8,155	$	—	$	8,155		$	8,176	$	—	$	8,176
Loans 90 days past due and still accruing		403		—		403			403		—		403
Total non-performing loans		8,558		—		8,558			8,579		—		8,579
Other real estate owned		—		—		—			—		—		—
Total non-performing assets		8,558		—		8,558			8,579		—		8,579
Non-performing loans (net of guarantees) to total loans						0.9	%						0.9	%
Non-performing assets (net of guarantees) to total assets						0.4	%						0.5	%
Allowance for loan and lease losses to non-performing loans (net of guarantees)						180.9	%						172.4	%

The Company had one loan totaling $403,000 that was 90 days or more past due and still accruing interest at each of the periods ended March 31, 2023 and December 31, 2022.

Excluding the non-performing loans cited previously, loans totaling $12,871,000 and $6,490,000 were classified as substandard loans, representing potential problem loans at March 31, 2023 and December 31, 2022, respectively.  Management believes that the allowance for credit losses at March 31, 2023 and December 31, 2022 appropriately reflected expected credit losses inherent in the loan portfolio at that date.  The ratio of the allowance for credit losses to total loans at March 31, 2023 and December 31, 2022 was 1.56% and 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 March 31, 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 March 31, 2023 and December 31, 2022.

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Allowance for Credit Losses (ACL)

The Company's ACL is maintained at a level believed by management to appropriately reflect expected credit losses inherent in the loan portfolio.  The ACL 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 and utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period.  The ACL is based on estimates, and actual losses may vary from current estimates.

The following table summarizes the ACL of the Company during the three months ended March 31, 2023 and 2022, and for the year ended December 31, 2022:

Analysis of the Allowance for Credit Losses

(Amounts in thousands, except percentage amounts)

	Three months ended March 31,						Year ended December 31,
	2023			2022			2022
Balance at beginning of period	$	14,792		$	13,952		$	13,952
Impact of adopting ASC 326		800			—			—
Provision for loan losses		—			300			900
Loans charged-off:
Commercial		(127	)		—			(297	)
Commercial Real Estate		—			—			—
Agriculture		—			—			—
Residential Mortgage		(3	)		—			—
Residential Construction		—			—			—
Consumer		(1	)		(4	)		(48	)
Total charged-off		(131	)		(4	)		(345	)
Recoveries:
Commercial		23			7			275
Commercial Real Estate		—			—			—
Agriculture		—			—			—
Residential Mortgage		—			—			—
Residential Construction		—			—			—
Consumer		—			3			10
Total recoveries		23			10			285
Net (charge-offs) recoveries		(108	)		6			(60	)
Balance at end of period	$	15,484		$	14,258		$	14,792
Ratio of net charge-offs to average loans outstanding during the period (annualized)		(0.04	%)		0.00	%		(0.01	%)
Allowance for credit losses to total loans		1.56	%		1.60	%		1.50	%
Nonaccrual loans to Total Loans		0.8	%		1.0	%		0.8	%
Allowance for credit losses to nonaccrual loans		189.9	%		153.6	%		180.9	%

The Company adopted and implemented CECL on January 1, 2023. The information for the three months ended March 31, 2023 in the table above is based on the expected credit loss methodology. The information for the three months ended March 31, 2022 and year ended December 31, 2022 in the table above is based on the incurred loss methodology.

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Deposits

Deposits are one of the Company’s primary sources of funds.  At March 31, 2023 and December 31, 2022, the Company had the following deposit mix:

	March 31, 2023			December 31, 2022
Savings and MMDA		27.0	%		26.6	%
Time		3.4	%		2.6	%
Interest-bearing transaction		25.3	%		25.9	%
Non-interest bearing transaction		44.3	%		44.9	%

The Company obtains deposits primarily from the communities it serves.  The Company believes that no material portion of its deposits has been obtained from or is dependent on any one person or industry.  The Company accepts deposits in excess of $250,000 from customers.  These deposits are priced to remain competitive.

Maturities of time certificates of deposits of over $250,000 or more outstanding at March 31, 2023 and December 31, 2022 are summarized as follows:

	(in thousands)
	March 31, 2023		December 31, 2022
Three months or less	$	1,533	$	1,211
Over three months through six months		5,090		1,012
Over six months to twelve months		2,517		3,769
Over twelve months		3,284		3,248
Total	$	12,424	$	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 three months ended March 31, 2023 net liquidity provided by investing activities totaled $1,978,000.

The Company’s available-for-sale investment securities plus cash and cash equivalents in excess of reserve requirements and certificates of deposit totaled $851,600,000 on March 31, 2023, which was 44.7% of assets at that time. This was an increase of $25,143,000 from $826,457,000 and 44.2% 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 March 31, 2023, the effective duration of our investment securities was 3.21 with projected principal cashflow of $108,220,000 for the remainder of 2023 available for reinvestment or liquidity needs. The Company had no held-to-maturity securities as of March 31, 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 March 31, 2023 the Company had $0 in borrowings outstanding. For the three months ended March 31, 2023 net liquidity provided by financing activities totaled $11,679,000. 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 three months ended March 31, 2023 operating activities provided cash of $5,036,000, primarily from net income of $5,489,000.

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 55.7% on March 31, 2023.

45

Loan demand during 2023 will depend in part on economic and competitive conditions. The Company emphasizes the solicitation of non-interest-bearing demand deposits and money market checking accounts, which are the least sensitive to interest rates. The outlook for deposit balances during 2023 is subject to actions from the Federal Reserve and 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 March 31, 2023.  Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity at March 31, 2023 of $374,480,000; 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 1-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 March 31, 2023, the Company had $626,863,000 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.

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 was not required to comply with the FRB’s regulatory capital requirements until such time that its consolidated total assets equal $3 billion or more or if the FRB determines that the Company is no longer deemed to be a small bank holding company. However, if the Company had been subject to these regulatory capital requirements, it would have exceeded all regulatory requirements.

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.

46

As of March 31, 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 March 31, 2023.

	(amounts in thousands except percentage amounts)
	Actual					Well Capitalized Ratio Requirement
	Capital		Ratio
Leverage	$	170,336		8.64	%		5.0	%
Common Equity Tier 1	$	184,969		14.58	%		6.5	%
Tier 1 Risk-Based	$	184,969		14.58	%		8.0	%
Total Risk-Based	$	184,969		15.83	%		10.0	%

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ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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 March 31, 2023.  This conclusion is based on an evaluation conducted under the supervision and with the participation of management.

(b)  During the quarter ended March 31, 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 2022 Form 10-K, which is incorporated by reference herein.

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 recent high-profile bank failures of Silicon Valley Bank, Signature Bank and First Republic Bank, and related negative media attention, have generated significant market trading volatility among publicly-traded bank holding companies and, in particular, regional and community banks, such as the Company. These developments have negatively impacted customer confidence in the safety and soundness of regional and community banks, which could prompt customers to choose to maintain their deposits with larger financial institutions or invest in higher yielding short-term fixed income securities, all of which could materially adversely impact our liquidity, cost of funding, loan funding capacity, net interest margin, capital and results of operations. While the Department of the Treasury, the Federal Reserve, and the FDIC have made statements assuring that depositors of recently-failed banks would have access to their deposits, including uninsured deposit accounts, there is no guarantee that such actions will be successful in restoring customer confidence in regional and community banks and the banking system more broadly. 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.

48

Congress and the federal banking agencies have begun to evaluate the events leading to these recent bank failures to ascertain possible explanations for these developments, which may lead to additional legislation, agency rulemaking and/or enhanced regulatory supervision and examination policies and priorities, including the potential for 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 payroll processing accounts.

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

Issuer Purchases of Equity Securities

The Company made the following purchases of its common stock during the three months ended March 31, 2023:

	(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(1)
January 1 - January 31, 2023		—		—		—		20,054
February 1 - February 28, 2023		—		—		—		20,054
March 1 - March 31, 2023		3,580	$	7.55		3,580		16,474
Total		3,580				3,580

(1) On May 20, 2021, the Company approved a new stock repurchase program effective June 15, 2021.  The new stock repurchase program, which will remain in effect until June 14, 2023, allows repurchases by the Company in an aggregate amount of up to 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 21,325 and 505,824 shares of the Company's outstanding common stock during the years ended December 31, 2022 and 2021, respectively.

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
31.1	Rule 13a — 14(a) Certification of Chief Executive Officer
31.2	Rule 13a — 14(a) Certification of Chief Financial Officer
32.1*	Statement of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
32.2*	Statement of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
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).

*   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.

50

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:	May 11, 2023	By:	/s/ Kevin Spink
			Kevin Spink, Executive Vice President / Chief Financial Officer
			(Principal Financial Officer and Duly Authorized Officer)

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