First Northern Community Bancorp (FNRN) 10-Q 2024 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, 2024

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 4, 2024 was 15,252,726.

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	34
ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	52
ITEM 4. – CONTROLS AND PROCEDURES	52
PART II – OTHER INFORMATION	52
ITEM 1. – LEGAL PROCEEDINGS	52
ITEM 1A. – RISK FACTORS	52
ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	54
ITEM 3. – DEFAULTS UPON SENIOR SECURITIES	54
ITEM 4. – MINE SAFETY DISCLOSURES	54
ITEM 5. – OTHER INFORMATION	54
ITEM 6. – EXHIBITS	55
SIGNATURES	56

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, 2024			December 31, 2023
Assets
Cash and cash equivalents	$	163,918		$	149,211
Certificates of deposit		19,244			19,710
Investment securities – available-for-sale, at estimated fair value, net of allowance for credit losses of $0; amortized cost of $665,113 at September 30, 2024 and $620,314 at December 31, 2023		632,404			572,357
Loans, net of allowance for credit losses of $16,422 at September 30, 2024 and $16,596 at December 31, 2023		1,042,304			1,052,465
Stock in Federal Home Loan Bank and other equity securities, at cost		10,518			10,518
Premises and equipment, net		9,391			9,962
Core deposit intangible		3,524			4,141
Interest receivable and other assets		49,387			53,468
Total Assets	$	1,930,690		$	1,871,832
Liabilities and Stockholders’ Equity
Liabilities:
Demand deposits	$	747,123		$	744,799
Interest-bearing transaction deposits		387,587			380,477
Savings and MMDA’s		443,396			431,472
Time, $250,000 or less		116,098			109,373
Time, over $250,000		37,838			26,323
Total deposits		1,732,042			1,692,444
Interest payable and other liabilities		16,651			20,143
Total Liabilities		1,748,693			1,712,587
Commitments and contingencies (Note 7)
Stockholders’ Equity:
Common stock, no par value; 32,000,000 shares authorized; 15,263,027 shares issued and outstanding at September 30, 2024 and 15,482,332 shares issued and outstanding at December 31, 2023		121,391			123,235
Additional paid-in capital		977			977
Retained earnings		82,616			68,760
Accumulated other comprehensive loss, net		(22,987	)		(33,727	)
Total Stockholders’ Equity		181,997			159,245
Total Liabilities and Stockholders’ Equity	$	1,930,690		$	1,871,832

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, 2024			Three months ended September 30, 2023		Nine months ended September 30, 2024			Nine months ended September 30, 2023
Interest and dividend income:
Loans	$	14,315		$	13,098	$	41,620		$	38,197
Due from banks interest bearing accounts		1,820			2,064		5,619			6,967
Investment securities
Taxable		3,586			2,685		9,519			8,041
Non-taxable		312			199		825			692
Other earning assets		261			214		784			557
Total interest and dividend income		20,294			18,260		58,367			54,454
Interest expense:
Deposits		3,798			2,386		10,531			4,817
Total interest expense		3,798			2,386		10,531			4,817
Net interest income		16,496			15,874		47,836			49,637
(Reversal of) provision for credit losses		(550	)		500		200			3,100
Net interest income after (reversal of) provision for credit losses		17,046			15,374		47,636			46,537
Non-interest income:
Service charges on deposit accounts		427			436		1,292			1,259
Gains on sales of loans held-for-sale		36			62		41			93
Investment and brokerage services income		146			136		422			387
Mortgage brokerage income		—			11		20			21
Loan servicing income		75			79		208			209
Debit card income		710			713		2,074			2,094
Losses on sales/calls of available-for-sale securities		(75	)		—		(155	)		(64	)
Gain on bargain purchase		—			—		—			1,405
Other income		219			339		627			751
Total non-interest income		1,538			1,776		4,529			6,155
Non-interest expenses:
Salaries and employee benefits		6,242			6,377		18,506			19,653
Occupancy and equipment		1,204			1,064		3,514			3,138
Data processing		1,079			933		3,065			2,949
Stationery and supplies		45			103		187			272
Advertising		109			111		303			322
Directors’ fees		74			83		229			234
Amortization of core deposit intangible		203			226		617			603
Other expense		1,978			1,986		6,039			5,363
Total non-interest expenses		10,934			10,883		32,460			32,534
Income before provision for income taxes		7,650			6,267		19,705			20,158
Provision for income taxes		2,162			1,648		5,517			5,486
Net income	$	5,488		$	4,619	$	14,188		$	14,672
Basic earnings per common share	$	0.36		$	0.30	$	0.93		$	0.97
Diluted earnings per common share	$	0.36		$	0.30	$	0.92		$	0.96

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, 2024		Three months ended September 30, 2023			Nine months ended September 30, 2024		Nine months ended September 30, 2023
Net income	$	5,488	$	4,619		$	14,188	$	14,672
Other comprehensive income (loss), net of tax:
Unrealized holding (losses) gains arising during the period, net of tax effect of $5,084 and $(2,097) for the three months ended September 30, 2024 and September 30, 2023, respectively, and $4,462 and $(1,145) for the nine months ended September 30, 2024 and September 30, 2023, respectively		12,114		(4,999	)		10,631		(2,721	)
Less: reclassification adjustment due to losses realized on sales of securities, net of tax effect of $22 and $0 for the three months ended September 30, 2024 and September 30, 2023, respectively, and $46 and $19 for the nine months ended September 30, 2024 and September 30, 2023, respectively		53		—			109		45
Other comprehensive income (loss), net of tax	$	12,167	$	(4,999	)	$	10,740	$	(2,676	)
Comprehensive income (loss)	$	17,655	$	(380	)	$	24,928	$	11,996

See notes to unaudited condensed consolidated financial statements.

5

FIRST NORTHERN COMMUNITY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data)

	Common Stock						Additional Paid-in		Retained			Accumulated Other Comprehensive Income (Loss), net
	Shares			Amounts			Capital		Earnings			of tax			Total
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
Balance at December 31, 2023		15,482,332		$	123,235		$	977	$	68,760		$	(33,727	)	$	159,245
Net income										4,276						4,276
Other comprehensive loss, net of taxes													(1,461	)		(1,461	)
Stock dividend adjustment		2,671			325					(325	)					—
Cash in lieu of fractional shares		(148	)							(7	)					(7	)
Stock-based compensation					296											296
Common shares issued related to restricted stock grants, net of restricted stock forfeited		57,489			—											—
Stock options exercised, net of swapped shares		8,387			—											—
Balance at March 31, 2024		15,550,731		$	123,856		$	977	$	72,704		$	(35,188	)	$	162,349
Net income										4,424						4,424
Other comprehensive income, net of taxes													34			34
Stock-based compensation					159											159
Common shares issued related to restricted stock grants		4,470			—											—
Stock repurchase and retirement		(137,500	)		(1,239	)										(1,239	)
Stock options exercised, net of swapped shares		1,872			—											—
Balance at June 30, 2024		15,419,573		$	122,776		$	977	$	77,128		$	(35,154	)	$	165,727
Net income										5,488						5,488
Other comprehensive income, net of taxes													12,167			12,167
Stock-based compensation					171											171
Restricted stock forfeited		(768	)		—											—
Stock repurchase and retirement		(155,778	)		(1,556	)										(1,556	)
Balance at September 30, 2024		15,263,027		$	121,391		$	977	$	82,616		$	(22,987	)	$	181,997

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, 2024			Nine months ended September 30, 2023
Cash Flows From Operating Activities
Net income	$	14,188		$	14,672
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		792			730
Accretion and amortization of investment securities premiums and discounts, net		505			1,591
Increase in deferred loan origination fees and costs, net		43			759
Amortization of core deposit intangible		617			603
Provision for credit losses		200			3,100
Stock-based compensation		626			516
Losses on sales/calls of available-for-sale securities		155			64
Amortization of operating lease right-of-use asset		701			806
Gains on sales of loans held-for-sale		(41	)		(93	)
Proceeds from sales of loans held-for-sale		3,155			5,277
Originations of loans held-for-sale		(3,114	)		(5,553	)
Gain on bargain purchase		—			(1,405	)
Changes in assets and liabilities:
(Increase) decrease in interest receivable and other assets		(1,128	)		4,128
Decrease in interest payable and other liabilities		(3,492	)		(196	)
Net cash provided by operating activities		13,207			24,999
Cash Flows From Investing Activities
Proceeds from calls or maturities of available-for-sale securities		59,785			30,766
Proceeds from sales of available-for-sale securities		4,652			16,987
Principal repayments on available-for-sale securities		54,745			54,864
Purchases of available-for-sale securities		(164,641	)		(57,391	)
Proceeds from maturities of certificates of deposit		6,166			3,687
Purchases of certificates of deposit		(5,700	)		(3,435	)
Net decrease (increase) in loans		9,918			(66,781	)
Purchases of Federal Home Loan Bank stock and other equity securities, at cost		—			(1,078	)
Purchases of premises and equipment		(221	)		(1,045	)
Cash and cash equivalents acquired in acquisition		—			103,425
Net cash (used in) provided by investing activities		(35,296	)		79,999
Cash Flows From Financing Activities
Net increase (decrease) in deposits		39,598			(95,160	)
Cash dividends paid in lieu of fractional shares		(7	)		(7	)
Repurchases of common stock		(2,795	)		(143	)
Net cash provided by (used in) by financing activities		36,796			(95,310	)
Net increase in Cash and Cash Equivalents		14,707			9,688
Cash and Cash Equivalents, beginning of period		149,211			187,417
Cash and Cash Equivalents, end of period	$	163,918		$	197,105
Supplemental Disclosures of Cash Flow Information:
Cash paid during the period for:
Interest	$	10,753		$	3,699
Income taxes		6,320			—
Supplemental disclosures of non-cash investing and financing activities:
Stock dividend distributed		6,392			5,652
Unrealized holding gains (losses) on available for sale securities, net of taxes		10,740			(2,676	)
Market value of shares tendered in-lieu of cash to pay for exercise of options		348			361
Recognition of right-of-use assets obtained in exchange for operating lease liabilities		—			245
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, 2024 and 2023 and December 31, 2023

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, 2023 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, 2023. 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.

Accounting Standards Adopted in 2024

On January 1, 2024, the Company adopted Accounting Standards Update (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. Adoption of ASU 2022-03 did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

In January 2021, the Financial Accounting Standards Board (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 August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture (JV) Formations: Recognition and Initial Measurement. The guidance requires newly formed JVs to apply a new basis of accounting to all of its contributed net assets, which results in the JV initially measuring its contributed net assets under ASC 805-20, Business Combinations. The new guidance would be applied prospectively and is effective for all newly formed joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. The Company is evaluating the accounting and disclosure requirements of this update and the impact of adopting the new guidance on the consolidated financial statements.

8

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.  The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.  Early adoption is permitted. The Company has determined that its current business and operations consist of a single business segment and single reporting unit. The Company has evaluated this ASU and does not expect the adoption to have a material impact on the Company’s consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Among other things, these amendments provide additional transparency into an entity’s income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The standard requires that public business entities disclose, on an annual basis, specific categories in the rate reconciliation and additional information for reconciling items meeting a certain quantitative threshold. The amendments also require that entities disclose on an annual basis: 1) income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes and 2) the income taxes paid (net of refunds received) disaggregated by individual jurisdictions exceeding 5% of total income taxes paid (net of refunds received). The amendments are effective for public business entities for annual periods beginning after December 15, 2024. The Company is evaluating the accounting and disclosure requirements of this update and the impact of adopting the new guidance on the consolidated financial statements.

In March 2024, the FASB issued guidance within ASU 2024-01, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards. The amendments in the ASU apply to companies that provide employees and non-employees with profits interest and similar awards to align compensation with a company’s operating performance and provide those holders with the opportunity to participate in future profits and/or equity appreciation of the company. The purpose of the ASU is to clarify the application of the scope guidance in Accounting Standards Codification (ASC) paragraph 718-10-15-3 in determining if a profit interest award should be accounted for in accordance with Topic 718: Compensation—Stock Compensation. The amendment in ASC paragraph 718-10-15-3 is solely intended to improve the overall clarity and does not change the guidance. The ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. If a company adopts the amendments in an interim period, it should adopt them as of the beginning of the annual period that includes the interim period. The amendments should be applied either (1) retrospectively to all prior periods presented in the financial statements or (2) on a prospective basis. The Company has evaluated this ASU and does not expect the adoption to have a material impact on the Company’s consolidated financial statements, as the Company does not typically provide these types of awards.

9

3.  INVESTMENT SECURITIES

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at September 30, 2024 are summarized as follows:

(in thousands)	Amortized cost		Unrealized gains		Unrealized losses			Estimated fair value		ACL
Investment securities available-for-sale:
U.S. Treasury securities	$	94,368	$	634	$	(1,319	)	$	93,683	$	—
Securities of U.S. government agencies and corporations		113,923		573		(3,757	)		110,739		—
Obligations of states and political subdivisions		71,656		555		(3,532	)		68,679		—
Collateralized mortgage obligations		109,755		73		(14,592	)		95,236		—
Mortgage-backed securities		275,411		1,306		(12,650	)		264,067		—
Total debt securities	$	665,113	$	3,141	$	(35,850	)	$	632,404	$	—

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2023 are summarized as follows:

(in thousands)	Amortized cost		Unrealized gains		Unrealized losses			Estimated fair value		ACL
Investment securities available-for-sale:
U.S. Treasury securities	$	90,063	$	134	$	(3,015	)	$	87,182	$	—
Securities of U.S. government agencies and corporations		121,305		105		(6,331	)		115,079		—
Obligations of states and political subdivisions		55,021		237		(3,581	)		51,677		—
Collateralized mortgage obligations		107,658		15		(16,726	)		90,947		—
Mortgage-backed securities		246,267		242		(19,037	)		227,472		—
Total debt securities	$	620,314	$	733	$	(48,690	)	$	572,357	$	—

The Company generated $1,720,000 and $0 in proceeds from sales of available-for-sale securities for the three-month periods ended September 30, 2024 and 2023, respectively. The Company generated $4,652,000 and $16,987,000 in proceeds from sales of available-for-sale securities for the nine-month periods ended September 30, 2024 and 2023, respectively.  There were no gross realized gains on sales of available-for-sale securities for the three-month periods ended September 30, 2024 and 2023, respectively. Gross realized gains on sales of available-for-sale securities were $0 and $96,000 for the nine-month periods ended September 30, 2024 and 2023, respectively. Gross realized losses on sales of available-for-sale securities were $75,000 and $0 for the three-month periods ended September 30, 2024 and 2023, respectively. Gross realized losses on sales of available-for-sale securities were $155,000 and $160,000 for the nine-month periods ended September 30, 2024  and 2023, respectively.

The amortized cost and estimated fair value of debt and other securities at September 30, 2024, 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	$	55,374	$	54,782
Due after one year through five years		142,743		139,442
Due after five years through ten years		37,078		36,123
Due after ten years		44,752		42,754
Subtotal		279,947		273,101
Mortgage-backed securities & Collateralized mortgage obligations		385,166		359,303
Total	$	665,113	$	632,404

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.

10

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of September 30, 2024, 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	$	1,995	$	(1	)	$	51,543	$	(1,318	)	$	53,538	$	(1,319	)
Securities of U.S. government agencies and corporations		4,050		(3	)		69,228		(3,754	)		73,278		(3,757	)
Obligations of states and political subdivisions		9,651		(238	)		31,255		(3,294	)		40,906		(3,532	)
Collateralized mortgage obligations		13,198		(1,053	)		68,730		(13,539	)		81,928		(14,592	)
Mortgage-backed securities		12,370		(80	)		155,966		(12,570	)		168,336		(12,650	)
Total	$	41,264	$	(1,375	)	$	376,722	$	(34,475	)	$	417,986	$	(35,850	)

Thirty-seven securities, all considered investment grade, which had an aggregate fair value of $41,264,000 and a total unrealized loss of $1,375,000, have been in an unrealized loss position for less than twelve months as of September 30, 2024.  Three hundred and eighty-one securities, all considered investment grade, which had an aggregate fair value of $376,722,000 and a total unrealized loss of $34,475,000, have been in an unrealized loss position for more than twelve months as of September 30, 2024.  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, 2024, 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, 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	$	—	$	—		$	77,203	$	(3,015	)	$	77,203	$	(3,015	)
Securities of U.S. government agencies and corporations		3,424		(7	)		97,057		(6,324	)		100,481		(6,331	)
Obligations of states and political subdivisions		4,981		(31	)		32,578		(3,550	)		37,559		(3,581	)
Collateralized Mortgage obligations		6,597		(26	)		80,995		(16,700	)		87,592		(16,726	)
Mortgage-backed securities		17,023		(124	)		182,626		(18,913	)		199,649		(19,037	)
Total	$	32,025	$	(188	)	$	470,459	$	(48,502	)	$	502,484	$	(48,690	)

Investment securities carried at $58,273,000 and $43,884,000 at September 30, 2024 and December 31, 2023, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.

11

4.  LOANS AND ALLOWANCE FOR CREDIT LOSSES

The composition of the Company’s loan portfolio, by loan class, as of September 30, 2024 and December 31, 2023 was as follows:

($ in thousands)	September 30, 2024			December 31, 2023
Commercial	$	109,380		$	106,897
Commercial Real Estate		724,986			721,729
Agriculture		94,994			105,838
Residential Mortgage		106,049			107,328
Residential Construction		7,055			12,323
Consumer		16,227			14,868
		1,058,691			1,068,983
Allowance for credit losses		(16,422	)		(16,596	)
Deferred origination fees and costs, net		35			78
Loans, net	$	1,042,304		$	1,052,465

At September 30, 2024 and December 31, 2023, 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

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 as of and for the three and nine months ended September 30, 2024.

	Allowance for credit losses – Three months ended September 30, 2024
($ in thousands)	Beginning balance		Charge-offs			Recoveries		Provision (recovery)			Ending Balance
Commercial	$	2,359	$	(49	)	$	—	$	(739	)	$	1,571
Commercial Real Estate		10,439		—			—		83			10,522
Agriculture		1,680		—			—		(29	)		1,651
Residential Mortgage		1,862		—			—		50			1,912
Residential Construction		380		—			—		86			466
Consumer		304		(5	)		2		(1	)		300
Allowance for credit losses on loans		17,024		(54	)		2		(550	)		16,422
Reserve for unfunded commitments		950		—			—		—			950
Total	$	17,974	$	(54	)	$	2	$	(550	)	$	17,372

	Allowance for credit losses – Nine months ended September 30, 2024
($ in thousands)	Beginning balance		Charge-offs			Recoveries		Provision (recovery)			Ending Balance
Commercial	$	2,041	$	(606	)	$	47	$	89		$	1,571
Commercial Real Estate		10,864		—			—		(342	)		10,522
Agriculture		997		—			—		654			1,651
Residential Mortgage		2,005		—			—		(93	)		1,912
Residential Construction		334		—			—		132			466
Consumer		355		(19	)		4		(40	)		300
Allowance for credit losses on loans		16,596		(625	)		51		400			16,422
Reserve for unfunded commitments		1,150		—			—		(200	)		950
Total	$	17,746	$	(625	)	$	51	$	200		$	17,372

12

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 as of and for the three and nine months ended September 30, 2023.

	Allowance for credit losses – Three months ended September 30, 2023
($ in thousands)	Beginning balance		Charge-offs			Recoveries		Provision (recovery)			Ending Balance
Commercial	$	1,792	$	(91	)	$	20	$	39		$	1,760
Commercial Real Estate		10,139		—			—		584			10,723
Agriculture		947		—			—		86			1,033
Residential Mortgage		1,840		—			—		89			1,929
Residential Construction		491		—			—		(154	)		337
Consumer		370		(9	)		—		6			367
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	$	1,491	$	689		$	(269	)	$	155	$	(306	)	$	1,760
Commercial Real Estate		10,259		(513	)		—			—		977			10,723
Agriculture		1,789		(742	)		(2,567	)		—		2,553			1,033
Residential Mortgage		896		923			(3	)		—		113			1,929
Residential Construction		181		221			—			—		(65	)		337
Consumer		176		222			(10	)		1		(22	)		367
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

The Company utilizes two economic variables, forecasted unemployment and gross domestic product, as loss drivers for its allowance for credit losses. The Company moved from California state loss drivers to national loss drivers at the beginning of 2024. The reason for the change is a higher credit loss correlation between the national loss driver variables than the state loss driver variables. During the quarter ended September 30, 2024, the levels of forecasted national unemployment and forecasted gross domestic product remained relatively stable.  The Company recognized a reversal of provision of $550,000 during the three months ended September 30, 2024, primarily due to a substantial payoff of a non-performing commercial loan relationship.  Management believes the allowance for credit losses at September 30, 2024 appropriately reflected expected credit losses in the loan portfolio at that date.

13

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, 2024 and December 31, 2023. 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, 2024 and December 31, 2023:

September 30, 2024
($ 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		Secured by owner-occupied, nonfarm nonresidential properties
Commercial	$	—	$	—	$	—	$	—
Commercial Real Estate		—		—		—		466
Agriculture		—		—		—		—
Residential Mortgage		469		—		—		—
Residential Construction		—		—		—		—
Consumer		—		298		263		—
Total	$	469	$	298	$	263	$	466

($ in thousands)	Commercial		Construction and land development		Secured by farmland		Agriculture production loans		Total
Commercial	$	139	$	—	$	—	$	—	$	139
Commercial Real Estate		—		—		—		—		466
Agriculture		—		—		787		1,593		2,380
Residential Mortgage		—		—		—		—		469
Residential Construction		—		—		—		—		—
Consumer		—		—		—		—		561
Total	$	139	$	—	$	787	$	1,593	$	4,015

December 31, 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		Secured by owner-occupied, nonfarm nonresidential  properties
Commercial	$	—	$	—	$	—	$	—
Commercial Real Estate		—		—		—		—
Agriculture		—		—		—		—
Residential Mortgage		424		—		—		—
Residential Construction		—		—		—		—
Consumer		—		351		352		—
Total	$	424	$	351	$	352	$	—

($ in thousands)	Commercial		Construction and land development		Secured by farmland		Agriculture production loans		Total
Commercial	$	—	$	—	$	—	$	—	$	—
Commercial Real Estate		—		—		—		—		—
Agriculture		—		—		946		1,925		2,871
Residential Mortgage		—		—		—		—		424
Residential Construction		—		—		—		—		—
Consumer		—		—		—		—		703
Total	$	—	$	—	$	946	$	1,925	$	3,998

Foreclosure Proceedings

The Company had no residential real estate property in the process of foreclosure at September 30, 2024 and December 31, 2023.

14

Non-accrual and Past Due Loans

The Company’s loans by delinquency and non-accrual status, as of September 30, 2024 and December 31, 2023, 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, 2024
Commercial	$	603	$	41	$	48	$	139	$	831	$	108,549	$	109,380	$	139
Commercial Real Estate		—		—		—		466		466		724,520		724,986		466
Agriculture		—		2		—		2,380		2,382		92,612		94,994		2,380
Residential Mortgage		116		81		—		469		666		105,383		106,049		469
Residential Construction		—		—		—		—		—		7,055		7,055		—
Consumer		—		100		—		561		661		15,566		16,227		561
Total	$	719	$	224	$	48	$	4,015	$	5,006	$	1,053,685	$	1,058,691	$	4,015
December 31, 2023
Commercial	$	91	$	178	$	—	$	—	$	269	$	106,628	$	106,897	$	—
Commercial Real Estate		—		—		—		—		—		721,729		721,729		—
Agriculture		—		—		—		2,871		2,871		102,967		105,838		2,871
Residential Mortgage		976		—		916		424		2,316		105,012		107,328		424
Residential Construction		—		—		3,420		—		3,420		8,903		12,323		—
Consumer		194		—		—		703		897		13,971		14,868		703
Total	$	1,261	$	178	$	4,336	$	3,998	$	9,773	$	1,059,210	$	1,068,983	$	3,998

The Company recognized $119,000 and $4,000 of interest income on nonaccrual loans during the three months ended September 30, 2024 and September 30, 2023, respectively. The Company recognized $438,000 and $1,289,000 of interest income on nonaccrual loans during the nine months ended September 30, 2024 and September 30, 2023, respectively.

Loan Modifications

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.

15

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, 2024 were as follows:

($ in thousands)	Term Extension		Combination Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
Commercial	$	11	$	47		0.05	%
Commercial Real Estate		—		—		—
Agriculture		—		—		—
Residential Mortgage		—		—		—
Residential Construction		—		—		—
Consumer		—		—		—
Total	$	11	$	47		0.01	%

The amortized cost basis of loans that were experiencing both financial difficulty and modification during the nine months ended September 30, 2024 were as follows:

($ in thousands)	Term Extension		Combination Term Extension and Interest Rate Reduction		Total Class of Financing Receivable
Commercial	$	2,102	$	47		1.96	%
Commercial Real Estate		—		—		—
Agriculture		—		—		—
Residential Mortgage		—		—		—
Residential Construction		—		—		—
Consumer		—		—		—
Total	$	2,102	$	47		0.20	%

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	$	—		0.32	%

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		0.75	%

The Company had no commitments to lend additional funds to borrowers whose loans were modified at September 30, 2024.

16

The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the three-month period ended September 30, 2024:

	Weighted-Average Interest Rate Reduction			Weighted-Average Term Extension (in months)
Commercial		3.00	%		19
Commercial Real Estate		—			—
Agriculture		—			—
Residential Mortgage		—			—
Residential Construction		—			—
Consumer		—			—
Total		3.00	%		19

The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the nine-month period ended September 30, 2024:

	Weighted-Average Interest Rate Reduction			Weighted-Average Term Extension (in months)
Commercial		3.00	%		9
Commercial Real Estate		—			—
Agriculture		—			—
Residential Mortgage		—			—
Residential Construction		—			—
Consumer		—			—
Total		3.00	%		9

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:

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

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:

	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

17

There were no loans modified within the previous twelve months and for which there was a payment default during the three- and nine- month periods ended September 30, 2024.

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.

18

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, 2023.

The following tables present the loan portfolio by loan class, origination year, and internal risk rating as of September 30, 2024. 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 $6,718,000 as of September 30, 2024.

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of September 30, 2024
	2024		2023			2022			2021			2020			Prior			Revolving Loans Amortized Cost Basis			Total
Commercial
Pass	$	28,566	$	17,624		$	12,776		$	13,570		$	4,091		$	8,495		$	18,645		$	103,767
Special Mention		—		—			891			1,807			—			—			1,590			4,288
Substandard		559		41			—			—			349			—			237			1,186
Doubtful/Loss		—		—			—			—			139			—			—			139
Total Commercial loans	$	29,125	$	17,665		$	13,667		$	15,377		$	4,579		$	8,495		$	20,472		$	109,380
Year-to-date Period Charge-offs		—		(162	)		(224	)		(5	)		(13	)		(2	)		(200	)		(606	)
Year-to-date Recoveries		—		—			4			—			—			43			—			47
Year-to-date Net Charge-offs		—		(162	)		(220	)		(5	)		(13	)		41			(200	)		(559	)
Commercial Real Estate
Pass	$	67,094	$	111,516		$	171,046		$	161,470		$	40,235		$	136,443		$	6,616		$	694,420
Special Mention		516		—			—			7,845			—			9,231			—			17,592
Substandard		—		385			1,003			2,536			1,650			7,400			—			12,974
Doubtful/Loss		—		—			—			—			—			—			—			—
Total Commercial Real Estate loans	$	67,610	$	111,901		$	172,049		$	171,851		$	41,885		$	153,074		$	6,616		$	724,986
Year-to-date Charge-offs		—		—			—			—			—			—			—			—
Year-to-date Recoveries		—		—			—			—			—			—			—			—
Year-to-date Net Charge-offs		—		—			—			—			—			—			—			—
Agriculture
Pass	$	4,428	$	6,621		$	16,939		$	20,367		$	6,471			10,828		$	21,983		$	87,637
Special Mention		—		—			1,890			2,996			—			—			—			4,886
Substandard		—		—			—			787			—			—			1,684			2,471
Doubtful/Loss		—		—			—			—			—			—			—			—
Total Agriculture loans	$	4,428	$	6,621		$	18,829		$	24,150		$	6,471		$	10,828		$	23,667		$	94,994
Year-to-date Charge-offs		—		—			—			—			—			—			—			—
Year-to-date Recoveries		—		—			—			—			—			—			—			—
Year-to-date Net Charge-offs		—		—			—			—			—			—			—			—

19

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of September 30, 2024
	2024			2023			2022			2021			2020			Prior			Revolving Loans Amortized Cost Basis			Total
Residential Mortgage
Pass	$	2,986		$	20,029		$	22,785		$	27,358		$	13,416		$	19,006		$	—		$	105,580
Special Mention		—			—			—			—			—			—			—			—
Substandard		79			—			—			36			—			354			—			469
Doubtful/Loss		—			—			—			—			—			—			—			—
Total Residential Mortgage loans	$	3,065		$	20,029		$	22,785		$	27,394		$	13,416		$	19,360		$	—		$	106,049
Year-to-date Charge-offs		—			—			—			—			—			—			—			—
Year-to-date Recoveries		—			—			—			—			—			—			—			—
Year-to-date Net Charge-offs		—			—			—			—			—			—			—			—
Residential Construction
Pass	$	2,037		$	2,124		$	1,637		$	1,257		$	—		$	—		$	—		$	7,055
Special Mention		—			—			—			—			—			—			—			—
Substandard		—			—			—			—			—			—			—			—
Doubtful/Loss		—			—			—			—			—			—			—			—
Total Residential Construction loans	$	2,037		$	2,124		$	1,637		$	1,257		$	—		$	—		$	—		$	7,055
Year-to-date Charge-offs		—			—			—			—			—			—			—			—
Year-to-date Recoveries		—			—			—			—			—			—			—			—
Year-to-date Net Charge-offs		—			—			—			—			—			—			—			—
Consumer
Pass	$	240		$	161		$	1,139		$	117		$	125		$	274		$	13,610		$	15,666
Special Mention		—			—			—			—			—			—			—			—
Substandard		—			—			—			—			—			—			561			561
Doubtful/Loss		—			—			—			—			—			—			—			—
Total Consumer loans	$	240		$	161		$	1,139		$	117		$	125		$	274		$	14,171		$	16,227
Year-to-date Charge-offs		(19	)		—			—			—			—			—			—			(19	)
Year-to-date Recoveries		2			—			—			—			—			2			—			4
Year-to-date Net Charge-offs		(17	)		—			—			—			—			2			—			(15	)
Total Loans
Pass	$	105,351		$	158,075		$	226,322		$	224,139		$	64,338		$	175,046		$	60,854		$	1,014,125
Special Mention		516			—			2,781			12,648			—			9,231			1,590			26,766
Substandard		638			426			1,003			3,359			1,999			7,754			2,482			17,661
Doubtful/Loss		—			—			—			—			139			—			—			139
Total Loans	$	106,505		$	158,501		$	230,106		$	240,146		$	66,476		$	192,031		$	64,926		$	1,058,691
Year-to-date Charge-offs	$	(19	)	$	(162	)	$	(224	)	$	(5	)	$	(13	)	$	(2	)	$	(200	)	$	(625	)
Year-to-date Recoveries	$	2		$	—		$	4		$	—		$	—		$	45		$	—		$	51
Year-to-date Net Charge-offs	$	(17	)	$	(162	)	$	(220	)	$	(5	)	$	(13	)	$	43		$	(200	)	$	(574	)

20

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2023
	2023			2022			2021			2020		2019			Prior		Revolving Loans Amortized Cost Basis			Total
Commercial
Pass	$	19,776		$	16,961		$	15,833		$	5,381	$	7,420		$	6,298	$	26,183		$	97,852
Special Mention		—			1,122			2,530			235		308			—		2,936			7,131
Substandard		—			32			1,152			542		—			—		188			1,914
Doubtful/Loss		—			—			—			—		—			—		—			—
Total Commercial loans	$	19,776		$	18,115		$	19,515		$	6,158	$	7,728		$	6,298	$	29,307		$	106,897
Year-to-date Period Charge-offs		(47	)		(196	)		(36	)		—		(87	)		—		—			(366	)
Year-to-date Recoveries		—			—			—			—		87			148		—			235
Year-to-date Net Charge-offs		(47	)		(196	)		(36	)		—		—			148		—			(131	)
Commercial Real Estate
Pass	$	115,807		$	173,918		$	191,907		$	50,150	$	52,157		$	107,909	$	6,879		$	698,727
Special Mention		—			—			7,448			—		2,869			1,273		—			11,590
Substandard		395			—			1,712			1,684		6,604			1,017		—			11,412
Doubtful/Loss		—			—			—			—		—			—		—			—
Total Commercial Real Estate loans	$	116,202		$	173,918		$	201,067		$	51,834	$	61,630		$	110,199	$	6,879		$	721,729
Year-to-date Charge-offs		—			—			—			—		—			—		—			—
Year-to-date Recoveries		—			—			—			—		—			—		—			—
Year-to-date Net Charge-offs		—			—			—			—		—			—		—			—
Agriculture
Pass	$	6,842		$	16,985		$	20,511		$	8,792	$	2,509		$	11,437	$	29,893		$	96,969
Special Mention		—			1,937			2,996			—		—			1,064		—			5,997
Substandard		—			—			946			—		1,926			—		—			2,872
Doubtful/Loss		—			—			—			—		—			—		—			—
Total Agriculture loans	$	6,842		$	18,922		$	24,453		$	8,792	$	4,435		$	12,501	$	29,893		$	105,838
Year-to-date Charge-offs		(1,825	)		—			—			—		—			—		(742	)		(2,567	)
Year-to-date Recoveries		1,825			—			—			—		—			—		742			2,567
Year-to-date Net Charge-offs		—			—			—			—		—			—		—			—

21

(in thousands)
	Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2023
	2023			2022			2021			2020		2019			Prior			Revolving Loans Amortized Cost Basis			Total
Residential Mortgage
Pass	$	20,239		$	24,906		$	26,429		$	14,500	$	5,481		$	15,349		$	—		$	106,904
Special Mention		—			—			—			—		—			—			—			—
Substandard		—			—			39			—		—			385			—			424
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Residential Mortgage loans	$	20,239		$	24,906		$	26,468		$	14,500	$	5,481		$	15,734		$	—		$	107,328
Year-to-date Charge-offs		—			—			—			—		—			(3	)		—			(3	)
Year-to-date Recoveries		—			—			—			—		—			—			—			—
Year-to-date Net Charge-offs		—			—			—			—		—			(3	)		—			(3	)
Residential Construction
Pass	$	3,714		$	1,991		$	3,198		$	—	$	—		$	—		$	—		$	8,903
Special Mention		—			—			—			—		—			—			—			—
Substandard		—			3,420			—			—		—			—			—			3,420
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Residential Construction loans	$	3,714		$	5,411		$	3,198		$	—	$	—		$	—		$	—		$	12,323
Year-to-date Charge-offs		—			—			—			—		—			—			—			—
Year-to-date Recoveries		—			—			—			—		—			—			—			—
Year-to-date Net Charge-offs		—			—			—			—		—			—			—			—
Consumer
Pass	$	350		$	758		$	133		$	149	$	70		$	273		$	12,516		$	14,249
Special Mention		—			—			—			—		—			—			—			—
Substandard		—			—			—			—		—			—			619			619
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Consumer loans	$	350		$	758		$	133		$	149	$	70		$	273		$	13,135		$	14,868
Year-to-date Charge-offs		(13	)		—			—			—		—			—			—			(13	)
Year-to-date Recoveries		—			—			—			—		—			1			—			1
Year-to-date Net Charge-offs		(13	)		—			—			—		—			1			—			(12	)
Total Loans
Pass	$	166,728		$	235,519		$	258,011		$	78,972	$	67,637		$	141,266		$	75,471		$	1,023,604
Special Mention		—			3,059			12,974			235		3,177			2,337			2,936			24,718
Substandard		395			3,452			3,849			2,226		8,530			1,402			807			20,661
Doubtful/Loss		—			—			—			—		—			—			—			—
Total Loans	$	167,123		$	242,030		$	274,834		$	81,433	$	79,344		$	145,005		$	79,214		$	1,068,983
Year-to-date Charge-offs	$	(1,885	)	$	(196	)	$	(36	)	$	—	$	(87	)	$	(3	)	$	(742	)	$	(2,949	)
Year-to-date Recoveries	$	1,825		$	—		$	—		$	—	$	87		$	149		$	742		$	2,803
Year-to-date Net Charge-offs	$	(60	)	$	(196	)	$	(36	)	$	—	$	—		$	146		$	—		$	(146	)

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, 2024 for cash proceeds equal to the fair value of the loans.  The Company serviced real estate mortgage loans for others totaling $175,691,000 and $184,288,000 at September 30, 2024 and December 31, 2023, 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 loan servicing income on the condensed consolidated statements of income.

Key assumptions used in measuring the fair value of mortgage servicing rights as of September 30, 2024 and December 31, 2023 were as follows:

	September 30, 2024			December 31, 2023
Constant prepayment rate		7.33	%		6.09	%
Discount rate		10.00	%		10.50	%
Weighted average life (years)		7.40			7.99

The following tables summarize the changes to the Company’s mortgage servicing rights assets as of the periods presented.  Mortgage servicing rights are included in Interest Receivable and Other Assets on the condensed consolidated balance sheets.

	(in thousands)
	June 30, 2024		Additions		Reductions			September 30, 2024
Mortgage servicing rights	$	1,387	$	16	$	(53	)	$	1,350
Valuation allowance		—		—		—			—
Mortgage servicing rights, net of valuation allowance	$	1,387	$	16	$	(53	)	$	1,350

	(in thousands)
	December 31, 2023		Additions		Reductions			September 30, 2024
Mortgage servicing rights	$	1,482	$	27	$	(159	)	$	1,350
Valuation allowance		—		—		—			—
Mortgage servicing rights, net of valuation allowance	$	1,482	$	27	$	(159	)	$	1,350

At September 30, 2024 and December 31, 2023, the estimated fair market value of the Company’s mortgage servicing rights assets was $1,880,000 and $2,094,000, respectively.  The change in fair value of mortgage servicing rights during 2024 was primarily due to a decrease in the amount of mortgage loans serviced coupled with changes in prepayment speeds and the discount rate.

The Company received contractually specified servicing fees of $112,000 and $117,000 for the three months ended September 30, 2024 and September 30, 2023, respectively.  The Company received contractually specified servicing fees of $340,000 and $357,000 for the nine months ended September 30, 2024 and September 30, 2023, respectively. Loan servicing income on the condensed consolidated statements of income includes 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, 2024 and December 31, 2023.

	(in thousands)
September 30, 2024	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	$	93,683	$	93,683	$	—	$	—
Securities of U.S. government agencies and corporations		110,739		—		110,739		—
Obligations of states and political subdivisions		68,679		—		68,679		—
Collateralized mortgage obligations		95,236		—		95,236		—
Mortgage-backed securities		264,067		—		264,067		—
Total investments at fair value	$	632,404	$	93,683	$	538,721	$	—

	(in thousands)
December 31, 2023	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
U.S. Treasury securities	$	87,182	$	87,182	$	—	$	—
Securities of U.S. government agencies and corporations		115,079		—		115,079		—
Obligations of states and political subdivisions		51,677		—		51,677		—
Collateralized mortgage obligations		90,947		—		90,947		—
Mortgage-backed securities		227,472		—		227,472		—
Total investments at fair value	$	572,357	$	87,182	$	485,175	$	—

24

Assets Recorded at Fair Value on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are included in the table below by level within the fair value hierarchy as of September 30, 2024.

	(in thousands)
September 30, 2024	Carrying Value		Level 1		Level 2		Level 3
Individually evaluated loans	$	139	$	—	$	—	$	139
Total assets at fair value	$	139	$	—	$	—	$	139

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

There were no liabilities measured at fair value on a recurring or non-recurring basis at September 30, 2024 and December 31, 2023.

Key methods and assumptions used in measuring the fair value of collateral dependent loans as of September 30, 2024 were as follows:

	Method	Assumption Inputs
Individually evaluated loans	Collateral, market, income, enterprise, liquidation	External appraised values, management assumptions regarding market trends or other relevant factors, selling costs generally ranging from 6% to 10%

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.  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, 2024 and December 31, 2023 were approximately as follows:

(in thousands)			September 30, 2024				December 31, 2023
	Level		Carrying amount		Fair value		Carrying amount		Fair value
Financial assets:
Cash and cash equivalents		1	$	163,918	$	163,918	$	149,211	$	149,211
Certificates of deposit		2		19,244		19,351		19,710		19,570
Stock in Federal Home Loan Bank and other equity securities		3		10,518		10,518		10,518		10,518
Loans receivable:
Net loans		3		1,042,304		961,748		1,052,465		958,077
Interest receivable		2		7,678		7,678		6,810		6,810
Mortgage servicing rights		3		1,350		1,880		1,482		2,094
Financial liabilities:
Time deposits		3		153,936		153,887		135,696		135,540
Interest payable		2		1,345		1,345		1,567		1,567

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, 2024		December 31, 2023
Undisbursed loan commitments	$	158,836	$	187,401
Standby letters of credit		895		1,251
Commitments to sell loans		960		—
	$	160,691	$	188,652

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, 2024 and December 31, 2023, 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 $895,000 and $1,251,000 at September 30, 2024 and December 31, 2023, 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 embedded agreements of recourse from the customer. The Bank has set aside a reserve for unfunded commitments in the amount of $950,000 and $1,150,000 at September 30, 2024 and December 31, 2023, 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, 2024 and December 31, 2023, the Company had no off-balance sheet derivatives requiring additional disclosure.

The Company may enter into interest rate lock commitments in connection with its mortgage banking activities to fund residential mortgage loans within specified times in the future. These commitments expose the Company to the risk that the price of the loan underlying the interest rate lock commitment might decline from the inception of the interest rate lock to the funding of the mortgage loan. To protect against this risk, the Company may enter into commitments to sell loans to economically hedge the risk of potential changes in the value of the loans that would result from the commitment. These commitments totaled $960,000 and $0 at September 30, 2024 and December 31, 2023, 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 had to repurchase one loan totaling $420,000 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 25, 2024, the Board of Directors of the Company declared a 5% stock dividend payable as of March 25, 2024 to shareholders of record as of February 29, 2024.  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, 2024.

	Number of Shares		Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term (in years)
Options outstanding at Beginning of Period		592,393	$	8.52
Granted		—		—
Expired		—		—
Cancelled / Forfeited		—		—
Exercised		—		—
Options outstanding at End of Period		592,393	$	8.52	$	1,051,764		4.11
Exercisable (vested) at End of Period		568,709	$	8.49	$	1,028,080		3.97

The following table presents the activity related to stock options for the nine months ended September 30, 2024.

	Number of Shares			Weighted Average Exercise Price		Aggregate Intrinsic Value		Weighted Average Remaining Contractual Term (in years)
Options outstanding at Beginning of Period		642,779		$	8.40
Granted		—			—
Expired		—			—
Cancelled / Forfeited		—			—
Exercised		(50,386	)		6.92
Options outstanding at End of Period		592,393		$	8.52	$	1,051,764		4.11
Exercisable (vested) at End of Period		568,709		$	8.49	$	1,028,080		3.97

The intrinsic value of options exercised was $90,000 and $305,000 during the nine months ended September 30, 2024 and September 30, 2023, respectively.  The fair value of awards vested was $88,000 and $123,000 during the nine months ended September 30, 2024 and September 30, 2023, respectively.

As of September 30, 2024, there was $38,000 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 1.49 years.

There was $6,000 and $30,000 of recognized compensation cost related to stock options granted for the three and nine months ended September 30, 2024, respectively.

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The following table presents the activity related to non-vested restricted stock for the three months ended September 30, 2024.

	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		259,886		$	8.51
Granted		—			—
Cancelled / Forfeited		(768	)		8.55
Exercised/Released/Vested		(849	)		6.58
Non-vested restricted stock outstanding at End of Period		258,269		$	8.52	$	2,660,171	2.58

The following table presents the activity related to non-vested restricted stock for the nine months ended September 30, 2024.

	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		274,268		$	8.72
Granted		84,046			8.33
Cancelled / Forfeited		(19,980	)		8.76
Exercised/Released/Vested		(80,065	)		8.93
Non-vested restricted stock outstanding at End of Period		258,269		$	8.52	$	2,660,171	2.58

The weighted average fair value of restricted stock granted during the nine months ended September 30, 2024 was $8.33 per share.

As of September 30, 2024, there was $1,116,000 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 2.58 years.

There was $149,000 and $565,000 of recognized compensation cost related to restricted stock awards for the three and nine months ended September 30, 2024, respectively.

29

The Company has an Employee Stock Purchase Plan (“ESPP”).  There are 376,856 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 25, 2024, payable March 25, 2024 to shareholders of record as of February 29, 2024.  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, 2023 to November 23, 2024.  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, 2024, there was no unrecognized compensation cost related to ESPP issuances.

There was $15,000 and $31,000 of recognized compensation cost related to ESPP issuances for the three and nine months ended September 30, 2024, respectively.

The weighted average fair value option at issuance date during the nine months ended September 30, 2024 was $2.14 per share.

A summary of the weighted average assumptions used in valuing ESPP issuances during the three and nine months ended September 30, 2024 is presented below.

	Three Months Ended September 30, 2024			Nine Months Ended September 30, 2024
Risk Free Interest Rate		5.27	%		5.27	%
Expected Dividend Yield		0.00	%		0.00	%
Expected Life in Years		1.00			1.00
Expected Price Volatility		25.96	%		25.96	%

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9.  ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table details activity in accumulated other comprehensive income (loss) for the three months ended September 30, 2024.

(in thousands)	Unrealized losses on securities			Officers’ retirement plan			Directors’ retirement plan		Accumulated other comprehensive loss
Balance as of June 30, 2024	$	(35,205	)	$	(70	)	$	121	$	(35,154	)
Current period other comprehensive income		12,167			—			—		12,167
Balance as of September 30, 2024	$	(23,038	)	$	(70	)	$	121	$	(22,987	)

The following table details activity in accumulated other comprehensive loss for the nine months ended September 30, 2024.

(in thousands)	Unrealized losses on securities			Officers’ retirement plan			Directors’ retirement plan		Accumulated other comprehensive loss
Balance as of December 31, 2023	$	(33,778	)	$	(70	)	$	121	$	(33,727	)
Current period other comprehensive income		10,740			—			—		10,740
Balance as of September 30, 2024	$	(23,038	)	$	(70	)	$	121	$	(22,987	)

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 loss		(2,676	)		—			—		(2,676	)
Balance as of September 30, 2023	$	(48,949	)	$	(308	)	$	53	$	(49,204	)

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10.  OUTSTANDING SHARES AND EARNINGS PER SHARE

On January 25, 2024, the Board of Directors of the Company declared a 5% stock dividend payable March 25, 2024 to shareholders of record as of February 29, 2024.  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, 2024 and 2023 (dollars in thousands except share and per share amounts):

	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023
Basic earnings per share:
Net income	$	5,488	$	4,619	$	14,188	$	14,672
Weighted average common shares outstanding		15,123,404		15,191,973		15,209,757		15,182,554
Basic EPS	$	0.36	$	0.30	$	0.93	$	0.97
Diluted earnings per share:
Net income	$	5,488	$	4,619	$	14,188	$	14,672
Weighted average common shares outstanding		15,123,404		15,191,973		15,209,757		15,182,554
Effect of dilutive shares		221,923		168,013		190,954		135,920
Adjusted weighted average common shares outstanding		15,345,327		15,359,986		15,400,711		15,318,474
Diluted EPS	$	0.36	$	0.30	$	0.92	$	0.96

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 27,499 shares and 355,263 shares for the three months ended September 30, 2024 and 2023, 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 0 shares for the three months ended September 30, 2024 and 2023, 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 306,120 shares and 476,883 shares for the nine months ended September 30, 2024 and 2023, 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 2,592 shares and 47,231 shares for the nine months ended September 30, 2024 and 2023, 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, 2024.

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 $3,372,000 and $4,073,000 as of September 30, 2024 and December 31, 2023, respectively. Right-of-use assets are included in Interest receivable and other assets on the condensed consolidated balance sheets. The Company had lease liabilities totaling $3,880,000 and $4,585,000 as of September 30, 2024 and December 31, 2023, respectively. Lease liabilities are included in Interest payable and other liabilities on the condensed consolidated balance sheets. The Company recognized lease expense totaling $323,000 and $315,000 for the three-month periods ended September 30, 2024 and 2023, respectively, and $928,000 and $916,000 for the nine-month periods ended September 30, 2024 and 2023, 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, 2024:

(in thousands)	September 30, 2024
2024 (remaining 3 months)	$	259
2025		1,051
2026		672
2027		611
2028		625
2029 and thereafter		895
Total lease payments		4,113
Less: interest		(233	)
Present value of lease liabilities	$	3,880

The following table presents supplemental cash flow information related to leases for the three and nine months ended September 30, 2024:

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2024		2023		2024		2023
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	244	$	296	$	839	$	910
Right-of-use assets obtained in exchange for new operating lease liabilities		—		—		—		245

The following table presents the weighted average operating lease term and discount rate as of September 30, 2024 and December 31, 2023:

	September 30, 2024			December 31, 2023
Weighted-average remaining lease term – operating leases, in years		5.03			5.43
Weighted-average discount rate – operating leases		2.38	%		2.42	%

33

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 2023 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

● 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

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

34

● 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, sources and amounts of funds and ability to satisfactorily manage our liquidity

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

● Expected rates of return, maturities, loss exposure, growth rates, yields, and projected results

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

● Maintenance of insurance coverages appropriate for our operations

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

● Possible changes in the fair values recorded on our financial statements of the assets acquired and liabilities assumed in our business combination completed in January 2023

● The possible effects on community banks and our business from the 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 2023 Annual Report on Form 10-K, and in our other reports to the SEC.

35

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, 2023.

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 2024 included:

• Net income of $14.2 million for the nine months ended September 30, 2024, down 3.3% from net income of $14.7 million earned for the same period last year. Net income of $5.5 million for the three months ended September 30, 2024, up 18.8% from net income of $4.6 million earned for the same period last year.

• Diluted income per share of $0.92 for the nine months ended September 30, 2024, down 4.2% from diluted income per share of $0.96 in the same period last year. Diluted income per share of $0.36 for the three months ended September 30, 2024, up 20.0% from diluted income per share of $0.30 for the same period last year.

• Net interest income of $47.8 million for the nine months ended September 30, 2024, down 3.6% from net interest income of $49.6 million for the same period last year. Net interest income of $16.5 million for the three months ended September 30, 2024, up 3.9% from net interest income of $15.9 million for the same period last year.

• Net interest margin of 3.60% for the nine months ended September 30, 2024, down 2.2% from net interest margin of 3.68% for the same period last year. Net interest margin of 3.65% for the three months ended September 30, 2024, up 4.0% from net interest margin of 3.51% for the same period last year.

• Provision for credit losses of $200 thousand for the nine months ended September 30, 2024, down 93.6% from $3.1 million for the same period last year. Reversal of provision for credit losses of $550 thousand for the three months ended September 30, 2024 compared to provision for credit losses of $500 thousand for the same period last year.  The Company recognized a reversal of provision of $550 thousand during the three months ended September 30, 2024, primarily due to a substantial payoff of a non-performing commercial loan relationship.

• Total assets of $1.93 billion as of September 30, 2024, up 3.1% from $1.87 billion as of December 31, 2023.

• Total net loans (including loans held-for-sale) of $1.04 billion as of September 30, 2024, down 1.0% from $1.05 billion as of December 31, 2023.

• Total investment securities of $632.4 million as of September 30, 2024, up 10.5% from $572.4 million as of December 31, 2023.

• Total deposits of $1.73 billion as of September 30, 2024, up 2.3% from $1.69 billion as of December 31, 2023.

36

SUMMARY FINANCIAL DATA

The Company recorded net income of $14,188,000 for the nine months ended September 30, 2024, representing a decrease of $484,000, or 3.3%, from net income of $14,672,000 for the same period in 2023. The Company recorded net income of $5,488,000 for the three months ended September 30, 2024, representing an increase of $869,000, or 18.8%, from net income of $4,619,000 for the same period in 2023.

The following tables present a summary of the results for the three and nine months ended September 30, 2024 and 2023, and a summary of financial condition at September 30, 2024 and December 31, 2023.

	Three Months Ended September 30, 2024			Three Months Ended September 30, 2023			Nine Months Ended September 30, 2024			Nine Months Ended September 30, 2023
(dollars in thousands except for per share amounts)
For the Period:
Net Income	$	5,488		$	4,619		$	14,188		$	14,672
Basic Earnings Per Common Share	$	0.36		$	0.30		$	0.93		$	0.97
Diluted Earnings Per Common Share	$	0.36		$	0.30		$	0.92		$	0.96
Return on Average Assets (annualized)		1.15	%		0.96	%		1.01	%		1.02	%
Return on Average Equity (annualized)		12.73	%		13.11	%		11.50	%		14.41	%
Average Equity to Average Assets		9.02	%		7.30	%		8.77	%		7.09	%

	September 30, 2024			December 31, 2023
(in thousands except for ratios)
At Period End:
Total Assets	$	1,930,690		$	1,871,832
Total Investment Securities, at fair value	$	632,404		$	572,357
Total Loans, Net (including loans held-for-sale)	$	1,042,304		$	1,052,465
Total Deposits	$	1,732,042		$	1,692,444
Loan-To-Deposit Ratio		60.2	%		62.2	%

37

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

(in thousands, except percentage amounts)

	Three months ended September 30, 2024							Three months ended September 30, 2023
	Average Balance		Interest		Yield/ Rate (4)			Average Balance		Interest		Yield/ Rate (4)
Assets
Interest-earning assets:
Loans (1)	$	1,048,639	$	14,315		5.43	%	$	1,031,647	$	13,098		5.04	%
Certificate of deposits		18,052		188		4.14	%		20,794		194		3.70	%
Interest bearing due from banks		126,903		1,632		5.12	%		148,250		1,870		5.00	%
Investment securities, taxable		550,360		3,586		2.59	%		551,555		2,685		1.93	%
Investment securities, non-taxable  (2)		42,736		312		2.90	%		31,765		199		2.49	%
Other interest earning assets		10,518		261		9.87	%		10,518		214		8.07	%
Total average interest-earning assets		1,797,208		20,294		4.49	%		1,794,529		18,260		4.04	%
Non-interest-earning assets:
Cash and due from banks		40,401							49,630
Premises and equipment, net		9,470							9,704
Interest receivable and other assets		55,357							59,579
Total average assets	$	1,902,436						$	1,913,442
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing transaction deposits		381,356		718		0.75	%		415,232		472		0.45	%
Savings and MMDA’s		431,446		1,443		1.33	%		443,536		819		0.73	%
Time, $250,000 or less		117,985		1,341		4.52	%		98,898		968		3.88	%
Time, over $250,000		38,453		296		3.06	%		17,554		127		2.87	%
Total average interest-bearing liabilities		969,240		3,798		1.56	%		975,220		2,386		0.97	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		745,700							779,615
Interest payable and other liabilities		15,924							18,858
Total liabilities		1,730,864							1,773,693
Total average stockholders’ equity		171,572							139,749
Total average liabilities and stockholders’ equity	$	1,902,436						$	1,913,442
Net interest income and net interest margin (3)			$	16,496		3.65	%			$	15,874		3.51	%

(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 $4 and $(50) for the three months ended September 30, 2024 and 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.

38

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

(in thousands, except percentage amounts)

	Nine months ended September 30, 2024							Nine months ended September 30, 2023
	Average Balance		Interest		Yield/ Rate (4)			Average Balance		Interest		Yield/ Rate (4)
Assets
Interest-earning assets:
Loans (1)	$	1,045,710	$	41,620		5.32	%	$	994,504	$	38,197		5.14	%
Certificate of deposits		17,935		542		4.04	%		21,115		556		3.52	%
Interest bearing due from banks		127,030		5,077		5.34	%		174,391		6,411		4.92	%
Investment securities, taxable		531,871		9,519		2.39	%		568,322		8,041		1.89	%
Investment securities, non-taxable  (2)		39,600		825		2.78	%		36,092		692		2.56	%
Other interest earning assets		10,518		784		9.96	%		9,985		557		7.46	%
Total average interest-earning assets		1,772,664		58,367		4.40	%		1,804,409		54,454		4.03	%
Non-interest-earning assets:
Cash and due from banks		38,716							47,135
Premises and equipment, net		9,654							8,713
Interest receivable and other assets		57,104							58,805
Total average assets	$	1,878,138						$	1,919,062
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing transaction deposits		375,090		1,851		0.66	%		432,741		1,107		0.34	%
Savings and MMDA’s		429,227		3,910		1.22	%		460,198		1,926		0.56	%
Time, $250,000 or less		114,847		3,908		4.55	%		73,485		1,542		2.81	%
Time, over $250,000		37,430		862		3.08	%		13,043		242		2.48	%
Total average interest-bearing liabilities		956,594		10,531		1.47	%		979,467		4,817		0.66	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		740,261							785,634
Interest payable and other liabilities		16,523							17,837
Total liabilities		1,713,378							1,782,938
Total average stockholders’ equity		164,760							136,124
Total average liabilities and stockholders’ equity	$	1,878,138						$	1,919,062
Net interest income and net interest margin (3)			$	47,836		3.60	%			$	49,637		3.68	%

(1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest thereon is generally excluded. Loan interest income includes loan fees, net of deferred costs of approximately $(448) and $(17) for the nine months ended September 30, 2024 and 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.

39

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

(in thousands, except percentage amounts)

	Three months ended September 30, 2024							Three months ended June 30, 2024
	Average Balance		Interest		Yield/ Rate			Average Balance		Interest		Yield/ Rate (4)
Assets
Interest-earning assets:
Loans (1)	$	1,048,639	$	14,315		5.43	%	$	1,041,102	$	13,830		5.34	%
Certificates of deposit		18,052		188		4.14	%		17,081		171		4.03	%
Interest bearing due from banks		126,903		1,632		5.12	%		130,963		1,913		5.87	%
Investment securities, taxable		550,360		3,586		2.59	%		519,789		3,088		2.39	%
Investment securities, non-taxable (2)		42,736		312		2.90	%		38,055		261		2.76	%
Other interest earning assets		10,518		261		9.87	%		10,518		267		10.21	%
Total average interest-earning assets		1,797,208		20,294		4.49	%		1,757,508		19,530		4.47	%
Non-interest-earning assets:
Cash and due from banks		40,401							39,630
Premises and equipment, net		9,470							9,642
Interest receivable and other assets		55,357							59,523
Total average assets	$	1,902,436						$	1,866,303
Liabilities and Stockholders’ Equity:
Interest-bearing liabilities:
Interest-bearing transaction deposits		381,356		718		0.75	%		371,657		622		0.67	%
Savings and MMDA’s		431,446		1,443		1.33	%		425,601		1,272		1.20	%
Time, $250,000 and under		117,985		1,341		4.52	%		123,303		1,356		4.42	%
Time, over $250,000		38,453		296		3.06	%		34,605		302		3.51	%
Total average interest-bearing liabilities		969,240		3,798		1.56	%		955,166		3,552		1.50	%
Non-interest-bearing liabilities:
Non-interest-bearing demand deposits		745,700							732,153
Interest payable and other liabilities		15,924							15,737
Total liabilities		1,730,864							1,703,056
Total average stockholders’ equity		171,572							163,247
Total average liabilities and stockholders’ equity	$	1,902,436						$	1,866,303
Net interest income and net interest margin (3)			$	16,496		3.65	%			$	15,978		3.66	%

(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 $4 and $(100) for the three months ended September 30, 2024 and June 30, 2024, 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.

40

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, 2024 over the three months ended September 30, 2023, the nine months ended September 30, 2024 over the nine months ended September 30, 2023, and the three months ended September 30, 2024 over the three months ended June 30, 2024.  Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume.

	Three Months Ended September 30, 2024								Nine Months Ended September 30, 2024								Three Months Ended September 30, 2024
	Over								Over								Over
	Three Months Ended September 30, 2023								Nine Months Ended September 30, 2023								Three Months Ended June 30, 2024
	Volume			Interest Rate		Change			Volume			Interest Rate		Change			Volume			Interest Rate			Change
Increase (Decrease) in Interest Income:
Loans	$	213		$	1,004	$	1,217		$	2,038		$	1,385	$	3,423		$	146		$	339		$	485
Certificates of Deposit		(27	)		21		(6	)		(91	)		77		(14	)		11			6			17
Due From Banks		(281	)		43		(238	)		(1,851	)		517		(1,334	)		(55	)		(226	)		(281	)
Investment Securities - Taxable		(6	)		907		901			(544	)		2,022		1,478			206			292			498
Investment Securities - Non-taxable		76			37		113			71			62		133			36			15			51
Other Assets		—			47		47			32			195		227			—			(6	)		(6	)
	$	(25	)	$	2,059	$	2,034		$	(345	)	$	4,258	$	3,913		$	344		$	420		$	764
Increase (Decrease) in Interest Expense:
Deposits:
Interest-Bearing Transaction Deposits	$	(41	)	$	287	$	246		$	(166	)	$	910	$	744		$	17		$	79		$	96
Savings & MMDAs		(22	)		646		624			(139	)		2,123		1,984			19			152			171
Time Certificates		399			143		542			1,887			1,099		2,986			(4	)		(17	)		(21	)
	$	336		$	1,076	$	1,412		$	1,582		$	4,132	$	5,714		$	32		$	214		$	246
Increase (Decrease) in Net Interest Income:	$	(361	)	$	983	$	622		$	(1,927	)	$	126	$	(1,801	)	$	312		$	206		$	518

41

CHANGES IN FINANCIAL CONDITION

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $14,707,000, or 9.9%, increase in cash and cash equivalents, a $466,000, or 2.4%, decrease in certificates of deposit, a $60,047,000, or 10.5%, increase in investment securities available-for-sale, and a $10,161,000, or 1.0%, decrease in net loans held-for-investment from December 31, 2023 to September 30, 2024. The increase in cash and cash equivalents was primarily due to an increase in deposit balances coupled with a decrease in loans due to proceeds from loan payoffs, net of loan originations, which was partially offset by an increase in investment securities due to net purchases of investment securities. The decrease in certificates of deposits was due to net maturities and repayments of certificates of deposit. The decrease in net loans held-for-investment was primarily due to net payoffs of agriculture, residential mortgage, and residential construction loans, which was partially offset by net originations of commercial, commercial real estate and consumer loans.

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an increase in total deposits of $39,598,000, or 2.3%, from December 31, 2023 to September 30, 2024. The overall increase in total deposits was primarily due to seasonal fluctuations due to changes in market conditions and monetary policy.

CHANGES IN RESULTS OF OPERATIONS

Interest Income

The Federal Open Market Committee lowered the benchmark rate by 50 basis points to a target range of 4.75% - 5.00% during the quarter ended September 30, 2024.

Interest income on loans for the nine months ended September 30, 2024 was up 9.0% from the same period in 2023, increasing from $38,197,000 to $41,620,000, and was up 9.3% for the three months ended September 30, 2024 over the same period in 2023, increasing from $13,098,000 to $14,315,000. The increase in interest income on loans for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to an increase in average balance of loans coupled with an 18 basis point increase in yield on loans. The increase in interest income on loans for the three months ended September 30, 2024 as compared to the same period a year ago was primarily due to an increase in average balance of loans coupled with a 39 basis point increase in yield on loans.

Interest income on certificates of deposit for the nine months ended September 30, 2024 was down 2.5% from the same period in 2023, decreasing from $556,000 to $542,000, and was down 3.1% for the three months ended September 30, 2024 over the same period in 2023, decreasing from $194,000 to $188,000. The decrease in interest income on certificates of deposit for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of certificates of deposit, which was partially offset by a 52 basis point increase in yield on certificates of deposit. The decrease in interest income on certificates of deposit for the three months ended September 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of certificates of deposit, which was partially offset by a 44 basis point increase in yield on certificates of deposit.

Interest income on interest-bearing due from banks for the nine months ended September 30, 2024 was down 20.8% from the same period in 2023, decreasing from $6,411,000 to $5,077,000, and was down 12.7% for the three months ended September 30, 2024 over the same period in 2023, decreasing from $1,870,000 to $1,632,000. The decrease in interest income on interest-bearing due from banks for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of interest-bearing due from banks, which was partially offset by a 42 basis point increase in yield on interest-bearing due from banks. The decrease in interest income on interest-bearing due from banks for the three months ended September 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of interest-bearing due from banks, which was partially offset by a 12 basis point increase in yield on interest-bearing due from banks.

Interest income on investment securities available-for-sale for the nine months ended September 30, 2024 was up 18.5% from the same period in 2023, increasing from $8,733,000 to $10,344,000, and was up 35.2% for the three months ended September 30, 2024 over the same period in 2023, increasing from $2,884,000 to $3,898,000. The increase in interest income on investment securities for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to a 49 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, 2024 as compared to the same period a year ago was primarily due to a 65 basis point increase in investment yields coupled with an increase in average investment securities.

Interest income on other earning assets for the nine months ended September 30, 2024 was up 40.8% from the same period in 2023, increasing from $557,000 to $784,000, and was up 22.0% for the three months ended September 30, 2024 over the same period in 2023, increasing from $214,000 to $261,000. This income is primarily derived from dividends received from the Federal Home Loan Bank. The increase in interest income on other earning assets for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to a 250 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, 2024 as compared to the same period a year ago was due to a 180 basis point increase in yield on other earning assets.

42

The Company had no Federal Funds sold balances during the three and nine months ended September 30, 2024 and September 30, 2023.

Interest Expense

Interest expense on deposits for the nine months ended September 30, 2024 was up 118.6% from the same period in 2023, increasing from $4,817,000 to $10,531,000, and was up 59.2% for the three months ended September 30, 2024 over the same period in 2023, increasing from $2,386,000 to $3,798,000. The increase in interest expense for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to an 81 basis point increase in average interest-bearing deposit yield, which was partially offset by a decrease in average balance of interest-bearing liabilities. The increase in interest expense for the three months ended September 30, 2024 as compared to the same period a year ago was primarily due to a 59 basis point increase in average interest-bearing deposit yield, which was partially offset by a decrease in average balance of interest-bearing liabilities.

Provision for Credit Losses

Provision for credit losses for the nine months ended September 30, 2024 was down 93.6% from the same period in 2023, decreasing from $3,100,000 to $200,000, and was down 210.0% for the three months ended September 30, 2024 over the same period in 2023, decreasing from $500,000 to a reversal of provision of $550,000. The levels of forecasted national unemployment and forecasted gross domestic product remained relatively stable during the three and nine months ended September 30, 2024.  The Company recognized a reversal of provision of $550 thousand during the three months ended September 30, 2024, primarily due to a substantial payoff of a non-performing commercial loan relationship.

Non-Interest Income

Non-interest income was down 26.4% for the nine months ended September 30, 2024 from the same period in 2023, decreasing from $6,155,000 to $4,529,000. The decrease was primarily driven by a bargain purchase gain recognized during the nine months ended September 30, 2023. The Company recognized a bargain purchase gain totaling approximately $1.4 million resulting from the acquisition of the Colusa, Willows, and Orland branches located in California in the first quarter of 2023.

Non-interest income was down 13.4% for the three months ended September 30, 2024 from the same period in 2023, decreasing from $1,776,000 to $1,538,000.  The decrease was primarily due to decreases in other income and losses on sales of securities.

Non-Interest Expenses

Total non-interest expenses were down 0.2% for the nine months ended September 30, 2024 from the same period in 2023, decreasing from $32,534,000 to $32,460,000. The decrease was primarily due to a decrease in salaries and employee benefits, which was partially offset by increases in occupancy and equipment and other expenses. The decrease in salaries and employee benefits was primarily due to a decrease in full-time equivalent employees and decreases in contingent compensation and profit sharing expense. The increase in occupancy and equipment expenses was primarily due to an increase in depreciation expense due to a full nine months of expenses related to the acquired branches in the first quarter of 2023. The increase in other expenses was primarily due to increases in loan collection expenses, which was partially offset by a decrease in legal fees.

Total non-interest expenses were up 0.5% for the three months ended September 30, 2024 from the same period in 2023, increasing from $10,883,000 to $10,934,000. The decrease was primarily due to a decrease in salaries and employee benefits, which was partially offset by an increase in occupancy and equipment and data processing expense. The decrease in salaries and employee benefits was primarily due to a decrease in full-time equivalent employees. The increase in occupancy and equipment and data processing expense was primarily due to increases in service contracts partially due to a full year of additional processing related to new branches acquired in the first quarter of 2023.

43

The following table sets forth other non-interest expenses by category for the three and nine months ended September 30, 2024 and 2023.

	(in thousands)
	Three months ended September 30, 2024			Three months ended September 30, 2023		Nine months ended September 30, 2024		Nine months ended September 30, 2023
Other non-interest expenses
FDIC assessments	$	210		$	231	$	633	$	681
Contributions		76			79		242		190
Legal fees		59			88		238		428
Accounting and audit fees		151			134		472		451
Consulting fees		313			163		768		599
Postage expense		36			27		114		123
Telephone expense		35			37		108		124
Public relations		42			87		222		230
Training expense		43			37		127		165
Loan origination expense		(39	)		120		89		248
Computer software depreciation		—			1		2		17
Sundry losses		167			80		421		203
Loan collection expense (recovery)		102			160		132		(294	)
Debit card expense		323			305		949		902
Other non-interest expense		460			437		1,522		1,296
Total other non-interest expenses	$	1,978		$	1,986	$	6,039	$	5,363

44

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 0.6% for the nine months ended September 30, 2024 from the same period in 2023, increasing from $5,486,000 to $5,517,000, and increased 31.2% for the three months ended September 30, 2024 from the same period in 2023, increasing from $1,648,000 to $2,162,000. The effective tax rate was 28.0% and 27.2% for the nine months ended September 30, 2024 and September 30, 2023, respectively. The effective tax rate was 28.3% and 26.3% for the three months ended September 30, 2024 and September 30, 2023, 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, 2024		December 31, 2023
Undisbursed loan commitments	$	158,836	$	187,401
Standby letters of credit		895		1,251
Commitments to sell loans		960		—
	$	160,691	$	188,652

The reserve for unfunded lending commitments amounted to $950,000 and $1,150,000 as of September 30, 2024 and December 31, 2023, 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.

45

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, 2024 and December 31, 2023:

	At September 30, 2024						At December 31, 2023
	Gross		Guaranteed		Net		Gross		Guaranteed		Net
(in thousands)
Commercial	$	139	$	139	$	—	$	—	$	—	$	—
Commercial real estate		466		—		466		—		—		—
Agriculture		2,380		—		2,380		2,871		—		2,871
Residential mortgage		469		—		469		424		—		424
Residential construction		—		—		—		—		—		—
Consumer		561		—		561		703		—		703
Total non-accrual loans	$	4,015	$	139	$	3,876	$	3,998	$	—	$	3,998

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 $4,015,000 at September 30, 2024 and were comprised of one commercial loan totaling $139,000, one commercial real estate loan totaling $466,000, two agriculture loans totaling $2,380,000, four residential mortgage loans totaling $469,000 and three consumer loans totaling $561,000. Non-accrual loans amounted to $3,998,000 at December 31, 2023 and were comprised of two agriculture loans totaling $2,871,000, three residential mortgage loans totaling $424,000 and four consumer loans totaling $703,000.

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.

46

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 $4,410,000, or 52.9%, to $3,924,000 during the first nine months of 2024. Non-performing assets, net of guarantees, represented 0.2% of total assets at September 30, 2024.

	At September 30, 2024							At December 31, 2023
	Gross		Guaranteed		Net			Gross		Guaranteed		Net
(dollars in thousands)
Non-accrual loans	$	4,015	$	139	$	3,876		$	3,998	$	—	$	3,998
Loans 90 days past due and still accruing		48		—		48			4,336		—		4,336
Total non-performing loans		4,063		139		3,924			8,334		—		8,334
Other real estate owned		—		—		—			—		—		—
Total non-performing assets	$	4,063	$	139	$	3,924		$	8,334	$	—	$	8,334
Non-performing loans (net of guarantees) to total loans						0.4	%						0.8	%
Non-performing assets (net of guarantees) to total assets						0.2	%						0.5	%
Allowance for credit losses to non-performing loans (net of guarantees)						418.5	%						199.1	%

The Company had one loan totaling $48,000 that was 90 days or more past due and still accruing as of September 30, 2024. The Company had two loans totaling $4,336,000 that were 90 days or more past due and still accruing as of December 31, 2023.

Excluding the non-performing loans, net of guaranteed loans cited previously, loans totaling $13,876,000 and $12,327,000 were classified as substandard or doubtful loans, representing potential problem loans at September 30, 2024 and December 31, 2023, respectively. Management believes that the allowance for credit losses at September 30, 2024 and December 31, 2023 appropriately reflected expected credit losses in the loan portfolio at that date.  The ratio of the allowance for credit losses to total loans was 1.55% at each of the periods ended September 30, 2024 and December 31, 2023.

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, 2024 and December 31, 2023.

47

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, 2024 and 2023, and for the year ended December 31, 2023:

Analysis of the Allowance for Credit Losses

(Amounts in thousands, except percentage amounts)

	Nine months ended September 30,						Year ended December 31,
	2024			2023			2023
Balance at beginning of period	$	16,596		$	14,792		$	14,792
Impact of adopting ASC 326		—			800			800
Provision for credit losses		400			3,250			1,150
Loans charged-off:
Commercial		(606	)		(269	)		(366	)
Commercial Real Estate		—			—			—
Agriculture		—			(2,567	)		(2,567	)
Residential Mortgage		—			(3	)		(3	)
Residential Construction		—			—			—
Consumer		(19	)		(10	)		(13	)
Total charged-off		(625	)		(2,849	)		(2,949	)
Recoveries:
Commercial		47			155			235
Commercial Real Estate		—			—			—
Agriculture		—			—			2,567
Residential Mortgage		—			—			—
Residential Construction		—			—			—
Consumer		4			1			1
Total recoveries		51			156			2,803
Net charge-offs		(574	)		(2,693	)		(146	)
Balance at end of period	$	16,422		$	16,149		$	16,596
Ratio of net charge-offs to average loans outstanding during the period (annualized)		(0.07	%)		(0.36	%)		(0.01	%)
Allowance for credit losses to total loans		1.55	%		1.53	%		1.55	%
Nonaccrual loans to total loans		0.4	%		0.6	%		0.4	%
Allowance for credit losses to nonaccrual loans		409.0	%		263.9	%		415.1	%

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Deposits

Deposits are one of the Company’s primary sources of funds.  At September 30, 2024 and December 31, 2023, the Company had the following deposit mix:

	September 30, 2024			December 31, 2023
Non-interest bearing transaction		43.1	%		44.0	%
Interest-bearing transaction		22.4	%		22.5	%
Savings and MMDA		25.6	%		25.5	%
Time		8.9	%		8.0	%

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, 2024 and December 31, 2023 are summarized as follows:

	(in thousands)
	September 30, 2024		December 31, 2023
Three months or less	$	15,933	$	4,321
Over three to six months		3,719		3,653
Over six to twelve months		14,732		13,277
Over twelve months		3,454		5,072
Total	$	37,838	$	26,323

Approximately 40% and 37% of our deposits were uninsured as of September 30, 2024 and December 31, 2023, respectively.

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 at 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 Statements of Cash Flows. For the nine months ended September 30, 2024, net liquidity used in investing activities totaled $35,296,000.

The Company’s available-for-sale investment securities plus cash and cash equivalents in excess of reserve requirements and certificates of deposit totaled $815,566,000 on September 30, 2024, which was 42.2% of assets at that date. This was an increase of $74,288,000 from $741,278,000 and 39.6% of assets as of December 31, 2023. 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, 2024, the effective duration of our investment securities was 3.06 with projected principal cashflow of $50,012,000 for the remainder of 2024 available for reinvestment or liquidity needs. The Company had no held-to-maturity securities as of September 30, 2024 and December 31, 2023.

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 Statements of Cash Flows. As of September 30, 2024, the Company had $0 in borrowings outstanding. For the nine months ended September 30, 2024, net liquidity provided by financing activities totaled $36,796,000, primarily due to a net increase in deposits. 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, 2024, operating activities provided cash of $13,207,000.

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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 60.2% and 62.2% as of September 30, 2024 and December 31, 2023, respectively.

Loan demand during the remainder of 2024 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 2024 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 $130,000,000 at September 30, 2024.  Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity at September 30, 2024 of $394,192,000; credit availability is subject to certain collateral requirements.

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

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, 2024, 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, excluding the capital conservation buffer, as of September 30, 2024.

	(amounts in thousands except percentage amounts)
	Actual					Well Capitalized
	Capital		Ratio			Ratio Requirement
Leverage	$	199,232		10.3	%		5.0	%
Common Equity Tier 1	$	214,812		16.0	%		6.5	%
Tier 1 Risk-Based	$	214,812		16.0	%		8.0	%
Total Risk-Based	$	214,812		17.3	%		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, 2024, from those presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, 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, 2024.  This conclusion is based on an evaluation conducted under the supervision and with the participation of management.

(b)  During the quarter ended September 30, 2024, 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 2023 Form 10-K, which is incorporated by reference herein, and to the following:

Several of California’s Largest Home Insurance Providers Have Recently Paused or Severely Limited Their Issuance of New Policies, or Their Renewal of Existing Policies, in the State, Which Could Increase the Bank’s Risk of Loss in its Loan Portfolio

At September 30, 2024, loans secured by real estate comprised approximately 87% of the total loans in the Bank’s portfolio.  At September 30, 2024, all of the Bank’s real estate mortgage and construction loans were secured fully or in part by deeds of trust on underlying real estate.  Most of the Company’s customers, including its loan customers, are located in the State of California.

Recently, several of California’s largest home insurance providers, including State Farm, Allstate, Farmers, USAA, Travelers, Nationwide and Chubb, have either paused or severely limited their issuance of new policies, or their renewal of existing policies, in the state. Mounting claims from wildfire damages, the increasing cost of building and repairing homes in California, and a steep increase in reinsurance premiums, as well as state insurance regulations that make it difficult for insurers to adjust premiums in response to the evolving risk landscape, have challenged the capacity of insurance companies to sustainably and profitably offer home insurance in California. The result of these actions has been to significantly limit the availability of home insurance in California, where homeowners already face escalating property values and high wildfire, seismic, severe weather and other risks.

The California Department of Insurance enforces some safeguards to temporarily shield homeowners from the cancellation or non-renewal of home insurance policies in high-risk areas, particularly those prone to wildfires.  In addition, the California Fair Access to Insurance Requirements (FAIR) Plan, a state-established risk pool, operates as an insurer of last resort, providing temporary coverage for California homeowners unable to obtain (generally at increased premium cost) such coverage from a traditional insurance carrier; however, enrollment in the FAIR Plan as a percentage of the total number of residential insurance policies in California has steadily increased over the past five years, particularly in counties with the highest wildfire risk, threatening the ongoing stability of the Plan.  In late 2023, following the California Governor’s declaration of a State of Emergency regarding property insurance, the Insurance Commissioner of the State of California introduced a comprehensive package of executive actions aimed at insurance reform. In August 2024, the California Department of Insurance issued proposed regulations intended to cause insurance companies to write more policies in wildfire distressed areas of California as a condition for using forward-looking wildfire modeling designed to more accurately assess wildfire risks and to reverse FAIR Plan growth. There can be no assurance that these regulatory actions will increase insurance availability or stabilize and strengthen California’s insurance market.

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Many homeowners in the State of California have been negatively impacted by the contraction of insurance options in the State and the resulting lack of access to affordable home insurance, which could adversely impact the ability of prospective homebuyers to obtain insurance, and escalating premiums and limited coverage options could result in limiting coverage in the event of loss.  If any loss suffered by a loan customer of the Bank is not insured or exceeds applicable insurance limits, this could increase the risk of loss in the Bank’s loan portfolio, which could have a material adverse effect on the Company’s business, financial condition, and results of operations.  For additional information, see “The Bank’s Dependence on Real Estate Lending Increases Our Risk of Losses” in Part I, Item 1A “Risk Factors” in our 2023 Annual Report on Form 10-K.

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 $16.4 million, or 1.55% of total loans, at September 30, 2024, compared to $16.6 million, or 1.55% of total loans, at December 31, 2023, and 418.5% of total non-performing loans net of guaranteed portions at September 30, 2024, compared to 199.1% of total non-performing loans, net of guaranteed portions at December 31, 2023. Reversal of provision for credit losses totaling $550 thousand and provision for credit losses totaling $500 thousand for the three-month periods ended September 30, 2024 and September 30, 2023, respectively. Provision for credit losses totaling $200 thousand and $3.1 million for the nine-month periods ended September 30, 2024 and September 30, 2023, respectively.

Material future additions to the allowance for estimated losses on loans may be necessary if material adverse changes in economic conditions in our markets were to continue to occur and the performance of the Bank’s loan portfolio were to deteriorate.

Other real estate owned is initially recorded at fair value less estimated costs to sell the property, thereby establishing the new cost basis of other real estate. Losses arising at the time of acquisition of such properties are charged against the allowance for credit losses. Subsequent to acquisition, such properties are carried at the lower of cost or fair value less estimated selling expenses, determined on an individual asset basis. Any deficiency resulting from the excess of cost over fair value less estimated selling expenses is recognized as a valuation allowance. Any subsequent increase in fair value up to its cost basis is recorded as a reduction of the valuation allowance. The FDIC and the California DFPI, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses on loans and the carrying value of its assets.  Increases in the provision for credit losses on loans and valuation allowance on 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, 2024, loans secured by real estate comprised approximately 87% of the total loans in the Bank’s portfolio. At September 30, 2024, all of the Bank’s real estate mortgage and construction loans and approximately 1% 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

Issuer Purchases of Equity Securities

The Company made the following purchases of its common stock during the three months ended September 30, 2024:

	(a)		(b)		(c)		(d)
Period	Total number of shares purchased		Average price paid per share		Number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased under the plans or programs(1)
July 1 - July 31, 2024		—		—		—		795,543
August 1 - August 31, 2024		52,667	$	9.81		52,667		742,876
September 1 - September 30, 2024		103,111	$	10.09		103,111		639,765
Total		155,778				155,778

(1) On March 27, 2024, the Company approved a stock repurchase program effective May 1, 2024.  The stock repurchase program, which remains in effect until April 30, 2026 unless terminated sooner, allows repurchases by the Company in an aggregate amount of no more than 6% of the Company’s 15,550,731 outstanding shares of common stock as of March 21, 2024.  This represented total shares of 933,043 eligible for repurchase at May 1, 2024.

ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. – OTHER INFORMATION

None.

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ITEM 6.   – EXHIBITS

Exhibit Number	Description of Document
31.1	Rule 13a — 14(a) Certification of Chief Executive Officer
31.2	Rule 13a — 14(a) Certification of Chief Financial Officer
32.1**	Statement of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
32.2**	Statement of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
101.INS	Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH	Inline XBRL Taxonomy Extension Schema Document.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104	Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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

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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 8, 2024	By:	/s/  Kevin Spink
			Kevin Spink, Executive Vice President / Chief Financial Officer
			(Principal Financial Officer and Duly Authorized Officer)

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