FIRST NORTHERN COMMUNITY BANCORP 10-K

ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Management’s Report on Internal Control over Financial Reporting Page 57 Report of Independent Registered Public Accounting Firm (PCAOB ID # 659 ) Page 58 Consolidated Balance Sheets as of December 31, 2022 and 2021 Page 60 Consolidated Statements of Income for Years Ended December 31, 2022 and 2021 Page 61 Consolidated Statements of Comprehensive Income (Loss) for Years Ended December 31, 2022 and 2021 Page 62 Consolidated Statement of Stockholders’ Equity for Years Ended December 31, 2022 and 2021 Page 63 Consolidated Statements of Cash Flows for Years Ended December 31, 2022 and 2021 Page 64 Notes to Consolidated Financial Statements Page 65 56 Table of Contents Management’s Report FIRST NORTHERN COMMUNITY BANCORP AND SUBSIDIARY MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of First Northern Community Bancorp and subsidiary (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2022. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the board of directors; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Management recognizes that even a highly effective internal control system has inherent risks, including the possibility of human error and the circumvention or overriding of controls, and that the effectiveness of an internal control system can change with circumstances. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022, based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management of the Company has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2022. /s/ Jeremiah Z. Smith Jeremiah Z. Smith President/Chief Executive Officer/Director (Principal Executive Officer) /s/ Kevin Spink Kevin Spink Executive Vice President/Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) March 10, 2023 57 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of First Northern Community Bancorp Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of First Northern Community Bancorp and subsidiary (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022 and 2021, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Loan Losses As described in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for loan losses balance was $14.8 million as of December 31, 2022. The allowance for loan losses is maintained to provide for estimated losses inherent in existing loans based on evaluations of collectability and prior loss experience. The allowance consists of specific and general components. Specific reserves are recorded to recognize impairments on individually evaluated loans. The general component covers loans evaluated collectively, and the estimate is determined using historical losses adjusted for qualitative and environmental factors. The qualitative and environmental factors used to adjust historical loss rates by loan type consist of the risks of the Company’s general lending activity, including risk of losses that are attributable to national or local economic or industry trends which have occurred but have yet been recognized in past loan charge-off history, and risk of losses attributable to general attributes of the Company’s loan portfolio and credit administration. 58 Table of Contents We identified management’s estimation of qualitative and environmental factors as a critical audit matter. The qualitative and environmental factors include current economic conditions, concentrations of credit, nature and volume of the loan portfolio, trends in delinquent loans and special assets, values of underlying collateral, results of external loan reviews and regulatory examinations, changes in lending policies and procedures, experience of lending staff, changes in competition and regulatory requirements, and other internal and external factors as determined by management. Each qualitative and environmental factor is assigned a value to reflect improving, stable, or declining economic conditions based on management’s best judgement using relevant information available at the time of evaluation. Auditing management’s judgments regarding the determination of qualitative and environmental factors applied to the allowance for loan losses involved a high degree of subjectivity. The primary procedures we performed to address this critical audit matter included: • Obtained management’s analysis and supporting documentation related to the qualitative and environmental factors and tested whether the qualitative and environmental factors used in the calculation of the allowance for loan losses are supported by the documentation provided by management. • Tested the mathematical accuracy of the allowance for loan losses calculation, including completeness and accuracy of the data used in the calculation, sources of data and application of the qualitative and environmental factors within the calculation. • Performed a sensitivity analysis over the qualitative and environmental factor thresholds established by management. /s/ MOSS ADAMS LLP Sacramento, California March 10, 2023 We have served as the Company’s auditor since 2006. 59 Table of Contents FIRST NORTHERN COMMUNITY BANCORP AND SUBSIDIARY Consolidated Balance Sheets December 31, 2022 and 2021 (in thousands, except shares and share amounts) 2022 2021 Assets Cash and cash equivalents $ 187,417 $ 345,929 Certificates of deposit 20,948 13,272 Investment securities – available-for-sale, at fair value (includes securities pledged to creditors with the right to sell or repledge of $ 44,319 at December 31, 2022 and $ 39,695 at December 31, 2021 ) 618,092 632,213 Loans (net of allowance for loan losses of $ 14,792 at December 31, 2022 and $ 13,952 at December 31, 2021 ) 970,138 852,717 Loans held-for-sale — 1,063 Stock in Federal Home Loan Bank and other equity securities, at cost 9,440 7,097 Premises and equipment, net 6,122 6,552 Interest receivable and other assets 59,204 40,244 Total Assets $ 1,871,361 $ 1,899,087 Liabilities and Stockholders’ Equity Liabilities: Deposits: Demand $ 775,173 $ 820,412 Interest-bearing transaction deposits 448,039 432,479 Savings and MMDAs 459,307 426,026 Time, $250,000 or less 35,115 38,388 Time, over $250,000 9,240 10,997 Total Deposits 1,726,874 1,728,302 Interest payable and other liabilities 19,447 19,874 Total Liabilities 1,746,321 1,748,176 Commitments and contingencies (Note 10 and 11) Stockholders’ Equity: Common stock, no par value; 16,000,000 shares authorized; 14,652,584 and 13,848,904 shares issued and outstanding at December 31, 2022 and 2021 , respectively 116,099 109,793 Additional paid-in capital 977 977 Retained earnings 54,492 44,338 Accumulated other comprehensive loss, net ( 46,528 ) ( 4,197 ) Total Stockholders’ Equity 125,040 150,911 Total Liabilities and Stockholders’ Equity $ 1,871,361 $ 1,899,087 See accompanying notes to consolidated financial statements. 60 Table of Contents FIRST NORTHERN COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Income Years Ended December 31, 2022 and 2021 (in thousands, except per share amounts) 2022 2021 Interest and dividend income: Interest and fees on loans $ 42,316 $ 39,207 Due from banks interest bearing accounts 3,829 722 Investment securities: Taxable 8,296 6,249 Non-taxable 909 603 Other earning assets 532 395 Total interest and dividend income 55,882 47,176 Interest expense: Time deposits over $250,000 35 64 Other deposits 1,151 848 Total interest expense 1,186 912 Net interest income 54,696 46,264 Provision (reversal of provision) for loan losses 900 ( 1,500 ) Net interest income after provision (reversal of provision) for loan losses 53,796 47,764 Non-interest income: Service charges on deposit accounts 1,672 1,656 Losses on sales of available-for-sale securities ( 152 ) ( 221 ) Gains on sales of loans held-for-sale 145 1,528 Debit card income 2,547 2,593 Other income 2,721 2,307 Total non-interest income 6,933 7,863 Non-interest expenses: Salaries and employee benefits 24,204 22,756 Occupancy and equipment 3,598 3,451 Data processing 3,450 3,377 Stationery and supplies 292 253 Advertising 496 382 Directors fees 290 293 Other expense 6,733 5,689 Total non-interest expenses 39,063 36,201 Income before provision for income tax 21,666 19,426 Provision for income tax ( 5,782 ) ( 5,240 ) Net income $ 15,884 $ 14,186 Basic income per share $ 1.11 $ 0.96 Diluted income per share $ 1.09 $ 0.95 See accompanying notes to consolidated financial statements. 61 Table of Contents FIRST NORTHERN COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Comprehensive (Loss) Income Years Ended December 31, 2022 and 2021 (in thousands) 2022 2021 Net income $ 15,884 $ 14,186 Other comprehensive loss, net of tax: Unrealized holding losses on securities arising during the current period, net of tax effect of ($ 18,348 ) and ($ 4,082 ) for the years ended December 31, 2022 and 2021 , respectively ( 43,617 ) ( 10,117 ) Reclassification adjustment due to losses realized on sales of securities, net of tax effect of $ 44 and $ 64 for the years ended December 31, 2022 and 2021 , respectively 108 157 Officers’ retirement plan equity adjustments, net of tax effect of $ 443 and $ 276 for the years ended December 31, 2022 and 2021 , respectively 1,112 685 Directors’ retirement plan equity adjustments, net of tax effect of $ 28 and $ 16 for the years ended December 31, 2022 and 2021 , respectively 66 40 Total other comprehensive loss, net of tax effect of ($ 17,833 ) and ($ 3,726 ) for the years ended December 31, 2022 and 2021 , respectively ( 42,331 ) ( 9,235 ) Comprehensive (loss) income $ ( 26,447 ) $ 4,951 See accompanying notes to consolidated financial statements. 62 Table of Contents FIRST NORTHERN COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statement of Stockholders’ Equity Years Ended December 31, 2022 and 2021 (in thousands, except share data) Common Stock Additional Paid-in Retained Accumulated Other Comprehensive Shares Amounts Capital Earnings Income/(Loss) Total Balance at December 31, 2020 13,634,463 $ 107,527 $ 977 $ 37,115 $ 5,038 $ 150,657 Net income 14,186 14,186 Other comprehensive loss, net of tax ( 9,235 ) ( 9,235 ) Stock dividend adjustment 1,282 329 ( 329 ) — 5 % stock dividend declared in 2022 659,471 6,626 ( 6,626 ) — Cash in lieu of fractional shares ( 168 ) ( 8 ) ( 8 ) Stock-based compensation 588 588 Common shares issued related to restricted stock grants and ESPP, net of restricted stock reversals 53,572 97 97 Stock options exercised, net 6,108 — — Stock repurchase and retirement ( 505,824 ) ( 5,374 ) ( 5,374 ) Balance at December 31, 2021 13,848,904 $ 109,793 $ 977 $ 44,338 $ ( 4,197 ) $ 150,911 Net income 15,884 15,884 Other comprehensive loss, net of tax ( 42,331 ) ( 42,331 ) Stock dividend adjustment 3,276 366 ( 366 ) — 5 % stock dividend declared in 2023 697,742 5,356 ( 5,356 ) — Cash in lieu of fractional shares ( 161 ) ( 8 ) ( 8 ) Stock-based compensation 655 655 Common shares issued related to restricted stock grants and ESPP, net of restricted stock reversals 112,533 116 116 Stock options exercised, net 11,615 — — Stock repurchase and retirement ( 21,325 ) ( 187 ) ( 187 ) Balance at December 31, 2022 14,652,584 $ 116,099 $ 977 $ 54,492 $ ( 46,528 ) $ 125,040 See accompanying notes to consolidated financial statements. 63 Table of Contents FIRST NORTHERN COMMUNITY BANCORP AND SUBSIDIARY Consolidated Statements of Cash Flows Years Ended December 31, 2022 and 2021 (in thousands) 2022 2021 Cash flows from operating activities: Net income $ 15,884 $ 14,186 Adjustments to reconcile net income to net cash provided by operating activities: Provision (Reversal of provision) for loan losses 900 ( 1,500 ) Stock-based compensation 655 588 Depreciation and amortization of bank premises and equipment 774 764 Accretion and amortization of securities, net 4,319 4,391 Net loss on sale/call of available-for-sale securities 152 221 Gain on sale of loans held-for-sale ( 145 ) ( 1,528 ) (Benefit) provision for deferred income taxes ( 687 ) 1,000 Valuation adjustment on mortgage servicing rights ( 276 ) ( 110 ) Proceeds from sales of loans held-for-sale 10,693 68,819 Originations of loans held-for-sale ( 9,485 ) ( 60,929 ) Decrease in deferred loan origination fees and costs, net ( 2,062 ) ( 736 ) Amortization of operating lease right-of-use asset 1,102 1,060 Increase in interest receivable and other assets ( 981 ) — Increase (decrease) in interest payable and other liabilities 937 ( 951 ) Net cash provided by operating activities 21,780 25,275 Cash flows from investing activities: Proceeds from maturities of available-for-sale securities 22,100 21,730 Proceeds from sales of available-for-sale securities 6,348 21,917 Principal repayments on available-for-sale securities 96,308 97,780 Purchase of available-for-sale securities ( 176,919 ) ( 357,150 ) Proceeds from maturities of certificates of deposit 5,151 5,880 Proceeds from sales of certificates of deposit 493 — Purchase of certificates of deposit ( 13,320 ) ( 2,229 ) Purchases of stock in Federal Home Loan Bank and other equity securities, at cost ( 2,343 ) ( 617 ) Net (increase) decrease in loans ( 116,259 ) 27,114 Purchases of bank premises and equipment, net ( 344 ) ( 803 ) Net cash used in investing activities ( 178,785 ) ( 186,378 ) Cash flows from financing activities: Net (decrease) increase in deposits ( 1,428 ) 250,140 Principal payments on Federal Home Loan Bank advances — ( 5,000 ) Cash dividends paid in lieu of fractional shares ( 8 ) ( 8 ) Common stock issued 116 97 Repurchases of common stock ( 187 ) ( 5,374 ) Net cash (used in) provided by financing activities ( 1,507 ) 239,855 Net (decrease) increase in cash and cash equivalents ( 158,512 ) 78,752 Cash and cash equivalents at beginning of year 345,929 267,177 Cash and cash equivalents at end of year $ 187,417 $ 345,929 Supplemental Consolidated Statements of Cash Flows Information (Note 20) See accompanying notes to consolidated financial statements. 64 Table of Contents FIRST NORTHERN COMMUNITY BANCORP AND SUBSIDIARY Notes to Consolidated Financial Statements Years Ended December 31, 2022 and 2021 (in thousands, except shares and share amounts) (1) Summary of Significant Accounting Policies First Northern Community Bancorp (the “Company”) is a bank holding company whose only subsidiary, First Northern Bank of Dixon (“Bank”), a California state-chartered bank, conducts general banking activities, including collecting deposits and originating loans, and serves Solano, Yolo, Sacramento, Placer, El Dorado, and Contra Costa Counties. All intercompany transactions between the Company and the Bank have been eliminated in consolidation. The consolidated financial statements also include the accounts of Yolano Realty Corporation, a wholly-owned subsidiary of the Bank. Yolano Realty Corporation was formed in September 2009 for the purpose of managing selected other real estate owned properties. Yolano Realty Corporation was an inactive subsidiary in 2022. The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates applied in the preparation of the accompanying consolidated financial statements. For the Company, the most significant accounting estimates are the allowance for loan losses, recognition and measurement of impaired loans, other-than-temporary impairment of securities, fair value measurements, share based compensation, valuation of mortgage servicing rights and deferred tax asset realization. A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows. (a) Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers due from banks, federal funds sold for one-day periods and short-term bankers acceptances to be cash equivalents. At times, the Company maintains deposits with other financial institutions in amounts that may exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with correspondent banks. (b) Investment Securities Investment securities consist of U.S. Treasury securities, U.S. Agency securities, obligations of states and political subdivisions, obligations of U.S. Corporations, collateralized mortgage obligations and mortgage-backed securities. At the time of purchase of a security the Company designates the security as held-to-maturity or available-for-sale, based on its investment objectives, operational needs, and intent to hold. The Company does not purchase securities with the intent to engage in trading activity. Held-to-maturity securities are recorded at amortized cost, adjusted for amortization or accretion of premiums or discounts. Available-for-sale securities are recorded at fair value with unrealized holding gains and losses, net of the related tax effect, reported as a separate component of stockholders’ equity until realized. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to the earliest call date using the effective interest method. Such amortization and accretion is included in investment income, along with interest and dividends. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in earnings. Investments with fair values that are less than amortized cost are considered impaired. Impairment may result from either a decline in the financial condition of the issuing entity or, in the case of fixed interest rate investments, from rising interest rates. At each consolidated financial statement date, management assesses each investment to determine if impaired investments are temporarily impaired or if the impairment is other than temporary. This assessment includes consideration regarding the duration and severity of impairment, the credit quality of the issuer and a determination of whether the Company intends to sell the security, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis less any current-period credit losses. Other-than-temporary impairment is recognized in earnings if one of the following conditions exists: 1) the Company’s intent is to sell the security; 2) it is more likely than not that the Company will be required to sell the security before the impairment is recovered; or 3) the Company does not expect to recover its amortized cost basis. If, by contrast, the Company does not intend to sell the security and is not more likely than not to be required to sell the security prior to recovery of the amortized cost basis, the Company recognizes only the credit loss component of other-than-temporary impairment in earnings. The credit loss component is calculated as the difference between the security’s amortized cost basis and the present value of its expected future cash flows. The remaining difference between the security’s fair value and the present value of the future expected cash flows is deemed to be due to factors that are not credit related and is recognized in other comprehensive income. 65 Table of Contents (c) Federal Home Loan Bank Stock and Other Equity Securities, at Cost Federal Home Loan Bank (“FHLB”) stock represents an equity interest that does not have a readily determinable fair value because its ownership is restricted and it lacks a market (liquidity). FHLB stock and other equity securities are recorded at cost. (d) Loans Loans are reported at the principal amount outstanding, net of deferred loan fees and costs and the allowance for loan losses. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. For a loan that has been restructured, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the restructuring agreement. Restructured loans are loans on which concessions in terms have been granted because of the borrowers’ financial difficulties. A restructuring constitutes a troubled debt restructuring, and thus an impaired loan, if the restructuring constitutes a concession and the debtor is experiencing financial difficulties. An impaired loan is measured based upon the present value of future cash flows discounted at the loan’s effective rate, the loan’s observable market price, or the fair value of collateral if the loan is collateral dependent. Interest on impaired loans is recognized on a cash basis. If the measurement of the impaired loan is less than the recorded investment in the loan, an impairment is recognized by a charge to the allowance for loan losses. Unearned discount on installment loans is recognized as income over the terms of the loans by the interest method. Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding. Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield are deferred and amortized over the contractual term of the loan using the interest method. Processing fees received from the SBA for PPP loans are recognized as an adjustment to the effective yield over the loans’ projected life. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest. Accrual of interest on loans that are troubled debt restructurings commence after a sustained period of performance. Interest is generally accrued on such loans in accordance with the new terms. (e) Loans Held-for-Sale Loans originated and held-for-sale are carried at the lower of cost or estimated fair value in the aggregate. Net fees and costs of originating loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale. Net unrealized losses are recognized through a valuation allowance by charges to income. (f) Allowance for Loan Losses The allowance for loan losses is established through a provision charged to expense. It is the Company’s policy to charge-off loans when the following exists: management determines that a loss is expected or when specified by regulatory examination; impairment analysis shows an impaired amount, which requires a partial charge-off; interest and/or principal are past due 90 days or more unless the credit is both well secured and in process of collection; consumer loans become 90 days delinquent, except those well secured by real estate collateral and in the process of collection; loan is canceled as part of a court judgment. The allowance is an amount that management believes will be adequate to absorb losses inherent in existing loans and overdrafts on evaluations of collectability and prior loss experience. The loan portfolio is segregated into loan types to facilitate the assessment of risk to pools of loans based on historical charge-off experience and internal and external factors. Non-accrual loans, troubled debt restructurings and loans with a risk rating of 5 (special mention) or worse and an aggregate exposure of $ 500 or more are evaluated for impairment, while all other loans, including individually evaluated loans determined not to be impaired, are collectively evaluated for impairment. The evaluations take into consideration internal and external factors such as trends in portfolio volume, maturity and composition, overall portfolio quality, loan concentrations, levels of and trends in charge-offs and recoveries, current and anticipated economic conditions that may affect the borrowers’ ability to pay and national and local economic trends and conditions. While management uses these evaluations to determine the allowance for loan losses, additional provisions may be necessary based on changes in the factors used in the evaluations. 66 Table of Contents Material estimates relating to the determination of the allowance for loan losses are particularly susceptible to significant change in the near term. Management believes that the allowance for loan losses was adequate at December 31, 2022. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to provide for additional allowance based on their judgment about information available to them at the time of their examination. (g) Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed substantially by the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are depreciated over the estimated useful lives of the improvements or the terms of the related leases, whichever is shorter. The useful lives used in computing depreciation are as follows: Buildings and improvements 15 to 50 years Furniture and equipment 3 to 10 years (h) Other Real Estate Owned Other real estate acquired by foreclosure is carried at fair value less estimated selling costs. Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for loan losses, if necessary. Fair value of other real estate owned is generally determined based on an appraisal of the property. Any subsequent operating expenses or income, reduction in estimated values and gains or losses on disposition of such properties are included in other operating expenses. Gain recognition on the disposition of real estate is dependent upon the transaction meeting certain criteria relating to the nature of the property sold and the terms of the sale. Under certain circumstances, revenue recognition may be deferred until these criteria are met. The Bank held no other real estate owned (“OREO”) as of December 31, 2022 and 2021. (i) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of Long-lived assets and certain identifiable intangibles are required to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. ( j ) Pension Benefit Plans The Company and the Bank maintain unfunded non-contributory defined benefit pension plans for a select group of highly compensated employees and directors, as well as a supplemental executive retirement plan. Net periodic benefit cost is recognized over the approximate service period of plan participants and includes discount rate assumptions. See Note 17 of Notes to Consolidated Financial Statements. ( k ) Revenue from Contracts with Customers The following are descriptions of the Company’s sources of Non-interest income within the scope of the FASB’s Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (Topic 606) : Service charges on deposit accounts Service charges on deposit accounts include account maintenance and analysis fees and transaction-based fees. Account maintenance and analysis fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees consist of non-sufficient funds fees, wire fees, overdraft fees and fees on other products and services and are charged to deposit customers for specific services provided to the customer. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer. 67 Table of Contents Investment and brokerage services income The Bank earns investment and brokerage services fees for providing a broad range of alternative investment products and services through Raymond James Financial Services, Inc. Brokerage fees are generally earned in two ways. Brokerage fees for managed accounts charge a set annual percentage fee based on the underlying portfolio value and are earned and recognized on a quarterly basis. Brokerage fees for a standard commission account are charged on a per transaction fee and are earned and recognized at the time of the transaction. Debit card income Debit card income represent fees earned on Bank-issued debit card transactions. The Bank earns interchange fees from debit cardholder transactions through the related payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ account. Certain expenses directly associated with the debit card are recorded on a net basis with the interchange income. Other income Other income within the scope of Topic 606 include check sales fees, bankcard fees, and merchant fees. Check sales fees, based on check sales volume, are received from check printing companies and are recognized monthly. Bankcard fees are earned from the Bank’s credit card program and are recognized monthly as the service period is completed. Merchant fees are earned for card payment services provided to its merchant customers. The Bank has a contract with a third party to provide card payment services to merchants that contract for those services. Merchant fees are recognized monthly as the service period is completed. ( l ) Gain or Loss on Sale of Loans and Servicing Rights Transfers and servicing of financial assets 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. A sale is recognized when the transaction closes and the proceeds are other than beneficial interests in the assets sold. A gain or loss is recognized to the extent that the sales proceeds and the fair value of the servicing asset exceed or are less than the book value of the loan. The Company recognizes an asset for the fair value of the rights to service loans for others when loans are sold on a servicing-retained basis. The Company sold substantially all of its conforming long-term residential mortgage loans originated during the years ended December 31, 2022 and 2021, for cash proceeds equal to the fair value of the loans. Mortgage servicing rights (“MSR”) in 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. The Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The Company measures and reports its residential mortgage servicing assets initially at fair value and amortizes the servicing rights in proportion to, and over the period of, estimated net servicing revenues. Management assesses servicing rights for impairment as of each financial reporting date. Fair value adjustments that encompass market-driven valuation changes and the runoff in value that occurs from the passage of time are each separately reported. In determining the fair value of the MSR, the Company uses quoted market prices when available. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSR, the present value of expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income. This model is periodically validated by an independent external model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. Key assumptions used in measuring the fair value of the MSR as of December 31, were as follows: 68 Table of Contents 2022 2021 Constant prepayment rate 7.55 % 15.73 % Discount rate 9.50 % 9.50 % Weighted average life (years) 7.20 4.95 The expected life of the loan can vary from management’s estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management’s estimates would negatively impact the recorded value of the mortgage servicing rights. The value of the mortgage servicing rights is also dependent upon the discount rate used in the model, which we base on current market rates. Management reviews this rate on an ongoing basis based on current market rates. A significant increase in the discount rate would reduce the value of mortgage servicing rights. (m) Income Taxes The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A liability for uncertain tax positions is recorded for unrecognized tax benefits related to uncertain tax positions where it is more likely than not that the position will be sustained upon examination by a taxing authority. Interest and/or penalties related to income taxes are reported as a component of provision for income taxes. (n) Share Based Compensation The Company accounts for share based compensation transactions whereby the Company receives employee services in exchange for equity instruments, including stock options and restricted stock. The Company recognizes in the consolidated statements of income the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over their requisite service period (generally the vesting period). The fair value of options granted is determined on the date of the grant using a Black-Scholes-Merton pricing model. The grant date fair value of restricted stock is determined by the closing market price of the day prior to the grant date. The Company issues new shares of common stock upon the exercise of stock options. See Note 15 of Notes to Consolidated Financial Statements. ( o ) Earnings Per Share (“EPS”) Basic EPS includes no dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period, excluding non-vested restricted shares. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity. The number of potential common shares included in annual diluted EPS is a year-to-date average of the number of potential common shares included in each quarter’s diluted EPS computation under the treasury stock method. The calculation of weighted average shares includes two classes of the Company’s outstanding common stock: common stock and restricted stock awards. Holders of restricted stock also receive dividends at the same rate as common shareholders, subject to vesting restrictions, and they both share equally in undistributed earnings. There are no unvested share-based payment awards that contain nonforfeitable rights to dividends. See Note 14 of Notes to Consolidated Financial Statements. ( p ) Advertising Costs Advertising costs were $ 496 and $ 382 for the years ended December 31, 2022 and 2021, respectively. Advertising costs are expensed as incurred. ( q ) Comprehensive Income Accounting principles generally accepted in the United States require that recognized revenue, expenses, gains, and losses be included in net income. Certain changes in assets and liabilities, such as unrealized gain and losses on available-for-sale securities and directors’ and officers’ retirement plans, are reported as a separate component of the equity section of the consolidated balance sheet. Such items, along with net income, are components of comprehensive income. 69 Table of Contents ( r ) Stock Dividend On January 27, 2022 , the Company announced that its Board of Directors had declared a 5 % stock dividend which resulted in 662,747 shares, which was paid on March 25, 2022 to shareholders of record as of February 28, 2022 . On January 26, 2023 , the Company announced that its Board of Directors had declared a 5 % stock dividend which will result in an estimate of 697,742 shares, which will be paid on March 24, 2023 to shareholders of record as of February 28, 2023 . The earnings per share data for all periods presented have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 26, 2023. December 31, 2022 figures included in the Consolidated Balance Sheets and Consolidated Statement of Stockholders’ Equity have been adjusted to reflect the estimated impact of the 2023 stock dividend. Figures that have been adjusted include common stock shares issued and outstanding, common stock balance and retained earnings balance. The December 31, 2021 and 2020 balances included in the Consolidated Balance Sheets and Statement of Stockholders’ Equity have not been adjusted to retroactively reflect the stock dividends, but instead show the historical rollforward of stock dividends declared. ( s ) Segment Reporting The “Segment Reporting” topic of the FASB ASC requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. Therefore, the Company reports community banking as its only segment. (t) Business Combinations The Company accounts for acquisitions of businesses using the acquisition method of accounting. Under the acquisition method, assets acquired and liabilities assumed are recorded at their estimated fair values at the date of acquisition. Management utilizes various valuation techniques including discounted cash flow analyses to determine these fair values. Any excess of the purchase price over amounts allocated to the acquired assets, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. (u) Impact of Recently Issued Accounting Standards The FASB issued ASU 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities, based on management’s intent to sell the security or likelihood the Company will be required to sell the security, before recovery of the amortized cost basis. The Company will apply the amendment’s provisions as a cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective. ASU 2016-13 is effective for the Company as of January 1, 2023. Management has taken steps to prepare for the implementation requirements of this standard, such as developing policies, procedures and internal controls over the model and working with a software vendor to measure expected losses required by the amendment. Based on the loan portfolio composition, characteristics and quality of the loan portfolio as of December 31, 2022, and the current economic environment, management estimates that the total allowance for loan losses and reserve for unfunded commitments will increase from approximately $ 15,492 to approximately $ 16,658 to $ 18,324 , or an increase of $ 1,166 to $ 2,832 . The estimated decline in equity, net of tax, will range from $ 855 to $ 2,076 . The economic conditions, forecasts and assumptions used in the model could be significantly different in future periods. The impact of the change in the allowance on our results of operations in a provision for credit losses will depend on the current period net charge-offs, level of loan originations, and change in mix of the loan portfolio. As time progresses and the results of economic conditions require model assumption inputs to change, further refinements to the estimation process may also be identified. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. This ASU was effective for all entities as of March 12, 2020 through December 31, 2022. As of January 1, 2022, the Company is no longer originating LIBOR based loans and are originating new loans using the Secured Overnight Financing Rate (SOFR). For existing LIBOR based loans, the Company is monitoring the development and reporting of fallback indices. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements. 70 Table of Contents In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope. This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. 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 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 does not expect this ASU to have a material impact on the Company’s consolidated financial statements. In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, these amendments require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. This ASU is effective on January 1, 2023, the same effective date as ASU 2016-13. The Company is currently evaluating the effects that the adoption of these amendments will have on its consolidated financial statements. In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. This ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023. The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements. (2) Cash and Due from Banks The Bank is required to maintain reserves with the Federal Reserve Bank based on a percentage of deposit liabilities. No aggregate reserves were required at December 31, 2022 and 2021. The Bank has met its average reserve requirements during 2022 and 2021 and the minimum required balance at December 31, 2022 and 2021. 71 Table of Contents (3) Investment Securities The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2022 are summarized as follows: Amortized cost Unrealized gains Unrealized losses Estimated fair value Investment securities available-for-sale: U.S. Treasury securities $ 119,644 $ 13 $ ( 5,842 ) $ 113,815 Securities of U.S. government agencies and corporations 128,697 20 ( 9,806 ) 118,911 Obligations of states and political subdivisions 58,955 13 ( 5,642 ) 53,326 Collateralized mortgage obligations 114,983 — ( 19,633 ) 95,350 Mortgage-backed securities 261,505 56 ( 24,871 ) 236,690 Total debt securities $ 683,784 $ 102 $ ( 65,794 ) $ 618,092 The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2021 are summarized as follows: Amortized cost Unrealized gains Unrealized losses Estimated fair value Investment securities available-for-sale: U.S. Treasury Securities $ 86,534 $ 388 $ ( 711 ) $ 86,211 Securities of U.S. government agencies and corporations 104,106 330 ( 1,826 ) 102,610 Obligations of states and political subdivisions 44,842 1,444 ( 301 ) 45,985 Collateralized mortgage obligations 137,872 665 ( 2,885 ) 135,652 Mortgage-backed securities 262,738 1,971 ( 2,954 ) 261,755 Total debt securities $ 636,092 $ 4,798 $ ( 8,677 ) $ 632,213 Gross realized gains from sales and calls of available-for-sale securities were $ 0 and $ 322 for the years ended December 31, 2022 and 2021, respectively. Gross realized losses from sales of available-for-sale securities were $ 152 and $ 543 for the years ended December 31, 2022 and 2021, respectively. The amortized cost and estimated fair value of debt and other securities at December 31, 2022, by contractual maturity, are shown in the following table: Amortized cost Estimated fair value Maturity in years: Due in one year or less $ 52,471 $ 51,254 Due after one year through five years 184,189 171,618 Due after five years through ten years 38,225 34,754 Due after ten years 32,411 28,426 Subtotal 307,296 286,052 MBS and CMO 376,488 332,040 Total $ 683,784 $ 618,092 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. 72 Table of Contents An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of December 31, 2022, follows: Less than 12 months 12 months or more Total Fair Value Unrealized losses Fair Value Unrealized losses Fair Value Unrealized losses U.S. Treasury securities $ 54,574 $ ( 1,680 ) $ 56,872 $ ( 4,162 ) $ 111,446 $ ( 5,842 ) Securities of U.S. government agencies and corporations 45,261 ( 1,341 ) 69,635 ( 8,465 ) 114,896 ( 9,806 ) Obligations of states and political subdivisions 40,479 ( 3,022 ) 10,049 ( 2,620 ) 50,528 ( 5,642 ) Collateralized mortgage obligations 36,040 ( 2,586 ) 59,310 ( 17,047 ) 95,350 ( 19,633 ) Mortgage-backed securities 99,250 ( 6,131 ) 131,951 ( 18,740 ) 231,201 ( 24,871 ) Total $ 275,604 $ ( 14,760 ) $ 327,817 $ ( 51,034 ) $ 603,421 $ ( 65,794 ) No decline in value was considered “other-than-temporary” during 2022. Four hundred securities, all considered investment grade, which had a fair value of $ 275,604 and a total unrealized loss of $ 14,760 have been in an unrealized loss position for less than twelve months as of December 31, 2022. One hundred seventy-one securities, all considered investment grade, which had a fair value of $ 327,817 and total unrealized loss of $ 51,034 , have been in an unrealized loss position for more than twelve months as of December 31, 2022. The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The Company does not intend to sell the securities and has concluded it is not more likely than not that it will be required to sell these securities prior to recovery of their anticipated cost basis. Therefore, the Company does not consider these investments to be other than temporarily impaired as of December 31, 2022. The fair value of investment securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for securities declines. As a result, other than temporary impairments may occur in the future. An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of December 31, 2021, follows: Less than 12 months 12 months or more Total Fair Value Unrealized losses Fair Value Unrealized losses Fair Value Unrealized losses U.S. Treasury Securities $ 63,254 $ ( 673 ) $ 2,066 $ ( 38 ) $ 65,320 $ ( 711 ) Securities of U.S. government agencies and corporation 48,288 ( 942 ) 30,158 ( 884 ) 78,446 ( 1,826 ) Obligations of states and political subdivision 11,680 ( 233 ) 934 ( 68 ) 12,614 ( 301 ) Collateralized mortgage obligations 90,299 ( 2,850 ) 1,298 ( 35 ) 91,597 ( 2,885 ) Mortgage-backed securities 175,943 ( 2,816 ) 6,997 ( 138 ) 182,940 ( 2,954 ) Total $ 389,464 $ ( 7,514 ) $ 41,453 $ ( 1,163 ) $ 430,917 $ ( 8,677 ) Investment securities carried at $ 44,319 and $ 39,695 at December 31, 2022 and 2021, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law. 73 Table of Contents (4) Loans The composition of the Company’s loan portfolio, by loan class, at December 31, is as follows: 2022 2021 Commercial $ 106,771 $ 135,894 Commercial Real Estate 645,166 526,924 Agriculture 114,040 107,183 Residential Mortgage 92,669 76,160 Residential Construction 10,167 4,482 Consumer 15,287 17,258 984,100 867,901 Allowance for loan losses ( 14,792 ) ( 13,952 ) Net deferred origination fees and costs 830 ( 1,232 ) Loans, net $ 970,138 $ 852,717 The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times. Asset quality reviews of loans and other non-performing assets are administered using credit risk rating standards and criteria similar to those employed by state and federal banking regulatory agencies. Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses. These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above. Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Paycheck Protection Program (“PPP”) loans outstanding included in Commercial loans totaled $ 0.5 million and $ 37.3 million as of December 31, 2022 and December 31, 2021, respectively. Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied. Loans secured by owner-occupied real estate are primarily susceptible to changes in the market conditions of the related business. This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles. These same risks apply to commercial loans whether secured by equipment, receivables or other personal property or unsecured. Problem commercial real estate loans are generally identified by periodic review of financial information that may include financial statements, tax returns, payment history of the borrower, and site inspections. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary. Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral. When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default. Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resulting over-supply of space. Losses are dependent on the value of underlying collateral at the time of default. Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means. 74 Table of Contents Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock. Repayment is primarily from the sale of an agricultural product or service. Agricultural loans are generally secured by inventory, receivables, equipment, and other real property. Agricultural loans primarily are susceptible to changes in market demand for specific commodities. This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as adverse weather conditions such as drought, fire, or floods. Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary. Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’s cash flow to sustain payments, and shortfalls in collateral value. In general, non-payment is usually due to loss of employment and follows general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts . Construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the related risks described above but the added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion. Losses are primarily related to underlying collateral value and changes therein as described above. Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Consumer loans, whether unsecured or secured, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’s cash flow to sustain payments, and shortfall in collateral value. In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly the upward movements in the unemployment rate, loss of collateral value, inflation and demand shifts. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Collateral valuations are obtained at origination of the credit. Once repayment is questionable, and the loan has been deemed classified, collateral valuations are obtained periodically (generally annually but may be more frequent depending on the collateral type). At December 31, 2022, approximately 11 % in principal amount of the Company’s loans were for general commercial uses, including professional, retail and small businesses. Approximately 65 % in principal amount of the Company’s loans were secured by commercial real estate, which consists primarily of loans secured by commercial properties and construction and land development loans. Approximately 12 % in principal amount of the Company’s loans were for agriculture, approximately 9 % in principal amount of the Company’s loans were residential mortgage loans, approximately 1 % in principal amount of the Company’s loans were residential construction loans and approximately 2 % in principal amount of the Company’s loans were consumer loans. Once a loan becomes delinquent or repayment becomes questionable, a Company collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral or a principal payment. If this is not forthcoming and payment of principal and interest in accordance with the contractual terms of the loan agreement becomes unlikely, the Company will consider the loan to be impaired and will estimate its probable loss, using the present value of future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. For collateral dependent loans, the Company will utilize a recent valuation of the underlying collateral less estimated costs of sale, and charge-off the loan down to the estimated net realizable amount. Depending on the length of time until final collection, the Company may periodically revalue the estimated loss and take additional charge-offs or specific reserves as warranted. Revaluations may occur as often as every 3 - 12 months depending on the underlying collateral and volatility of values. Final charge-offs or recoveries are taken when the collateral is liquidated and the actual loss is confirmed. Unpaid balances on loans after or during collection and liquidation may also be pursued through legal action and attachment of wages or judgment liens on the borrower’s other assets. At December 31, 2022 and 2021, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank. 75 Table of Contents Non-accrual and Past Due Loans The Company’s loans by delinquency and non-accrual status, as of December 31, 2022 and 2021, was as follows: Current & Accruing 30-59 Days Past Due & Accruing 60-89 Days Past Due & Accruing 90 Days or more Past Due & Accruing Nonaccrual Total Loans December 31, 2022 Commercial $ 106,327 $ 41 $ — $ 403 $ — $ 106,771 Commercial Real Estate 645,166 — — — — 645,166 Agriculture 106,624 — — — 7,416 114,040 Residential Mortgage 92,546 — — — 123 92,669 Residential Construction 10,167 — — — — 10,167 Consumer 14,650 — — — 637 15,287 Total $ 975,480 $ 41 $ — $ 403 $ 8,176 $ 984,100 December 31, 2021 Commercial $ 134,890 $ 394 $ 477 $ — $ 133 $ 135,894 Commercial Real Estate 526,337 32 — — 555 526,924 Agriculture 98,471 — — — 8,712 107,183 Residential Mortgage 75,861 161 — — 138 76,160 Residential Construction 4,482 — — — — 4,482 Consumer 16,523 — 76 — 659 17,258 Total $ 856,564 $ 587 $ 553 $ — $ 10,197 $ 867,901 Non-accrual loans amounted to $ 8,176 at December 31, 2022, and were comprised of three agriculture loans totaling $ 7,416 , one residential mortgage loan totaling $ 123 , and four consumer loans totaling $ 637 . Non-accrual loans amounted to $ 10,197 at December 31, 2021, and were comprised of two commercial loans totaling $ 133 , one commercial real estate loan totaling $ 555 , three agriculture loans totaling $ 8,712 , one residential mortgage loan totaling $ 138 , and four consumer loans totaling $ 659 . 76 Table of Contents Impaired Loans A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Loans to be considered for impairment include non-accrual loans, troubled debt restructurings and loans with a risk rating of 5 (special mention) or worse and an aggregate exposure of $ 500 or more. Once identified, impaired loans are measured individually for impairment using one of three methods: present value of expected cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or fair value of collateral if the loan is collateral dependent. If the measurement of a non-accrual loan is less than the recorded investment in the loan, an impairment is recognized through the establishment of a specific reserve sufficient to cover expected losses and/or a charge-off against the allowance for loan losses. In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is, therefore, deemed a confirmed loss, is promptly charged-off against the allowance for loan losses. Impaired loans, segregated by loan class, as of December 31, 2022 and 2021, were as follows: Unpaid Contractual Principal Balance Recorded Investment with no Allowance Recorded Investment with Allowance Total Recorded Investment Related Allowance December 31, 2022 Commercial $ — $ — $ — $ — $ — Commercial Real Estate — — — — — Agriculture 10,032 7,416 — 7,416 — Residential Mortgage 673 123 499 622 75 Residential Construction — — — — — Consumer 822 637 64 701 2 Total $ 11,527 $ 8,176 $ 563 $ 8,739 $ 77 December 31, 2021 Commercial $ 142 $ 133 $ — $ 133 $ — Commercial Real Estate 555 555 — 555 — Agriculture 10,680 8,712 — 8,712 — Residential Mortgage 701 138 517 655 81 Residential Construction 241 — 241 241 10 Consumer 815 659 64 723 2 Total $ 13,134 $ 10,197 $ 822 $ 11,019 $ 93 The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the years ended December 31, 2022 and 2021, was as follows: December 31, 2022 December 31, 2021 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized Commercial $ 40 $ 3 $ 300 $ 7 Commercial Real Estate 384 32 4,165 509 Agriculture 8,047 — 9,046 — Residential Mortgage 639 19 809 23 Residential Construction 48 — 329 15 Consumer 737 21 745 7 Total $ 9,895 $ 75 $ 15,394 $ 561 None of the interest on impaired loans was recognized using a cash basis of accounting for the years ended December 31, 2022 and 2021. 77 Table of Contents Troubled Debt Restructurings The Company’s loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring (“TDR”), which are loans on which concessions in terms have been granted because of the borrowers’ financial difficulties and, as a result, the Company receives less than the current market-based compensation for the loan. These concessions may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions. Certain TDRs are placed on non-accrual status at the time of restructure and may be returned to accruing status after considering the borrower’s sustained repayment performance for a reasonable period, generally six months . When a loan is modified, it is measured based upon the present value of future cash flows discounted at the contractual interest rate of the original loan agreement, or the fair value of collateral less selling costs if the loan is collateral dependent. If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off of the loan. The Company had $ 8,399 and $ 10,103 in TDR loans as of December 31, 2022 and 2021, respectively. Specific reserves for TDR loans totaled $ 77 and $ 93 as of December 31, 2022 and 2021, respectively. TDR loans performing in compliance with modified terms totaled $ 8,399 and $ 10,006 as of December 31, 2022 and 2021, respectively. There were no commitments to advance additional funds on existing TDR loans as of December 31, 2022. Loans modified as troubled debt restructurings during the years ended December 31, 2022 and 2021, were as follows: Year Ended December 31, 2022 Number of Contracts Pre-modification outstanding recorded investment Post- modification outstanding recorded investment Consumer 1 $ 75 $ 75 Total 1 $ 75 $ 75 Year Ended December 31, 2021 Number of Contracts Pre-modification outstanding recorded investment Post- modification outstanding recorded investment Agriculture 3 $ 9,130 $ 9,130 Consumer 2 593 593 Total 5 $ 9,723 $ 9,723 Loan modifications generally involve reductions in the interest rate, payment extensions, forgiveness of principal, or forbearance. No loans were modified as a TDR within the previous 12 months that subsequently defaulted during the years ended December 31, 2022 and 2021. The Company considers a loan to be in payment default when it is 90 days or more past due. 78 Table of Contents Credit Quality Indicators All new 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 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. General definitions for each risk rating are as follows: Risk Rating “1” – Pass (High Quality): This category is reserved for loans fully secured by Company CDs or savings accounts and properly margined (as defined in the Company’s Credit Policy) and actively traded securities (including stocks, as well as corporate, municipal and U.S. Government bonds). Risk Rating “2” – Pass (Above Average Quality): This category is reserved for borrowers with strong balance sheets that are well structured with manageable levels of debt and good liquidity. Cash flow is sufficient to service all debt, including the Company’s, as agreed. Historical earnings, cash flow, and payment performance have all been strong and trends are positive and consistent. Collateral protection is better than the Company’s Credit Policy guidelines. Risk Rating “3” – Pass (Average Quality): Credits within this category are considered to be of average, but acceptable, quality. Loan characteristics, including term and collateral advance rates, meet the Company’s Credit Policy guidelines; unsecured lines to borrowers with above average liquidity and cash flow may be considered for this category; the borrower’s financial strength is well documented, with adequate, but consistent, cash flow to meet all obligations. Liquidity should be sufficient and leverage should be moderate. Monitoring of collateral may be required, including a borrowing base or construction budget. Alternative financing is typically available. Risk Rating “4” – Pass (Below Average Quality): Credits within this category are considered sound, but merit additional attention due to industry concentrations within the borrower’s customer base, problems within their industry, deteriorating financial or earnings trends, declining collateral values, increased frequency of past due payments and/or overdrafts, discovery of documentation deficiencies which may impair our borrower’s ability to repay, or the Company’s ability to liquidate collateral. Financial performance is average but inconsistent. There also may be changes of ownership, management or professional advisors, which could be detrimental to the borrower’s future performance. Risk Rating “5” – Special Mention (Criticized): Loans in this category are currently protected by their collateral value and have no loss potential identified, but have potential weaknesses which may, if not monitored or corrected, weaken our ability to collect payments from the borrower or satisfactorily liquidate our collateral position. Loans where terms have been modified due to their failure to perform as agreed may be included in this category. Adverse trends in the borrower’s operation, such as reporting losses or inadequate cash flow, increasing and unsatisfactory leverage, or an adverse change in economic or market conditions may have weakened the borrower’s business and impaired their ability to repay based on original terms. The condition or value of the collateral has deteriorated to the point where adequate protection for our loan may be jeopardized in the future. Loans in this category are in transition and, generally, do not remain in this category beyond 12 months. During this time, efforts are focused on strategies aimed at upgrading the credit or locating alternative financing. Risk Rating “6” – Substandard (Classified): Loans in this category are inadequately protected by the borrower’s net worth, capacity to repay or collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. There exists a strong possibility of loss if the deficiencies are not corrected. Loans that are dependent on the liquidation of collateral to repay are included in this category, as well as borrowers in bankruptcy or where legal action is required to effect collection of our debt. Risk Rating “7” – Doubtful (Classified): Loans in this category indicate all of the weaknesses of a Substandard classification, however, collection of loan principal, in full, is highly questionable and improbable; possibility of loss is very high, but there is still a possibility that certain collection strategies may, yet, be successful, rendering a definitive loss difficult to estimate, at this time. Loans in this category are in transition and, generally, do not remain in this category more than 6 months. 79 Table of Contents Risk Rating “8” – Loss (Classified): Active Charge-Off. Loans in this category are considered uncollectible and of such little value that their removal from the Company’s books is required. The charge-off is pending or already processed. Collateral positions have been or are in the process of being liquidated and the borrower/guarantor may or may not be cooperative in repayment of the debt. Recovery prospects are unknown, but the Company is actively engaged in the collection of the loan. Inactive Charge-Off. Loans in this category are considered uncollectible and of such little value that their removal from the Company’s books is required. The charge-off is pending or already processed. Collateral positions have been liquidated and the borrower/guarantor has nothing of any value remaining to apply to the repayment of our loan. Any further collection activities would be of little value. The following table presents the risk ratings by loan class as of December 31, 2022 and 2021. Pass Special Mention Substandard Doubtful Loss Total December 31, 2022 Commercial $ 106,643 $ — $ 128 $ — $ — $ 106,771 Commercial Real Estate 631,693 6,748 6,725 — — 645,166 Agriculture 105,560 1,064 7,416 — — 114,040 Residential Mortgage 92,299 207 163 — — 92,669 Residential Construction 10,167 — — — — 10,167 Consumer 14,650 — 637 — — 15,287 Total $ 961,012 $ 8,019 $ 15,069 $ — $ — $ 984,100 December 31, 2021 Commercial $ 132,425 $ 2,376 $ 1,093 $ — $ — $ 135,894 Commercial Real Estate 516,120 6,524 4,280 — — 526,924 Agriculture 98,471 — 8,712 — — 107,183 Residential Mortgage 76,020 — 140 — — 76,160 Residential Construction 4,482 — — — — 4,482 Consumer 16,599 — 659 — — 17,258 Total $ 844,117 $ 8,900 $ 14,884 $ — $ — $ 867,901 80 Table of Contents Allowance for Loan Losses The following table details activity in the allowance for loan losses by loan category for the years ended December 31, 2022 and 2021. Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Unallocated Total Balance as of December 31, 2021 $ 1,604 $ 8,808 $ 1,482 $ 742 $ 74 $ 167 $ 1,075 $ 13,952 Provision for loan losses ( 119 ) 1,265 275 138 104 44 ( 807 ) 900 Charge-offs ( 297 ) — — — — ( 48 ) — ( 345 ) Recoveries 275 — — — — 10 — 285 Net charge-offs ( 22 ) — — — — ( 38 ) — ( 60 ) Ending Balance 1,463 10,073 1,757 880 178 173 268 14,792 Period-end amount allocated to: Loans individually evaluated for impairment — — — 75 — 2 — 77 Loans collectively evaluated for impairment 1,463 10,073 1,757 805 178 171 268 14,715 Balance as of December 31, 2022 $ 1,463 $ 10,073 $ 1,757 $ 880 $ 178 $ 173 $ 268 $ 14,792 Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Unallocated Total Balance as of December 31, 2020 $ 2,252 $ 7,915 $ 3,834 $ 635 $ 128 $ 214 $ 438 $ 15,416 Reversal of provision for loan losses ( 575 ) 879 ( 2,352 ) 112 ( 54 ) ( 147 ) 637 ( 1,500 ) Charge-offs ( 502 ) — — ( 5 ) — ( 12 ) — ( 519 ) Recoveries 429 14 — — — 112 — 555 Net (charge-offs)/ recoveries ( 73 ) 14 — ( 5 ) — 100 — 36 Ending Balance 1,604 8,808 1,482 742 74 167 1,075 13,952 Period-end amount allocated to: Loans individually evaluated for impairment — — — 81 10 2 — 93 Loans collectively evaluated for impairment 1,604 8,808 1,482 661 64 165 1,075 13,859 Balance as of December 31, 2021 $ 1,604 $ 8,808 $ 1,482 $ 742 $ 74 $ 167 $ 1,075 $ 13,952 81 Table of Contents The Company’s investment in loans as of December 31, 2022 and 2021 related to each balance in the allowance for loan losses by loan category and disaggregated on the basis of the Company’s impairment methodology was as follows: Commercial Commercial Real Estate Agriculture Residential Mortgage Residential Construction Consumer Total December 31, 2022 Loans individually evaluated for impairment $ — $ — $ 7,416 $ 622 $ — $ 701 $ 8,739 Loans collectively evaluated for impairment 106,771 645,166 106,624 92,047 10,167 14,586 975,361 Ending Balance $ 106,771 $ 645,166 $ 114,040 $ 92,669 $ 10,167 $ 15,287 $ 984,100 December 31, 2021 Loans individually evaluated for impairment $ 133 $ 555 $ 8,712 $ 655 $ 241 $ 723 $ 11,019 Loans collectively evaluated for impairment 135,761 526,369 98,471 75,505 4,241 16,535 856,882 Ending Balance $ 135,894 $ 526,924 $ 107,183 $ 76,160 $ 4,482 $ 17,258 $ 867,901 82 Table of Contents (5) Mortgage Operations The Company recognizes a gain or loss and a related asset for the fair value of the rights to service loans for others when loans are sold and servicing is retained. The Company sold a substantial portion of its portfolio of conforming long-term residential mortgage loans originated during the year ended December 31, 2022 on a servicing retained basis, for cash proceeds equal to the fair value of the loans. At December 31, 2022 and 2021, the Company serviced real estate mortgage loans for others totaling $ 194,818 and $ 208,169 , respectively. The recorded value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value. Impairment, if any, is recognized through a valuation allowance for each individual stratum. Changes in the carrying amount of mortgage servicing rights are reported in earnings under other operating income on the consolidated statements of income. The following table summarizes the activity related to the Company’s mortgage servicing rights assets for the years ended December 31, 2022 and 2021. Mortgage servicing rights are included in Interest Receivable and Other Assets on the consolidated balance sheets. December 31, 2021 Additions Reductions December 31, 2022 Mortgage servicing rights $ 1,807 $ 129 $ ( 286 ) $ 1,650 Valuation allowance ( 276 ) — 276 — Mortgage servicing rights, net of valuation allowance $ 1,531 $ 129 $ ( 10 ) $ 1,650 December 31, 2020 Additions Reductions December 31, 2021 Mortgage servicing rights $ 1,628 $ 641 $ ( 462 ) $ 1,807 Valuation allowance ( 386 ) — 110 ( 276 ) Mortgage servicing rights, net of valuation allowance $ 1,242 $ 641 $ ( 352 ) $ 1,531 At December 31, 2022 and December 31, 2021 , the estimated fair market value of the Company’s mortgage servicing rights asset was $ 2,101 and $ 1,531 , respectively. The changes in fair value of mortgage servicing rights during 2022 and 2021 were primarily due to new originations and changes in estimated prepayment speeds. The Company received contractually specified servicing fees of $ 509 and $ 530 for the years ended December 31, 2022 and 2021, respectively. Contractually specified servicing fees are included in Other Income on the Consolidated Statements of Income. 83 Table of Contents (6) Premises and Equipment Premises and equipment consisted of the following at December 31, of the indicated years: 2022 2021 Land $ 2,292 $ 2,292 Buildings 5,737 5,737 Furniture and equipment 14,132 13,782 Leasehold improvements 2,209 2,214 24,370 24,025 Less accumulated depreciation and amortization 18,248 17,473 $ 6,122 $ 6,552 Depreciation and amortization expense, included in occupancy and equipment expense, was $ 774 and $ 764 for the years ended December 31, 2022 and 2021, respectively. (7) Interest Receivable and Other Assets Interest receivable and other assets consisted of the following at December 31, of the indicated years: 2022 2021 Interest receivable $ 5,745 $ 4,571 Mortgage servicing rights asset (see Note 5) 1,650 1,531 Officer’s life insurance 15,599 17,656 Deferred tax assets, net (see Note 18) 24,175 5,655 Operating lease right-of-use asset (see Note 9) 4,905 5,138 Prepaid and other 7,130 5,693 $ 59,204 $ 40,244 (8) Short-Term and Long-Term Borrowings The Company had no secured borrowings and no Federal Funds purchased at December 31, 2022 and December 31, 2021. Additional short-term borrowings available to the Company consist of a line of credit and advances with the Federal Home Loan Bank (“FHLB”) secured under terms of a blanket collateral agreement by a pledge of FHLB stock and all loans. At December 31, 2022, the Company had a current collateral borrowing capacity with the FHLB of $ 365,786 and, at such date, also had unsecured formal lines of credit totaling $ 122,000 with correspondent banks. The Company had no long-term borrowings at December 31, 2022 and 2021. 84 Table of Contents (9) 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 Topic 842, the Company combines lease and nonlease components. The Bank had no financing leases as of December 31, 2022. Most leases include options to renew, with renewal terms that can extend the lease term from 3 to 10 years. The exercise of lease renewal options is at the Company’s sole discretion. Most leases are currently in the extension period. For the remaining leases with options to renew, the Company has not included the extended lease terms in the calculation of lease liabilities as the options are not reasonably certain of being exercised. Certain lease agreements include rental payments that are adjusted periodically for inflation. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. The Company uses its FHLB advance fixed rates, which are its incremental borrowing rates for secured borrowings, as the discount rates to calculate lease liabilities. The Company had right-of-use assets totaling $ 4,905 and $ 5,138 as of December 31, 2022 and December 31, 2021, respectively. Right-of-use assets are included in Interest receivable and other assets on the Consolidated Balance Sheets. The Company had lease liabilities totaling $ 5,422 and $ 5,664 as of December 31, 2022 and December 31, 2021, respectively. Lease liabilities are included in Interest payable and other liabilities on the Consolidated Balance Sheets. The Company recognized lease expenses totaling $ 1,154 and $ 1,172 for the years ended December 31, 2022 and December 31, 2021, respectively. Lease expense is included in Occupancy and Equipment expense on the Consolidated Statements of Income. The table below summarizes the maturity of remaining lease liabilities at December 31: (in thousands) 2022 2023 $ 1,097 2024 979 2025 962 2026 672 2027 611 2028 and thereafter 1,520 Total lease payments 5,841 Less: interest ( 419 ) Present value of lease liabilities $ 5,422 The following table presents supplemental cash flow information related to leases for the year ended December 31: (in thousands) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 1,251 $ 1,220 Right-of-use assets obtained in exchange for new operating lease liabilities $ 869 $ 285 The following table presents the weighted average operating lease term and discount rate at December 31: 2022 2021 Weighted-average remaining lease term - operating leases, in years 6.14 6.32 Weighted-average discount rate - operating leases 2.37 % 2.36 % 85 Table of Contents (10) Financial Instruments with Off-Balance Sheet Risk The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit in addition to entering into commitments to sell loans in conjunction with our mortgage banking activities. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments, whose contract amounts represent credit risk at December 31 of the indicated periods, were as follows: 2022 2021 Undisbursed loan commitments $ 205,610 $ 192,874 Standby letters of credit 1,930 2,305 Commitments to sell loans — 1,500 $ 207,540 $ 196,679 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank issues both financial and performance standby letters of credit. The financial standby letters of credit are primarily to guarantee payment to third parties. At December 31, 2022, there were no financial standby letters of credit outstanding. The performance standby letters of credit are typically issued to municipalities as specific performance bonds. At December 31, 2022, there was $ 1,930 issued in performance standby letters of credit and the Bank carried no liability. The Bank has experienced no draws on these letters of credit and does not expect to in the future; however, should a triggering event occur, the Bank either has collateral in excess of the letter of credit or imbedded agreements of recourse from the customer. The Bank has set aside a reserve for unfunded commitments in the amount of $ 700 and $ 650 at December 31, 2022 and 2021, respectively, which is recorded in “interest payable and other liabilities” on the consolidated balance sheets. Commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans. As of December 31, 2022, the Company had no off-balance sheet derivatives requiring additional disclosure. The Company may enter into interest rate lock commitments in connection with its mortgage banking activities to fund residential mortgage loans within specified times in the future. These commitments expose the Company to the risk that the price of the loan underlying the interest rate lock commitment might decline from the inception of the interest rate lock to the funding of the mortgage loan. To protect against this risk, the Company may enter into commitments to sell loans to economically hedge the risk of potential changes in the value of the loans that would result from the commitment. These commitments totaled $ 0 and $ 1,500 at December 31, 2022 and 2021, respectively. Mortgage loans sold to investors may be sold with servicing rights retained, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards. In the past two years, the Company has not had to repurchase any loans due to deficiencies in underwriting or loan documentation. Management believes that any liabilities that may result from such recourse provisions are not significant. 86 Table of Contents (11) Commitments and Contingencies At December 31, 2022, the aggregate maturities for time deposits were as follows: Year ending December 31: 2023 $ 34,689 2024 5,893 2025 2,209 2026 1,172 2027 151 Thereafter 241 $ 44,355 The Company is subject to various legal proceedings in the normal course of its business. In the opinion of management, after having consulted with legal counsel, the outcome of the pending legal proceedings should not have a material adverse effect on the consolidated financial condition or results of operations of the Company. 87 Table of Contents (12) Capital Adequacy and Restriction on Dividends The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s and the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. Quantitative measures established by regulation to help ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below). 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 will be 8.5 percent through calendar year 2021 and 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. Management believes, as of December 31, 2022, that the Bank met all capital adequacy requirements to which it is subject. As of December 31, 2022, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must meet the minimum ratios as set forth below. As of the date hereof, there have been no conditions or events since that notification that management believes have changed the institution’s category. 88 Table of Contents The Bank had Tier I Leverage, Common Equity Tier 1, Tier I Risk-Based and Total Risk-Based capital above the “well capitalized” levels at December 31, 2022 and 2021, respectively, as set forth in the following table (calculated in accordance with the Basel III capital rules): The Bank 2022 2021 Adequately Capitalized Well Capitalized Capital Ratio Capital Ratio Ratio* Ratio Tier 1 Leverage Capital (to Average Assets) $ 170,533 8.7 % $ 154,436 7.9 % 4.0 % 5.0 % Common Equity Tier 1 Capital (to Risk-Weighted Assets) 170,533 14.7 % 154,436 15.3 % 4.5 % 6.5 % Tier 1 Capital (to Risk-Weighted Assets) 170,533 14.7 % 154,436 15.3 % 6.0 % 8.0 % Total Risk-Based Capital (to Risk-Weighted Assets) 185,079 15.9 % 166,889 16.8 % 8.0 % 10.0 % * Ratio for regulatory requirement excludes the capital conservation buffer of 2.50%. Cash dividends declared by the Bank are restricted under California State banking laws to the lesser of the Bank’s retained earnings or the Bank’s net income for the latest three fiscal years, less dividends previously declared during those periods. 89 Table of Contents (13) Fair Value Measurement The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and trading securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a non-recurring basis, such as loans held-for-sale, loans held-for-investment and certain other assets. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. Assets Recorded at Fair Value on a Recurring Basis The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021. December 31, 2022 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury securities $ 113,815 $ 113,815 $ — $ — Securities of U.S. government agencies and corporations 118,911 — 118,911 — Obligations of states and political subdivisions 53,326 — 53,326 — Collateralized mortgage obligations 95,350 — 95,350 — Mortgage-backed securities 236,690 — 236,690 — Total investments at fair value $ 618,092 $ 113,815 $ 504,277 $ — December 31, 2021 Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury securities $ 86,211 $ 86,211 $ — $ — Securities of U.S. government agencies and corporations 102,610 — 102,610 — Obligations of states and political subdivisions 45,985 — 45,985 — Collateralized mortgage obligations 135,652 — 135,652 — Mortgage-backed securities 261,755 — 261,755 — Total investments at fair value $ 632,213 $ 86,211 $ 546,002 $ — 90 Table of Contents Assets Recorded at Fair Value on a Non-recurring Basis There were no assets measured at fair value on a non-recurring basis as of December 31, 2022. Assets measured at fair value on a non-recurring basis are included in the table below by level within the fair value hierarchy as of December 31, 2021. December 31, 2021 Total Level 1 Level 2 Level 3 Impaired loans $ 33 $ — $ — $ 33 Mortgage servicing rights 1,531 — — 1,531 Total assets at fair value $ 1,564 $ — $ — $ 1,564 There were no liabilities measured at fair value on a recurring or non-recurring basis at December 31, 2022 and 2021. Key methods and assumptions used in measuring the fair value of impaired loans and mortgage servicing rights as of December 31, 2021, were as follows: Method Assumption Inputs Impaired loans Collateral, market, income, enterprise, liquidation, and discounted cash flows External appraised values, management assumptions regarding market trends or other relevant factors, selling costs generally ranging from 6 % to 10 %, or the amount and timing of cash flows based on the loan’s effective interest rate. Mortgage servicing rights Discounted cash flows Present value of expected future cash flows was estimated using a weighted average discount rate factor of 9.50 % as of December 31, 2021 . A weighted average constant prepayment rate of 15.73 % as of December 31, 2021 was utilized. The following section describes the valuation methodologies used for assets 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. Impaired Loans The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, the Company measures impairment. The fair value of impaired loans is estimated using one of several methods, including the present value of expected cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Those impaired loans not requiring charge-off or specific allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At December 31, 2021, certain impaired loans were considered collateral dependent and were evaluated based on the fair value of the underlying collateral securing the loan. At December 31, 2022, there were no impaired loans that were considered collateral dependent. Impaired 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 impaired loan as non-recurring Level 3 given the valuation includes significant unobservable assumptions. 91 Table of Contents Mortgage Servicing Rights Mortgage servicing rights (MSRs) are subject to impairment testing. All mortgage servicing rights are initially measured and recorded at fair value at the time loans are sold. The fair value of MSRs is determined based on the price that would be received to sell the MSRs in an orderly transaction between market participants at the measurement date. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the mortgage servicing rights, the present value of expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income. The model used to calculate the fair value of the Company’s MSRs is periodically validated. The model assumptions and the MSRs fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. If the valuation model reflects a value less than the carrying value, MSRs are adjusted to fair value through a valuation allowance as determined by the model. As such, the Company classifies MSRs subjected to non-recurring fair value adjustments as Level 3. Disclosures about Fair Value of Financial Instruments The following table summarizes fair value estimates for financial instruments for the years ended December 31, 2022 and 2021, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note). 2022 2021 Level Carrying amount Fair value Carrying amount Fair value Financial assets: Cash and cash equivalents 1 $ 187,417 $ 187,417 $ 345,929 $ 345,929 Certificates of deposit 2 20,948 20,560 13,272 13,443 Stock in Federal Home Loan Bank and other equity securities, at cost 3 9,440 9,440 7,097 7,097 Loans receivable: Net loans 3 970,138 929,163 852,717 830,967 Loans held-for-sale 2 — — 1,063 1,089 Interest receivable 2 5,745 5,745 4,571 4,571 Mortgage servicing rights 3 1,650 2,101 1,531 1,531 Financial liabilities: Deposits 3 1,726,874 1,372,411 1,728,302 1,678,658 Interest payable 2 93 93 42 42 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. 92 Table of Contents (14) Outstanding Shares and Earnings Per Share All income per share amounts have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5 % stock dividend declared on January 26, 2023 , payable on March 24, 2023 , to shareholders of record as of February 28, 2023 . Earnings Per Share Basic and diluted earnings per share for the years ended December 31, were computed as follows: 2022 2021 Basic earnings per share: Net income $ 15,884 $ 14,186 Weighted average common shares outstanding 14,365,443 14,738,356 Basic earnings per share $ 1.11 $ 0.96 Diluted earnings per share: Net income $ 15,884 $ 14,186 Weighted average common shares outstanding 14,365,443 14,738,356 Effect of dilutive shares 157,894 187,785 Adjusted weighted average common shares outstanding 14,523,337 14,926,141 Diluted earnings per share $ 1.09 $ 0.95 Options not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 438,471 shares and 309,252 shares for the years ended December 31, 2022 and 2021, respectively. Restricted stock not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 66,301 shares and 10,961 shares for the years ended December 31, 2022 and 2021, respectively. 93 Table of Contents (15) Stock Compensation Plans The total number of shares authorized, number of shares outstanding, weighted average exercise prices, exercise prices and weighted average grant date fair value have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5 % stock dividend declared on January 26, 2023 , payable on March 24, 2023 to shareholders of record as of February 28, 2023 . Under the Company’s 2016 Stock Incentive Plan (the “Plan”), the Company may grant option grants, stock appreciation rights, restricted stock, or stock units to an employee for an amount up to 50,000 total shares in any calendar year. With respect to awards granted to non-employee directors under the Plan during the term of the Plan, the total number of shares of common stock which may be issued upon exercise or settlement of such awards is 100,000 shares and no outside director may receive option grants, stock appreciation rights, restricted stock or stock units for more than 3,000 shares total in any calendar year. There are 894,071 shares authorized under the Plan. The Plan will terminate on March 15, 2026. The Compensation Committee of the Board of Directors is authorized to prescribe the terms and conditions of each option, including exercise price, vestings, or duration of the option. Generally, option grants vest at a rate of 25 % per year after the first anniversary of the date of grant and restricted stock awards vest at a rate of 100 % after four years . Options expire 10 years after the date of grant. Options are granted with an exercise price of the fair value of the related common stock on the date of grant. Stock option activity under the Plan during the year ended December 31, 2022, was as follows: Stock Options Number of shares Weighted average exercise price Balance at December 31, 2021 659,205 $ 8.16 Granted 45,113 9.76 Exercised ( 19,450 ) 3.34 Cancelled/Forfeited — — Balance at December 31, 2022 684,868 $ 8.41 The following table presents information on stock options for the year ended December 31, 2022: Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value Weighted Average Remaining Contractual Term Options exercised 19,450 $ 3.34 $ 125 — Stock options outstanding and expected to vest: 684,868 $ 8.41 $ 431 5.28 Stock options vested and currently exercisable: 513,099 $ 8.01 $ 431 4.52 The weighted average grant date fair value per share of options granted during the years ended December 31, 2022 was $ 2.22 . There were no options granted in 2021. The intrinsic value of options exercised during the years ended December 31, was $ 125 in 2022 and $ 63 in 2021. The fair value of awards vested during the years ended December 31 was $ 142 in 2022 and $ 182 in 2021. At December 31, 2022, outstanding options had a weighted average exercise price of $ 8.41 . As of December 31, 2022, there was $ 157 of total unrecognized compensation related to non-vested stock options. This cost is expected to be recognized over a weighted average period of approximately 2.2 years. 94 Table of Contents For the years ended December 31, 2022 and 2021, there was $ 121 and $ 145 , respectively, of recognized compensation related to stock options. The Company determines fair value at grant date using the Black-Scholes-Merton pricing model that takes into account the stock price at the grant date, the exercise price, the risk-free interest rate, the volatility of the underlying stock and the expected life of the option. The weighted average assumptions used in the pricing model are noted in the following table. The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Expected volatility is based on both the implied volatilities from the traded option on the Company’s stock and historical volatility on the Company’s stock. The Company expenses the fair value of the option on a straight line basis over the vesting period. The Company estimates forfeitures and only recognizes expense for those shares that actually vest. The following table shows our weighted average assumptions used in valuing stock options granted for the years ended December 31: 2022 2021 Risk-Free Interest Rate 2.54 % 0.00 % Expected Dividend Yield 0.00 % 0.00 % Expected Life in Years 5.00 — Expected Price Volatility 19.70 % 0.00 % In addition to stock options, the Company also grants restricted stock awards to directors, certain officers and employees. The restricted shares awarded become fully vested after four years of continued employment or service from the date of grant. Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions. The following table presents information about non-vested restricted stock awards outstanding for the year ended December 31, 2022: Restricted Stock Awards Number of shares Weighted average grant date fair value Balance at December 31, 2021 175,767 $ 9.50 Granted 104,352 9.31 Vested ( 31,652 ) 10.17 Cancelled/Forfeited — — Balance at December 31, 2022 248,467 $ 9.33 The aggregate intrinsic value of restricted stock awards vested in calendar years 2022 and 2021, was $ 310 and $ 332 , respectively. The weighted average fair value per share of restricted stock awards granted during the years ended December 31, was $ 9.31 in 2022 and $ 9.52 in 2021. As of December 31, 2022, there was $ 1,196 of total unrecognized compensation related to non-vested restricted stock awards. This cost is expected to be recognized over a weighted average period of approximately 2.8 years. For the year ended December 31, 2022 and 2021, there was $ 514 and $ 411 , respectively, of recognized compensation related to restricted stock awards. 95 Table of Contents Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan (“ESPP”). Under the ESPP, the Company is authorized to issue to an eligible employee shares of common stock. There are 358,911 shares authorized under the ESPP, which include authorized but unissued shares under the 2006 Amended ESPP. 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. An eligible employee is one who has been continually employed for at least ninety ( 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. Approximately 40 percent of eligible employees are participating in the ESPP in the current participation period, which began November 24, 2022 and will end November 23, 2023. Under the ESPP, at the annual stock purchase date of November 23, 2022, there were $ 116 in contributions, and 17,353 shares were purchased at a price of $ 6.68 . For the year ended December 31, 2022 and 2021, there was $ 20 and $ 32 , respectively, of recognized compensation related to ESPP issuances. Compensation cost is reported in salaries and employee benefits expense in the consolidated statements of income. The total number of shares authorized, number of shares purchased and stock price have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5 % stock dividend declared on January 26, 2023 , payable March 24, 2023 , to shareholders of record as of February 28, 2023 . (16) Profit Sharing Plan The Bank maintains a profit sharing plan for the benefit of its employees. Employees who have completed 1,000 hours of service and are actively employed on the last day of the plan year are eligible. Under the terms of this plan, a portion of the Bank’s profits, as determined by the Board of Directors, will be set aside and maintained in a trust fund for the benefit of qualified employees. Contributions to the plan, included in salaries and employee benefits in the consolidated statements of income, were $ 2,387 and $ 2,037 in 2022 and 2021, respectively. The profit sharing plan also has a 401(k) feature that allows employees to contribute to the profit sharing plan, even if they are not eligible for a contribution from the Bank. An employee is eligible to make contributions through the 401(k) feature on the 1 st of the month following 90 days of employment. 96 Table of Contents (17) Supplemental Compensation Plans EXECUTIVE RETIREMENT PLAN Pension Benefit Plans The Company and the Bank maintain an unfunded non-contributory defined benefit pension plan (“ Salary Continuation Plan ”) and related split dollar plan for a select group of highly compensated employees. The Salary Continuation Plan provides defined annual benefit levels between $ 50 and $ 125 depending on responsibilities at the Bank. The retirement benefits are paid for 10 years following retirement at age 65 . Reduced retirement benefits are available after age 55 and 10 years of service. Eligibility to participate in the Salary Continuation Plan is limited to a select group of management or highly compensated employees of the Bank that are designated by the Board. Additionally, the Company and the Bank adopted a supplemental executive retirement plan (“SERP”) in 2006. The SERP is intended to integrate the various forms of retirement payments offered to executives. There are currently three participants in the SERP. The SERP benefit is calculated using 3 -year average salary plus 7 -year average bonus (average compensation). For each year of service, the benefit formula credits 2 % to 2.5 % of average compensation up to a cumulative maximum of 50%. Therefore, for an executive serving 20 to 25 years, the target benefit is 50 % of average compensation. The target benefit is reduced for other forms of retirement income provided by the Bank. Reductions are made for 50 % of the social security benefit expected at age 65 and for the accumulated value of contributions the Bank makes to the executive’s profit sharing plan. For purposes of this reduction, contributions to the profit sharing plan are accumulated each year at a 3 -year average of the yields on 10 -year Treasury securities. Retirement benefits are paid monthly for 120 months, plus 6 months for each full year of service over 10 years, up to a maximum of 180 months. Reduced benefits are payable for retirement prior to age 65. Should retirement occur prior to age 65, the benefit determined by the formula described above is reduced 5 % for each year payments commence prior to age 65. Therefore, the new SERP benefit is reduced 50 % for retirement at age 55 . No benefit is payable for voluntary terminations prior to age 55. 97 Table of Contents The following table sets forth the status of the Salary Continuation Plan and SERP as of December 31, 2022 and December 31, 2021: 2022 2021 Change in benefit obligation Benefit obligation at beginning of year $ 6,581 $ 7,127 Service cost 278 312 Interest cost 175 168 Plan gain ( 1,423 ) ( 754 ) Benefits paid ( 272 ) ( 272 ) Benefit obligation at end of year $ 5,339 $ 6,581 Change in plan assets Employer contribution $ 272 $ 272 Benefits paid ( 272 ) ( 272 ) Fair value of plan assets at end of year $ — $ — Reconciliation of funded status Funded status $ ( 5,339 ) $ ( 6,581 ) Unrecognized net plan loss 406 1,959 Unrecognized prior service cost 32 34 Net amount recognized $ ( 4,901 ) $ ( 4,588 ) Amounts recognized in the consolidated balance sheets consist of: Accrued benefit liability $ ( 5,339 ) $ ( 6,581 ) Accumulated other comprehensive loss 438 1,993 Net amount recognized $ ( 4,901 ) $ ( 4,588 ) 98 Table of Contents The Company expects to recognize approximately $ 2 of the unrecognized net actuarial loss and prior service cost as a component of net periodic benefit cost in 2023. For the Year ended December 31, 2022 2021 Components of net periodic benefit cost Service cost $ 278 $ 312 Interest cost 175 168 Amortization of prior service cost 2 2 Recognized actuarial loss 130 205 Net periodic benefit cost 585 687 Additional Information Minimum benefit obligation at year end $ 5,339 $ 6,581 Decrease increase in minimum liability included in other comprehensive loss $ ( 1,555 ) $ ( 961 ) Assumptions used to determine benefit obligations at December 31 2022 2021 Discount rate used to determine net periodic benefit cost for years ended December 31 2.60 % 2.30 % Discount rate used to determine benefit obligations at December 31 5.00 % 2.60 % Future salary increases 5.75 % 6.75 % Plan Assets The Bank informally funds the liabilities of the Salary Continuation Plan through life insurance purchased on the lives of plan participants. This informal funding does not meet the definition of “plan assets” under pension accounting standards. Therefore, assets held for this purpose are not disclosed as part of the Salary Continuation Plan. Cash Flows Contributions and Estimated Benefit Payments For unfunded plans, contributions to the Salary Continuation Plan are the benefit payments made to participants. The Bank paid $ 272 in benefit payments during fiscal 2022. The following benefit payments, which reflect expected future service, are expected to be paid in future fiscal years: Year ending December 31, Pension Benefits 2023 $ 445 2024 445 2025 471 2026 320 2027 310 2028 - 2032 1,550 Disclosure of settlements and curtailments: There were no events during fiscal 2022 that would constitute a curtailment or settlement. 99 Table of Contents DIRECTORS’ RETIREMENT PLAN On July 19, 2001, the Company and the Bank approved an unfunded non-contributory defined benefit pension plan (“ Directors’ Retirement Plan ”) and related split dollar plan for the directors of the Bank. The Directors’ Retirement Plan provides a retirement benefit equal to $ 1 per year of service as a director, up to a maximum benefit amount of $ 15 . The retirement benefit is payable for ten years following retirement at age 65 . Reduced retirement benefits are available after age 55 and ten years of service. The following table sets forth the status of the Directors’ Retirement Plan as of December 31, 2022 and December 31, 2021: 2022 2021 Change in benefit obligation Benefit obligation at beginning of year $ 710 $ 831 Service cost — — Interest cost 14 10 Plan gain ( 94 ) ( 56 ) Benefits paid ( 70 ) ( 75 ) Benefit obligation at end of year $ 560 $ 710 Change in plan assets Employer contribution $ 70 $ 75 Benefits paid ( 70 ) ( 75 ) Fair value of plan assets at end of year $ — $ — Reconciliation of funded status Funded status $ ( 560 ) $ ( 710 ) Unrecognized net plan gain ( 76 ) 18 Net amount recognized $ ( 636 ) $ ( 692 ) Amounts recognized in the statement of financial position consist of: Accrued benefit liability $ ( 560 ) $ ( 710 ) Accumulated other comprehensive (gain) loss ( 76 ) 18 Net amount recognized $ ( 636 ) $ ( 692 ) 100 Table of Contents For the Year Ended December 31, 2022 2021 Components of net periodic benefit cost Service cost $ — $ — Interest cost 14 10 Recognized actuarial gain — — Net periodic benefit cost 14 10 Additional Information Minimum benefit obligation at year end $ 560 $ 710 Decrease in minimum liability included in other comprehensive loss $ ( 94 ) $ ( 56 ) Assumptions used to determine benefit obligations at December 31 2022 2021 Discount rate used to determine net periodic benefit cost for years ended December 31 2.10 % 1.30 % Discount rate used to determine benefit obligations at December 31 4.60 % 2.10 % Plan Assets The Bank informally funds the liabilities of the Directors’ Retirement Plan through life insurance purchased on the lives of plan participants. This informal funding does not meet the definition of “plan assets” under pension accounting standards. Therefore, assets held for this purpose are not disclosed as part of the Directors’ Retirement Plan. Cash Flows Contributions and Estimated Benefit Payments For unfunded plans, contributions to the Directors’ Retirement Plan are the benefit payments made to participants. The Bank paid $ 70 in benefit payments during fiscal 2022. The following benefit payments, which reflect expected future service, are expected to be paid in future fiscal years: Year ending December 31, Pension Benefits 2023 $ 60 2024 60 2025 65 2026 60 2027 46 2028 - 2032 239 Disclosure of settlements and curtailments: There were no events during fiscal 2022 that would constitute a curtailment or settlement. 101 Table of Contents EXECUTIVE ELECTIVE DEFERRED COMPENSATION PLAN — 2001 EXECUTIVE DEFERRAL PLAN On July 19, 2001, the Bank approved a revised Executive Elective Deferred Compensation Plan (“2001 Executive Deferral Plan”) for certain officers to provide them the ability to make elective deferrals of compensation due to tax law limitations on benefit levels under qualified plans. Deferred amounts earn interest at an annual rate determined by the Bank’s Board. The 2001 Executive Deferral Plan is a non-qualified plan funded with Bank owned life insurance policies taken on the lives of the participating officers. During the year ended December 31, 2001, the Bank purchased insurance making a single-premium payment aggregating $ 1,125 , which is reported in other assets on the Consolidated Balance Sheets. The Bank is the beneficiary and owner of the policies. The cash surrender value of the related insurance policies as of December 31, 2022 and 2021 totaled $ 2,820 and $ 2,749 , respectively. The net decrease in accrued liability for the 2001 Executive Deferral Plan totaled $ 28 for each of the years ended December 31, 2022 and 2021. The net decrease was due to payments totaling $ 35 for each of the years ended December 31, 2022 and 2021, which was partially offset by interest accrued totaling $ 7 during each of the years ended December 31, 2022 and 2021. Interest expense for the 2001 Executive Deferral Plan totaled $ 7 for each of the years ended December 31, 2022 and 2021. DIRECTOR ELECTIVE DEFERRED FEE PLAN — 2001 DIRECTOR DEFERRAL PLAN On July 19, 2001, the Bank approved a Director Elective Deferred Fee Plan (“2001 Director Deferral Plan”) for directors to provide them the ability to make elective deferrals of director’s fees. Deferred amounts earn interest at an annual rate determined by the Bank’s Board. The 2001 Director Deferral Plan is a non-qualified plan funded with Bank owned life insurance policies taken on the lives of the participating directors. The Bank is the beneficiary and owner of the policies. The cash surrender value of the related insurance policies as of December 31, 2022 and 2021 totaled $ 157 and $ 153 , respectively. The net decrease in accrued liability for the 2001 Director Deferral Plan totaled $ 4 for each of the years ended December 31, 2022 and 2021. The net decrease was due to payments totaling $ 5 for each of the years ended December 31, 2022 and 2021, which was partially offset by interest accrued totaling $ 1 for each of the years ended December 31, 2022 and 2021. Interest expense for the 2001 Director Deferral Plan totaled $ 1 for each of the years ended December 31, 2022 and 2021. 102 Table of Contents (18) Income Taxes The provision for income tax expense consisted of the following for the years ended December 31: 2022 2021 Current: Federal $ 4,141 $ 2,553 State 2,328 1,687 6,469 4,240 Deferred: Federal ( 599 ) 652 State ( 88 ) 348 ( 687 ) 1,000 $ 5,782 $ 5,240 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021, consisted of: 2022 2021 Deferred tax assets: Allowance for loan losses $ 4,580 $ 4,317 Deferred compensation 82 91 Retirement compensation 1,635 1,559 Stock option compensation 379 311 Postretirement benefits 107 578 Current state franchise taxes 490 322 Non-accrual interest 416 291 Sale-leaseback 2 26 Lease liability 1,590 1,667 Investment securities unrealized loss 19,419 1,115 Other 392 246 Deferred tax assets 29,092 10,523 Deferred tax liabilities: Fixed assets depreciation 1,183 1,320 FHLB dividends 184 184 Tax credit – loss on pass-through 422 400 Deferred loan costs 1,024 1,010 Mortgage servicing rights 378 288 Right of Use Asset 1,450 1,519 Other 276 147 Total deferred tax liabilities 4,917 4,868 Net deferred tax assets (see Note 7) $ 24,175 $ 5,655 Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are deductible, management believed it is more-likely-than-not the Company will realize the benefits of these deductible differences. 103 Table of Contents At December 31, 2022, the Company had no state net operating loss carry forwards and no federal tax credit carry forwards. A reconciliation of income taxes computed at the federal statutory rate and the provision for income taxes for the years ended December 31, is as follows: 2022 2021 Federal statutory income tax rate 21.0 % 21.0 % Increase (decrease) in tax rate due to: State franchise tax, net of federal benefit 8.2 % 8.3 % Reduction for tax exempt interest ( 1.7 )% ( 1.6 )% Cash surrender value of life insurance ( 1.0 )% ( 0.5 )% Other 0.2 % ( 0.2 )% Effective income tax rate 26.7 % 27.0 % Accounting for Uncertainty in Income Taxes The Company had no unrecognized tax benefits for the years ended December 31, 2022 and 2021. The Company recognized no changes in unrecognized tax benefits during 2022 and 2021, due to the expiration of a statute of limitations. The Company had no significant uncertain tax positions as of December 31, 2022 and December 31, 2021. The Company does not currently anticipate any significant increase or decrease in unrecognized tax benefits during 2023. The Company classifies interest and penalties as a component of the provision for income taxes. At December 31, 2022, there were no unrecognized interest and penalties. The tax years ended December 31, 2021, 2020, and 2019 remain subject to examination by the Internal Revenue Service. The tax years ended December 31, 2021, 2020, 2019, and 2018 remain subject to examination by the California Franchise Tax Board. The deductibility of these tax positions will be determined through examination by the appropriate tax authorities or the expiration of the tax statute of limitations. On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, permits net operating loss carryovers and carrybacks to offset 100% of taxable income for taxable years beginning before 2021. In addition, the CARES Act allows net operating losses incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes. The Company has evaluated the impact of the CARES Act and determined that none of the changes would result in a material income tax benefit to the Company. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law and extends several provisions of the CARES Act. As of December 31, 2022, the Company has determined that neither this Act nor changes to income tax laws or regulations in other jurisdictions have a significant impact on our effective tax rate. 104 Table of Contents (19) Accumulated Other Comprehensive Income/(Loss) The following table details activity in accumulated other comprehensive income/(loss) for the year ended December 31, 2022. Unrealized Gains (Losses) on Securities Officers’ retirement plan Directors’ retirement plan Accumulated Other Comprehensive Income/(loss) Balance as of December 31, 2021 $ ( 2,764 ) $ ( 1,420 ) $ ( 13 ) $ ( 4,197 ) Current period other comprehensive income (loss), net of tax ( 43,509 ) 1,112 66 ( 42,331 ) Balance as of December 31, 2022 $ ( 46,273 ) $ ( 308 ) $ 53 $ ( 46,528 ) The following table details activity in accumulated other comprehensive income/(loss) for the year ended December 31, 2021. Unrealized Gains (Losses) on Securities Officers’ retirement plan Directors’ retirement plan Accumulated Other Comprehensive Income/(loss) Balance as of December 31, 2020 $ 7,196 $ ( 2,105 ) $ ( 53 ) $ 5,038 Current period other comprehensive income (loss), net of tax ( 9,960 ) 685 40 ( 9,235 ) Balance as of December 31, 2021 $ ( 2,764 ) $ ( 1,420 ) $ ( 13 ) $ ( 4,197 ) 105 Table of Contents (20) Supplemental Consolidated Statements of Cash Flows Information Supplemental disclosures to the Consolidated Statements of Cash Flows for the years ended December 31, are as follows: 2022 2021 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 1,135 $ 929 Income taxes 4,660 4,770 Supplemental disclosure of non-cash investing and financing activities: Stock dividend distributed 6,992 6,636 Fair value adjustment of securities available for sale, net of tax of $( 18,304 ) and ( 4,018 ) for the years ended December 31, 2022 and 2021 , respectively ( 43,509 ) ( 9,960 ) Loans held-for-sale transferred to loans held-for-investment — 1,765 Recognition of right-of-use assets obtained in exchange for operating lease liabilities 869 285 Market value of shares tendered in-lieu of cash to pay for exercise of options 65 32 106 Table of Contents (21) Parent Company Financial Information This information should be read in conjunction with the other notes to the consolidated financial statements. The following presents summary balance sheets and summary statements of income and cash flows information for the years ended December 31: Balance Sheets 2022 2021 Assets Cash $ 1,034 $ 671 Investment in wholly-owned subsidiary 124,006 150,240 Total assets $ 125,040 $ 150,911 Liabilities and stockholders’ equity Liabilities — — Stockholders’ equity 125,040 150,911 Total liabilities and stockholders’ equity $ 125,040 $ 150,911 Statements of Income 2022 2021 Dividends from subsidiary $ — $ 1,500 Other operating expenses ( 303 ) ( 257 ) Income tax benefit 90 76 (Loss) income before undistributed earnings of subsidiary ( 213 ) 1,319 Equity in undistributed earnings of subsidiary 16,097 12,867 Net income $ 15,884 $ 14,186 Statements of Cash Flows 2022 2021 Net income $ 15,884 $ 14,186 Adjustments to reconcile net income to net cash provided by operating activities Stock-based compensation 655 588 Equity in undistributed earnings of subsidiary ( 16,097 ) ( 12,867 ) Net cash provided by operating activities 442 1,907 Cash flows from financing activities: Common stock issued 116 97 Stock repurchases ( 187 ) ( 5,374 ) Cash dividends paid in lieu of fractional shares ( 8 ) ( 8 ) Net cash provided by financing activities ( 79 ) ( 5,285 ) Net change in cash 363 ( 3,378 ) Cash at beginning of year 671 4,049 Cash at end of year $ 1,034 $ 671 107 Table of Contents (22) Related Party Transactions The Bank, in the ordinary course of business, has loan and deposit transactions with directors and executive officers. In management’s opinion, these transactions were on substantially the same terms as comparable transactions with other customers of the Bank. The amount of such deposits totaled approximately $ 5,740 and $ 8,672 at December 31, 2022 and 2021, respectively. The following is an analysis of the activity of loans to executive officers and directors for the years ended December 31: 2022 2021 Outstanding balance, beginning of year $ 3,352 $ 3,964 Credit granted 1,660 923 Repayments / Reductions ( 2,429 ) ( 1,535 ) Outstanding balance, end of year $ 2,583 $ 3,352 (23) Subsequent Events On November 5, 2022, the Bank entered into a Purchase and Assumption Agreement (the “Purchase Agreement”) with Columbia State Bank, a Washington state-chartered commercial bank (“Columbia”) and a wholly-owned subsidiary of Columbia Banking System, Inc., to acquire three branches of Columbia located in the California towns of Colusa, Orland and Willows. On January 20, 2023 the Company completed the acquisition of these branches. This acquisition enabled the Company to extend its existing footprint. Pursuant to the Purchase Agreement, the Bank acquired these branches for consideration in an amount equal to 3.15 % of the average daily closing balance of the deposits for the period commencing thirty calendar days prior to the closing date and concluding on the date preceding the closing date plus the net book values of certain assets of Columbia and accrued interest and fees with respect to the acquired loans. At the closing of the acquisition, and subject to the terms of the Purchase Agreement, the Bank assumed the deposit liabilities related to certain accounts. The aggregate deposits assumed totaled approximately $ 116 million, and the aggregate principal balance of the loans acquired totaled approximately $ 4 million. Given the close proximity between the transaction closing date and the Company’s Annual Report on Form 10-K, the preliminary purchase price allocation has not yet been completed. Management expects to complete the initial accounting for the acquisition, including the estimated fair values, later in the first quarter of 2023. As a result, the estimated fair values of the assets acquired and liabilities assumed, the valuation techniques and inputs used to measure and develop the fair values and any goodwill recorded will be disclosed in the Company’s Quarterly Report on Form 10-Q for the period ended March 31, 2023. 108 Table of Contents ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.