First Northern Community Bancorp (FNRN) 10-Q 2023 Q3 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 September 30, 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 November 6, 2023 was 14,730,761.

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 Statements 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	37
ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	55
ITEM 4. – CONTROLS AND PROCEDURES	55
PART II – OTHER INFORMATION	55
ITEM 1. – LEGAL PROCEEDINGS	55
ITEM 1A. – RISK FACTORS	55
ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	58
ITEM 3. – DEFAULTS UPON SENIOR SECURITIES	58
ITEM 4. – MINE SAFETY DISCLOSURES	58
ITEM 5. – OTHER INFORMATION	58
ITEM 6. – EXHIBITS	58
SIGNATURES	59

2

PART I – FINANCIAL INFORMATION

FIRST NORTHERN COMMUNITY BANCORP

ITEM I.    – FINANCIAL STATEMENTS (UNAUDITED)

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except share amounts)	September 30, 2023			December 31, 2022
Assets
Cash and cash equivalents	$	197,105		$	187,417
Certificates of deposit		20,696			20,948
Investment securities – available-for-sale, at estimated fair value, net of allowance for credit losses of $0; amortized cost of $636,903 at September 30, 2023 and $683,784 at December 31, 2022		567,409			618,092
Loans, net of allowance for credit losses of $16,149 at September 30, 2023 and $14,792 at December 31, 2022		1,037,066			970,138
Loans held-for-sale		369			—
Stock in Federal Home Loan Bank and other equity securities, at cost		10,518			9,440
Premises and equipment, net		10,058			6,122
Core deposit intangible		4,367			—
Interest receivable and other assets		54,740			59,204
Total Assets	$	1,902,328		$	1,871,361
Liabilities and Stockholders’ Equity
Liabilities:
Demand deposits	$	770,620		$	775,173
Interest-bearing transaction deposits		405,980			448,039
Savings and MMDA’s		444,646			459,307
Time, $250,000 or less		106,241			35,115
Time, over $250,000		18,857			9,240
Total deposits		1,746,344			1,726,874
Interest payable and other liabilities		19,498			19,447
Total Liabilities		1,765,842			1,746,321
Commitments and contingencies (Note 7)
Stockholders’ Equity:
Common stock, no par value; 32,000,000 shares authorized at September 30, 2023, 16,000,000 shares authorized at December 31, 2022; 14,732,351 shares issued and outstanding at September 30, 2023 and 14,652,584 shares issued and outstanding at December 31, 2022		116,768			116,099
Additional paid-in capital		977			977
Retained earnings		67,945			54,492
Accumulated other comprehensive loss, net		(49,204	)		(46,528	)
Total Stockholders’ Equity		136,486			125,040
Total Liabilities and Stockholders’ Equity	$	1,902,328		$	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 September 30, 2023		Three months ended September 30, 2022		Nine months ended September 30, 2023			Nine months ended September 30, 2022
Interest and dividend income:
Loans	$	13,098	$	10,857	$	38,197		$	30,979
Due from banks interest bearing accounts		2,064		1,118		6,967			1,793
Investment securities
Taxable		2,685		2,122		8,041			5,783
Non-taxable		199		250		692			634
Other earning assets		214		137		557			361
Total interest and dividend income		18,260		14,484		54,454			39,550
Interest expense:
Deposits		2,386		271		4,817			691
Total interest expense		2,386		271		4,817			691
Net interest income		15,874		14,213		49,637			38,859
Provision for credit losses		500		300		3,100			900
Net interest income after provision for credit losses		15,374		13,913		46,537			37,959
Non-interest income:
Service charges on deposit accounts		436		414		1,259			1,308
Gains on sales of loans held-for-sale		62		27		93			145
Investment and brokerage services income		136		137		387			443
Mortgage brokerage income		11		10		21			21
Loan servicing income		79		78		209			569
Debit card income		713		635		2,094			1,915
Losses on sales/calls of available-for-sale securities		—		—		(64	)		(152	)
Gain on bargain purchase		—		—		1,405			—
Other income		339		769		751			1,231
Total non-interest income		1,776		2,070		6,155			5,480
Non-interest expenses:
Salaries and employee benefits		6,377		6,164		19,653			17,578
Occupancy and equipment		1,064		896		3,138			2,645
Data processing		933		912		2,949			2,587
Stationery and supplies		103		75		272			203
Advertising		111		99		322			276
Directors’ fees		83		60		234			196
Amortization of core deposit intangible		226		—		603			—
Other expense		1,986		1,703		5,363			4,854
Total non-interest expenses		10,883		9,909		32,534			28,339
Income before provision for income taxes		6,267		6,074		20,158			15,100
Provision for income taxes		1,648		1,506		5,486			3,945
Net income	$	4,619	$	4,568	$	14,672		$	11,155
Basic earnings per common share	$	0.32	$	0.32	$	1.01		$	0.77
Diluted earnings per common share	$	0.32	$	0.31	$	1.01		$	0.77

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

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			Loss, net of tax			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 taxes													(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		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
Net income										3,546						3,546
Other comprehensive loss, net of taxes													(10,641	)		(10,641	)
Stock-based compensation					168											168
Common shares issued related to restricted stock grants		1,500			—											—
Stock repurchase and retirement		(7,280	)		(69	)										(69	)
Balance at June 30, 2022		13,924,049		$	110,407		$	977	$	50,551		$	(34,801	)	$	127,134
Net income										4,568						4,568
Other comprehensive loss, net of taxes													(18,492	)		(18,492	)
Stock-based compensation					168											168
Stock repurchase and retirement		(2,000	)		(18	)										(18	)
Balance at September 30, 2022		13,922,049		$	110,557		$	977	$	55,119		$	(53,293	)	$	113,360
Balance at December 31, 2022		14,652,584		$	116,099		$	977	$	54,492		$	(46,528	)	$	125,040
Cumulative change from adoption of ASU 2016-13 on January 1, 2023										(916	)					(916	)
Balance at January 1, 2023 (as adjusted for adoption of accounting standard)		14,652,584			116,099			977		53,576			(46,528	)		124,124
Net income										5,489						5,489
Other comprehensive income, net of taxes													6,013			6,013
Stock dividend adjustment		3,525			296					(296	)					—
Cash in lieu of fractional shares		(164	)							(7	)					(7	)
Stock-based compensation					192											192
Common shares issued related to restricted stock grants		72,242			—											—
Stock options exercised, net of swapped shares		11,000			—											—
Stock repurchase and retirement		(3,580	)		(26	)										(26	)
Balance at March 31, 2023		14,735,607		$	116,561		$	977	$	58,762		$	(40,515	)	$	135,785
Net income										4,564						4,564
Other comprehensive loss, net of taxes													(3,690	)		(3,690	)
Stock-based compensation					188											188
Common shares issued related to restricted stock grants		1,500														—
Stock repurchase and retirement		(16,474	)		(117	)										(117	)
Balance at June 30, 2023		14,720,633		$	116,632		$	977	$	63,326		$	(44,205	)	$	136,730
Net income										4,619						4,619
Other comprehensive loss, net of taxes													(4,999	)		(4,999	)
Stock-based compensation					136											136
Restricted stock cancelled, net of common shares issued related to restricted stock grants		(10,209	)													—
Stock options exercised, net		21,927			—											—
Balance at September 30, 2023		14,732,351		$	116,768		$	977	$	67,945		$	(49,204	)	$	136,486

See notes to unaudited condensed consolidated financial statements.

6

FIRST NORTHERN COMMUNITY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

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

See notes to unaudited condensed consolidated financial statements.

7

FIRST NORTHERN COMMUNITY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2023 and 2022 and December 31, 2022

1. BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of First Northern Community Bancorp (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. 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 (“SEC”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. All material intercompany balances and transactions have been eliminated in consolidation.

2. ACCOUNTING POLICIES

The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 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. Accrued interest receivable on available-for-sale debt securities totaled $1,991,000 and $2,151,000 as of September 30, 2023 and December 31, 2022, respectively, and is included in interest receivable and other assets on the Condensed Consolidated Balance Sheet.

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. Accrued interest receivable on loans totaled $5,194,000 and $3,594,000 as of September 30, 2023 and December 31, 2022, respectively, and is included in interest receivable and other assets on the Condensed Consolidated Balance Sheet.

Business Combinations

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

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

10

Upon adoption of ASU 2016-13, the Company made the accounting policy election to not measure an estimate of credit losses on accrued interest receivable as the Company writes off any uncollectible accrued interest receivable in a timely manner.

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

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

Recently Issued Accounting Pronouncements

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

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

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3.  INVESTMENT SECURITIES

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

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

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

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

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

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

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

12

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

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

(in thousands)	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses
U.S. Treasury securities	$	10,775	$	(53	)	$	83,726	$	(4,534	)	$	94,501	$	(4,587	)
Securities of U.S. government agencies and corporations		17,526		(183	)		97,438		(8,675	)		114,964	��	(8,858	)
Obligations of states and political subdivisions		9,900		(430	)		34,011		(6,473	)		43,911		(6,903	)
Collateralized mortgage obligations		11,689		(244	)		77,729		(20,536	)		89,418		(20,780	)
Mortgage-backed securities		31,322		(1,081	)		185,973		(27,289	)		217,295		(28,370	)
Total	$	81,212	$	(1,991	)	$	478,877	$	(67,507	)	$	560,089	$	(69,498	)

Sixty-eight securities, all considered investment grade, which had an aggregate fair value of $81,212,000 and a total unrealized loss of $1,991,000, have been in an unrealized loss position for less than twelve months as of September 30, 2023. Four hundred and ninety-six securities, all considered investment grade, which had an aggregate fair value of $478,877,000 and a total unrealized loss of $67,507,000, have been in an unrealized loss position for more than twelve months as of September 30, 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 September 30, 2023, the Company has not recorded an allowance for credit losses on these securities and the unrecognized or unrealized losses on these securities have not been recognized into income.

The fair value of investment securities could decline in the future if the general economy deteriorates, inflation and interest rate increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for securities declines. As a result, an allowance for credit loss 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:

(in thousands)	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses
U.S. Treasury Securities	$	54,574	$	(1,680	)	$	56,872	$	(4,162	)	$	111,446	$	(5,842	)
Securities of U.S. government agencies and corporations		45,261		(1,341	)		69,635		(8,465	)		114,896		(9,806	)
Obligations of states and political subdivisions		40,479		(3,022	)		10,049		(2,620	)		50,528		(5,642	)
Collateralized Mortgage obligations		36,040		(2,586	)		59,310		(17,047	)		95,350		(19,633	)
Mortgage-backed securities		99,250		(6,131	)		131,951		(18,740	)		231,201		(24,871	)
Total	$	275,604	$	(14,760	)	$	327,817	$	(51,034	)	$	603,421	$	(65,794	)

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

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4.  LOANS AND ALLOWANCE FOR CREDIT LOSSES

The composition of the Company’s loan portfolio, by loan class, as of September 30, 2023 and December 31, 2022 was as follows:

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

At September 30, 2023 and December 31, 2022, all loans were pledged under a blanket collateral lien to secure actual or potential borrowings from the Federal Home Loan Bank (“FHLB”).

Allowance for Credit Losses

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

	Allowance for credit losses – Three months ended September 30, 2023
($ in thousands)	Beginning balance		Charge-offs			Recoveries		Provision (recovery)			Ending Balance
Commercial	$	1,775	$	(91	)	$	20	$	32		$	1,736
Commercial Real Estate		10,050		—			—		526			10,576
Agriculture		939		—			—		80			1,019
Residential Mortgage		1,824		—			—		79			1,903
Residential Construction		487		—			—		(155	)		332
Consumer		367		(9	)		—		4			362
Unallocated		137		—			—		84			221
Allowance for credit losses on loans		15,579		(100	)		20		650			16,149
Reserve for unfunded commitments		1,200		—			—		(150	)		1,050
Total	$	16,779	$	(100	)	$	20	$	500		$	17,199

	Allowance for credit losses – Nine months ended September 30, 2023
($ in thousands)	Beginning balance		Adoption of CECL			Charge-offs			Recoveries		Provision (recovery)			Ending Balance
Commercial	$	1,463	$	623		$	(269	)	$	155	$	(236	)	$	1,736
Commercial Real Estate		10,073		(464	)		—			—		967			10,576
Agriculture		1,757		(671	)		(2,567	)		—		2,500			1,019
Residential Mortgage		880		834			(3	)		—		192			1,903
Residential Construction		178		200			—			—		(46	)		332
Consumer		173		201			(10	)		1		(3	)		362
Unallocated		268		77			—			—		(124	)		221
Allowance for credit losses on loans		14,792		800			(2,849	)		156		3,250			16,149
Reserve for unfunded commitments		700		500			—			—		(150	)		1,050
Total	$	15,492	$	1,300		$	(2,849	)	$	156	$	3,100		$	17,199

14

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

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

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

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

15

Collateral-Dependent Loans

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

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

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

Foreclosure Proceedings

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

16

Non-accrual and Past Due Loans

The Company’s loans by delinquency and non-accrual status, as of September 30, 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
September 30, 2023
Commercial	$	7	$	47	$	—	$	—	$	54	$	93,699	$	93,753	$	—
Commercial Real Estate		1,910		1,956		—		—		3,866		714,981		718,847		—
Agriculture		—		—		—		5,020		5,020		104,922		109,942		5,020
Residential Mortgage		636		—		—		400		1,036		100,719		101,755		400
Residential Construction		3,420		—		—		—		3,420		10,601		14,021		—
Consumer		45		—		—		699		744		14,082		14,826		699
Total	$	6,018	$	2,003	$	—	$	6,119	$	14,140	$	1,039,004	$	1,053,144	$	6,119
December 31, 2022
Commercial	$	41	$	—	$	403	$	—	$	444	$	106,327	$	106,771	$	—
Commercial Real Estate		—		—		—		—		—		645,166		645,166		—
Agriculture		—		—		—		7,416		7,416		106,624		114,040		7,416
Residential Mortgage		—		—		—		123		123		92,546		92,669		123
Residential Construction		—		—		—		—		—		10,167		10,167		—
Consumer		—		—		—		637		637		14,650		15,287		637
Total	$	41	$	—	$	403	$	8,176	$	8,620	$	975,480	$	984,100	$	8,176

The Company recognized $4,000 and $19,000 of interest income on nonaccrual loans during the three months ended September 30, 2023 and September 30, 2022, respectively. The Company recognized $1,289,000 and $46,000 of interest income on nonaccrual loans during the nine months ended September 30, 2023 and September 30, 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 TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan.

Occasionally, the Company modifies loans to borrowers in financial difficulty by providing principal forgiveness, term extension, payment delays or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL.

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

17

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

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

($ in thousands)	Term Extension		Combination Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
Commercial	$	—	$	—		—
Commercial Real Estate		—		—		—
Agriculture		—		—		—
Residential Mortgage		—		—		—
Residential Construction		3,420		—		24.39	%
Consumer		—		—		—
Total	$	3,420	$	—		24.39	%

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

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

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

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

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

18

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

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

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

Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently become 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 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.

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

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

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

There were no loans modified as a TDR within the previous twelve months that subsequently defaulted during the three and nine month periods ended September 30, 2022.

19

Credit Quality Indicators

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

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

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of September 30, 2023
	2023			2022			2021			2020		2019			Prior		Revolving Loans Amortized Cost Basis			Total
Commercial
Pass	$	7,398		$	18,546		$	22,473		$	5,829	$	7,999		$	6,764	$	20,995		$	90,004
Special Mention		—			—			—			258		326			—		945			1,529
Substandard		44			—			1,576			553		—			—		47			2,220
Doubtful/Loss		—			—			—			—		—			—		—			—
Total Commercial loans	$	7,442		$	18,546		$	24,049		$	6,640	$	8,325		$	6,764	$	21,987		$	93,753
Year-to-date Period Charge-offs		—			(146	)		(36	)		—		(87	)		—		—			(269	)
Year-to-date Recoveries		—			—			—			—		87			68		—			155
Year-to-date Net Charge-offs		—			(146	)		(36	)		—		—			68		—			(114	)
Commercial Real Estate
Pass	$	98,815		$	171,601		$	197,873		$	50,758	$	52,652		$	121,005	$	6,953		$	699,657
Special Mention		—			—			2,219			846		2,898			1,291		—			7,254
Substandard		398			—			1,728			2,117		6,671			1,022		—			11,936
Doubtful/Loss		—			—			—			—		—			—		—			—
Total Commercial Real Estate loans	$	99,213		$	171,601		$	201,820		$	53,721	$	62,221		$	123,318	$	6,953		$	718,847
Year-to-date Charge-offs		—			—			—			—		—			—		—			—
Year-to-date Recoveries		—			—			—			—		—			—		—			—
Year-to-date Net Charge-offs		—			—			—			—		—			—		—			—
Agriculture
Pass	$	6,836		$	21,080		$	23,854		$	8,868	$	4,459			11,712	$	27,050		$	103,859
Special Mention		—			—			—			—		—			1,064		—			1,064
Substandard		—			—			1,525			—		—			—		3,494			5,019
Doubtful/Loss		—			—			—			—		—			—		—			—
Total Agriculture loans	$	6,836		$	21,080		$	25,379		$	8,868	$	4,459		$	12,776	$	30,544		$	109,942
Year-to-date Charge-offs		(1,825	)		—			—			—		—			—		(742	)		(2,567	)
Year-to-date Recoveries		—			—			—			—		—			—		—			—
Year-to-date Net Charge-offs		(1,825	)		—			—			—		—			—		(742	)		(2,567	)

20

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of September 30, 2023
	2023			2022			2021			2020		2019			Prior			Revolving Loans Amortized Cost Basis			Total
Residential Mortgage
Pass	$	14,581		$	23,310		$	26,725		$	15,053	$	6,073		$	15,574		$	—		$	101,316
Special Mention		—			—			—			—		—			—			—			—
Substandard		—			—			39			—		—			400			—			439
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Residential Mortgage loans	$	14,581		$	23,310		$	26,764		$	15,053	$	6,073		$	15,974		$	—		$	101,755
Year-to-date Charge-offs		—			—			—			—		—			(3	)		—			(3	)
Year-to-date Recoveries		—			—			—			—		—			—			—			—
Year-to-date Net Charge-offs		—			—			—			—		—			(3	)		—			(3	)
Residential Construction
Pass	$	3,086		$	4,521		$	2,994		$	—	$	—		$	—		$	—		$	10,601
Special Mention		—			—			—			—		—			—			—			—
Substandard		—			3,420			—			—		—			—			—			3,420
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Residential Construction loans	$	3,086		$	7,941		$	2,994		$	—	$	—		$	—		$	—		$	14,021
Year-to-date Charge-offs		—			—			—			—		—			—			—			—
Year-to-date Recoveries		—			—			—			—		—			—			—			—
Year-to-date Net Charge-offs		—			—			—			—		—			—			—			—
Consumer
Pass	$	357		$	801		$	138		$	172	$	64		$	433		$	12,162		$	14,127
Special Mention		—			—			—			—		—			—			—			—
Substandard		—			—			—			—		—			—			699			699
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Consumer loans	$	357		$	801		$	138		$	172	$	64		$	433		$	12,861		$	14,826
Year-to-date Charge-offs		(10	)		—			—			—		—			—			—			(10	)
Year-to-date Recoveries		—			—			—			—		—			1			—			1
Year-to-date Net Charge-offs		(10	)		—			—			—		—			1			—			(9	)
Total Loans
Pass	$	131,073		$	239,859		$	274,057		$	80,680	$	71,247		$	155,488		$	67,160		$	1,019,564
Special Mention		—			—			2,219			1,104		3,224			2,355			945			9,847
Substandard		442			3,420			4,868			2,670		6,671			1,422			4,240			23,733
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Loans	$	131,515		$	243,279		$	281,144		$	84,454	$	81,142		$	159,265		$	72,345		$	1,053,144
Year-to-date Charge-offs	$	(1,835	)	$	(146	)	$	(36	)	$	—	$	(87	)	$	(3	)	$	(742	)	$	(2,849	)
Year-to-date Recoveries	$	—		$	—		$	—		$	—	$	87		$	69		$	—		$	156
Year-to-date Net Charge-offs	$	(1,835	)	$	(146	)	$	(36	)	$	—	$	—		$	66		$	(742	)	$	(2,693	)

21

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

22

5.  MORTGAGE OPERATIONS

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

The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The Company sold a substantial portion of its portfolio of conforming long-term residential mortgage loans originated during the nine months ended September 30, 2023 for cash proceeds equal to the fair value of the loans.  The Company serviced real estate mortgage loans for others totaling $186,373,000 and $194,818,000 at September 30, 2023 and December 31, 2022, respectively.

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

Key assumptions used in measuring the fair value of mortgage servicing rights as of September 30, 2023 and December 31, 2022 were as follows:

	September 30, 2023			December 31, 2022
Constant prepayment rate		7.58	%		7.55	%
Discount rate		9.50	%		9.50	%
Weighted average life (years)		7.10			7.20

The following table summarizes the Company’s mortgage servicing rights assets as of September 30, 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			September 30, 2023
Mortgage servicing rights	$	1,650	$	35	$	(182	)	$	1,503
Valuation allowance		—		—		—			—
Mortgage servicing rights, net of valuation allowance	$	1,650	$	35	$	(182	)	$	1,503

At September 30, 2023 and December 31, 2022, the estimated fair market value of the Company’s mortgage servicing rights assets was $2,031,000 and $2,101,000, respectively. The change in fair value of mortgage servicing rights during 2023 was primarily due to a decrease in the amount of mortgage loans serviced coupled with changes in prepayment speeds and weighted average life.

The Company received contractually specified servicing fees of $117,000 and $126,000 for the three months ended September 30, 2023 and September 30, 2022, respectively.  The Company received contractually specified servicing fees of $357,000 and $385,000 for the nine months ended September 30, 2023 and September 30, 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.

23

6.  FAIR VALUE MEASUREMENTS

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

Assets Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022.

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

	(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	$	—

24

Assets Recorded at Fair Value on a Non-Recurring Basis

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

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

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

There were no liabilities measured at fair value on a recurring or non-recurring basis at September 30, 2023 and December 31, 2022.

Key methods and assumptions used in measuring the fair value of collateral dependent loans as of September 30, 2023 were as follows:

	Method	Assumption Inputs
Individually evaluated loans	Collateral, market, income, enterprise, liquidation, and discounted cash flows	External appraised values, management assumptions regarding market trends or other relevant factors, selling costs of 8% (generally ranging from 6% to 10%), or the amount and timing of cash flows based on the loan’s effective interest rate.

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

Investment Securities Available-for-Sale

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

Individually Evaluated Loans

The Company does not record loans at fair value on a recurring basis.  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.  Collateral dependent loans where a charge-off is recorded based on the fair value of collateral require classification in the fair value hierarchy.  When a loan is evaluated based on the fair value of the underlying collateral securing the loan, the Company records the collateral dependent loan as non-recurring Level 3 given the valuation includes significant unobservable assumptions.

25

Disclosures about Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments for the periods ended September 30, 2023 and December 31, 2022 were approximately as follows:

(in thousands)			September 30, 2023					December 31, 2022
	Level		Carrying amount		��	Fair value		Carrying amount		Fair value
Financial assets:
Cash and cash equivalents		1	$	197,105		$	197,105	$	187,417	$	187,417
Certificates of deposit		2		20,696			20,311		20,948		20,560
Stock in Federal Home Loan Bank and other equity securities		3		10,518			10,518		9,440		9,440
Loans receivable:
Net loans		3		1,037,066			933,513		970,138		929,163
Loans held-for-sale		2		369			371		—		—
Interest receivable		2		7,185			7,185		5,745		5,745
Mortgage servicing rights		3		1,503			2,031		1,650		2,101
Financial liabilities:
Time deposits		3		125,098			124,671		44,355		43,987
Interest payable		2		1,211			1,211		93		93

Limitations

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

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

26

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. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

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

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

(in thousands)	September 30, 2023		December 31, 2022
Undisbursed loan commitments	$	197,710	$	205,610
Standby letters of credit		1,251		1,930
Commitments to sell loans		765		—
	$	199,726	$	207,540

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

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Bank issues both financial and performance standby letters of credit.  The financial standby letters of credit are primarily to guarantee payment to third parties.  At September 30, 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 $1,251,000 and $1,930,000 at September 30, 2023 and December 31, 2022, respectively.  The Bank had experienced no draws on outstanding letters of credit, resulting in no related liability included on its balance sheet; however, should a triggering event occur, the Bank either has collateral in excess of the letter of credit or imbedded agreements of recourse from the customer.  The Bank has set aside a reserve for unfunded commitments in the amount of $1,050,000 and $700,000 at September 30, 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 September 30, 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. Interest rate lock commitments totaled $310,000 and $0 at September 30, 2023 and December 31, 2022, respectively. These commitments expose the Company to the risk that the price of the loan underlying the interest rate lock commitment might decline from the inception of the interest rate lock commitment to the funding of the mortgage loan. To protect against this risk, the Company may enter into commitments to sell loans at specified prices to economically hedge the risk of potential changes in the value of the loans that would result from the commitment. These commitments totaled $765,000 and $0 at September 30, 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.

27

8.  STOCK PLANS

On January 26, 2023, the Board of Directors of the Company declared a 5% stock dividend payable as of March 24, 2023 to shareholders of record as of February 28, 2023. All stock options and restricted stock amounts outstanding have been adjusted to give retroactive effect to stock dividends.

The following table presents the activity related to stock options for the three months ended September 30, 2023.

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

The following table presents the activity related to stock options for the nine months ended September 30, 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		(72,644	)		4.97
Options outstanding at End of Period		612,193		$	8.82	$	523,161		4.95
Exercisable (vested) at End of Period		526,829		$	8.67	$	523,161		4.58

The intrinsic value of options exercised was $305,000 and $125,000 during the nine months ended September 30, 2023 and September 30, 2022, respectively. The fair value of awards vested was $123,000 and $142,000 during the nine months ended September 30, 2023 and September 30, 2022, respectively.

As of September 30, 2023, there was $87,000 of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted average period of approximately 1.90 years.

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

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

	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		275,473		$	9.17
Granted		1,000			9.55
Cancelled / Forfeited		(11,209	)		9.46
Exercised/Released/Vested		(2,428	)		9.31
Non-vested restricted stock outstanding at End of Period		262,836		$	9.56	$	2,494,314	2.76

The following table presents the activity related to non-vested restricted stock for the nine months ended September 30, 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		78,351			8.51
Cancelled / Forfeited		(11,209	)		9.46
Exercised/Released/Vested		(52,724	)		8.98
Non-vested restricted stock outstanding at End of Period		262,836		$	9.56	$	2,494,314	2.76

The weighted average fair value of restricted stock granted during the nine months ended September 30, 2023 was $8.51 per share.

As of September 30, 2023, there was $1,335,000 of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a weighted average period of approximately 2.76 years.

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

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The Company has an Employee Stock Purchase Plan (“ESPP”). There are 358,911 shares authorized for issuance under the ESPP. The total number of shares authorized has been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 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 September 30, 2023, there was $7,000 of unrecognized compensation cost related to ESPP issuances. This cost is expected to be recognized over a weighted average period of approximately 0.25 years.

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

The weighted average fair value option at issuance date during the nine months ended September 30, 2023 was $1.83 per share.

A summary of the weighted average assumptions used in valuing ESPP issuances during the three and nine months ended September 30, 2023 is presented below.

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

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9.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

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

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

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

(in thousands)	Unrealized losses on securities			Officers’ retirement plan			Directors’ retirement plan		Accumulated other comprehensive loss
Balance as of December 31, 2022	$	(46,273	)	$	(308	)	$	53	$	(46,528	)
Current period other comprehensive income		(2,676	)		—			—		(2,676	)
Balance as of September 30, 2023	$	(48,949	)	$	(308	)	$	53	$	(49,204	)

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

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

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

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

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10.  OUTSTANDING SHARES AND EARNINGS PER SHARE

On January 26, 2023, the Board of Directors of the Company declared a 5% stock dividend payable 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 and nine months ended September 30, 2023 and 2022 (dollars in thousands except per share amounts):

	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Basic earnings per share:
Net income	$	4,619	$	4,568	$	14,672	$	11,155
Weighted average common shares outstanding		14,465,191		14,404,438		14,455,772		14,394,959
Basic EPS	$	0.32	$	0.32	$	1.01	$	0.77
Diluted earnings per share:
Net income	$	4,619	$	4,568	$	14,672	$	11,155
Weighted average common shares outstanding		14,465,191		14,404,438		14,455,772		14,394,959
Effect of dilutive shares		160,012		150,672		129,448		162,748
Adjusted weighted average common shares outstanding		14,625,203		14,555,110		14,585,220		14,557,707
Diluted EPS	$	0.32	$	0.31	$	1.01	$	0.77

Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 338,346 shares and 513,058 shares for the three months ended September 30, 2023 and 2022, respectively. Unvested restricted stock which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 0 shares and 74,522 shares for the three months ended September 30, 2023 and 2022, respectively. Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 454,174 shares and 413,335 shares for the nine months ended September 30, 2023 and 2022, respectively. Unvested restricted stock which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 44,982 shares and 61,966 shares for the nine months ended September 30, 2023 and 2022, respectively.

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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 September 30, 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 $4,345,000 and $4,905,000 as of September 30, 2023 and December 31, 2022, respectively. The Company had lease liabilities totaling $4,854,000 and $5,422,000 as of September 30, 2023 and December 31, 2022, respectively. The Company recognized lease expense totaling $315,000 and $286,000 for the three-month periods ended September 30, 2023 and 2022, respectively, and $916,000 and $874,000 for the nine-month periods ended September 30, 2023 and 2022, respectively. Lease expense includes operating lease costs, short-term lease costs and variable lease costs.  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 at September 30, 2023:

(in thousands)	September 30, 2023
2023 (remaining 3 months)	$	297
2024		1,040
2025		1,052
2026		672
2027		611
2028 and thereafter		1,520
Total lease payments		5,192
Less: interest		(338	)
Present value of lease liabilities	$	4,854

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

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

The following table presents the weighted average operating lease term and discount rate as of September 30, 2023 and December 31, 2022:

	September 30, 2023			December 31, 2022
Weighted-average remaining lease term – operating leases, in years		5.55			6.14
Weighted-average discount rate – operating leases		2.43	%		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 a 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 ASC 805, Business Combinations, the Company recorded a bargain purchase gain of $1,405,000 and $4,970,000 of core deposit intangibles on the acquisition date. The core deposit intangible will be amortized using the sum of the year’s digits method over the expected life of 10 years with no significant residual value. For tax purposes, acquisition accounting adjustments including the core deposit intangible are all non-taxable and/or non-deductible. Acquisition related costs of approximately $0 and $154,000 are included in the income statement for the three months ended September 30, 2023 and September 30, 2022, respectively. Acquisition related costs of approximately $204,000 and $154,000 are included in the income statement for the nine months ended September 30, 2023 and September 30, 2022, respectively.

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

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

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

	Acquired Branches January 20, 2023
Fair value of consideration received:
Cash consideration	$	103,425
Total fair value of consideration received		103,425
Assets acquired:
Cash and cash equivalents		1,284
Loans		4,006
Premises and equipment		3,621
Core deposit intangible		4,970
Other assets		15
Total assets acquired		13,896
Liabilities assumed:
Deposits		115,914
Other liabilities		2
Total liabilities assumed		115,916
Total net liabilities assumed		102,020
Bargain purchase gain recognized	$	1,405

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

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

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

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

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

We believe that we were able to negotiate a bargain purchase price primarily as a result of Columbia State Bank being required to divest of certain branches  (along with the associated deposits and loans) for competitive reasons in accordance with a 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.

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

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

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

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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 the timing thereof

● 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

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

● The seasonal nature of our business

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

● Loan portfolio composition and risk grade trends, expected charge-offs, portfolio credit quality, loan demand, our strategy regarding loan modifications, delinquency rates and our underwriting standards and our expectations regarding our recognition of interest income on loans that were provided payment deferrals upon completion of the payment forbearance period

● Our deposit base including renewal of time deposits and the outlook for deposit balances

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

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

● Tax rates and the impact of changes in the U.S. tax laws

● Our pension and retirement plan costs

● Our liquidity strategies and beliefs concerning the adequacy of our liquidity position

● Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements or changes in accounting principles

● Expected rates of return, maturities, loss exposure, growth rates, yields, and projected results, including expectations about the results of the Company’s acquisition of these branches from Columbia State Bank, completed in January 2023

● The possible impact of weather-related or other natural conditions, including drought, fire or flooding, seismic events, and related governmental responses, including related electrical power outages, on economic conditions, especially in the agricultural sector

● Maintenance of insurance coverages appropriate for our operations

● Threats to the banking sector and our business due to cybersecurity issues and attacks and regulatory expectations related to cybersecurity

● 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.

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INTRODUCTION

This overview of Management’s Discussion and Analysis highlights selected information in this report and may not contain all of the information that is important to you.  For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire report and any other reports to the Securities and Exchange Commission (“SEC”), together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2022.

Our subsidiary, First Northern Bank of Dixon (the “Bank”), is a California state-chartered bank that derives most of its revenues from lending and deposit taking in the Sacramento Valley region of Northern California. Interest rates, business conditions and customer confidence all affect our ability to generate revenues. In addition, the regulatory and compliance environment and competition can present challenges to our ability to generate those revenues.

Significant results and developments during the third quarter and year-to-date 2023 included:

• Net income of $14.7 million for the nine months ended September 30, 2023, up 31.5% from $11.2 million earned for the same period last year. Net income of $4.6 million for each of the three-month periods ended September 30, 2023 and September 30, 2022.

• Diluted income per share of $1.01 for the nine months ended September 30, 2023, up 31.2% from diluted income per share of $0.77 in the same period last year. Diluted income per share of $0.32 for the three months ended September 30, 2023, up 3.2% from diluted income per share of $0.31 for the same period last year.

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

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

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

• Total assets of $1.90 billion as of September 30, 2023, up 1.7% from $1.87 billion as of December 31, 2022.

• Total net loans (including loans held-for-sale) of $1.04 billion as of September 30, 2023, up 6.9% from $970.1 million as of December 31, 2022.

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

• Total deposits of $1.75 billion as of September 30, 2023, up 1.1% 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 nine months ended September 30, 2023.  On an after-tax basis, the bargain purchase gain contributed $1.0 million to net income for the nine months ended September 30, 2023.

39

SUMMARY FINANCIAL DATA

The Company recorded net income of $14,672,000 for the nine months ended September 30, 2023, representing an increase of $3,517,000, or 31.5%, from net income of $11,155,000 for the same period in 2022. The Company recorded net income of $4,619,000 for the three months ended September 30, 2023, representing an increase of $51,000, or 1.1%, from net income of $4,568,000 for the same period in 2022.

The following tables present a summary of the results for the three and nine months ended September 30, 2023 and 2022, and a summary of financial condition at September 30, 2023 and December 31, 2022.

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

	September 30, 2023			December 31, 2022
(in thousands except for ratios)
At Period End:
Total Assets	$	1,902,328		$	1,871,361
Total Investment Securities, at fair value	$	567,409		$	618,092
Total Loans, Net (including loans held-for-sale)	$	1,037,435		$	970,138
Total Deposits	$	1,746,344		$	1,726,874
Loan-To-Deposit Ratio		59.4	%		56.2	%

40

FIRST NORTHERN COMMUNITY BANCORP

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

(in thousands, except percentage amounts)

	Three months ended September 30, 2023							Three months ended September 30, 2022
	Average Balance		Interest		Yield/ Rate (4)			Average Balance		Interest		Yield/ Rate (4)
Assets
Interest-earning assets:
Loans (1)	$	1,031,647	$	13,098		5.04	%	$	949,424	$	10,857		4.54	%
Certificate of deposits		20,794		194		3.70	%		11,423		57		1.98	%
Interest bearing due from banks		148,250		1,870		5.00	%		208,059		1,061		2.02	%
Investment securities, taxable		551,555		2,685		1.93	%		589,082		2,122		1.43	%
Investment securities, non-taxable  (2)		31,765		199		2.49	%		40,272		250		2.46	%
Other interest earning assets		10,518		214		8.07	%		9,440		137		5.76	%
Total average interest-earning assets		1,794,529		18,260		4.04	%		1,807,700		14,484		3.18	%
Non-interest-earning assets:
Cash and due from banks		49,630							41,157
Premises and equipment, net		9,704							6,125
Interest receivable and other assets		59,579							54,289
Total average assets	$	1,913,442						$	1,909,271
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing transaction deposits		415,232		472		0.45	%		452,708		69		0.06	%
Savings and MMDA’s		443,536		819		0.73	%		447,797		171		0.15	%
Time, $250,000 or less		98,898		968		3.88	%		36,456		23		0.25	%
Time, over $250,000		17,554		127		2.87	%		10,504		8		0.30	%
Total average interest-bearing liabilities		975,220		2,386		0.97	%		947,465		271		0.11	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		779,615							814,300
Interest payable and other liabilities		18,858							18,662
Total liabilities		1,773,693							1,780,427
Total average stockholders’ equity		139,749							128,844
Total average liabilities and stockholders’ equity	$	1,913,442						$	1,909,271
Net interest income and net interest margin (3)			$	15,874		3.51	%			$	14,213		3.12	%

(1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest thereon is generally excluded. Loan interest income includes loan fees, net of deferred costs of approximately $(50) and $223 for the three months ended September 30, 2023 and 2022, respectively.  Net loan fees for the three months ended September 30, 2023 and September 30, 2022 include $0 and $154 in PPP loan fees recognized, respectively. Also included in loan interest income is interest income recognized on nonaccrual loans paid off totaling $4 and $19 for the three months ended September 30, 2023 and 2022, respectively.

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

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

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

41

FIRST NORTHERN COMMUNITY BANCORP

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

(in thousands, except percentage amounts)

	Nine months ended September 30, 2023							Nine months ended September 30, 2022
	Average Balance		Interest		Yield/ Rate (4)			Average Balance		Interest		Yield/ Rate (4)
Assets
Interest-earning assets:
Loans (1)	$	994,504	$	38,197		5.14	%	$	896,708	$	30,979		4.62	%
Certificate of deposits		21,115		556		3.52	%		11,659		167		1.92	%
Interest bearing due from banks		174,391		6,411		4.92	%		231,712		1,626		0.94	%
Investment securities, taxable		568,322		8,041		1.89	%		597,040		5,783		1.30	%
Investment securities, non-taxable  (2)		36,092		692		2.56	%		36,656		634		2.31	%
Other interest earning assets		9,985		557		7.46	%		8,513		361		5.67	%
Total average interest-earning assets		1,804,409		54,454		4.03	%		1,782,288		39,550		2.97	%
Non-interest-earning assets:
Cash and due from banks		47,135							46,737
Premises and equipment, net		8,713							6,298
Interest receivable and other assets		58,805							49,547
Total average assets	$	1,919,062						$	1,884,870
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing transaction deposits		432,741		1,107		0.34	%		441,819		205		0.06	%
Savings and MMDA’s		460,198		1,926		0.56	%		443,063		395		0.12	%
Time, $250,000 or less		73,485		1,542		2.81	%		37,374		68		0.24	%
Time, over $250,000		13,043		242		2.48	%		10,769		23		0.29	%
Total average interest-bearing liabilities		979,467		4,817		0.66	%		933,025		691		0.10	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		785,634							797,890
Interest payable and other liabilities		17,837							18,380
Total liabilities		1,782,938							1,749,295
Total average stockholders’ equity		136,124							135,575
Total average liabilities and stockholders’ equity	$	1,919,062						$	1,884,870
Net interest income and net interest margin (3)			$	49,637		3.68	%			$	38,859		2.92	%

(1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest thereon is generally excluded. Loan interest income includes loan fees, net of deferred costs of approximately $(17) and $2,703 for the nine months ended September 30, 2023 and 2022, respectively.  Net loan fees for the nine months ended September 30, 2023 and September 30, 2022 include $0 and $2,706 in PPP loan fees recognized, respectively. Also included in loan interest income is interest income recognized on nonaccrual loans paid off totaling $1,289 and $46 for the nine months ended September 30, 2023 and 2022, respectively.

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

(3)          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.

42

FIRST NORTHERN COMMUNITY BANCORP

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

(in thousands, except percentage amounts)

	Three months ended September 30, 2023							Three months ended June 30, 2023
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate (4)
Assets
Interest-earning assets:														��
Loans (1)	$	1,031,647	$	13,098		5.04	%	$	988,094	$	13,722		5.57	%
Certificates of deposit		20,794		194		3.70	%		21,491		188		3.51	%
Interest bearing due from banks		148,250		1,870		5.00	%		169,071		2,315		5.49	%
Investment securities, taxable		551,555		2,685		1.93	%		571,381		2,673		1.88	%
Investment securities, non-taxable (2)		31,765		199		2.49	%		34,953		220		2.52	%
Other interest earning assets		10,518		214		8.07	%		9,985		165		6.63	%
Total average interest-earning assets		1,794,529		18,260		4.04	%		1,794,975		19,283		4.31	%
Non-interest-earning assets:
Cash and due from banks		49,630							46,004
Premises and equipment, net		9,704							9,804
Interest receivable and other assets		59,579							59,479
Total average assets	$	1,913,442						$	1,910,262
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing transaction deposits		415,232		472		0.45	%		425,903		377		0.36	%
Savings and MMDA’s		443,536		819		0.73	%		455,943		582		0.51	%
Time, $250,000 and under		98,898		968		3.88	%		78,378		470		2.41	%
Time, over $250,000		17,554		127		2.87	%		11,373		72		2.54	%
Total average interest-bearing liabilities		975,220		2,386		0.97	%		971,597		1,501		0.62	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		779,615							783,045
Interest payable and other liabilities		18,858							17,210
Total liabilities		1,773,693							1,771,852
Total average stockholders’ equity		139,749							138,410
Total average liabilities and stockholders’ equity	$	1,913,442						$	1,910,262
Net interest income and net interest margin (3)			$	15,874		3.51	%			$	17,782		3.97	%

(1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest is generally excluded.  Loan interest income includes loan fees, net of deferred costs of approximately $(50) and $69 for the three months ended September 30, 2023 and June 30, 2023, respectively. Also included in loan interest income is interest income recognized on nonaccrual loans paid off totaling $4 and $1,285 for the three months ended September 30, 2023 and June 30, 2023, respectively.

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

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

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

43

Analysis of Changes

in Interest Income and Interest Expense

(Dollars in thousands)

Following is an analysis of changes in interest income and expense (dollars in thousands) for the three months ended September 30, 2023 over the three months ended September 30, 2022, the nine months ended September 30, 2023 over the nine months ended September 30, 2022, and the three months ended September 30, 2023 over the three months ended June 30, 2023.  Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume.

	Three Months Ended September 30, 2023 Over Three Months Ended September 30, 2022								Nine Months Ended September 30, 2023 Over Nine Months Ended September 30, 2022							Three Months Ended September 30, 2023 Over Three Months Ended June 30, 2023
	Volume			Interest Rate		Change			Volume			Interest Rate		Change		Volume			Interest Rate			Change
Increase in Interest Income:
Loans	$	986		$	1,255	$	2,241		$	3,552		$	3,666	$	7,218	$	631		$	(1,255	)	$	(624	)
Certificates of Deposit		67			70		137			192			197		389		(5	)		11			6
Due From Banks		(374	)		1,183		809			(500	)		5,285		4,785		(258	)		(187	)		(445	)
Investment Securities - Taxable		(140	)		703		563			(290	)		2,548		2,258		(75	)		87			12
Investment Securities - Non-taxable		(54	)		3		(51	)		(10	)		68		58		(18	)		(3	)		(21	)
Other Assets		18			59		77			69			127		196		10			39			49
	$	503		$	3,273	$	3,776		$	3,013		$	11,891	$	14,904	$	285		$	(1,308	)	$	(1,023	)
Increase in Interest Expense:
Deposits:
Interest-Bearing Transaction Deposits	$	(6	)	$	409	$	403		$	(4	)	$	906	$	902	$	(9	)	$	104		$	95
Savings & MMDAs		(1	)		649		648			16			1,515		1,531		(16	)		253			237
Time Certificates		123			941		1,064			138			1,555		1,693		249			304			553
	$	116		$	1,999	$	2,115		$	150		$	3,976	$	4,126	$	224		$	661		$	885
Increase in Net Interest Income:	$	387		$	1,274	$	1,661		$	2,863		$	7,915	$	10,778	$	61		$	(1,969	)	$	(1,908	)

44

CHANGES IN FINANCIAL CONDITION

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $9,688,000, or 5.2%, increase in cash and cash equivalents, a $252,000, or 1.2%, decrease in certificates of deposit, a $50,683,000, or 8.2%, decrease in investment securities available-for-sale, a $66,928,000, or 6.9%, increase in net loans held-for-investment, and a $369,000, or 100.0%, increase in loans held-for-sale from December 31, 2022 to September 30, 2023. The increase in cash and cash equivalents was primarily due to an increase in deposit balances, primarily due to the purchase of brokered deposits coupled with deposits assumed from the branch acquisition during the first quarter of 2023, which was partially offset by seasonal fluctuations and deposit outflows due to changes in market conditions and monetary policy and originations of loans held-for-investment. The decrease in certificates of deposit was due to maturities, net of purchases of certificates of deposit. The decrease in investment securities was primarily due to maturities and principal repayments on available-for-sale securities, which was partially offset by purchases of available-for-sale securities. The increase in net loans held-for-investment was primarily driven by growth in commercial real estate, residential mortgage and residential construction loans, partially offset by net reductions in commercial and agricultural 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 September 30, 2023 were subsequently sold in October 2023.

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an increase in total deposits of $19,470,000, or 1.1%, from December 31, 2022 to September 30, 2023. The overall increase in total deposits was primarily due to the purchase of brokered deposits during the second quarter, coupled with the assumption of $115.9 million of deposits as part of the acquisition of three branches in the California cities of Colusa, Willows, and Orland during the first quarter, which was partially offset by seasonal fluctuations 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 100 basis points to a target range of 5.25% to 5.50% during the nine months ended September 30, 2023.

Interest income on loans for the nine months ended September 30, 2023 was up 23.3% from the same period in 2022, increasing from $30,979,000 to $38,197,000, and was up 20.6% for the three months ended September 30, 2023 over the same period in 2022, increasing from $10,857,000 to $13,098,000. The increase in interest income on loans for the nine months ended September 30, 2023 as compared to the same period a year ago was primarily due to an increase in average balance of loans, a 52 basis point increase in yield on loans and recognition of interest on a non-performing loan, which was partially offset by a decrease in PPP fee recognition. The increase in interest income on loans for the three months ended September 30, 2023 as compared to the same period a year ago was primarily due to an increase in average balance of loans and a 50 basis point increase in yield on loans, which was partially offset by a decrease in PPP fee recognition. The Company recognized a paydown during the nine months ended September 30, 2023 on a non-performing agricultural loan relationship, resulting in the recognition of interest totaling $1.3 million included in interest income on loans for the nine months ended September 30, 2023. PPP processing fees received from the SBA for PPP loans originated in 2020 and 2021 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 $2.7 million for the nine-month periods ended September 30, 2023 and September 30, 2022, respectively. The Company recognized PPP processing fees totaling $0 and approximately $0.2 million for the three-month periods ended September 30, 2023 and September 30, 2022, respectively.

Interest income on certificates of deposit for the nine months ended September 30, 2023 was up 232.9% from the same period in 2022, increasing from $167,000 to $556,000, and was up 240.4% for the three months ended September 30, 2023 over the same period in 2022, increasing from $57,000 to $194,000. The increase in interest income on certificates of deposit for the nine months ended September 30, 2023 as compared to the same period a year ago was primarily due to a 160 basis point increase in yield on certificates of deposit coupled with an increase in average balances of certificates of deposit. The increase in interest income on certificates of deposit for the three months ended September 30, 2023 as compared to the same period a year ago was primarily due to a 172 basis point increase in yield on certificates of deposit coupled with an increase in average balances of certificates of deposit.

Interest income on interest-bearing due from banks for the nine months ended September 30, 2023 was up 294.3% from the same period in 2022, increasing from $1,626,000 to $6,411,000, and was up 76.3% for the three months ended September 30, 2023 over the same period in 2022, increasing from $1,061,000 to $1,870,000. This income is primarily derived from interest on reserves held at the Federal Reserve. The increase in interest income on interest-bearing due from banks for the nine months ended September 30, 2023 as compared to the same period a year ago was primarily due to increases in the Federal Funds rate resulting in a 398 basis point increase in yield on interest-bearing due from banks, which was partially offset by a decrease in average balances of interest-bearing due from banks. The increase in interest income on interest-bearing due from banks for the three months ended September 30, 2023 as compared to the same period a year ago was primarily due to a 298 basis point increase in yield on interest-bearing due from banks, which was partially offset by a decrease in average balances of interest-bearing due from banks.

45

Interest income on investment securities available-for-sale for the nine months ended September 30, 2023 was up 36.1% from the same period in 2022, increasing from $6,417,000 to $8,733,000, and was up 21.6% for the three months ended September 30, 2023 over the same period in 2022, increasing from $2,372,000 to $2,884,000. The increase in interest income on investment securities for the nine months ended September 30, 2023 as compared to the same period a year ago was primarily due to a 58 basis point increase in investment yields, which was partially offset by a decrease in average investment securities. The increase in interest income on investment securities for the three months ended September 30, 2023 as compared to the same period a year ago was primarily due to a 46 basis point increase in investment yields, which was partially offset by a decrease in average investment securities.

Interest income on other earning assets for the nine months ended September 30, 2023 was up 54.3% from the same period in 2022, increasing from $361,000 to $557,000, and was up 56.2% for the three months ended September 30, 2023 over the same period in 2022, increasing from $137,000 to $214,000. This income is primarily derived from dividends received by the Federal Home Loan Bank. The increase in interest income on other earning assets for the nine months ended September 30, 2023 as compared to the same period a year ago was primarily due to a 179 basis point increase in yield on other earning assets coupled with an increase in average balances of other earning assets. The increase in interest income on other earning assets for the three months ended September 30, 2023 as compared to the same period a year ago was primarily due to a 231 basis point increase in yield on other earning assets coupled with an increase in average balances of other earning assets.

The Company had no Federal Funds sold balances during the three and nine months ended September 30, 2023 and September 30, 2022.

Interest Expense

Interest expense on deposits for the nine months ended September 30, 2023 was up 597.1% from the same period in 2022, increasing from $691,000 to $4,817,000, and was up 780.4% for the three months ended September 30, 2023 over the same period in 2022, increasing from $271,000 to $2,386,000. The increase in interest expense for the nine months ended September 30, 2023 as compared to the same period a year ago was primarily due to a 56 basis point increase in average interest-bearing deposit yield coupled with an increase in average balance of interest-bearing liabilities. The increase in interest expense for the three months ended September 30, 2023 as compared to the same period a year ago was primarily due to an 86 basis point increase in average interest-bearing deposit yield coupled with an increase in average balance of interest-bearing liabilities.

Provision for Credit Losses

Provision for credit losses for the nine months ended September 30, 2023 was up 244.4% from the same period in 2022, increasing from $900,000 to $3,100,000, and was up 66.7% for the three months ended September 30, 2023 over the same period in 2022, increasing from $300,000 to $500,000. The increase in provision for credit losses was driven by the need to replenish the ACL for net charge-off activity as well as to provide reserves for our quarterly loan growth. During the nine months ended September 30, 2023, the Company experienced a credit event related to suspected customer fraud on a single agricultural relationship that required a charge-off of $2,567,000 against the ACL. Management believes that the allowance for credit losses at September 30, 2023 appropriately reflected expected credit losses in the loan portfolio at that date.

Non-Interest Income

Non-interest income was up 12.3% for the nine months ended September 30, 2023 from the same period in 2022, increasing from $5,480,000 to $6,155,000. The increase was primarily driven by a bargain purchase gain and an increase in debit card income, which was partially offset by decreases in loan servicing income and other income. The Company recognized a bargain purchase gain totaling approximately $1.4 million as a result of the acquisition of the Colusa, Willows, and Orland branches located in California in the first quarter of 2023.  The decrease in loan servicing income was primarily due to the prior year reversal of impairment expense on the Company’s mortgage servicing rights asset coupled with a decrease in mortgage servicing assets booked.  The decrease in other income was primarily due to the prior year recognition of non-taxable income from a bank owned life insurance policy.

Non-interest income was down 14.2% for the three months ended September 30, 2023 from the same period in 2022, decreasing from $2,070,000 to $1,776,000. The decrease was primarily due to the prior year recognition of non-taxable income from a bank owned life insurance policy.

46

Non-Interest Expenses

Total non-interest expenses were up 14.8% for the nine months ended September 30, 2023 from the same period in 2022, increasing from $28,339,000 to $32,534,000. The increase was primarily due to increases in salaries and employee benefits expense, occupancy and equipment, data processing, amortization of core deposit intangibles and other non-interest expenses. The increase in salaries and employee benefits expense was primarily due to an increase in full-time-equivalent employees. The increases in occupancy and equipment, data processing and amortization of core deposit intangibles are primarily due to the branch acquisitions in the first quarter of 2023. The increase in non-interest expenses was primarily due to increases in consulting fees and training expenses as part of the branch acquisitions, FDIC assessments and debit card expense.  The increase in non-interest expenses was partially offset by the recovery of loan collection expenses due to the recognition of a paydown on a non-performing agricultural loan relationship, resulting in the recovery of back interest and $0.7 million in loan collection expense recoveries.

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

The following table sets forth other non-interest expenses by category for the three and nine months ended September 30, 2023 and 2022.

	(in thousands)
	Three months ended September 30, 2023		Three months ended September 30, 2022		Nine months ended September 30, 2023			Nine months ended September 30, 2022
Other non-interest expenses
FDIC assessments	$	231	$	126	$	681		$	401
Contributions		79		66		190			148
Legal fees		88		151		428			474
Accounting and audit fees		134		135		451			404
Consulting fees		163		239		599			428
Postage expense		27		36		123			129
Telephone expense		37		36		124			109
Public relations		87		52		230			183
Training expense		37		34		165			115
Loan origination expense		120		29		248			178
Computer software depreciation		1		9		17			32
Sundry losses		80		80		203			184
Loan collection expense (recovery)		160		114		(294	)		292
Debit card expense		305		246		902			722
Other non-interest expense		437		350		1,296			1,055
Total other non-interest expenses	$	1,986	$	1,703	$	5,363		$	4,854

47

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 39.1% for the nine months ended September 30, 2023 from the same period in 2022, increasing from $3,945,000 to $5,486,000, and increased 9.4% for the three months ended September 30, 2023 from the same period in 2022, increasing from $1,506,000 to $1,648,000. The increase in provision for income taxes was primarily due to an increase in pre-tax income. The effective tax rate was 27.2% and 26.1% for the nine months ended September 30, 2023 and September 30, 2022, respectively. The effective tax rate was 26.3% and 24.8% for the three months ended September 30, 2023 and September 30, 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)
	September 30, 2023		December 31, 2022
Undisbursed loan commitments	$	197,710	$	205,610
Standby letters of credit		1,251		1,930
Commitments to sell loans		765		—
	$	199,726	$	207,540

The reserve for unfunded lending commitments amounted to $1,050,000 and $700,000 as of September 30, 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 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 table summarizes the Company’s non-accrual loans net of guarantees of the State of California and U.S. Government by loan category at September 30, 2023 and December 31, 2022:

	At September 30, 2023						At December 31, 2022
	Gross		Guaranteed		Net		Gross		Guaranteed		Net
(in thousands)
Commercial	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		—		—		—
Agriculture		5,020		—		5,020		7,416		—		7,416
Residential mortgage		400		—		400		123		—		123
Residential construction		—		—		—		—		—		—
Consumer		699		—		699		637		—		637
Total non-accrual loans	$	6,119	$	—	$	6,119	$	8,176	$	—	$	8,176

It is generally the Company’s policy to discontinue interest accruals once a loan is past due for a period of 90 days as to interest or principal payments unless the loan is well secured and in process of collection.  When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income.  Payments received on non-accrual loans are applied against principal.  A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected or there is an extended period of positive performance and a high probability that the loan will continue to pay according to original terms.

Non-accrual loans amounted to $6,119,000 at September 30, 2023 and were comprised of four agriculture loans totaling $5,020,000, two residential mortgage loans totaling $400,000, and four consumer loans totaling $699,000. Non-accrual loans amounted to $8,176,000 at December 31, 2022 and were comprised of three agriculture loans totaling $7,416,000, 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 $2,460,000, or 28.7%, to $6,119,000 during the first nine months of 2023. Non-performing assets, net of guarantees, represented 0.3% of total assets at September 30, 2023.

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

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

Loans totaling $23,733,000 and $15,069,000 were classified as substandard loans as of September 30, 2023 and December 31, 2022, respectively.  Management believes that the allowance for credit losses at September 30, 2023 and December 31, 2022 appropriately reflected expected credit losses in the loan portfolio at that date.  The ratio of the allowance for credit losses to total loans at September 30, 2023 and December 31, 2022 was 1.53% 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 September 30, 2023 is based on the expected loss methodology, and the ratio of allowance for credit losses to total loans as of December 31, 2022 is based on the incurred loss methodology.

Other real estate owned (“OREO”) consists of property that the Company has acquired by deed in lieu of foreclosure or through foreclosure proceedings, and property that the Company does not hold title to but is in actual control of, known as in-substance foreclosure. The estimated fair value of the property is determined prior to transferring the balance to OREO. The balance transferred to OREO is the estimated fair value of the property less estimated cost to sell.  Impairment may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals or loan officer evaluations are then conducted periodically thereafter charging any additional impairment to the appropriate expense account. The Company had no OREO as of September 30, 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 nine months ended September 30, 2023 and 2022, and for the year ended December 31, 2022:

Analysis of the Allowance for Credit Losses

(Amounts in thousands, except percentage amounts)

	Nine months ended September 30,						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 credit losses		3,250			900			900
Loans charged-off:
Commercial		(269	)		(297	)		(297	)
Commercial Real Estate		—			—			—
Agriculture		(2,567	)		—			—
Residential Mortgage		(3	)		—			—
Residential Construction		—			—			—
Consumer		(10	)		(39	)		(48	)
Total charged-off		(2,849	)		(336	)		(345	)
Recoveries:
Commercial		155			249			275
Commercial Real Estate		—			—			—
Agriculture		—			—			—
Residential Mortgage		—			—			—
Residential Construction		—			—			—
Consumer		1			6			10
Total recoveries		156			255			285
Net charge-offs		(2,693	)		(81	)		(60	)
Balance at end of period	$	16,149		$	14,771		$	14,792
Ratio of net charge-offs to average loans outstanding during the period (annualized)		(0.36	%)		(0.01	%)		(0.01	%)
Allowance for credit losses to total loans		1.53	%		1.50	%		1.50	%
Nonaccrual loans to total loans		0.6	%		0.9	%		0.8	%
Allowance for credit losses to nonaccrual loans		263.9	%		174.3	%		180.9	%

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Deposits

Deposits are one of the Company’s primary sources of funds.  At September 30, 2023 and December 31, 2022, the Company had the following deposit mix:

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

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

Maturities of time certificates of deposit of over $250,000 outstanding at September 30, 2023 and December 31, 2022 are summarized as follows:

	(in thousands)
	September 30, 2023		December 31, 2022
Three months or less	$	1,652	$	1,211
Over three to six months		3,294		1,012
Over six to twelve months		8,159		3,769
Over twelve months		5,752		3,248
Total	$	18,857	$	9,240

Liquidity and Capital Resources

In order to serve our market area and comply with banking regulations, the Company must maintain adequate liquidity and adequate capital. Liquidity refers to the Company’s ability to provide funds an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either the asset or liability side of the balance sheet.   

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

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

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

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

Liquidity is measured by various ratios, in management’s opinion, the most common being the ratio of net loans to deposits (including loans held-for-sale).  This ratio was 59.4% and 56.2% as of September 30, 2023 and December 31, 2022, respectively.  

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

The Company’s primary source of liquidity on a stand-alone basis is dividends from the Bank.  Dividends from the Bank are subject to regulatory restrictions.

In July 2013, the FRB and the other U.S. federal banking agencies adopted final rules making significant changes to the U.S. regulatory capital framework for U.S. banking organizations and to conform this framework to the guidelines published by the Basel Committee known as the Basel III Global Regulatory Framework for Capital and Liquidity.  The Basel Committee is a committee of banking supervisory authorities from major countries in the global financial system which formulates broad supervisory standards and guidelines relating to financial institutions for implementation on a country-by-country basis.   These rules adopted by the FRB and the other federal banking agencies (the U.S. Basel III Capital Rules) replaced the federal banking agencies’ general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules, in accordance with certain transition provisions.

Banks, such as First Northern, became subject to the final rules on January 1, 2015.  The final rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital.  The final rules provide for increased minimum capital ratios as follows: (a) a common equity Tier 1 capital ratio of 4.5%; (b) a Tier 1 capital ratio of 6%; (c) a total capital ratio of 8%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4%.  Under these rules, in order to avoid certain limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements (equal to 2.5% of total risk-weighted assets).  The capital conservation buffer is designed to absorb losses during periods of economic stress.

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.

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As of September 30, 2023, the Bank’s capital ratios exceeded applicable regulatory requirements. The following table presents the capital ratios for the Bank, compared to the regulatory standards for well-capitalized depository institutions, as of September 30, 2023.

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

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ITEM 3.   – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company believes that there have been no material changes in the quantitative and qualitative disclosures about market risk as of September 30, 2023, from those presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, which are incorporated by reference herein.

ITEM 4.   – CONTROLS AND PROCEDURES

(a)  We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2023.  This conclusion is based on an evaluation conducted under the supervision and with the participation of management.

(b)  During the quarter ended September 30, 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, and to the following:

Recent negative developments in the banking industry, and any legislative and/or bank regulatory actions that may result, could adversely affect our business operations, results of operations and financial condition.

The high-profile bank failures of Silicon Valley Bank, Signature Bank and First Republic Bank earlier this year, and related negative media attention, generated significant market trading volatility among publicly-traded bank holding companies and, in particular, regional and community banks, such as the Company. These developments negatively impacted customer confidence in the safety and soundness of regional and community banks. The FDIC took steps to ensure that depositors of these failed banks would have access to their deposits, including uninsured deposit accounts.  U.S. bank regulators have taken action in an effort to further strengthen public confidence in the banking system through the creation of a new Bank Term Funding Program. There can be no assurance that these actions will be successful in restoring customer confidence in regional and community banks and the banking system more broadly.  While we currently do not anticipate liquidity constraints of the kind that caused these other financial services institutions to fail or require external support, constraints on our liquidity could occur as a result of customers choosing to maintain their deposits with larger financial institutions or to invest in higher yielding short-term fixed income securities, which could materially adversely impact our liquidity, cost of funding, loan funding capacity, net interest margin, capital and results of operations. If we were required to sell a portion of our securities portfolio to address liquidity needs, we may incur losses, including as a result of the negative impact of rising interest rates on the value of our securities portfolio, which could negatively affect our earnings and our capital. While the Company has taken actions to maintain adequate and diversified sources of funding and management believes that its liquidity measures are reasonable in light of the nature of the Bank’s customer base, there can be no assurance that such actions will be sufficient in the event of a sudden liquidity crisis.

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These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies, enhanced regulatory supervision and examination policies and priorities, and/or the imposition of restrictions through regulatory supervisory or enforcement activities, including higher capital requirements and/or an increase in the Bank’s deposit insurance assessments. Although these legislative and regulatory actions cannot be predicted with certainty, any of these potential legislative or regulatory actions could, among other things, subject us to additional costs, limit the types of financial services and products we may offer, and reduce our profitability, any of which could materially and adversely affect our business, results of operations or financial condition. The FDIC has recently proposed that Congress consider various changes in the FDIC insurance program, including possible increases in the deposit insurance limit for certain types of accounts, such as business payment accounts. 

Economic Conditions in the U.S. May Soften or Become Recessionary with Resultant Adverse Consequences for the U.S. Financial Services Industry and for the Bank

Following the financial crisis of 2008, adverse financial and economic developments impacted U.S. and global economies and financial markets and presented challenges for the banking and financial services industry and for us. These developments included a general recession both globally and in the U.S. accompanied by substantial volatility in the financial markets.

In response, various significant economic and monetary stimulus measures were implemented by the U.S. government. The FRB also pursued a highly accommodative monetary policy aimed at keeping interest rates at historically low levels although the FRB has more recently modified certain aspects of this policy by gradually increasing short-term interest rates and reducing its balance sheet. The U.S. economy has experienced a period of significant expansion in recent years; however, this expansion is not likely to continue indefinitely and, at some point, economic conditions in the U.S. are likely to soften or become recessionary. We, and other financial services companies, are impacted to a significant degree by current economic conditions. The U.S. government continues to face significant fiscal and budgetary challenges which, if not resolved, could result in renewed adverse U.S. economic conditions. These challenges may be intensified over time if federal budget deficits were to increase and Congress and the Administration cannot effectively work to address them.

The overall level of the federal government’s debt, the extensive political disagreements regarding the government’s statutory debt limit and the continuing substantial federal budget deficits led to a downgrade from “AAA” to “AA+” of the long-term sovereign credit rating of United States debt by one credit rating agency.  On August 1, 2023, a second credit rating agency downgraded certain of the United States’ long-term debt ratings to AA+ from AAA citing an expected fiscal deterioration over the next three years, a high and growing general government debt burden and the erosion of governance relative to other highly rated peers over the last two decades resulting in repeated debt limit standoffs and last-minute resolutions.   This risk could be exacerbated over time.

If substantial federal budget deficits were to continue in the years ahead, further downgrades by the credit rating agencies with respect to the obligations of the U.S. federal government could occur. Any such further downgrades could increase over time the U.S. federal government’s cost of borrowing, which may worsen its fiscal challenges, as well as generate upward pressure on interest rates generally in the U.S. which could, in turn, have adverse consequences for borrowers and the level of business activity. It is also possible that the federal government’s fiscal and budgetary challenges could be intensified over time as a result of the federal tax legislation signed into law in December of 2017 if the reductions in tax rates along with greater government spending result in increased federal budget deficits. The long-term impact of this situation, including the impact to the Bank’s investment securities portfolio and other assets, cannot be predicted.

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

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

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The COVID-19 pandemic and related responses to the pandemic by federal, state and local governments negatively impacted the U.S., California and global economies, significantly increased economic uncertainty, reduced economic activity, increased unemployment levels, and resulted in temporary and permanent closures of many businesses and restrictions on business and social activities in many states and communities, including many markets where we have operations. The extent to which the Company’s business will continue to be affected will depend on a variety of factors, many of which are outside of our control, including the persistence of the pandemic, the actions of governmental authorities, changes in customer preferences, impacts on economic activity, and the possibility of recession or continued financial market instability. The pandemic has resulted and may continue to result in the recognition of credit losses in our loan portfolios and increases in our allowance for credit losses.  Material future additions to the allowance for estimated losses on loans may be necessary if such material adverse changes in economic conditions were to continue to occur and the performance of the Bank’s loan portfolio were to deteriorate.

An allowance for losses on other real estate owned may also be required in order to reflect changes in the markets for real estate in which the Bank’s other real estate owned is located and other factors which may result in adjustments which are necessary to ensure that the Bank’s foreclosed assets are carried at the lower of cost or fair value, less estimated costs to dispose of the properties.  Moreover, the FDIC and the California DFPI, as an integral part of their examination process, periodically review the Bank’s allowance for estimated losses on loans and the carrying value of its assets.  Increases in the provisions for estimated losses on loans and foreclosed assets would adversely affect the Bank’s financial condition and results of operations.

The Bank’s Dependence on Real Estate Lending Increases Our Risk of Losses

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

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

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

None.

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).

*  Management contract or compensatory plan, contract, or arrangement.

**  In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			FIRST NORTHERN COMMUNITY BANCORP
Date:	November 9, 2023	By:	/s/  Kevin Spink
			Kevin Spink, Executive Vice President / Chief Financial Officer
			(Principal Financial Officer and Duly Authorized Officer)

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