FIRST NORTHERN COMMUNITY BANCORP 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark one) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2024 OR ☐ T RANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File Number 000-30707 FIRST NORTHERN COMMUNITY BANCORP (Exact name of registrant as specified in its charter) California 68-0450397 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number) 195 N. First Street , Dixon , California 95620 (Address of principal executive offices) (Zip Code) 707 - 678-3041 (Registrant’s telephone number including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Trading symbols(s) Name of each exchange on which registered None Not Applicable Not Applicable Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☒ Smaller reporting company ☒ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ The number of shares of Common Stock outstanding as of August 5, 2024 was 15,396,989 . FIRST NORTHERN COMMUNITY BANCORP INDEX Page PART I – Financial Information 3 ITEM I. – Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheets (Unaudited) 3 Condensed Consolidated Statements of Income (Unaudited) 4 Condensed Consolidated Statements of Comprehensive Income (Unaudited) 5 Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) 6 Condensed Consolidated Statements of Cash Flows (Unaudited) 7 Notes to Condensed Consolidated Financial Statements 8 ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 31 ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 49 ITEM 4. – CONTROLS AND PROCEDURES 49 PART II – OTHER INFORMATION 49 ITEM 1. – LEGAL PROCEEDINGS 49 ITEM 1A. – RISK FACTORS 49 ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 51 ITEM 3. – DEFAULTS UPON SENIOR SECURITIES 51 ITEM 4. – MINE SAFETY DISCLOSURES 51 ITEM 5. – OTHER INFORMATION 51 ITEM 6. – EXHIBITS 52 SIGNATURES 53 2 Index PART I – FINANCIAL INFORMATION FIRST NORTHERN COMMUNITY BANCORP ITEM I. – FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts) June 30, 2024 December 31 , 2023 Assets Cash and cash equivalents $ 181,783 $ 149,211 Certificates of deposit 16,860 19,710 Investment securities – available-for-sale, at estimated fair value, net of allowance for credit losses of $ 0 ; amortized cost of $ 611,056 at June 30, 2024 and $ 620,314 at December 31, 2023 561,074 572,357 Loans, net of allowance for credit losses of $ 17,024 at June 30 , 2024 and $ 16,596 at December 31 , 2023 1,049,148 1,052,465 Loans held-for-sale 267 — Stock in Federal Home Loan Bank and other equity securities, at cost 10,518 10,518 Premises and equipment, net 9,549 9,962 Core deposit intangible 3,727 4,141 Interest receivable and other assets 55,089 53,468 Total Assets $ 1,888,015 $ 1,871,832 Liabilities and Stockholders’ Equity Liabilities: Demand deposits $ 746,004 $ 744,799 Interest-bearing transaction deposits 371,226 380,477 Savings and MMDA’s 430,927 431,472 Time, $250,000 or less 124,079 109,373 Time, over $250,000 34,823 26,323 Total deposits 1,707,059 1,692,444 Interest payable and other liabilities 15,229 20,143 Total Liabilities 1,722,288 1,712,587 Commitments and contingencies (Note 7) Stockholders’ Equity: Common stock, no par value; 32,000,000 shares authorized; 15,419,573 shares issued and outstanding at June 30, 2024 and 15,482,332 shares issued and outstanding at December 31, 2023 122,776 123,235 Additional paid-in capital 977 977 Retained earnings 77,128 68,760 Accumulated other comprehensive loss, net ( 35,154 ) ( 33,727 ) Total Stockholders’ Equity 165,727 159,245 Total Liabilities and Stockholders’ Equity $ 1,888,015 $ 1,871,832 See notes to unaudited condensed consolidated financial statements. 3 Index FIRST NORTHERN COMMUNITY BANCORP CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share amounts) Three months ended June 30, 2024 Three months ended June 30, 2023 Six months ended June 30, 2024 Six months ended June 30, 2023 Interest and dividend income: Loans $ 13,830 $ 13,722 $ 27,305 $ 25,099 Due from banks interest bearing accounts 2,084 2,503 3,799 4,903 Investment securities Taxable 3,088 2,673 5,933 5,356 Non-taxable 261 220 513 493 Other earning assets 267 165 523 343 Total interest and dividend income 19,530 19,283 38,073 36,194 Interest expense: Deposits 3,552 1,501 6,733 2,431 Total interest expense 3,552 1,501 6,733 2,431 Net interest income 15,978 17,782 31,340 33,763 Provision for credit losses 1,050 2,600 750 2,600 Net interest income after provision for credit losses 14,928 15,182 30,590 31,163 Non-interest income: Service charges on deposit accounts 437 411 865 823 Gains on sales of loans held-for-sale 5 13 5 31 Investment and brokerage services income 137 130 276 251 Mortgage brokerage income 11 — 20 10 Loan servicing income 66 66 133 130 Debit card income 705 727 1,364 1,381 Losses on sales/calls of available-for-sale securities ( 38 ) ( 66 ) ( 80 ) ( 64 ) Gain on bargain purchase — — — 1,405 Other income 161 225 408 412 Total non-interest income 1,484 1,506 2,991 4,379 Non-interest expenses: Salaries and employee benefits 5,593 6,471 12,264 13,276 Occupancy and equipment 1,183 1,057 2,310 2,074 Data processing 966 997 1,986 2,016 Stationery and supplies 82 69 142 169 Advertising 86 65 194 211 Directors’ fees 86 85 155 151 Amortization of core deposit intangible 203 226 414 377 Other expense 2,100 1,397 4,061 3,377 Total non-interest expenses 10,299 10,367 21,526 21,651 Income before provision for income taxes 6,113 6,321 12,055 13,891 Provision for income taxes 1,689 1,757 3,355 3,838 Net income $ 4,424 $ 4,564 $ 8,700 $ 10,053 Basic earnings per common share $ 0.29 $ 0.30 $ 0.57 $ 0.66 Diluted earnings per common share $ 0.29 $ 0.30 $ 0.57 $ 0.66 See notes to unaudited condensed consolidated financial statements. 4 Index FIRST NORTHERN COMMUNITY BANCORP CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands) Three months ended June 30, 2024 Three months ended June 30, 2023 Six months ended June 30, 2024 Six months ended June 30, 2023 Net income $ 4,424 $ 4,564 $ 8,700 $ 10,053 Other comprehensive income (loss), net of tax: Unrealized holding (losses) gains arising during the period, net of tax effect of $ 4 and $( 1,570 ) for the three months ended June 30 , 2024 and June 30 , 2023 , respectively, and $( 621 ) and $ 952 for the six months ended June 30 , 2024 and June 30 , 2023 , respectively 7 ( 3,736 ) ( 1,483 ) 2,278 Less: reclassification adjustment due to losses realized on sales of securities, net of tax effect of $ 11 and $ 20 for the three months ended June 30 , 2024 and June 30 , 2023 , respectively, and $ 24 and $ 19 for the six months ended June 30 , 2024 and June 30 , 2023 , respectively 27 46 56 45 Other comprehensive income (loss), net of tax $ 34 $ ( 3,690 ) $ ( 1,427 ) $ 2,323 Comprehensive income $ 4,458 $ 874 $ 7,273 $ 12,376 See notes to unaudited condensed consolidated financial statements. 5 Index FIRST NORTHERN COMMUNITY BANCORP CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED) (in thousands, except share data) Common Stock Additional Paid-in Retained Accumulated Other Comprehensive Income (Loss), Shares Amounts Capital Earnings net of tax Total Balance at December 31, 2022 14,652,584 $ 116,099 $ 977 $ 54,492 $ ( 46,528 ) $ 125,040 Cumulative change from adoption of ASU 2016-13 on January 1, 2023 ( 916 ) ( 916 ) Balance at January 1, 2023 (as adjusted for adoption of accounting standard) 14,652,584 116,099 977 53,576 ( 46,528 ) 124,124 Net income 5,489 5,489 Other comprehensive income, net of taxes 6,013 6,013 Stock dividend adjustment 3,525 296 ( 296 ) — Cash in lieu of fractional shares ( 164 ) ( 7 ) ( 7 ) Stock-based compensation 192 192 Common shares issued related to restricted stock grants 72,242 — — Stock options exercised, net of swapped shares 11,000 — — Stock repurchase and retirement ( 3,580 ) ( 26 ) ( 26 ) Balance at March 31, 2023 14,735,607 $ 116,561 $ 977 $ 58,762 $ ( 40,515 ) $ 135,785 Net income 4,564 4,564 Other comprehensive loss, net of taxes ( 3,690 ) ( 3,690 ) Stock-based compensation 188 188 Common shares issued related to restricted stock grants 1,500 — — Stock repurchase and retirement ( 16,474 ) ( 117 ) ( 117 ) Balance at June 30, 2023 14,720,633 $ 116,632 $ 977 $ 63,326 $ ( 44,205 ) $ 136,730 Balance at December 31, 2023 15,482,332 $ 123,235 $ 977 $ 68,760 $ ( 33,727 ) $ 159,245 Net income 4,276 4,276 Other comprehensive loss, net of taxes ( 1,461 ) ( 1,461 ) Stock dividend adjustment 2,671 325 ( 325 ) — Cash in lieu of fractional shares ( 148 ) ( 7 ) ( 7 ) Stock-based compensation 296 296 Common shares issued related to restricted stock grants, net of restricted stock reversals 57,489 — — Stock options exercised, net of swapped shares 8,387 — — Balance at March 31, 2024 15,550,731 $ 123,856 $ 977 $ 72,704 $ ( 35,188 ) $ 162,349 Net income 4,424 4,424 Other comprehensive income, net of taxes 34 34 Stock-based compensation 159 159 Common shares issued related to restricted stock grants 4,470 — Stock repurchase and retirement ( 137,500 ) ( 1,239 ) ( 1,239 ) Stock options exercised, net of swapped shares 1,872 — — Balance at June 30, 2024 15,419,573 $ 122,776 $ 977 $ 77,128 $ ( 35,154 ) $ 165,727 See notes to unaudited condensed consolidated financial statements. 6 Index FIRST NORTHERN COMMUNITY BANCORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Six months ended June 30, 2024 Six months ended June 30, 2023 Cash Flows From Operating Activities Net income $ 8,700 $ 10,053 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 532 480 Accretion and amortization of investment securities premiums and discounts, net 505 1,150 (Decrease) increase in deferred loan origination fees and costs, net ( 36 ) 553 Amortization of core deposit intangible 414 377 Provision for credit losses 750 2,600 Stock-based compensation 455 380 Losses on sales/calls of available-for-sale securities 80 64 Amortization of operating lease right-of-use asset 510 536 Gains on sales of loans held-for-sale ( 5 ) ( 31 ) Proceeds from sales of loans held-for-sale 1,699 1,945 Originations of loans held-for-sale ( 1,961 ) ( 2,925 ) Gain on bargain purchase — ( 1,405 ) Changes in assets and liabilities: (Increase) decrease in interest receivable and other assets ( 1,533 ) 828 Decrease in interest payable and other liabilities ( 4,914 ) ( 1,617 ) Net cash provided by operating activities 5,196 12,988 Cash Flows From Investing Activities Proceeds from calls or maturities of available-for-sale securities 42,785 15,265 Proceeds from sales of available-for-sale securities 2,932 16,986 Principal repayments on available-for-sale securities 35,155 36,202 Purchases of available-for-sale securities ( 72,199 ) ( 35,941 ) Proceeds from maturities of certificates of deposit 5,430 1,963 Purchases of certificates of deposit ( 2,580 ) ( 2,207 ) Net decrease (increase) in loans 2,603 ( 46,730 ) Purchases of Federal Home Loan Bank stock and other equity securities, at cost — ( 1,078 ) Purchases of premises and equipment ( 119 ) ( 506 ) Cash and cash equivalents acquired in acquisition — 103,425 Net cash provided by investing activities 14,007 87,379 Cash Flows From Financing Activities Net increase (decrease) in deposits 14,615 ( 82,828 ) Cash dividends paid in lieu of fractional shares ( 7 ) ( 7 ) Repurchases of common stock ( 1,239 ) ( 143 ) Net cash provided by (used in) by financing activities 13,369 ( 82,978 ) Net increase in Cash and Cash Equivalents 32,572 17,389 Cash and Cash Equivalents , beginning of period 149,211 187,417 Cash and Cash Equivalents, end of period $ 181,783 $ 204,806 Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 7,151 $ 2,000 Income taxes 4,520 — Supplemental disclosures of non-cash investing and financing activities: Stock dividend distributed 6,392 5,652 Unrealized holding (losses) gains on available for sale securities, net of taxes ( 1,427 ) 2,323 Market value of shares tendered in-lieu of cash to pay for exercise of options 348 81 Recognition of right-of-use assets obtained in exchange for operating lease liabilities — 245 Non-cash assets acquired (liabilities assumed) in acquisition: Total assets acquired — 12,612 Total liabilities assumed — ( 115,916 ) See notes to unaudited condensed consolidated financial statements. 7 Index FIRST NORTHERN COMMUNITY BANCORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2024 and 2023 and December 31, 2023 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of First Northern Community Bancorp (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of results expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. All material intercompany balances and transactions have been eliminated in consolidation . 2. ACCOUNTING POLICIES The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Accounting Standards Adopted in 2024 On January 1, 2024, the Company adopted Accounting Standards Updated (ASU) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. Adoption of ASU 2022-03 did not have a material impact on the Company’s consolidated financial statements. Recently Issued Accounting Pronouncements In January 2021, the Financial Accounting Standards Board (FASB) issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope . This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 . This ASU extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company is in the process of evaluating the provisions of this ASU but does not expect it to have a material impact on the Company’s consolidated financial statements. In August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture (JV) Formations: Recognition and Initial Measurement. The guidance requires newly formed JVs to apply a new basis of accounting to all of its contributed net assets, which results in the JV initially measuring its contributed net assets under ASC 805-20, Business Combinations. The new guidance would be applied prospectively and is effective for all newly formed joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. The Company is evaluating the accounting and disclosure requirements of this update and the impact of adopting the new guidance on the consolidated financial statements. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company has determined that its current business and operations consist of a single business segment and single reporting unit. The Company is currently evaluating the impact on the Company's consolidated financial statements as the Company has a single reportable segment. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Among other things, these amendments provide additional transparency into an entity’s income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The standard requires that public business entities disclose, on an annual basis, specific categories in the rate reconciliation and additional information for reconciling items meeting a certain quantitative threshold. The amendments also require that entities disclose on an annual basis: 1) income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes and 2) the income taxes paid (net of refunds received) disaggregated by individual jurisdictions exceeding 5% of total income taxes paid (net of refunds received). The amendments are effective for public business entities for annual periods beginning after December 15, 2024. The Company is evaluating the accounting and disclosure requirements of this update and the impact of adopting the new guidance on the consolidated financial statements. In March 2024, the FASB issued guidance within ASU 2024-01, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards . The amendments in the ASU apply to companies that provide employees and non-employees with profits interest and similar awards to align compensation with a company’s operating performance and provide those holders with the opportunity to participate in future profits and/or equity appreciation of the company. The purpose of the ASU is to clarify the application of the scope guidance in Accounting Standards Codification (ASC) paragraph 718-10-15-3 in determining if a profit interest award should be accounted for in accordance with Topic 718: Compensation—Stock Compensation. The amendment in ASC paragraph 718-10-15-3 is solely intended to improve the overall clarity and does not change the guidance. The ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. If a company adopts the amendments in an interim period, it should adopt them as of the beginning of the annual period that includes the interim period. The amendments should be applied either (1) retrospectively to all prior periods presented in the financial statements or (2) on a prospective basis. The Company has evaluated this ASU and does not expect the adoption to have a material impact on the Company’s Consolidated Financial Statements, as the Company does not typically provide these types of awards. 8 Index 3. INVESTMENT SECURITIES The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at June 30, 2024 are summarized as follows: Amortized cost Unrealized gains Unrealized losses Estimated fair value ACL Investment securities available-for-sale: U.S. Treasury securities $ 86,949 $ 34 $ ( 2,447 ) $ 84,536 $ — Securities of U.S. government agencies and corporations 108,213 27 ( 5,703 ) 102,537 — Obligations of states and political subdivisions 60,688 130 ( 4,391 ) 56,427 — Collateralized mortgage obligations 105,146 — ( 17,617 ) 87,529 — Mortgage-backed securities 250,060 41 ( 20,056 ) 230,045 — Total debt securities $ 611,056 $ 232 $ ( 50,214 ) $ 561,074 $ — The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2023 are summarized as follows: Amortized cost Unrealized gains Unrealized losses Estimated fair value ACL Investment securities available-for-sale: U.S. Treasury securities $ 90,063 $ 134 $ ( 3,015 ) $ 87,182 $ — Securities of U.S. government agencies and corporations 121,305 105 ( 6,331 ) 115,079 — Obligations of states and political subdivisions 55,021 237 ( 3,581 ) 51,677 — Collateralized mortgage obligations 107,658 15 ( 16,726 ) 90,947 — Mortgage-backed securities 246,267 242 ( 19,037 ) 227,472 — Total debt securities $ 620,314 $ 733 $ ( 48,690 ) $ 572,357 $ — The Company generated $ 1,961 ,000 and $ 9,785 ,000 in proceeds from sales of available-for-sale securities for the three-month periods ended June 30, 2024 and 2023, respectively. The Company generated $ 2,932 ,000 and $ 16,986 ,000 in proceeds from sales of available-for-sale securities for the six-month periods ended June 30, 2024 and 2023, respectively. Gross realized gains on sales of available-for-sale securities were $ 0 and $ 38 ,000 for the three-month periods ended June 30, 2024 and 2023, respectively. Gross realized gains on sales of available-for-sale securities were $ 0 and $ 96 ,000 for the six-month periods ended June 30, 2024 and 2023, respectively. Gross realized losses on sales of available-for-sale securities were $ 38 ,000 and $ 104 ,000 for the three-month periods ended June 30, 2024 and 2023, respectively. Gross realized losses on sales of available-for-sale securities were $ 80 ,000 and $ 160 ,000 for the six-month periods ended June 30, 2024 and 2023, respectively. The amortized cost and estimated fair value of debt and other securities at June 30, 2024, by contractual maturity, are shown in the following table: (in thousands) Amortized cost Estimated fair value Maturity in years: Due in one year or less $ 54,189 $ 53,362 Due after one year through five years 136,674 130,067 Due after five years through ten years 31,886 29,638 Due after ten years 33,101 30,433 Subtotal 255,850 243,500 Mortgage-backed securities & Collateralized mortgage obligations 355,206 317,574 Total $ 611,056 $ 561,074 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. 9 Index An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of June 30, 2024, follows: (in thousands) Less than 12 months 12 months or more Total Fair Value Unrealized losses Fair Value Unrealized losses Fair Value Unrealized losses U.S. Treasury securities $ 21,040 $ ( 52 ) $ 59,394 $ ( 2,395 ) $ 80,434 $ ( 2,447 ) Securities of U.S. government agencies and corporations 19,419 ( 80 ) 79,620 ( 5,623 ) 99,039 ( 5,703 ) Obligations of states and political subdivisions 15,905 ( 340 ) 31,958 ( 4,051 ) 47,863 ( 4,391 ) Collateralized mortgage obligations 7,538 ( 69 ) 78,980 ( 17,548 ) 86,518 ( 17,617 ) Mortgage-backed securities 41,951 ( 823 ) 174,050 ( 19,233 ) 216,001 ( 20,056 ) Total $ 105,853 $ ( 1,364 ) $ 424,002 $ ( 48,850 ) $ 529,855 $ ( 50,214 ) Eighty securities, all considered investment grade, which had an aggregate fair value of $ 105,853 ,000 and a total unrealized loss of $ 1,364 ,000, have been in an unrealized loss position for less than twelve months as of June 30, 2024. Four hundred and fifty two securities, all considered investment grade, which had an aggregate fair value of $ 424,002 ,000 and a total unrealized loss of $ 48,850 ,000, have been in an unrealized loss position for more than twelve months as of June 30, 2024. The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The decline in fair value is attributable to changes in interest rates and not credit quality, and the Company does not intend to sell the securities. The Company has concluded it is not more likely than not that the Company will be required to sell these securities prior to recovery of their anticipated cost basis. Therefore, as of June 30, 2024, the Company has no t recorded an allowance for credit losses on these securities and the unrecognized or unrealized losses on these securities have not been recognized into income. The fair value of investment securities could decline in the future if the general economy deteriorates, inflation and interest rate increases, credit ratings decline, the issuer’s financial condition deteriorates, or the liquidity for securities declines. As a result, an allowance for credit loss may occur in the future. An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of December 31, 2023, follows: (in thousands) Less than 12 months 12 months or more Total Fair Value Unrealized losses Fair Value Unrealized losses Fair Value Unrealized losses U.S. Treasury Securities $ — $ — $ 77,203 $ ( 3,015 ) $ 77,203 $ ( 3,015 ) Securities of U.S. government agencies and corporations 3,424 ( 7 ) 97,057 ( 6,324 ) 100,481 ( 6,331 ) Obligations of states and political subdivisions 4,981 ( 31 ) 32,578 ( 3,550 ) 37,559 ( 3,581 ) Collateralized Mortgage obligations 6,597 ( 26 ) 80,995 ( 16,700 ) 87,592 ( 16,726 ) Mortgage-backed securities 17,023 ( 124 ) 182,626 ( 18,913 ) 199,649 ( 19,037 ) Total $ 32,025 $ ( 188 ) $ 470,459 $ ( 48,502 ) $ 502,484 $ ( 48,690 ) Investment securities carried at $ 49,719 ,000 and $ 43,884 ,000 at June 30, 2024 and December 31, 2023, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law. 10 Index 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES The composition of the Company’s loan portfolio, by loan class, as of June 30, 2024 and December 31, 2023 was as follows: ($ in thousands) June 30, 2024 December 31, 2023 Commercial $ 110,749 $ 106,897 Commercial Real Estate 728,724 721,729 Agriculture 96,191 105,838 Residential Mortgage 106,671 107,328 Residential Construction 7,647 12,323 Consumer 16,076 14,868 1,066,058 1,068,983 Allowance for credit losses ( 17,024 ) ( 16,596 ) Deferred origination fees and costs, net 114 78 Loans, net $ 1,049,148 $ 1,052,465 At June 30, 2024 and December 31, 2023, all loans were pledged under a blanket collateral lien to secure actual or potential borrowings from the Federal Home Loan Bank (“FHLB”). Allowance for Credit Losses The following tables summarize the activity in the allowance for credit losses on loans which is recorded as a contra asset, and the reserve for unfunded commitments which is recorded on the balance sheet within other liabilities as of and for the three and six months ended June 30, 2024 . Allowance for credit losses – Three months ended June 30, 2024 ($ in thousands) Beginning balance Charge-offs Recoveries Provision (recovery) Ending Balance Commercial $ 1,547 $ ( 427 ) $ 6 $ 1,233 $ 2,359 Commercial Real Estate 10,496 — — ( 57 ) 10,439 Agriculture 1,641 — — 39 1,680 Residential Mortgage 1,901 — — ( 39 ) 1,862 Residential Construction 361 — — 19 380 Consumer 300 ( 1 ) — 5 304 Allowance for credit losses on loans 16,246 ( 428 ) 6 1,200 17,024 Reserve for unfunded commitments 1,100 — — ( 150 ) 950 Total $ 17,346 $ ( 428 ) $ 6 $ 1,050 $ 17,974 Allowance for credit losses – Six months ended June 30, 2024 ($ in thousands) Beginning balance Charge-offs Recoveries Provision (recovery) Ending Balance Commercial $ 2,041 $ ( 557 ) $ 47 $ 828 $ 2,359 Commercial Real Estate 10,864 — — ( 425 ) 10,439 Agriculture 997 — — 683 1,680 Residential Mortgage 2,005 — — ( 143 ) 1,862 Residential Construction 334 — — 46 380 Consumer 355 ( 14 ) 2 ( 39 ) 304 Allowance for credit losses on loans 16,596 ( 571 ) 49 950 17,024 Reserve for unfunded commitments 1,150 — — ( 200 ) 950 Total $ 17,746 $ ( 571 ) $ 49 $ 750 $ 17,974 The following tables summarize the activity in the allowance for credit losses on loans which is recorded as a contra asset, and the reserve for unfunded commitments which is recorded on the balance sheet within other liabilities as of and for the three and six months ended June 30, 2023 . Allowance for credit losses – Three months ended June 30, 2023 ($ in thousands) Beginning balance Charge-offs Recoveries Provision (recovery) Ending Balance Commercial $ 1,903 $ ( 51 ) $ 112 $ ( 172 ) $ 1,792 Commercial Real Estate 9,957 — — 182 10,139 Agriculture 949 ( 2,567 ) — 2,565 947 Residential Mortgage 1,825 — — 15 1,840 Residential Construction 453 — — 38 491 Consumer 397 — 1 ( 28 ) 370 Allowance for credit losses on loans 15,484 ( 2,618 ) 113 2,600 15,579 Reserve for unfunded commitments 1,200 — — — 1,200 Total $ 16,684 $ ( 2,618 ) $ 113 $ 2,600 $ 16,779 Allowance for credit losses – Six months ended June 30, 2023 ($ in thousands) Beginning balance Adoption of CECL Charge-offs Recoveries Provision (recovery) Ending Balance Commercial $ 1,491 $ 689 $ ( 178 ) $ 135 $ ( 345 ) $ 1,792 Commercial Real Estate 10,259 ( 513 ) — — 393 10,139 Agriculture 1,789 ( 742 ) ( 2,567 ) — 2,467 947 Residential Mortgage 896 923 ( 3 ) — 24 1,840 Residential Construction 181 221 — — 89 491 Consumer 176 222 ( 1 ) 1 ( 28 ) 370 Allowance for credit losses on loans 14,792 800 ( 2,749 ) 136 2,600 15,579 Reserve for unfunded commitments 700 500 — — — 1,200 Total $ 15,492 $ 1,300 $ ( 2,749 ) $ 136 $ 2,600 $ 16,779 The Company moved from California state loss drivers to national loss drivers at the beginning of 2024. The reason for the change is a higher loan loss correlation between the national loss driver variables than the state loss driver variables. During the quarter ended June 30, 2024, the levels of forecasted national unemployment and forecasted gross domestic product remained relatively stable, however, there was an increase in nonaccrual loans requiring specific reserves. As a result, the Company recorded provision for credit losses of $ 1,050 ,000 and $ 750 ,000 for the three and six months ended June 30, 2024. Management believes the allowance for credit losses at June 30, 2024 appropriately reflected expected credit losses in the loan portfolio at that date. 11 Index Collateral-Dependent Loans In accordance with ASC 326, a loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. All loans individually analyzed were collateral-dependent loans as of June 30, 2024 and December 31, 2023. The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses as of June 30, 2024 and December 31, 2023: June 30, 2024 ($ in thousands) Secured by 1-4 Family Residential Properties-1st lien Secured by 1-4 Family Residential Properties-junior lien Secured by 1-4 Family Residential Properties- revolving Commercial Construction and land development Secured by farmland Agriculture production loans Total Commercial $ — $ — $ — $ 2,374 $ — $ — $ — $ 2,374 Commercial Real Estate — — — — — — — — Agriculture — — — — — 849 1,723 2,572 Residential Mortgage 1,275 — — — — — — 1,275 Residential Construction — — — — — — — — Consumer — 319 265 — — — — 584 Total $ 1,275 $ 319 $ 265 $ 2,374 $ — $ 849 $ 1,723 $ 6,805 December 31, 2023 ($ in thousands) Secured by 1-4 Family Residential Properties-1st lien Secured by 1-4 Family Residential Properties-junior lien Secured by 1-4 Family Residential Properties- revolving Commercial Construction and land development Secured by farmland Agriculture production loans Total Commercial $ — $ — $ — $ — $ — $ — $ — $ — Commercial Real Estate — — — — — — — — Agriculture — — — — — 946 1,925 2,871 Residential Mortgage 424 — — — — — — 424 Residential Construction — — — — — — — — Consumer — 351 352 — — — — 703 Total $ 424 $ 351 $ 352 $ — $ — $ 946 $ 1,925 $ 3,998 Foreclosure Proceedings The Company had no residential real estate property in the process of foreclosure at June 30, 2024 and December 31, 2023. 12 Index Non-accrual and Past Due Loans The Company’s loans by delinquency and non-accrual status, as of June 30, 2024 and December 31, 2023, was as follows: ($ in thousands) 30-59 days Past Due & Accruing 60-89 days Past Due & Accruing 90 days or More Past Due & Accruing Nonaccrual Loans Total Past Due & Nonaccrual Loans Current & Accruing Loans Total Loans Nonaccrual loans with No ACL June 30 , 2024 Commercial $ 220 $ 556 $ — $ 2,374 $ 3,150 $ 107,599 $ 110,749 $ 605 Commercial Real Estate 305 — — — 305 728,419 728,724 — Agriculture — — — 2,572 2,572 93,619 96,191 2,572 Residential Mortgage 863 79 — 1,275 2,217 104,454 106,671 1,275 Residential Construction — — — — — 7,647 7,647 — Consumer — — — 584 584 15,492 16,076 584 Total $ 1,388 $ 635 $ — $ 6,805 $ 8,828 $ 1,057,230 $ 1,066,058 $ 5,036 December 31, 2023 Commercial $ 91 $ 178 $ — $ — $ 269 $ 106,628 $ 106,897 $ — Commercial Real Estate — — — — — 721,729 721,729 — Agriculture — — — 2,871 2,871 102,967 105,838 2,871 Residential Mortgage 976 — 916 424 2,316 105,012 107,328 424 Residential Construction — — 3,420 — 3,420 8,903 12,323 — Consumer 194 — — 703 897 13,971 14,868 703 Total $ 1,261 $ 178 $ 4,336 $ 3,998 $ 9,773 $ 1,059,210 $ 1,068,983 $ 3,998 The Company recognized $ 314 ,000 and $ 1,285 ,000 of interest income on nonaccrual loans during the three months ended June 30, 2024 and June 30, 2023, respectively. The Company recognized $ 319 ,000 and $ 1,285 ,000 of interest income on nonaccrual loans during the six months ended June 30, 2024 and June 30, 2023, respectively. Loan Modifications Occasionally, the Company modifies loans to borrowers in financial difficulty by providing principal forgiveness, term extension, payment delays or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL. In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, an other-than-insignificant payment delay and/or an interest rate reduction. 13 Index The following tables present the amortized cost basis of loans that were experiencing both financial difficulty and modification during the periods indicated, by class and by type of modification. The percentage of the amortized cost basis of loans that were modified to borrowers in financial difficulty as compared to the amortized cost basis of each class of financing receivable is also presented below. The amortized cost basis of loans that were experiencing both financial difficulty and modification during the three months ended June 30, 2024 were as follows: ($ in thousands) Term Extension Combination Term Extension and Interest Rate Reduction Total Class of Financing Receivable Commercial $ 75 $ — 0.07 % Commercial Real Estate — — — Agriculture — — — Residential Mortgage — — — Residential Construction — — — Consumer — — — Total $ 75 $ — 0.01 % The amortized cost basis of loans that were experiencing both financial difficulty and modification during the six months ended June 30, 2024 were as follows: ($ in thousands) Term Extension Combination Term Extension and Interest Rate Reduction Total Class of Financing Receivable Commercial $ 2,793 $ — 2.52 % Commercial Real Estate — — — Agriculture — — — Residential Mortgage — — — Residential Construction — — — Consumer — — — Total $ 2,793 $ — 0.26 % The amortized cost basis of loans that were experiencing both financial difficulty and modification during the three months ended June 30, 2023 were as follows: ($ in thousands) Term Extension Combination Term Extension and Interest Rate Reduction Total Class of Financing Receivable Commercial $ — $ — — Commercial Real Estate — 400 0.06 % Agriculture 4,005 — 3.86 % Residential Mortgage — — — Residential Construction — — — Consumer — — — Total $ 4,005 $ 400 3.92 % The amortized cost basis of loans that were experiencing both financial difficulty and modification during the six months ended June 30, 2023 were as follows: ($ in thousands) Term Extension Combination Term Extension and Interest Rate Reduction Total Class of Financing Receivable Commercial $ — $ 50 0.05 % Commercial Real Estate — 400 0.06 % Agriculture 4,005 — 3.86 % Residential Mortgage — — — Residential Construction — — — Consumer — — — Total $ 4,005 $ 450 3.97 % The Company had no commitments to lend additional funds to borrowers whose loans were modified at June 30, 2024. The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the three-month period ended June 30, 2024: ($ in thousands) Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (in months) Commercial — 62 Commercial Real Estate — — Agriculture — — Residential Mortgage — — Residential Construction — — Consumer — — Total — 62 14 Index The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the six-month period ended June 30, 2024: ($ in thousands) Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (in months) Commercial — 10 Commercial Real Estate — — Agriculture — — Residential Mortgage — — Residential Construction — — Consumer — — Total — 10 The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the three-month period ended June 30, 2023: ($ in thousands) Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (in months) Commercial — — Commercial Real Estate 0.25 % 26 Agriculture — 4 Residential Mortgage — — Residential Construction — — Consumer — — Total 0.25 % 6 The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the six-month period ended June 30, 2023: ($ in thousands) Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (in months) Commercial 0.50 % 38 Commercial Real Estate 0.25 % 26 Agriculture — 4 Residential Mortgage — — Residential Construction — — Consumer — — Total 0.28 % 6 There were no loans modified within the previous twelve months and for which there was a payment default during the three and six month periods ended June 30, 2024. There were two agricultural loans totaling $ 4,005 ,000 that were modified within the previous twelve months and for which there was a payment default during the three and six months ended June 30, 2023. The Company recorded charge-offs on these two agricultural loans totaling $ 2,567 ,000 during the three and six months ended June 30, 2023. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently become uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the same amount. 15 Index Credit Quality Indicators All loans are rated using the credit risk ratings and criteria adopted by the Company. Risk ratings are adjusted as future circumstances warrant. All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State bank regulatory agencies; a 5 equates to a Special Mention; a 6 equates to Substandard; a 7 equates to Doubtful; and an 8 equates to a Loss. For the definitions of each risk rating, see Note 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. The following tables present the loan portfolio by loan class, origination year, and internal risk rating as of June 30, 2024. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to permanent loans, are presented by year of origination. Revolving loans converted to term loans totaled $ 5,044 ,000 as of June 30, 2024. (in thousands) Term Loans Amortized Cost Basis by Origination Year - As of June 30, 2024 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Total Commercial Pass $ 20,954 $ 16,123 $ 13,979 $ 14,177 $ 4,494 $ 9,188 $ 23,130 $ 102,045 Special Mention — — 969 2,051 189 271 1,590 5,070 Substandard 756 — — 466 504 — 139 1,865 Doubtful/Loss — — 1,769 — — — — 1,769 Total Commercial loans $ 21,710 $ 16,123 $ 16,717 $ 16,694 $ 5,187 $ 9,459 $ 24,859 $ 110,749 Year-to-date Period Charge-offs — ( 113 ) ( 224 ) ( 5 ) ( 13 ) ( 2 ) ( 200 ) ( 557 ) Year-to-date Recoveries — — 4 — — 43 — 47 Year-to-date Net Charge-offs — ( 113 ) ( 220 ) ( 5 ) ( 13 ) 41 ( 200 ) ( 510 ) Commercial Real Estate Pass $ 43,656 $ 109,602 $ 173,398 $ 177,217 $ 41,884 $ 153,674 $ 6,700 $ 706,131 Special Mention 516 — — 2,787 — 1,236 — 4,539 Substandard — 388 1,017 7,514 1,661 7,474 — 18,054 Doubtful/Loss — — — — — — — — Total Commercial Real Estate loans $ 44,172 $ 109,990 $ 174,415 $ 187,518 $ 43,545 $ 162,384 $ 6,700 $ 728,724 Year-to-date Charge-offs — — — — — — — — Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — — — — Agriculture Pass $ 4,432 $ 7,042 $ 16,997 $ 20,401 $ 6,644 15,521 $ 17,599 $ 88,636 Special Mention — — 1,890 2,996 — — — 4,886 Substandard — — — 849 — — 1,820 2,669 Doubtful/Loss — — — — — — — — Total Agriculture loans $ 4,432 $ 7,042 $ 18,887 $ 24,246 $ 6,644 $ 15,521 $ 19,419 $ 96,191 Year-to-date Charge-offs — — — — — — — — Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — — — — 16 Index (in thousands) Term Loans Amortized Cost Basis by Origination Year - As of June 30, 2024 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Total Residential Mortgage Pass $ 1,306 $ 20,329 $ 23,177 $ 27,674 $ 13,604 $ 19,306 $ — $ 105,396 Special Mention — — — — — — — — Substandard — — — 36 — 1,239 — 1,275 Doubtful/Loss — — — — — — — — Total Residential Mortgage loans $ 1,306 $ 20,329 $ 23,177 $ 27,710 $ 13,604 $ 20,545 $ — $ 106,671 Year-to-date Charge-offs — — — — — — — — Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — — — — Residential Construction Pass $ 1,055 $ 3,245 $ 2,051 $ 1,296 $ — $ — $ — $ 7,647 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful/Loss — — — — — — — — Total Residential Construction loans $ 1,055 $ 3,245 $ 2,051 $ 1,296 $ — $ — $ — $ 7,647 Year-to-date Charge-offs — — — — — — — — Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — — — — Consumer Pass $ 247 $ 174 $ 1,151 $ 125 $ 129 $ 281 $ 13,385 $ 15,492 Special Mention — — — — — — — — Substandard — — — — — — 584 584 Doubtful/Loss — — — — — — — — Total Consumer loans $ 247 $ 174 $ 1,151 $ 125 $ 129 $ 281 $ 13,969 $ 16,076 Year-to-date Charge-offs ( 14 ) — — — — — — ( 14 ) Year-to-date Recoveries — — — — — 2 — 2 Year-to-date Net Charge-offs ( 14 ) — — — — 2 — ( 12 ) Total Loans Pass $ 71,650 $ 156,515 $ 230,753 $ 240,890 $ 66,755 $ 197,970 $ 60,814 $ 1,025,347 Special Mention 516 — 2,859 7,834 189 1,507 1,590 14,495 Substandard 756 388 1,017 8,865 2,165 8,713 2,543 24,447 Doubtful/Loss — — 1,769 — — — — 1,769 Total Loans $ 72,922 $ 156,903 $ 236,398 $ 257,589 $ 69,109 $ 208,190 $ 64,947 $ 1,066,058 Year-to-date Charge-offs $ ( 14 ) $ ( 113 ) $ ( 224 ) $ ( 5 ) $ ( 13 ) $ ( 2 ) $ ( 200 ) $ ( 571 ) Year-to-date Recoveries $ — $ — $ 4 $ — $ — $ 45 $ — $ 49 Year-to-date Net Charge-offs $ ( 14 ) $ ( 113 ) $ ( 220 ) $ ( 5 ) $ ( 13 ) $ 43 $ ( 200 ) $ ( 522 ) 17 Index (in thousands) Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Commercial Pass $ 19,776 $ 16,961 $ 15,833 $ 5,381 $ 7,420 $ 6,298 $ 26,183 $ 97,852 Special Mention — 1,122 2,530 235 308 — 2,936 7,131 Substandard — 32 1,152 542 — — 188 1,914 Doubtful/Loss — — — — — — — — Total Commercial loans $ 19,776 $ 18,115 $ 19,515 $ 6,158 $ 7,728 $ 6,298 $ 29,307 $ 106,897 Year-to-date Period Charge-offs ( 47 ) ( 196 ) ( 36 ) — ( 87 ) — — ( 366 ) Year-to-date Recoveries — — — — 87 148 — 235 Year-to-date Net Charge-offs ( 47 ) ( 196 ) ( 36 ) — — 148 — ( 131 ) Commercial Real Estate Pass $ 115,807 $ 173,918 $ 191,907 $ 50,150 $ 52,157 $ 107,909 $ 6,879 $ 698,727 Special Mention — — 7,448 — 2,869 1,273 — 11,590 Substandard 395 — 1,712 1,684 6,604 1,017 — 11,412 Doubtful/Loss — — — — — — — — Total Commercial Real Estate loans $ 116,202 $ 173,918 $ 201,067 $ 51,834 $ 61,630 $ 110,199 $ 6,879 $ 721,729 Year-to-date Charge-offs — — — — — — — — Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — — — — Agriculture Pass $ 6,842 $ 16,985 $ 20,511 $ 8,792 $ 2,509 11,437 $ 29,893 $ 96,969 Special Mention — 1,937 2,996 — — 1,064 — 5,997 Substandard — — 946 — 1,926 — — 2,872 Doubtful/Loss — — — — — — — — Total Agriculture loans $ 6,842 $ 18,922 $ 24,453 $ 8,792 $ 4,435 $ 12,501 $ 29,893 $ 105,838 Year-to-date Charge-offs ( 1,825 ) — — — — — ( 742 ) ( 2,567 ) Year-to-date Recoveries 1,825 — — — — — 742 2,567 Year-to-date Net Charge-offs — — — — — — — — 18 Index (in thousands) Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2023 2023 2022 2021 2020 2019 Prior Revolving Loans Amortized Cost Basis Total Residential Mortgage Pass $ 20,239 $ 24,906 $ 26,429 $ 14,500 $ 5,481 $ 15,349 $ — $ 106,904 Special Mention — — — — — — — — Substandard — — 39 — — 385 — 424 Doubtful/Loss — — — — — — — — Total Residential Mortgage loans $ 20,239 $ 24,906 $ 26,468 $ 14,500 $ 5,481 $ 15,734 $ — $ 107,328 Year-to-date Charge-offs — — — — — ( 3 ) — ( 3 ) Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — ( 3 ) — ( 3 ) Residential Construction Pass $ 3,714 $ 1,991 $ 3,198 $ — $ — $ — $ — $ 8,903 Special Mention — — — — — — — — Substandard — 3,420 — — — — — 3,420 Doubtful/Loss — — — — — — — — Total Residential Construction loans $ 3,714 $ 5,411 $ 3,198 $ — $ — $ — $ — $ 12,323 Year-to-date Charge-offs — — — — — — — — Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — — — — Consumer Pass $ 350 $ 758 $ 133 $ 149 $ 70 $ 273 $ 12,516 $ 14,249 Special Mention — — — — — — — — Substandard — — — — — — 619 619 Doubtful/Loss — — — — — — — — Total Consumer loans $ 350 $ 758 $ 133 $ 149 $ 70 $ 273 $ 13,135 $ 14,868 Year-to-date Charge-offs ( 13 ) — — — — — — ( 13 ) Year-to-date Recoveries — — — — — 1 — 1 Year-to-date Net Charge-offs ( 13 ) — — — — 1 — ( 12 ) Total Loans Pass $ 166,728 $ 235,519 $ 258,011 $ 78,972 $ 67,637 $ 141,266 $ 75,471 $ 1,023,604 Special Mention — 3,059 12,974 235 3,177 2,337 2,936 24,718 Substandard 395 3,452 3,849 2,226 8,530 1,402 807 20,661 Doubtful/Loss — — — — — — — — Total Loans $ 167,123 $ 242,030 $ 274,834 $ 81,433 $ 79,344 $ 145,005 $ 79,214 $ 1,068,983 Year-to-date Charge-offs $ ( 1,885 ) $ ( 196 ) $ ( 36 ) $ — $ ( 87 ) $ ( 3 ) $ ( 742 ) $ ( 2,949 ) Year-to-date Recoveries $ 1,825 $ — $ — $ — $ 87 $ 149 $ 742 $ 2,803 Year-to-date Net Charge-offs $ ( 60 ) $ ( 196 ) $ ( 36 ) $ — $ — $ 146 $ — $ ( 146 ) 19 Index 5. MORTGAGE OPERATIONS Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control. Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings. Retained servicing rights on loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer. Fair values are estimated using discounted cash flows based on a current market interest rate. The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold. The Company sold a substantial portion of its portfolio of conforming long-term residential mortgage loans originated during the six months ended June 30, 2024 for cash proceeds equal to the fair value of the loans. The Company serviced real estate mortgage loans for others totaling $ 178,746 ,000 and $ 184,288 ,000 at June 30, 2024 and December 31, 2023, respectively. The recorded value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value. Impairment, if any, is recognized through a valuation allowance for each individual stratum. Changes in the carrying amount of mortgage servicing rights are reported in earnings under other operating income on the condensed consolidated statements of income. Key assumptions used in measuring the fair value of mortgage servicing rights as of June 30, 2024 and December 31, 2023 were as follows: June 30, 2024 December 31, 2023 Constant prepayment rate 6.68 % 6.09 % Discount rate 10.00 % 10.50 % Weighted average life (years) 7.62 7.99 The following tables summarize the changes to the Company’s mortgage servicing rights assets as of the periods presented. Mortgage servicing rights are included in Interest Receivable and Other Assets on the condensed consolidated balance sheets. (in thousands) March 31, 2024 Additions Reductions June 30, 2024 Mortgage servicing rights $ 1,434 $ 4 $ ( 51 ) $ 1,387 Valuation allowance — — — — Mortgage servicing rights, net of valuation allowance $ 1,434 $ 4 $ ( 51 ) $ 1,387 (in thousands) December 31, 2023 Additions Reductions June 30, 2024 Mortgage servicing rights $ 1,482 $ 11 $ ( 106 ) $ 1,387 Valuation allowance — — — — Mortgage servicing rights, net of valuation allowance $ 1,482 $ 11 $ ( 106 ) $ 1,387 At June 30, 2024 and December 31, 2023, the estimated fair market value of the Company’s mortgage servicing rights assets was $ 2,016 ,000 and $ 2,094 ,000, respectively. The change in fair value of mortgage servicing rights during 2024 was primarily due to a decrease in the amount of mortgage loans serviced coupled with changes in prepayment speeds and the discount rate. The Company received contractually specified servicing fees of $ 113 ,000 and $ 119 ,000 for the three months ended June 30, 2024 and June 30, 2023, respectively. The Company received contractually specified servicing fees of $ 228 ,000 and $ 240 ,000 for the six months ended June 30, 2024 and June 30, 2023, respectively. Loan servicing income on the condensed consolidated statements of income includes contractually specified servicing fees, mortgage servicing rights additions, amortization and changes in the valuation allowance. 20 Index 6. FAIR VALUE MEASUREMENTS The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale and trading securities are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a non-recurring basis, such as loans held-for-sale, loans held-for-investment and certain other assets. These non-recurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets. Transfers between levels of the fair value hierarchy are recognized on the actual date of the event or circumstances that caused the transfer, which generally corresponds with the Company’s quarterly valuation process. Assets Recorded at Fair Value on a Recurring Basis The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2024 and December 31, 2023. (in thousands) June 30 , 2024 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury securities $ 84,536 $ 84,536 $ — $ — Securities of U.S. government agencies and corporations 102,537 — 102,537 — Obligations of states and political subdivisions 56,427 — 56,427 — Collateralized mortgage obligations 87,529 — 87,529 — Mortgage-backed securities 230,045 — 230,045 — Total investments at fair value $ 561,074 $ 84,536 $ 476,538 $ — (in thousands) December 31, 2023 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury securities $ 87,182 $ 87,182 $ — $ — Securities of U.S. government agencies and corporations 115,079 — 115,079 — Obligations of states and political subdivisions 51,677 — 51,677 — Collateralized mortgage obligations 90,947 — 90,947 — Mortgage-backed securities 227,472 — 227,472 — Total investments at fair value $ 572,357 $ 87,182 $ 485,175 $ — 21 Index Assets Recorded at Fair Value on a Non-Recurring Basis Assets measured at fair value on a non-recurring basis are included in the table below by level within the fair value hierarchy as of June 30, 2024 . (in thousands) June 30 , 2024 Carrying Value Level 1 Level 2 Level 3 Individually evaluated loans $ 1,079 $ — $ — $ 1,079 Total assets at fair value $ 1,079 $ — $ — $ 1,079 There were no assets measured at fair value on a non-recurring basis as of December 31, 2023. There were no liabilities measured at fair value on a recurring or non-recurring basis at June 30, 2024 and December 31, 2023. Key methods and assumptions used in measuring the fair value of collateral dependent loans as of June 30, 2024 were as follows: Method Assumption Inputs Individually evaluated loans Collateral, market, income, enterprise, liquidation External appraised values, management assumptions regarding market trends or other relevant factors, selling costs of 8 % (generally ranging from 6 % to 10 %) The following section describes the valuation methodologies used for assets and liabilities recorded at fair value. Investment Securities Available-for-Sale Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets where valuations include significant unobservable assumptions. Individually Evaluated Loans The Company does not record loans at fair value on a recurring basis. Loans that do not share similar risk characteristics are individually evaluated by management. Included in loans individually evaluated are collateral dependent loans. A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. Collateral dependent loans are considered to have unique risk characteristics and are individually evaluated. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken. Collateral dependent loans where a charge-off is recorded based on the fair value of collateral require classification in the fair value hierarchy. When a loan is evaluated based on the fair value of the underlying collateral securing the loan, the Company records the collateral dependent loan as non-recurring Level 3 given the valuation includes significant unobservable assumption s. 22 Index Disclosures about Fair Value of Financial Instruments The estimated fair values of the Company’s financial instruments for the periods ended June 30, 2024 and December 31, 2023 were approximately as follows: (in thousands) June 30, 2024 December 31, 2023 Level Carrying amount Fair value Carrying amount Fair value Financial assets: Cash and cash equivalents 1 $ 181,783 $ 181,783 $ 149,211 $ 149,211 Certificates of deposit 2 16,860 16,694 19,710 19,570 Stock in Federal Home Loan Bank and other equity securities 3 10,518 10,518 10,518 10,518 Loans receivable: Net loans 3 1,049,148 967,330 1,052,465 958,077 Loans held-for-sale 2 267 271 — — Interest receivable 2 7,108 7,108 6,810 6,810 Mortgage servicing rights 3 1,387 2,016 1,482 2,094 Financial liabilities: Time deposits 3 158,902 158,642 135,696 135,540 Interest payable 2 1,149 1,149 1,567 1,567 Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument and expected exit prices. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. 23 Index 7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments, whose contract amounts represent credit risk at the indicated periods, were as follows: (in thousands) June 30, 2024 December 31, 2023 Undisbursed loan commitments $ 168,295 $ 187,401 Standby letters of credit 688 1,251 Commitments to sell loans 270 — $ 169,253 $ 188,652 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. The types of collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank issues both financial and performance standby letters of credit. The financial standby letters of credit are primarily to guarantee payment to third parties. At June 30, 2024 and December 31, 2023, there were no financial standby letters of credit outstanding. The performance standby letters of credit are typically issued to municipalities as specific performance bonds. Performance standby letters of credit totaled $ 688 ,000 and $ 1,251 ,000 at June 30, 2024 and December 31, 2023, respectively. The Bank had experienced no draws on outstanding letters of credit, resulting in no related liability included on its balance sheet; however, should a triggering event occur, the Bank either has collateral in excess of the letter of credit or embedded agreements of recourse from the customer. The Bank has set aside a reserve for unfunded commitments in the amount of $ 950 ,000 and $ 1,150 ,000 at June 30, 2024 and December 31, 2023, respectively, which is recorded in “interest payable and other liabilities” on the condensed consolidated balance sheets. Commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans. As of June 30, 2024 and December 31, 2023, the Company had no off-balance sheet derivatives requiring additional disclosure. The Company may enter into interest rate lock commitments in connection with its mortgage banking activities to fund residential mortgage loans within specified times in the future. These commitments expose the Company to the risk that the price of the loan underlying the interest rate lock commitment might decline from the inception of the interest rate lock to the funding of the mortgage loan. To protect against this risk, the Company may enter into commitments to sell loans to economically hedge the risk of potential changes in the value of the loans that would result from the commitment. These commitments totaled $ 270 ,000 and $ 0 at June 30, 2024 and December 31, 2023, respectively. Mortgage loans sold to investors may be sold with servicing rights retained, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards. In the past two years, the Company had to repurchase one loan totaling $ 420 ,000 due to deficiencies in underwriting or loan documentation. Management believes that any liabilities that may result from suc h recourse provisions are not significant. 24 Index 8. STOCK PLANS On January 25, 2024 , the Board of Directors of the Company declared a 5 % stock dividend payable as of March 25, 2024 to shareholders of record as of February 29, 2024 . All stock options and restricted stock amounts outstanding have been adjusted to give retroactive effect to stock dividends. The following table presents the activity related to stock options for the three months ended June 30, 2024. Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value Weighted Average Remaining Contractual Term (in years) Options outstanding at Beginning of Period 622,751 $ 8.52 Granted — — Expired — — Cancelled / Forfeited — — Exercised ( 30,358 ) 8.42 Options outstanding at End of Period 592,393 $ 8.52 $ 419,016 4.37 Exercisable (vested) at End of Period 568,709 $ 8.49 $ 419,016 4.23 The following table presents the activity related to stock options for the six months ended June 30, 2024. Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value Weighted Average Remaining Contractual Term (in years) Options outstanding at Beginning of Period 642,779 $ 8.40 Granted — — Expired — — Cancelled / Forfeited — — Exercised ( 50,386 ) 6.92 Options outstanding at End of Period 592,393 $ 8.52 $ 419,016 4.37 Exercisable (vested) at End of Period 568,709 $ 8.49 $ 419,016 4.23 The intrinsic value of options exercised was $ 90,000 and $ 97,000 during the six months ended June 30, 2024 and June 30, 2023, respectively. The fair value of awards vested was $ 88,000 and $ 123,000 during the six months ended June 30, 2024 and June 30, 2023, respectively. As of June 30, 2024, there was $ 44,000 of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted average period of approximately 1.75 years. There was $ 6,000 and $ 23,000 of recognized compensation cost related to stock options granted for the three and six months ended June 30, 2024, respectively. 25 Index The following table presents the activity related to non-vested restricted stock for the three months ended June 30, 2024. Number of Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Weighted Average Remaining Contractual Term (in years) Non-vested Restricted stock outstanding at Beginning of Period 289,558 $ 8.52 Granted 4,470 8.95 Cancelled / Forfeited — — Exercised/Released/Vested — — Non-vested restricted stock outstanding at End of Period 294,028 $ 8.53 $ 2,660,953 2.78 The following table presents the activity related to non-vested restricted stock for the six months ended June 30, 2024. Number of Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Weighted Average Remaining Contractual Term (in years) Non-vested Restricted stock outstanding at Beginning of Period 274,268 $ 8.72 Granted 84,046 8.33 Cancelled / Forfeited ( 19,212 ) 8.77 Exercised/Released/Vested ( 45,074 ) 9.21 Non-vested restricted stock outstanding at End of Period 294,028 $ 8.53 $ 2,660,953 2.78 The weighted average fair value of restricted stock granted during the six months ended June 30, 2024 was $ 8.33 per share. As of June 30, 2024, there was $ 1,254,000 of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a weighted average period of approximately 2.78 years. There was $ 142,000 and $ 416,000 of recognized compensation cost related to restricted stock awards for the three and six months ended June 30, 2024, respectively. 26 Index The Company has an Employee Stock Purchase Plan (“ESPP”). There are 376,856 shares authorized for issuance under the ESPP. The total number of shares authorized has been adjusted to give retroactive effect to stock dividends and stock splits, including the 5 % stock dividend declared on January 25, 2024 , payable March 25, 2024 to shareholders of record as of February 29, 2024 . The ESPP will expire on March 16, 2026. The ESPP is implemented by participation periods of not more than twenty-seven months each. The Board of Directors determines the commencement date and duration of each participation period. The Board of Directors approved the current participation period of November 24, 2023 to November 23, 2024. An eligible employee is one who has been continually employed for at least 90 days prior to commencement of a participation period. Under the terms of the ESPP, employees can choose to have up to 10 percent of their compensation withheld to purchase the Company’s common stock each participation period. The purchase price of the stock is 85 percent of the lower of the fair value on the last trading day before the date of participation or the fair value on the last trading day during the participation period. As of June 30, 2024, there was $ 15,000 of unrecognized compensation cost related to ESPP issuances. This cost is expected to be recognized over a weighted average period of approximately 0.50 years. There was $ 11,000 and $ 16,000 of recognized compensation cost related to ESPP issuances for the three and six months ended June 30, 2024, respectively. The weighted average fair value option at issuance date during the six months ended June 30, 2024 was $ 2.14 per share. A summary of the weighted average assumptions used in valuing ESPP issuances during the three and six months ended June 30, 2024 is presented below. Three Months Ended June 30, 2024 Six Months Ended June 30, 2024 Risk Free Interest Rate 5.27 % 5.27 % Expected Dividend Yield 0.00 % 0.00 % Expected Life in Years 1.00 1.00 Expected Price Volatility 25.96 % 25.96 % 27 Index 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table details activity in accumulated other comprehensive income (loss) for the three months ended June 30, 2024. (in thousands) Unrealized losses on securities Officers’ retirement plan Directors’ retirement plan Accumulated other comprehensive loss Balance as of March 31, 2024 $ ( 35,239 ) $ ( 70 ) $ 121 $ ( 35,188 ) Current period other comprehensive income 34 — — 34 Balance as of June 30 , 2024 $ ( 35,205 ) $ ( 70 ) $ 121 $ ( 35,154 ) The following table details activity in accumulated other comprehensive loss for the six months ended June 30, 2024. (in thousands) Unrealized losses on securities Officers’ retirement plan Directors’ retirement plan Accumulated other comprehensive loss Balance as of December 31, 2023 $ ( 33,778 ) $ ( 70 ) $ 121 $ ( 33,727 ) Current period other comprehensive loss ( 1,427 ) — — ( 1,427 ) Balance as of June 30, 2024 $ ( 35,205 ) $ ( 70 ) $ 121 $ ( 35,154 ) The following table details activity in accumulated other comprehensive loss for the three months ended June 30, 2023. (in thousands) Unrealized gains on securities Officers’ retirement plan Directors’ retirement plan Accumulated other comprehensive loss Balance as of March 31, 2023 $ ( 40,260 ) $ ( 308 ) $ 53 $ ( 40,515 ) Current period other comprehensive loss ( 3,690 ) — — ( 3,690 ) Balance as of June 30 , 2023 $ ( 43,950 ) $ ( 308 ) $ 53 $ ( 44,205 ) The following table details activity in accumulated other comprehensive loss for the six months ended June 30, 2023. (in thousands) Unrealized gains on securities Officers’ retirement plan Directors’ retirement plan Accumulated other comprehensive loss Balance as of December 31, 2022 $ ( 46,273 ) $ ( 308 ) $ 53 $ ( 46,528 ) Current period other comprehensive income 2,323 — — 2,323 Balance as of June 30, 2023 $ ( 43,950 ) $ ( 308 ) $ 53 $ ( 44,205 ) 28 Index 10. OUTSTANDING SHARES AND EARNINGS PER SHARE On January 25, 2024 , the Board of Directors of the Company declared a 5 % stock dividend payable March 25, 2024 to shareholders of record as of February 29, 2024 . All income per share amounts have been adjusted to give retroactive effect to stock dividends. Earnings Per Share (EPS) Basic EPS includes no dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the respective period. Diluted EPS is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding plus dilutive shares for the quarter. Diluted shares include all common stock equivalents (“in-the-money” stock options, unvested restricted stock, stock units, warrants and rights, convertible bonds and preferred stock), which reflects the potential dilution of securities that could share in the earnings of the Company. The following table presents a reconciliation of basic and diluted EPS for the three and six months ended June 30, 2024 and 2023 (dollars in thousands except per share amounts): Three months ended June 30, Six months ended June 30, 2024 2023 2024 2023 Basic earnings per share: Net income $ 4,424 $ 4,564 $ 8,700 $ 10,053 Weighted average common shares outstanding 15,205,811 15,180,272 15,217,899 15,163,906 Basic EPS $ 0.29 $ 0.30 $ 0.57 $ 0.66 Diluted earnings per share: Net income $ 4,424 $ 4,564 $ 8,700 $ 10,053 Weighted average common shares outstanding 15,205,811 15,180,272 15,217,899 15,163,906 Effect of dilutive shares 190,575 97,539 175,301 119,609 Adjusted weighted average common shares outstanding 15,396,386 15,277,811 15,393,200 15,283,515 Diluted EPS $ 0.29 $ 0.30 $ 0.57 $ 0.66 Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 355,252 shares and 538,690 shares for the three months ended June 30, 2024 and 2023, respectively. Unvested restricted stock which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 0 shares and 109,311 shares for the three months ended June 30, 2024 and 2023, respectively. Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 446,962 shares and 538,700 shares for the six months ended June 30, 2024 and 2023, respectively. Unvested restricted stock which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 3,902 shares and 71,239 shares for the six months ended June 30, 2024 and 2023, respectively. 29 Index 11. LEASES The Company leases eleven branch and administrative locations under operating leases expiring on various dates through 2031. Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of ASU 2016-02, Leases (Topic 842), the Company combines lease and nonlease components. The Company had no financing leases as of June 30, 2024. Most leases include options to renew, with renewal terms that can extend the lease term from 3 to 10 years. The exercise of lease renewal options is at the Company’s sole discretion. Most leases are currently in the extension period. For the remaining leases with options to renew, the Company has not included the extended lease terms in the calculation of lease liabilities as the options are not reasonably certain of being exercised. Certain lease agreements include rental payments that are adjusted periodically for inflation. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. The Company uses its FHLB advance fixed rates, which are its incremental borrowing rates for secured borrowings, as the discount rates to calculate lease liabilities. The Company had right-of-use assets totaling $ 3,563 ,000 and $ 4,073 ,000 as of June 30, 2024 and December 31, 2023, respectively. The Company had lease liabilities totaling $ 4,079 ,000 and $ 4,585 ,000 as of June 30, 2024 and December 31, 2023, respectively. The Company recognized lease expense totaling $ 304 ,000 and $ 293 ,000 for the three-month periods ended June 30, 2024 and 2023, respectively, and $ 605 ,000 and $ 601 ,000 for the six-month periods ended June 30, 2024 and 2023, respectively. Lease expense includes operating lease costs, short-term lease costs and variable lease costs. Lease expense is included in occupancy and equipment expense on the condensed consolidated statements of income. The table below summarizes the maturity of remaining lease liabilities at June 30, 2024: (in thousands) June 30, 2024 2024 (remaining 6 months) $ 482 2025 1,051 2026 672 2027 611 2028 625 2029 and thereafter 895 Total lease payments 4,336 Less: interest ( 257 ) Present value of lease liabilities $ 4,079 The following table presents supplemental cash flow information related to leases for the three and six months ended June 30, 2024: Three months ended June 30, Six months ended June 30 , (in thousands) 2024 2023 2024 2023 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 296 $ 301 $ 595 $ 614 Right-of-use assets obtained in exchange for new operating lease liabilities — — — 245 The following table presents the weighted average operating lease term and discount rate as of June 30, 2024 and December 31, 2023: June 30, 2024 December 31, 2023 Weighted-average remaining lease term – operating leases, in years 5.18 5.43 Weighted-average discount rate – operating leases 2.40 % 2.42 % 30 Index FIRST NORTHERN COMMUNITY BANCORP ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This report may include forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our forecasts and expectations. See Part I, Item 1A. “Risk Factors,” and the other risks described in our 2023 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and the other risks described in our Quarterly Reports on Form 10-Q for factors to be considered when reading any forward-looking statements in this filing. This report and other reports or statements which we may release may include forward-looking statements, which are subject to the “safe harbor” created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles and when we are speaking on behalf of the Company. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words “believe,” “expect,” “target,” “anticipate,” “intend,” “plan,” “seek,” “strive,” “estimate,” “potential,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or “may.” These forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information available to us at the date of these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date any forward-looking statements are made. In this document and in other SEC filings or other public statements, for example, we make forward-looking statements relating to the following topics, among others: ● Our business objectives, strategies and initiatives, our organizational structure, the growth of our business and our competitive position and prospects, and the effect of competition on our business and strategies ● Our assessment of significant factors and developments that have affected or may affect our results ● Legal and regulatory actions, and future legislative and regulatory developments, including the effects of the Dodd-Frank Wall Street Reform and Protection Act (the “Dodd-Frank Act”), the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”), and other legislation and governmental measures introduced in response to the financial crisis which began in 2008 and the ensuing recession affecting the banking system, financial markets and the U.S. economy ● Regulatory and compliance controls, processes and requirements and their impact on our business ● The costs and effects of legal or regulatory actions ● Expectations regarding draws on performance letters of credit and liabilities that may result from recourse provisions in standby letters of credit ● Our intent to sell or hold, and the likelihood that we would be required to sell, various investment securities ● Our regulatory capital requirements, including the capital rules established after the 2008 financial crisis by the U.S. federal banking agencies and our current intention not to elect to use the community bank leverage ratio framework ● Expectations regarding our non-payment of a cash dividend on our common stock in the foreseeable future ● Credit quality and provision for credit losses and management of asset quality and credit risk, expectations regarding collections and the timing thereof ● Our allowances for credit losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, the adequacy of the allowance for credit losses, underwriting standards, and risk grading ● Our assessment of economic conditions and trends and credit cycles and their impact on our business ● The seasonal nature of our business 31 Index ● The impact of changes in interest rates and our strategy to manage our interest rate risk profile and the possible effect of changes in residential mortgage interest rates on new originations and refinancing of existing residential mortgage loans ● Loan portfolio composition and risk grade trends, expected charge-offs, portfolio credit quality, loan demand, our strategy regarding loan modifications, delinquency rates and our underwriting standards and our expectations regarding our recognition of interest income on loans that were provided payment deferrals upon completion of the payment forbearance period ● Our deposit base including renewal of time deposits and the outlook for deposit balances ● The impact on our net interest income and net interest margin of changes in interest rates ● The effect of possible changes in the initiatives and policies of the federal and state bank regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, the Securities and Exchange Commission and other standard setters ● Tax rates and the impact of changes in the U.S. tax laws ● Our pension and retirement plan costs ● Our liquidity strategies and beliefs concerning the adequacy of our liquidity, sources and amounts of funds and ability to satisfactorily manage our liquidity ● Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements or changes in accounting principles ● Expected rates of return, maturities, loss exposure, growth rates, yields, and projected results ● The possible impact of weather-related or other natural conditions, including drought, fire or flooding, seismic events, and related governmental responses, including related electrical power outages, on economic conditions, especially in the agricultural sector ● Maintenance of insurance coverages appropriate for our operations ● Threats to the banking sector and our business due to cybersecurity issues and attacks and regulatory expectations related to cybersecurity ● Possible changes in the fair values recorded on our financial statements of the assets acquired and liabilities assumed in our business combination completed in January 2023 ● The possible effects on community banks and our business from the failures of other banks ● The possible adverse impacts on the banking industry and our business from a period of significant, prolonged inflation ● Descriptions of assumptions underlying or relating to any of the foregoing Readers of this document should not rely on any forward-looking statements, which reflect only our management’s belief as of the date of this report. There are numerous risks and uncertainties that could and will cause actual results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our financial condition and results of operations or prospects. Such risks and uncertainties include, but are not limited to those listed in Item 1A “Risk Factors” of Part II of this Form 10-Q, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I of this Form 10-Q and "Risk Factors" and “Supervision and Regulation” in our 2023 Annual Report on Form 10-K, and in our other reports to the SEC. 32 Index INTRODUCTION This overview of Management’s Discussion and Analysis highlights selected information in this report and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire report and any other reports to the Securities and Exchange Commission (“SEC”), together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023. Our subsidiary, First Northern Bank of Dixon (the “Bank”), is a California state-chartered bank that derives most of its revenues from lending and deposit taking in the Sacramento Valley region of Northern California. Interest rates, business conditions and customer confidence all affect our ability to generate revenues. In addition, the regulatory and compliance environment and competition can present challenges to our ability to generate those revenues. Significant results and developments during the second quarter and year-to-date 2024 included: • Net income of $8.7 million for the six months ended June 30, 2024, down 13.5% from $10.1 million earned for the same period last year. Net income of $4.4 million for the three months ended June 30, 2024, down 3.1% from $4.6 million earned for the same period last year. • Diluted income per share of $0.57 for the six months ended June 30, 2024, down 13.6% from diluted income per share of $0.66 in the same period last year. Diluted income per share of $0.29 for the three months ended June 30, 2024, down 3.3% from diluted income per share of $0.30 for the same period last year. • Net interest income of $31.3 million for the six months ended June 30, 2024, down 7.2% from $33.8 million for the same period last year. Net interest income of $16.0 million for the three months ended June 30, 2024, down 10.2% from $17.8 million for the same period last year. • Net interest margin of 3.58% for the six months ended June 30, 2024, down 4.8% from 3.76% for the same period last year. Net interest margin of 3.66% for the three months ended June 30, 2024, down 7.8% from 3.97% for the same period last year. • Provision for credit losses of $0.8 million for the six months ended June 30, 2024, down 71.2% from $2.6 million for the same period last year. Provision for credit losses of $1.1 million for the three months ended June 30, 2024, down 59.6% from $2.6 million for the same period last year. • Total assets of $1.89 billion as of June 30, 2024, up 0.9% from $1.87 billion as of December 31, 2023. • Total net loans (including loans held-for-sale) of $1.049 billion as of June 30, 2024, down 0.3% from $1.052 billion as of December 31, 2023. • Total investment securities of $561.1 million as of June 30, 2024, down 2.0% from $572.4 million as of December 31, 2023. • Total deposits of $1.71 billion as of June 30, 2024, up 0.9% from $1.69 billion as of December 31, 2023. 33 Index SUMMARY FINANCIAL DATA The Company recorded net income of $8,700,000 for the six months ended June 30, 2024, representing a decrease of $1,353,000, or 13.5%, from net income of $10,053,000 for the same period in 2023. The Company recorded net income of $4,424,000 for the three months ended June 30, 2024, representing a decrease of $140,000, or 3.1%, from net income of $4,564,000 for the same period in 2023. The following tables present a summary of the results for the three and six months ended June 30, 2024 and 2023, and a summary of financial condition at June 30, 2024 and December 31, 2023. Three Months Ended June 30, 2024 Three Months Ended June 30, 2023 Six Months Ended June 30, 2024 Six Months Ended June 30, 2023 (dollars in thousands except for per share amounts) For the Period: Net Income $ 4,424 $ 4,564 $ 8,700 $ 10,053 Basic Earnings Per Common Share $ 0.29 $ 0.30 $ 0.57 $ 0.66 Diluted Earnings Per Common Share $ 0.29 $ 0.30 $ 0.57 $ 0.66 Return on Average Assets (annualized) 0.95 % 0.96 % 0.94 % 1.05 % Return on Average Equity (annualized) 10.87 % 13.23 % 10.72 % 15.08 % Average Equity to Average Assets 8.75 % 7.25 % 8.72 % 6.99 % June 30, 2024 December 31, 2023 (in thousands except for ratios) At Period End: Total Assets $ 1,888,015 $ 1,871,832 Total Investment Securities, at fair value $ 561,074 $ 572,357 Total Loans, Net (including loans held-for-sale) $ 1,049,415 $ 1,052,465 Total Deposits $ 1,707,059 $ 1,692,444 Loan-To-Deposit Ratio 61.5 % 62.2 % 34 Index FIRST NORTHERN COMMUNITY BANCORP Distribution of Average Statements of Condition and Analysis of Net Interest Income (in thousands, except percentage amounts) Three months ended June 30, 2024 Three months ended June 30, 2023 Average Balance Interest Yield/ Rate (4) Average Balance Interest Yield/ Rate (4) Assets Interest-earning assets: Loans (1) $ 1,041,102 $ 13,830 5.34 % $ 988,094 $ 13,722 5.57 % Certificate of deposits 17,081 171 4.03 % 21,491 188 3.51 % Interest bearing due from banks 130,963 1,913 5.87 % 169,071 2,315 5.49 % Investment securities, taxable 519,789 3,088 2.39 % 571,381 2,673 1.88 % Investment securities, non-taxable (2) 38,055 261 2.76 % 34,953 220 2.52 % Other interest earning assets 10,518 267 10.21 % 9,985 165 6.63 % Total average interest-earning assets 1,757,508 19,530 4.47 % 1,794,975 19,283 4.31 % Non-interest-earning assets: Cash and due from banks 39,630 46,004 Premises and equipment, net 9,642 9,804 Interest receivable and other assets 59,523 59,479 Total average assets $ 1,866,303 $ 1,910,262 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing transaction deposits 371,657 622 0.67 % 425,903 377 0.36 % Savings and MMDA’s 425,601 1,272 1.20 % 455,943 582 0.51 % Time, $250,000 or less 123,303 1,356 4.42 % 78,378 470 2.41 % Time, over $250,000 34,605 302 3.51 % 11,373 72 2.54 % Total average interest-bearing liabilities 955,166 3,552 1.50 % 971,597 1,501 0.62 % Non-interest-bearing liabilities: Non-interest-bearing demand deposits 732,153 783,045 Interest payable and other liabilities 15,737 17,210 Total liabilities 1,703,056 1,771,852 Total average stockholders’ equity 163,247 138,410 Total average liabilities and stockholders’ equity $ 1,866,303 $ 1,910,262 Net interest income and net interest margin (3) $ 15,978 3.66 % $ 17,782 3.97 % (1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest thereon is generally excluded. Loan interest income includes loan fees, net of deferred costs of approximately $(100) and $69 for the three months ended June 30, 2024 and 2023, respectively. (2) Interest income and yields on tax-exempt securities are not presented on a taxable-equivalent basis. (3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. (4) For disclosure purposes, yield /rates are annualized by dividing the number of days in the reported period by 365. 35 Index FIRST NORTHERN COMMUNITY BANCORP Distribution of Average Statements of Condition and Analysis of Net Interest Income (in thousands, except percentage amounts) Six months ended June 30, 2024 Six months ended June 30, 2023 Average Balance Interest Yield/ Rate (4) Average Balance Interest Yield/ Rate (4) Assets Interest-earning assets: Loans (1) $ 1,044,230 $ 27,305 5.26 % $ 975,624 $ 25,099 5.19 % Certificate of deposits 17,875 354 3.98 % 21,278 362 3.43 % Interest bearing due from banks 127,094 3,445 5.45 % 187,676 4,541 4.88 % Investment securities, taxable 522,525 5,933 2.28 % 576,845 5,356 1.87 % Investment securities, non-taxable (2) 38,015 513 2.71 % 38,292 493 2.60 % Other interest earning assets 10,518 523 10.00 % 9,714 343 7.12 % Total average interest-earning assets 1,760,257 38,073 4.35 % 1,809,429 36,194 4.03 % Non-interest-earning assets: Cash and due from banks 37,865 45,869 Premises and equipment, net 9,747 8,208 Interest receivable and other assets 57,987 58,412 Total average assets $ 1,865,856 $ 1,921,918 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing transaction deposits 371,922 1,133 0.61 % 441,640 635 0.29 % Savings and MMDA’s 428,106 2,466 1.16 % 468,668 1,107 0.48 % Time, $250,000 or less 117,263 2,567 4.40 % 62,281 575 1.86 % Time, over $250,000 32,910 567 3.46 % 9,037 114 2.54 % Total average interest-bearing liabilities 950,201 6,733 1.42 % 981,626 2,431 0.50 % Non-interest-bearing liabilities: Non-interest-bearing demand deposits 736,085 788,545 Interest payable and other liabilities 16,825 17,318 Total liabilities 1,703,111 1,787,489 Total average stockholders’ equity 162,745 134,429 Total average liabilities and stockholders’ equity $ 1,865,856 $ 1,921,918 Net interest income and net interest margin (3) $ 31,340 3.58 % $ 33,763 3.76 % (1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest thereon is generally excluded. Loan interest income includes loan fees, net of deferred costs of approximately $(452) and $33 for the six months ended June 30, 2024 and 2023, respectively. (2) Interest income and yields on tax-exempt securities are not presented on a taxable-equivalent basis. (3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. (4) For disclosure purposes, yield /rates are annualized by dividing the number of days in the reported period by 365. 36 Index FIRST NORTHERN COMMUNITY BANCORP Distribution of Average Statements of Condition and Analysis of Net Interest Income (in thousands, except percentage amounts) Three months ended June 30, 2024 Three months ended March 31, 2024 Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (4) Assets Interest-earning assets: Loans (1) $ 1,041,102 $ 13,830 5.34 % $ 1,047,358 $ 13,475 5.17 % Certificates of deposit 17,081 171 4.03 % 18,669 183 3.94 % Interest bearing due from banks 130,963 1,913 5.87 % 123,224 1,532 5.00 % Investment securities, taxable 519,789 3,088 2.39 % 525,261 2,845 2.18 % Investment securities, non-taxable (2) 38,055 261 2.76 % 37,975 252 2.67 % Other interest earning assets 10,518 267 10.21 % 10,518 256 9.79 % Total average interest-earning assets 1,757,508 19,530 4.47 % 1,763,005 18,543 4.23 % Non-interest-earning assets: Cash and due from banks 39,630 36,100 Premises and equipment, net 9,642 9,852 Interest receivable and other assets 59,523 56,451 Total average assets $ 1,866,303 $ 1,865,408 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing transaction deposits 371,657 622 0.67 % 372,188 511 0.55 % Savings and MMDA’s 425,601 1,272 1.20 % 430,611 1,195 1.12 % Time, $250,000 and under 123,303 1,356 4.42 % 115,881 1,211 4.20 % Time, over $250,000 34,605 302 3.51 % 26,556 264 4.00 % Total average interest-bearing liabilities 955,166 3,552 1.50 % 945,236 3,181 1.35 % Non-interest-bearing liabilities: Non-interest-bearing demand deposits 732,153 741,886 Interest payable and other liabilities 15,737 17,913 Total liabilities 1,703,056 1,705,035 Total average stockholders’ equity 163,247 160,373 Total average liabilities and stockholders’ equity $ 1,866,303 $ 1,865,408 Net interest income and net interest margin (3) $ 15,978 3.66 % $ 15,362 3.50 % (1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest is generally excluded. Loan interest income includes loan fees, net of deferred costs of approximately $(100) and $(351) for the three months ended June 30, 2024 and March 31, 2024, respectively. (2) Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis. (3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. (4) For disclosure purposes, yield/rates are annualized by dividing the number of days in the reported period by 365. 37 Index Analysis of Changes in Interest Income and Interest Expense (Dollars in thousands) Following is an analysis of changes in interest income and expense (dollars in thousands) for the three months ended June 30, 2024 over the three months ended June 30, 2023, the six months ended June 30, 2024 over the six months ended June 30, 2023, and the three months ended June 30, 2024 over the three months ended March 31, 2024. Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume. Three Months Ended June 30, 2024 Six Months Ended June 30, 2024 Three Months Ended June 30, 2024 Over Over Over Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 Three Months Ended March 31, 2024 Volume Interest Rate Change Volume Interest Rate Change Volume Interest Rate Change Increase (Decrease) in Interest Income: Loans $ 718 $ (610 ) $ 108 $ 1,940 $ 266 $ 2,206 $ (82 ) $ 437 $ 355 Certificates of Deposit (43 ) 26 (17 ) (63 ) 55 (8 ) (16 ) 4 (12 ) Due From Banks (551 ) 149 (402 ) (1,584 ) 488 (1,096 ) 101 280 381 Investment Securities - Taxable (257 ) 672 415 (538 ) 1,115 577 (30 ) 273 243 Investment Securities - Non-taxable 20 21 41 (3 ) 23 20 1 8 9 Other Assets 10 92 102 31 149 180 — 11 11 $ (103 ) $ 350 $ 247 $ (217 ) $ 2,096 $ 1,879 $ (26 ) $ 1,013 $ 987 Increase (Decrease) in Interest Expense: Deposits: Interest-Bearing Transaction Deposits $ (53 ) $ 298 $ 245 $ (115 ) $ 613 $ 498 $ (1 ) $ 112 $ 111 Savings & MMDAs (42 ) 732 690 (106 ) 1,465 1,359 (15 ) 92 77 Time Certificates 625 491 1,116 1,431 1,014 2,445 288 (105 ) 183 $ 530 $ 1,521 $ 2,051 $ 1,210 $ 3,092 $ 4,302 $ 272 $ 99 $ 371 Increase (Decrease) in Net Interest Income: $ (633 ) $ (1,171 ) $ (1,804 ) $ (1,427 ) $ (996 ) $ (2,423 ) $ (298 ) $ 914 $ 616 38 Index CHANGES IN FINANCIAL CONDITION The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $32,572,000, or 21.8%, increase in cash and cash equivalents, a $2,850,000, or 14.5%, decrease in certificates of deposit, an $11,283,000, or 2.0%, decrease in investment securities available-for-sale, a $3,317,000, or 0.3%, decrease in net loans held-for-investment, and a $267,000, or 100.0%, increase in loans held-for-sale from December 31, 2023 to June 30, 2024. The increase in cash and cash equivalents was primarily due to an increase in deposit balances coupled with decreases in investment securities and loans due to proceeds from maturities of available-for-sale securities and loan payoffs, net of loan originations. The decrease in certificates of deposit and investment securities available-for-sale was due to net maturities and repayments of investment securities and certificates of deposit. The decrease in net loans held-for-investment was primarily due to net payoffs of agriculture and residential construction loans, which was partially offset by net originations of commercial, commercial real estate and consumer loans. The increase in loans held-for-sale was due to the timing of funding and sale of the loans held-for-sale pipeline. Loans held-for-sale as of June 30, 2024 were subsequently sold in July 2024. The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an increase in total deposits of $14,615,000, or 0.9%, from December 31, 2023 to June 30, 2024. The overall increase in total deposits was primarily due to seasonal fluctuations due to changes in market conditions and monetary policy. CHANGES IN RESULTS OF OPERATIONS Interest Income The Federal Open Market Committee kept the Federal Funds benchmark rate range at 5.25% to 5.50% during the six months ended June 30, 2024. Interest income on loans for the six months ended June 30, 2024 was up 8.8% from the same period in 2023, increasing from $25,099,000 to $27,305,000, and was up 0.8% for the three months ended June 30, 2024 over the same period in 2023, increasing from $13,722,000 to $13,830,000. The increase in interest income on loans for the six months ended June 30, 2024 as compared to the same period a year ago was primarily due to an increase in average balance of loans coupled with a 7 basis point increase in yield on loans. The increase in interest income on loans for the three months ended June 30, 2024 as compared to the same period a year ago was primarily due to an increase in average balance of loans, which was partially offset by a 23 basis point decrease in yield on loans. Interest income on certificates of deposit for the six months ended June 30, 2024 was down 2.2% from the same period in 2023, decreasing from $362,000 to $354,000, and was down 9.0% for the three months ended June 30, 2024 over the same period in 2023, decreasing from $188,000 to $171,000. The decrease in interest income on certificates of deposit for the six months ended June 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of certificates of deposit, which was partially offset by a 55 basis point increase in yield on certificates of deposit. The decrease in interest income on certificates of deposit for the three months ended June 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of certificates of deposit, which was partially offset by a 52 basis point increase in yield on certificates of deposit. Interest income on interest-bearing due from banks for the six months ended June 30, 2024 was down 24.1% from the same period in 2023, decreasing from $4,541,000 to $3,445,000, and was down 17.4% for the three months ended June 30, 2024 over the same period in 2023, decreasing from $2,315,000 to $1,913,000. The decrease in interest income on interest-bearing due from banks for the six months ended June 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of interest-bearing due from banks, which was partially offset by a 57 basis point increase in yield on interest-bearing due from banks. The decrease in interest income on interest-bearing due from banks for the three months ended June 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of interest-bearing due from banks, which was partially offset by a 38 basis point increase in yield on interest-bearing due from banks. Interest income on investment securities available-for-sale for the six months ended June 30, 2024 was up 10.2% from the same period in 2023, increasing from $5,849,000 to $6,446,000, and was up 15.8% for the three months ended June 30, 2024 over the same period in 2023, increasing from $2,893,000 to $3,349,000. The increase in interest income on investment securities for the six months ended June 30, 2024 as compared to the same period a year ago was primarily due to a 39 basis point increase in investment yields, which was partially offset by a decrease in average investment securities. The increase in interest income on investment securities for the three months ended June 30, 2024 as compared to the same period a year ago was primarily due to a 50 basis point increase in investment yields, which was partially offset by a decrease in average investment securities. Interest income on other earning assets for the six months ended June 30, 2024 was up 52.5% from the same period in 2023, increasing from $343,000 to $523,000, and was up 61.8% for the three months ended June 30, 2024 over the same period in 2023, increasing from $165,000 to $267,000. This income is primarily derived from dividends received by the Federal Home Loan Bank. The increase in interest income on other earning assets for the six months ended June 30, 2024 as compared to the same period a year ago was primarily due to a 288 basis point increase in yield on other earning assets coupled with an increase in average balances of other earning assets. The increase in interest income on other earning assets for the three months ended June 30, 2024 as compared to the same period a year ago was primarily due to a 358 basis point increase in yield on other earning assets coupled with an increase in average balances of other earning assets. 39 Index The Company had no Federal Funds sold balances during the three and six months ended June 30, 2024 and June 30, 2023. Interest Expense Interest expense on deposits for the six months ended June 30, 2024 was up 177.0% from the same period in 2023, increasing from $2,431,000 to $6,733,000, and was up 136.6% for the three months ended June 30, 2024 over the same period in 2023, increasing from $1,501,000 to $3,552,000. The increase in interest expense for the six months ended June 30, 2024 as compared to the same period a year ago was primarily due to a 92 basis point increase in average interest-bearing deposit yield, which was partially offset by a decrease in average balance of interest-bearing liabilities. The increase in interest expense for the three months ended June 30, 2024 as compared to the same period a year ago was primarily due to an 88 basis point increase in average interest-bearing deposit yield, which was partially offset by a decrease in average balance of interest-bearing liabilities. Provision for Credit Losses Provision for credit losses for the six months ended June 30, 2024 was down 71.2% from the same period in 2023, decreasing from $2,600,000 to $750,000, and was down 59.6% for the three months ended June 30, 2024 over the same period in 2023, decreasing from $2,600,000 to $1,050,000. The levels of forecasted national unemployment and forecasted gross domestic product remained relatively stable during the three and six months ended June 30, 2024, however, there was an increase in nonaccrual loans requiring specific reserves during these periods. Non-Interest Income Non-interest income was down 31.7% for the six months ended June 30, 2024 from the same period in 2023, decreasing from $4,379,000 to $2,991,000. The decrease was primarily driven by a bargain purchase gain recognized during the six months ended June 30, 2023. The Company recognized a bargain purchase gain totaling approximately $1.4 million resulting from the acquisition of the Colusa, Willows, and Orland branches located in California in the first quarter of 2023. Non-interest income was down 1.5% for the three months ended June 30, 2024 from the same period in 2023, decreasing from $1,506,000 to $1,484,000. The decrease was primarily due to decreases in other income. Non-Interest Expenses Total non-interest expenses were down 0.6% for the six months ended June 30, 2024 from the same period in 2023, decreasing from $21,651,000 to $21,526,000. The decrease was primarily due to a decrease in salaries and employee benefits, which was partially offset by increases in occupancy and equipment and other expenses. The decrease in salaries and employee benefits was primarily due to decreases in contingent compensation and profit sharing expense. The increase in occupancy and equipment expenses was primarily due to an increase in depreciation expense due to a full six months of expenses related to the acquired branches in the first quarter of 2023. The increase in other expenses was primarily due to increases in loan collection expenses, which was partially offset by a decrease in legal fees. Total non-interest expenses were down 0.7% for the three months ended June 30, 2024 from the same period in 2023, decreasing from $10,367,000 to $10,299,000. The decrease was primarily due to a decrease in salaries and employee benefits, which was partially offset by an increase in other expenses. The decrease in salaries and employee benefits was primarily due to decreases in contingent compensation and profit sharing expense. The increase in other expenses was primarily due to an increase in loan collection expenses, which was partially offset by a decrease in FDIC assessment expense. 40 Index The following table sets forth other non-interest expenses by category for the three and six months ended June 30, 2024 and 2023. (in thousands) Three months ended June 30, 2024 Three months ended June 30, 2023 Six months ended June 30, 2024 Six months ended June 30, 2023 Other non-interest expenses FDIC assessments $ 193 $ 310 $ 423 $ 450 Contributions 81 66 166 111 Legal fees 125 147 180 340 Accounting and audit fees 176 182 332 317 Consulting fees 251 184 456 436 Postage expense 45 55 85 95 Telephone expense 36 38 72 86 Public relations 77 73 180 144 Training expense 34 45 84 128 Loan origination expense 101 57 128 127 Computer software depreciation 1 7 2 16 Sundry losses 129 65 254 123 Loan collection expense (recovery) (60 ) (595 ) 30 (454 ) Debit card expense 327 306 625 598 Other non-interest expense 584 457 1,044 860 Total other non-interest expenses $ 2,100 $ 1,397 $ 4,061 $ 3,377 41 Index Income Taxes The Company’s tax rate, the Company’s income before taxes and the amount of tax relief provided by non-taxable earnings affect the Company’s provision for income taxes. Provision for income taxes decreased 12.6% for the six months ended June 30, 2024 from the same period in 2023, decreasing from $3,838,000 to $3,355,000, and decreased 3.9% for the three months ended June 30, 2024 from the same period in 2023, decreasing from $1,757,000 to $1,689,000. The decrease in provision for income taxes was primarily due to a decrease in pre-tax income. The effective tax rate was 27.8% and 27.6% for the six months ended June 30, 2024 and June 30, 2023, respectively. The effective tax rate was 27.6% and 27.8% for the three months ended June 30, 2024 and June 30, 2023, respectively. Off-Balance Sheet Commitments The following table shows the distribution of the Company’s undisbursed loan commitments at the dates indicated. (in thousands) June 30, 2024 December 31, 2023 Undisbursed loan commitments $ 168,295 $ 187,401 Standby letters of credit 688 1,251 Commitments to sell loans 270 — $ 169,253 $ 188,652 The reserve for unfunded lending commitments amounted to $950,000 and $1,150,000 as of June 30, 2024 and December 31, 2023, respectively. The reserve for unfunded lending commitments is included in other liabilities on the Condensed Consolidated Balance Sheets. See Note 7 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q, "Financial Instruments with Off-Balance Sheet Risk," for additional information. 42 Index Asset Quality The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times. Asset quality reviews of loans and other non-performing assets are administered using credit risk-rating standards and criteria similar to those employed by state and federal banking regulatory agencies. The federal bank regulatory agencies utilize the following definitions for assets adversely classified for supervisory purposes: • Substandard Assets – A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. • Doubtful Assets – An asset classified doubtful has all the weaknesses inherent in one classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable or improbable. Other Real Estate Owned and loans rated Substandard and Doubtful are deemed "classified assets". This category, which includes both performing and non-performing assets, receives an elevated level of attention regarding collection. The following table summarizes the Company’s non-accrual loans net of guarantees of the State of California and U.S. Government by loan category at June 30, 2024 and December 31, 2023: At June 30, 2024 At December 31, 2023 Gross Guaranteed Net Gross Guaranteed Net (in thousands) Commercial $ 2,374 $ — $ 2,374 $ — $ — $ — Commercial real estate — — — — — — Agriculture 2,572 — 2,572 2,871 — 2,871 Residential mortgage 1,275 — 1,275 424 — 424 Residential construction — — — — — — Consumer 584 — 584 703 — 703 Total non-accrual loans $ 6,805 $ — $ 6,805 $ 3,998 $ — $ 3,998 It is generally the Company’s policy to discontinue interest accruals once a loan is past due for a period of 90 days as to interest or principal payments unless the loan is well secured and in process of collection. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected or there is an extended period of positive performance and a high probability that the loan will continue to pay according to original terms. Non-accrual loans amounted to $6,805,000 at June 30, 2024 and were comprised of seven commercial loans totaling $2,374,000, two agriculture loans totaling $2,572,000, four residential mortgage loans totaling $1,275,000 and three consumer loans totaling $584,000. Non-accrual loans amounted to $3,998,000 at December 31, 2023 and were comprised of two agriculture loans totaling $2,871,000, three residential mortgage loans totaling $424,000 and four consumer loans totaling $703,000. A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. It is generally the Company’s policy that if the value of the underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken. 43 Index As the following table illustrates, total non-performing assets, net of guarantees of the State of California and U.S. Government, including its agencies and its government-sponsored agencies, decreased $1,529,000, or 18.4%, to $6,805,000 during the first six months of 2024. Non-performing assets, net of guarantees, represented 0.4% of total assets at June 30, 2024. At June 30, 2024 At December 31, 2023 Gross Guaranteed Net Gross Guaranteed Net (dollars in thousands) Non-accrual loans $ 6,805 $ — $ 6,805 $ 3,998 $ - $ 3,998 Loans 90 days past due and still accruing — — — 4,336 — 4,336 Total non-performing loans 6,805 — 6,805 8,334 — 8,334 Other real estate owned — — — — — — Total non-performing assets $ 6,805 $ — $ 6,805 $ 8,334 $ — $ 8,334 Non-performing loans (net of guarantees) to total loans 0.6 % 0.8 % Non-performing assets (net of guarantees) to total assets 0.4 % 0.5 % Allowance for credit losses to non-performing loans (net of guarantees) 250.2 % 199.1 % The Company had no loans that were 90 days or more past due and still accruing as of June 30, 2024. The Company had two loans totaling $4,336,000 that were 90 days or more past due and still accruing as of December 31, 2023. Excluding the non-performing loans cited previously, loans totaling $19,411,000 and $12,327,000 were classified as substandard or doubtful loans, representing potential problem loans at June 30, 2024 and December 31, 2023, respectively. Management believes that the allowance for credit losses at June 30, 2024 and December 31, 2023 appropriately reflected expected credit losses in the loan portfolio at that date. The ratio of the allowance for credit losses to total loans at June 30, 2024 and December 31, 2023 was 1.60% and 1.55%, respectively. Other real estate owned (“OREO”) consists of property that the Company has acquired by deed in lieu of foreclosure or through foreclosure proceedings, and property that the Company does not hold title to but is in actual control of, known as in-substance foreclosure. The estimated fair value of the property is determined prior to transferring the balance to OREO. The balance transferred to OREO is the estimated fair value of the property less estimated cost to sell. Impairment may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals or loan officer evaluations are then conducted periodically thereafter charging any additional impairment to the appropriate expense account. The Company had no OREO as of June 30, 2024 and December 31, 2023. 44 Index Allowance for Credit Losses (ACL) The Company's ACL is maintained at a level believed by management to appropriately reflect expected credit losses inherent in the loan portfolio. The ACL is increased by provisions charged to operating expense and reduced by net charge-offs. The Company contracts with vendors for credit reviews of the loan portfolio and utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. The ACL is based on estimates, and actual losses may vary from current estimates. The following table summarizes the ACL of the Company during the six months ended June 30, 2024 and 2023, and for the year ended December 31, 2023: Analysis of the Allowance for Credit Losses (Amounts in thousands, except percentage amounts) Six months ended June 30, Year ended December 31, 2024 2023 2023 Balance at beginning of period $ 16,596 $ 14,792 $ 14,792 Impact of adopting ASC 326 — 800 800 Provision for credit losses 950 2,600 1,150 Loans charged-off: Commercial (557 ) (178 ) (366 ) Commercial Real Estate — — — Agriculture — (2,567 ) (2,567 ) Residential Mortgage — (3 ) (3 ) Residential Construction — — — Consumer (14 ) (1 ) (13 ) Total charged-off (571 ) (2,749 ) (2,949 ) Recoveries: Commercial 47 135 235 Commercial Real Estate — — — Agriculture — — 2,567 Residential Mortgage — — — Residential Construction — — — Consumer 2 1 1 Total recoveries 49 136 2,803 Net charge-offs (522 ) (2,613 ) (146 ) Balance at end of period $ 17,024 $ 15,579 $ 16,596 Ratio of net charge-offs to average loans outstanding during the period (annualized) (0.10 %) (0.53 %) (0.01 %) Allowance for credit losses to total loans 1.60 % 1.51 % 1.55 % Nonaccrual loans to total loans 0.6 % 0.6 % 0.4 % Allowance for credit losses to nonaccrual loans 250.2 % 252.6 % 415.1 % 45 Index Deposits Deposits are one of the Company’s primary sources of funds. At June 30, 2024 and December 31, 2023, the Company had the following deposit mix: June 30, 2024 December 31, 2023 Non-interest bearing transaction 43.7 % 44.0 % Interest-bearing transaction 21.7 % 22.5 % Savings and MMDA 25.3 % 25.5 % Time 9.3 % 8.0 % The Company obtains deposits primarily from the communities it serves. The Company believes that no material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company accepts deposits in excess of $250,000 from customers. These deposits are priced to remain competitive. Maturities of time certificates of deposit of over $250,000 outstanding at June 30, 2024 and December 31, 2023 are summarized as follows: (in thousands) June 30, 2024 December 31, 2023 Three months or less $ 12,992 $ 4,321 Over three to six months 12,081 3,653 Over six to twelve months 5,233 13,277 Over twelve months 4,517 5,072 Total $ 34,823 $ 26,323 Approximately 38% and 37% of our deposits were uninsured as of June 30, 2024 and December 31, 2023, respectively. Liquidity and Capital Resources In order to serve our market area and comply with banking regulations, the Company must maintain adequate liquidity and adequate capital. Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either the asset or liability side of the balance sheet. Asset liquidity sources consist of the repayments and maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Condensed Consolidated Statement of Cash Flows. For the six months ended June 30, 2024, net liquidity provided by investing activities totaled $14,007,000. The Company’s available-for-sale investment securities plus cash and cash equivalents in excess of reserve requirements and certificates of deposit totaled $759,717,000 on June 30, 2024, which was 40.2% of assets at that date. This was an increase of $18,439,000 from $741,278,000 and 39.6% of assets as of December 31, 2023. The Company’s investment securities are generally shorter term in nature to provide ongoing cash flows for liquidity needs and/or reinvestment for interest rate risk management. On June 30, 2024, the effective duration of our investment securities was 3.10 with projected principal cashflow of $79,699,000 for the remainder of 2024 available for reinvestment or liquidity needs. The Company had no held-to-maturity securities as of June 30, 2024 and December 31, 2023. Liquidity may also be impacted from liabilities through changes in deposits and borrowings outstanding. These activities are included under financing activities in the Condensed Consolidated Statement of Cash Flows. As of June 30, 2024, the Company had $0 in borrowings outstanding. For the six months ended June 30, 2024, net liquidity provided by financing activities totaled $13,369,000, primarily due to a net increase in deposits. While these sources of funds are expected to continue to provide significant amounts of funds in the future, their mix, as well as the possible use of other sources, will depend on future economic and market conditions. Liquidity is also provided or used through the results of operating activities. For the six months ended June 30, 2024, operating activities provided cash of $5,196,000. Liquidity is measured by various ratios, in management’s opinion, the most common being the ratio of net loans to deposits (including loans held-for-sale). This ratio was 61.5% and 62.2% as of June 30, 2024 and December 31, 2023, respectively. 46 Index Loan demand during the remainder of 2024 will depend in part on economic and competitive conditions. The Company emphasizes the solicitation of non-interest-bearing demand deposits and money market checking accounts, which are the least sensitive to interest rates. The outlook for deposit balances during the remainder of 2024 is subject to actions by the Federal Reserve and heightened competition. To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks which totaled $132,000,000 at June 30, 2024. Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity at June 30, 2024 of $407,031,000; credit availability is subject to certain collateral requirements. The Company’s primary source of liquidity on a stand-alone basis is dividends from the Bank. Dividends from the Bank are subject to regulatory restrictions. In July 2013, the FRB and the other U.S. federal banking agencies adopted final rules making significant changes to the U.S. regulatory capital framework for U.S. banking organizations and to conform this framework to the guidelines published by the Basel Committee known as the Basel III Global Regulatory Framework for Capital and Liquidity. The Basel Committee is a committee of banking supervisory authorities from major countries in the global financial system which formulates broad supervisory standards and guidelines relating to financial institutions for implementation on a country-by-country basis. These rules adopted by the FRB and the other federal banking agencies (the U.S. Basel III Capital Rules) replaced the federal banking agencies’ general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules, in accordance with certain transition provisions. Banks, such as First Northern, became subject to the final rules on January 1, 2015. The final rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. The final rules provide for increased minimum capital ratios as follows: (a) a common equity Tier 1 capital ratio of 4.5%; (b) a Tier 1 capital ratio of 6%; (c) a total capital ratio of 8%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4%. Under these rules, in order to avoid certain limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements (equal to 2.5% of total risk-weighted assets). The capital conservation buffer is designed to absorb losses during periods of economic stress. Pursuant to the EGRRCPA, the FRB adopted a final rule, effective August 31, 2018, amending the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (the “policy statement”) to increase the consolidated assets threshold to qualify to utilize the provisions of the policy statement from $1 billion to $3 billion. Bank holding companies, such as the Company, are subject to capital adequacy requirements of the FRB; however, bank holding companies which are subject to the policy statement are not subject to compliance with the regulatory capital requirements until they hold $3 billion or more in consolidated total assets. As a consequence, as of December 31, 2018, the Company was not required to comply with the FRB’s regulatory capital requirements until such time that its consolidated total assets equal $3 billion or more or if the FRB determines that the Company is no longer deemed to be a small bank holding company. However, if the Company had been subject to these regulatory capital requirements, it would have exceeded all regulatory requirements. In August of 2020, the Federal banking agencies adopted the final version of the community bank leverage ratio framework rule (the “CBLR”), implementing two interim final rules adopted in April of 2020. The rule provides an optional, simplified measure of capital adequacy. Under the optional CBLR framework, the CBLR was 8.5 percent through calendar year 2021 and is 9 percent thereafter. The rule is applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets. Banks not electing the CBLR framework will continue to be subject to the generally applicable risk-based capital rule. At the present time, the Company and the Bank do not intend to elect to use the CBLR framework. 47 Index As of June 30, 2024, the Bank’s capital ratios exceeded applicable regulatory requirements. The following table presents the capital ratios for the Bank, compared to the regulatory standards for well-capitalized depository institutions, excluding the capital conservation buffer, as of June 30, 2024. (amounts in thousands except percentage amounts) Actual Well Capitalized Capital Ratio Ratio Requirement Leverage $ 193,499 10.18 % 5.0 % Common Equity Tier 1 $ 209,194 15.44 % 6.5 % Tier 1 Risk-Based $ 209,194 15.44 % 8.0 % Total Risk-Based $ 209,194 16.69 % 10.0 % 48 Index ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company believes that there have been no material changes in the quantitative and qualitative disclosures about market risk as of June 30, 2024, from those presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which are incorporated by reference herein. ITEM 4. – CONTROLS AND PROCEDURES (a) We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of June 30, 2024. This conclusion is based on an evaluation conducted under the supervision and with the participation of management. (b) During the quarter ended June 30, 2024, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. PART II – OTHER INFORMATION ITEM 1. – LEGAL PROCEEDINGS Neither the Company nor the Bank is a party to any material pending legal proceeding, nor is any of their property the subject of any material pending legal proceeding, except ordinary routine litigation arising in the ordinary course of the Bank’s business and incidental to its business, none of which is expected to have a material adverse impact upon the Company’s or the Bank’s business, financial position or results of operations. ITEM 1A. – RISK FACTORS For a discussion of risk factors relating to our business, please refer to Part I, Item 1A of our 2023 Form 10-K, which is incorporated by reference herein, and to the following: Several of California’s Largest Home Insurance Providers Have Recently Paused or Severely Limited Their Issuance of New Policies, or Their Renewal of Existing Policies, in the State, Which Could Increase the Bank’s Risk of Loss in its Loan Portfolio At June 30, 2024, real estate mortgage (excluding loans held-for-sale) and construction loans (residential and other) comprised approximately 90% and 3%, respectively, of the principal amount of total loans in the Bank’s portfolio. At June 30, 2024, all of the Bank’s real estate mortgage and construction loans were secured fully or in part by deeds of trust on underlying real estate. Most of the Company’s customers, including its loan customers, are located in the State of California. Recently, several of California’s largest home insurance providers, including State Farm, Allstate, Farmers, USAA, Travelers, Nationwide and Chubb, have either paused or severely limited their issuance of new policies, or their renewal of existing policies, in the state. Mounting claims from wildfire damages, the increasing cost of building and repairing homes in California, and a steep increase in reinsurance premiums, as well as state insurance regulations that make it difficult for insurers to adjust premiums in response to the evolving risk landscape, have challenged the capacity of insurance companies to sustainably and profitably offer home insurance in California. The result of these actions has been to significantly limit the availability of home insurance in California, where homeowners already face escalating property values and high wildfire, seismic, severe weather and other risks. 49 Index The California Department of Insurance enforces some safeguards to temporarily shield homeowners from the cancellation or non-renewal of home insurance policies in high-risk areas, particularly those prone to wildfires. In addition, the California Fair Access to Insurance Requirements (FAIR) Plan, a state-established risk pool, operates as an insurer of last resort, providing temporary coverage for California homeowners unable to obtain (generally at increased premium cost) such coverage from a traditional insurance carrier; however, enrollment in the FAIR Plan as a percentage of the total number of residential insurance policies in California has steadily increased over the past five years, particularly in counties with the highest wildfire risk, threatening the ongoing stability of the Plan. In late 2023, following the California Governor’s declaration of a State of Emergency regarding property insurance, the Insurance Commissioner of the State of California introduced a comprehensive package of executive actions aimed at insurance reform; however, there can be no assurance that these regulatory actions will increase insurance availability or stabilize and strengthen California’s insurance market. Many homeowners in the State of California have been negatively impacted by the contraction of insurance options in the State and the resulting lack of access to affordable home insurance, which could adversely impact the ability of prospective homebuyers to obtain insurance, and escalating premiums and limited coverage options could result in limiting coverage in the event of loss. If any loss suffered by a loan customer of the Bank is not insured or exceeds applicable insurance limits, this could increase the risk of loss in the Bank’s loan portfolio, which could have a material adverse effect on the Company’s business, financial condition, and results of operations. For additional information, see “The Bank’s Dependence on Real Estate Lending Increases Our Risk of Losses” in Part I, Item 1A “Risk Factors” in our 2023 Annual Report on Form 10-K. Increases in the Allowance for Credit Losses Would Adversely Affect the Bank’s Financial Condition and Results of Operations The Bank’s allowance for credit losses on loans was approximately $17.0 million, or 1.60% of total loans, at June 30, 2024, compared to $16.6 million, or 1.55% of total loans, at December 31, 2023, and 250.2% of total non-performing loans net of guaranteed portions at June 30, 2024, compared to 199.1% of total non-performing loans, net of guaranteed portions at December 31, 2023. Provision for credit losses totaling $1.1 and $2.6 million for the three month periods ended June 30, 2024 and June 30, 2023, respectively . Provision for credit losses totaling $0.8 and $2.6 million for the six month periods ended June 30, 2024 and June 30, 2023, respectively . Material future additions to the allowance for estimated losses on loans may be necessary if material adverse changes in economic conditions in our markets were to continue to occur and the performance of the Bank’s loan portfolio were to deteriorate. Other real estate owned is initially recorded at fair value less estimated costs to sell the property, thereby establishing the new cost basis of other real estate. Losses arising at the time of acquisition of such properties are charged against the allowance for credit losses. Subsequent to acquisition, such properties are carried at the lower of cost or fair value less estimated selling expenses, determined on an individual asset basis. Any deficiency resulting from the excess of cost over fair value less estimated selling expenses is recognized as a valuation allowance. Any subsequent increase in fair value up to its cost basis is recorded as a reduction of the valuation allowance. The FDIC and the California DFPI, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses on loans and the carrying value of its assets. Increases in the provision for credit losses on loans and valuation allowance on foreclosed assets would adversely affect the Bank’s financial condition and results of operations. The Bank’s Dependence on Real Estate Lending Increases Our Risk of Losses The Bank’s primary lending focus has historically been commercial (including agricultural), construction, and real estate mortgage. At June 30, 2024, real estate mortgage (excluding loans held-for-sale) and construction loans (residential and other) comprised approximately 90% and 3%, respectively, of the total loans in the Bank’s portfolio. At June 30, 2024, all of the Bank’s real estate mortgage and construction loans and approximately 1% of its commercial loans were secured fully or in part by deeds of trust on underlying real estate. The Company’s dependence on real estate increases the risk of loss in both the Bank’s loan portfolio and its holdings of other real estate owned if economic conditions in Northern California were to deteriorate. Deterioration of the real estate market in Northern California would have a material adverse effect on the Company’s business, financial condition, and results of operations. The CFPB has adopted various regulations which have impacted, and will continue to impact, our residential mortgage lending business. 50 Index ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Issuer Purchases of Equity Securities The Company made the following purchases of its common stock during the three months ended June 30, 2024: (a) (b) (c) (d) Period Total number of shares purchased Average price paid per share Number of shares purchased as part of publicly announced plans or programs Maximum number of shares that may yet be purchased under the plans or programs (1) April 1 - April 30, 2024 — — — — May 1 - May 31, 2024 101,399 $ 9.01 101,399 831,644 June 1 - June 30, 2024 36,101 $ 8.99 36,101 795,543 Total 137,500 137,500 (1) On March 27, 2024, the Company approved a stock repurchase program effective May 1, 2024. The stock repurchase program, which remains in effect until April 30, 2026 unless terminated sooner, allows repurchases by the Company in an aggregate amount of no more than 6% of the Company’s 15,550,731 outstanding shares of common stock as of March 21, 2024. This represents total shares of 933,043 eligible for repurchase. ITEM 3. – DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. – MINE SAFETY DISCLOSURES Not applicable. ITEM 5. – OTHER INFORMATION None . 51 Index ITEM 6. – EXHIBITS Exhibit Number Description of Document 31.1 Rule 13a — 14(a) Certification of Chief Executive Officer 31.2 Rule 13a — 14(a) Certification of Chief Financial Officer 32.1** Statement of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) 32.2** Statement of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) 101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). 101.SCH Inline XBRL Taxonomy Extension Schema Document. 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document. 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document. 104 Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) . ** In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act. 52 Index SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FIRST NORTHERN COMMUNITY BANCORP Date: August 9, 2024 By: /s/ Kevin Spink Kevin Spink, Executive Vice President / Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 53