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 September 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 November 4, 2024 was 15,252,726 . FIRST NORTHERN COMMUNITY BANCORP INDEX Page PART I – Financial Information 3 ITEM I. – Financial Statements (Unaudited) 3 Condensed Consolidated Balance Sheets (Unaudited) 3 Condensed Consolidated Statements of Income (Unaudited) 4 Condensed Consolidated Statements of Comprehensive Income (loss) (Unaudited) 5 Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) 6 Condensed Consolidated Statements of Cash Flows (Unaudited) 7 Notes to Condensed Consolidated Financial Statements 8 ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 34 ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 52 ITEM 4. – CONTROLS AND PROCEDURES 52 PART II – OTHER INFORMATION 52 ITEM 1. – LEGAL PROCEEDINGS 52 ITEM 1A. – RISK FACTORS 52 ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 54 ITEM 3. – DEFAULTS UPON SENIOR SECURITIES 54 ITEM 4. – MINE SAFETY DISCLOSURES 54 ITEM 5. – OTHER INFORMATION 54 ITEM 6. – EXHIBITS 55 SIGNATURES 56 2 Index PART I – FINANCIAL INFORMATION FIRST NORTHERN COMMUNITY BANCORP ITEM I. – FINANCIAL STATEMENTS (UNAUDITED) CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share amounts) September 30, 2024 December 31 , 2023 Assets Cash and cash equivalents $ 163,918 $ 149,211 Certificates of deposit 19,244 19,710 Investment securities – available-for-sale, at estimated fair value, net of allowance for credit losses of $ 0 ; amortized cost of $ 665,113 at September 30, 2024 and $ 620,314 at December 31, 2023 632,404 572,357 Loans, net of allowance for credit losses of $ 16,422 at September 30 , 2024 and $ 16,596 at December 31 , 2023 1,042,304 1,052,465 Stock in Federal Home Loan Bank and other equity securities, at cost 10,518 10,518 Premises and equipment, net 9,391 9,962 Core deposit intangible 3,524 4,141 Interest receivable and other assets 49,387 53,468 Total Assets $ 1,930,690 $ 1,871,832 Liabilities and Stockholders’ Equity Liabilities: Demand deposits $ 747,123 $ 744,799 Interest-bearing transaction deposits 387,587 380,477 Savings and MMDA’s 443,396 431,472 Time, $250,000 or less 116,098 109,373 Time, over $250,000 37,838 26,323 Total deposits 1,732,042 1,692,444 Interest payable and other liabilities 16,651 20,143 Total Liabilities 1,748,693 1,712,587 Commitments and contingencies (Note 7) Stockholders’ Equity: Common stock, no par value; 32,000,000 shares authorized; 15,263,027 shares issued and outstanding at September 30, 2024 and 15,482,332 shares issued and outstanding at December 31, 2023 121,391 123,235 Additional paid-in capital 977 977 Retained earnings 82,616 68,760 Accumulated other comprehensive loss, net ( 22,987 ) ( 33,727 ) Total Stockholders’ Equity 181,997 159,245 Total Liabilities and Stockholders’ Equity $ 1,930,690 $ 1,871,832 See notes to unaudited condensed consolidated financial statements. 3 Index FIRST NORTHERN COMMUNITY BANCORP CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (in thousands, except per share amounts) Three months ended September 30, 2024 Three months ended September 30, 2023 Nine months ended September 30, 2024 Nine months ended September 30, 2023 Interest and dividend income: Loans $ 14,315 $ 13,098 $ 41,620 $ 38,197 Due from banks interest bearing accounts 1,820 2,064 5,619 6,967 Investment securities Taxable 3,586 2,685 9,519 8,041 Non-taxable 312 199 825 692 Other earning assets 261 214 784 557 Total interest and dividend income 20,294 18,260 58,367 54,454 Interest expense: Deposits 3,798 2,386 10,531 4,817 Total interest expense 3,798 2,386 10,531 4,817 Net interest income 16,496 15,874 47,836 49,637 (Reversal of) provision for credit losses ( 550 ) 500 200 3,100 Net interest income after (reversal of) provision for credit losses 17,046 15,374 47,636 46,537 Non-interest income: Service charges on deposit accounts 427 436 1,292 1,259 Gains on sales of loans held-for-sale 36 62 41 93 Investment and brokerage services income 146 136 422 387 Mortgage brokerage income — 11 20 21 Loan servicing income 75 79 208 209 Debit card income 710 713 2,074 2,094 Losses on sales/calls of available-for-sale securities ( 75 ) — ( 155 ) ( 64 ) Gain on bargain purchase — — — 1,405 Other income 219 339 627 751 Total non-interest income 1,538 1,776 4,529 6,155 Non-interest expenses: Salaries and employee benefits 6,242 6,377 18,506 19,653 Occupancy and equipment 1,204 1,064 3,514 3,138 Data processing 1,079 933 3,065 2,949 Stationery and supplies 45 103 187 272 Advertising 109 111 303 322 Directors’ fees 74 83 229 234 Amortization of core deposit intangible 203 226 617 603 Other expense 1,978 1,986 6,039 5,363 Total non-interest expenses 10,934 10,883 32,460 32,534 Income before provision for income taxes 7,650 6,267 19,705 20,158 Provision for income taxes 2,162 1,648 5,517 5,486 Net income $ 5,488 $ 4,619 $ 14,188 $ 14,672 Basic earnings per common share $ 0.36 $ 0.30 $ 0.93 $ 0.97 Diluted earnings per common share $ 0.36 $ 0.30 $ 0.92 $ 0.96 See notes to unaudited condensed consolidated financial statements. 4 Index FIRST NORTHERN COMMUNITY BANCORP CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED) (in thousands) Three months ended September 30, 2024 Three months ended September 30, 2023 Nine months ended September 30, 2024 Nine months ended September 30, 2023 Net income $ 5,488 $ 4,619 $ 14,188 $ 14,672 Other comprehensive income (loss), net of tax: Unrealized holding (losses) gains arising during the period, net of tax effect of $ 5,084 and $( 2,097 ) for the three months ended September 30 , 2024 and September 30 , 2023 , respectively, and $ 4,462 and $( 1,145 ) for the nine months ended September 30 , 2024 and September 30 , 2023 , respectively 12,114 ( 4,999 ) 10,631 ( 2,721 ) Less: reclassification adjustment due to losses realized on sales of securities, net of tax effect of $ 22 and $ 0 for the three months ended September 30 , 2024 and September 30 , 2023 , respectively, and $ 46 and $ 19 for the nine months ended September 30 , 2024 and September 30 , 2023 , respectively 53 — 109 45 Other comprehensive income (loss), net of tax $ 12,167 $ ( 4,999 ) $ 10,740 $ ( 2,676 ) Comprehensive income (loss) $ 17,655 $ ( 380 ) $ 24,928 $ 11,996 See notes to unaudited condensed consolidated financial statements. 5 Index FIRST NORTHERN COMMUNITY BANCORP CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (in thousands, except share data) Common Stock Additional Paid-in Retained Accumulated Other Comprehensive Income (Loss), net Shares Amounts Capital Earnings of tax Total Balance at December 31, 2022 14,652,584 $ 116,099 $ 977 $ 54,492 $ ( 46,528 ) $ 125,040 Cumulative change from adoption of ASU 2016-13 on January 1, 2023 ( 916 ) ( 916 ) Balance at January 1, 2023 (as adjusted for adoption of accounting standard) 14,652,584 116,099 977 53,576 ( 46,528 ) 124,124 Net income 5,489 5,489 Other comprehensive income, net of taxes 6,013 6,013 Stock dividend adjustment 3,525 296 ( 296 ) — Cash in lieu of fractional shares ( 164 ) ( 7 ) ( 7 ) Stock-based compensation 192 192 Common shares issued related to restricted stock grants 72,242 — — Stock options exercised, net of swapped shares 11,000 — — Stock repurchase and retirement ( 3,580 ) ( 26 ) ( 26 ) Balance at March 31, 2023 14,735,607 $ 116,561 $ 977 $ 58,762 $ ( 40,515 ) $ 135,785 Net income 4,564 4,564 Other comprehensive loss, net of taxes ( 3,690 ) ( 3,690 ) Stock-based compensation 188 188 Common shares issued related to restricted stock grants 1,500 — — Stock repurchase and retirement ( 16,474 ) ( 117 ) ( 117 ) Balance at June 30, 2023 14,720,633 $ 116,632 $ 977 $ 63,326 $ ( 44,205 ) $ 136,730 Net income 4,619 4,619 Other comprehensive loss, net of taxes ( 4,999 ) ( 4,999 ) Stock-based compensation 136 136 Restricted stock cancelled, net of common shares issued related to restricted stock grants ( 10,209 ) — — Stock options exercised, net 21,927 — — Balance at September 30, 2023 14,732,351 $ 116,768 $ 977 $ 67,945 $ ( 49,204 ) $ 136,486 Balance at December 31, 2023 15,482,332 $ 123,235 $ 977 $ 68,760 $ ( 33,727 ) $ 159,245 Net income 4,276 4,276 Other comprehensive loss, net of taxes ( 1,461 ) ( 1,461 ) Stock dividend adjustment 2,671 325 ( 325 ) — Cash in lieu of fractional shares ( 148 ) ( 7 ) ( 7 ) Stock-based compensation 296 296 Common shares issued related to restricted stock grants, net of restricted stock forfeited 57,489 — — Stock options exercised, net of swapped shares 8,387 — — Balance at March 31, 2024 15,550,731 $ 123,856 $ 977 $ 72,704 $ ( 35,188 ) $ 162,349 Net income 4,424 4,424 Other comprehensive income, net of taxes 34 34 Stock-based compensation 159 159 Common shares issued related to restricted stock grants 4,470 — — Stock repurchase and retirement ( 137,500 ) ( 1,239 ) ( 1,239 ) Stock options exercised, net of swapped shares 1,872 — — Balance at June 30, 2024 15,419,573 $ 122,776 $ 977 $ 77,128 $ ( 35,154 ) $ 165,727 Net income 5,488 5,488 Other comprehensive income, net of taxes 12,167 12,167 Stock-based compensation 171 171 Restricted stock forfeited ( 768 ) — — Stock repurchase and retirement ( 155,778 ) ( 1,556 ) ( 1,556 ) Balance at September 30, 2024 15,263,027 $ 121,391 $ 977 $ 82,616 $ ( 22,987 ) $ 181,997 See notes to unaudited condensed consolidated financial statements. 6 Index FIRST NORTHERN COMMUNITY BANCORP CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Nine months ended September 30, 2024 Nine months ended September 30, 2023 Cash Flows From Operating Activities Net income $ 14,188 $ 14,672 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 792 730 Accretion and amortization of investment securities premiums and discounts, net 505 1,591 Increase in deferred loan origination fees and costs, net 43 759 Amortization of core deposit intangible 617 603 Provision for credit losses 200 3,100 Stock-based compensation 626 516 Losses on sales/calls of available-for-sale securities 155 64 Amortization of operating lease right-of-use asset 701 806 Gains on sales of loans held-for-sale ( 41 ) ( 93 ) Proceeds from sales of loans held-for-sale 3,155 5,277 Originations of loans held-for-sale ( 3,114 ) ( 5,553 ) Gain on bargain purchase — ( 1,405 ) Changes in assets and liabilities: (Increase) decrease in interest receivable and other assets ( 1,128 ) 4,128 Decrease in interest payable and other liabilities ( 3,492 ) ( 196 ) Net cash provided by operating activities 13,207 24,999 Cash Flows From Investing Activities Proceeds from calls or maturities of available-for-sale securities 59,785 30,766 Proceeds from sales of available-for-sale securities 4,652 16,987 Principal repayments on available-for-sale securities 54,745 54,864 Purchases of available-for-sale securities ( 164,641 ) ( 57,391 ) Proceeds from maturities of certificates of deposit 6,166 3,687 Purchases of certificates of deposit ( 5,700 ) ( 3,435 ) Net decrease (increase) in loans 9,918 ( 66,781 ) Purchases of Federal Home Loan Bank stock and other equity securities, at cost — ( 1,078 ) Purchases of premises and equipment ( 221 ) ( 1,045 ) Cash and cash equivalents acquired in acquisition — 103,425 Net cash (used in) provided by investing activities ( 35,296 ) 79,999 Cash Flows From Financing Activities Net increase (decrease) in deposits 39,598 ( 95,160 ) Cash dividends paid in lieu of fractional shares ( 7 ) ( 7 ) Repurchases of common stock ( 2,795 ) ( 143 ) Net cash provided by (used in) by financing activities 36,796 ( 95,310 ) Net increase in Cash and Cash Equivalents 14,707 9,688 Cash and Cash Equivalents , beginning of period 149,211 187,417 Cash and Cash Equivalents, end of period $ 163,918 $ 197,105 Supplemental Disclosures of Cash Flow Information: Cash paid during the period for: Interest $ 10,753 $ 3,699 Income taxes 6,320 — Supplemental disclosures of non-cash investing and financing activities: Stock dividend distributed 6,392 5,652 Unrealized holding gains (losses) on available for sale securities, net of taxes 10,740 ( 2,676 ) Market value of shares tendered in-lieu of cash to pay for exercise of options 348 361 Recognition of right-of-use assets obtained in exchange for operating lease liabilities — 245 Non-cash assets acquired (liabilities assumed) in acquisition: Total assets acquired — 12,612 Total liabilities assumed — ( 115,916 ) See notes to unaudited condensed consolidated financial statements. 7 Index FIRST NORTHERN COMMUNITY BANCORP NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2024 and 2023 and December 31, 2023 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of First Northern Community Bancorp (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The results of operations for any interim period are not necessarily indicative of results expected for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 as filed with the Securities and Exchange Commission (“SEC”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. All material intercompany balances and transactions have been eliminated in consolidation . 2. ACCOUNTING POLICIES The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Accounting Standards Adopted in 2024 On January 1, 2024, the Company adopted Accounting Standards Update (ASU) 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions . These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value. Adoption of ASU 2022-03 did not have a material impact on the Company’s consolidated financial statements. Recently Issued Accounting Pronouncements In January 2021, the Financial Accounting Standards Board (FASB) issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope . This ASU clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. The ASU also amends the expedients and exceptions in Topic 848 to capture the incremental consequences of the scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. An entity may elect to apply ASU 2021-01 on contract modifications that change the interest rate used for margining, discounting, or contract price alignment retrospectively as of any date from the beginning of the interim period that includes March 12, 2020, or prospectively to new modifications from any date within the interim period that includes or is subsequent to January 7, 2021, up to the date that financial statements are available to be issued. An entity may elect to apply ASU 2021-01 to eligible hedging relationships existing as of the beginning of the interim period that includes March 12, 2020, and to new eligible hedging relationships entered into after the beginning of the interim period that includes March 12, 2020. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 . This ASU extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. ASU 2022-06 defers the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company is in the process of evaluating the provisions of this ASU but does not expect it to have a material impact on the Company’s consolidated financial statements. In August 2023, the FASB issued ASU 2023-05, Business Combinations—Joint Venture (JV) Formations: Recognition and Initial Measurement. The guidance requires newly formed JVs to apply a new basis of accounting to all of its contributed net assets, which results in the JV initially measuring its contributed net assets under ASC 805-20, Business Combinations. The new guidance would be applied prospectively and is effective for all newly formed joint venture entities with a formation date on or after January 1, 2025, with early adoption permitted. The Company is evaluating the accounting and disclosure requirements of this update and the impact of adopting the new guidance on the consolidated financial statements. 8 Index In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company has determined that its current business and operations consist of a single business segment and single reporting unit. The Company has evaluated this ASU and does not expect the adoption to have a material impact on the Company’s consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. Among other things, these amendments provide additional transparency into an entity’s income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The standard requires that public business entities disclose, on an annual basis, specific categories in the rate reconciliation and additional information for reconciling items meeting a certain quantitative threshold. The amendments also require that entities disclose on an annual basis: 1) income taxes paid (net of refunds received) disaggregated by federal (national), state, and foreign taxes and 2) the income taxes paid (net of refunds received) disaggregated by individual jurisdictions exceeding 5% of total income taxes paid (net of refunds received). The amendments are effective for public business entities for annual periods beginning after December 15, 2024. The Company is evaluating the accounting and disclosure requirements of this update and the impact of adopting the new guidance on the consolidated financial statements. In March 2024, the FASB issued guidance within ASU 2024-01, Compensation—Stock Compensation (Topic 718): Scope Application of Profits Interest and Similar Awards . The amendments in the ASU apply to companies that provide employees and non-employees with profits interest and similar awards to align compensation with a company’s operating performance and provide those holders with the opportunity to participate in future profits and/or equity appreciation of the company. The purpose of the ASU is to clarify the application of the scope guidance in Accounting Standards Codification (ASC) paragraph 718-10-15-3 in determining if a profit interest award should be accounted for in accordance with Topic 718: Compensation—Stock Compensation. The amendment in ASC paragraph 718-10-15-3 is solely intended to improve the overall clarity and does not change the guidance. The ASU is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for both interim and annual financial statements that have not yet been issued or made available for issuance. If a company adopts the amendments in an interim period, it should adopt them as of the beginning of the annual period that includes the interim period. The amendments should be applied either (1) retrospectively to all prior periods presented in the financial statements or (2) on a prospective basis. The Company has evaluated this ASU and does not expect the adoption to have a material impact on the Company’s consolidated financial statements, as the Company does not typically provide these types of awards. 9 Index 3. INVESTMENT SECURITIES The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at September 30, 2024 are summarized as follows: (in thousands) Amortized cost Unrealized gains Unrealized losses Estimated fair value ACL Investment securities available-for-sale: U.S. Treasury securities $ 94,368 $ 634 $ ( 1,319 ) $ 93,683 $ — Securities of U.S. government agencies and corporations 113,923 573 ( 3,757 ) 110,739 — Obligations of states and political subdivisions 71,656 555 ( 3,532 ) 68,679 — Collateralized mortgage obligations 109,755 73 ( 14,592 ) 95,236 — Mortgage-backed securities 275,411 1,306 ( 12,650 ) 264,067 — Total debt securities $ 665,113 $ 3,141 $ ( 35,850 ) $ 632,404 $ — The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2023 are summarized as follows: (in thousands) Amortized cost Unrealized gains Unrealized losses Estimated fair value ACL Investment securities available-for-sale: U.S. Treasury securities $ 90,063 $ 134 $ ( 3,015 ) $ 87,182 $ — Securities of U.S. government agencies and corporations 121,305 105 ( 6,331 ) 115,079 — Obligations of states and political subdivisions 55,021 237 ( 3,581 ) 51,677 — Collateralized mortgage obligations 107,658 15 ( 16,726 ) 90,947 — Mortgage-backed securities 246,267 242 ( 19,037 ) 227,472 — Total debt securities $ 620,314 $ 733 $ ( 48,690 ) $ 572,357 $ — The Company generated $ 1,720 ,000 and $ 0 in proceeds from sales of available-for-sale securities for the three-month periods ended September 30, 2024 and 2023, respectively. The Company generated $ 4,652 ,000 and $ 16,987 ,000 in proceeds from sales of available-for-sale securities for the nine-month periods ended September 30, 2024 and 2023, respectively. There were no gross realized gains on sales of available-for-sale securities for the three-month periods ended September 30, 2024 and 2023, respectively. Gross realized gains on sales of available-for-sale securities were $ 0 and $ 96 ,000 for the nine-month periods ended September 30, 2024 and 2023, respectively. Gross realized losses on sales of available-for-sale securities were $ 75 ,000 and $ 0 for the three-month periods ended September 30, 2024 and 2023, respectively. Gross realized losses on sales of available-for-sale securities were $ 155 ,000 and $ 160 ,000 for the nine-month periods ended September 30, 2024 and 2023, respectively. The amortized cost and estimated fair value of debt and other securities at September 30, 2024, by contractual maturity, are shown in the following table: (in thousands) Amortized cost Estimated fair value Maturity in years: Due in one year or less $ 55,374 $ 54,782 Due after one year through five years 142,743 139,442 Due after five years through ten years 37,078 36,123 Due after ten years 44,752 42,754 Subtotal 279,947 273,101 Mortgage-backed securities & Collateralized mortgage obligations 385,166 359,303 Total $ 665,113 $ 632,404 Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. In addition, factors such as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities. 10 Index An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of September 30, 2024, follows: (in thousands) Less than 12 months 12 months or more Total Fair Value Unrealized losses Fair Value Unrealized losses Fair Value Unrealized losses U.S. Treasury securities $ 1,995 $ ( 1 ) $ 51,543 $ ( 1,318 ) $ 53,538 $ ( 1,319 ) Securities of U.S. government agencies and corporations 4,050 ( 3 ) 69,228 ( 3,754 ) 73,278 ( 3,757 ) Obligations of states and political subdivisions 9,651 ( 238 ) 31,255 ( 3,294 ) 40,906 ( 3,532 ) Collateralized mortgage obligations 13,198 ( 1,053 ) 68,730 ( 13,539 ) 81,928 ( 14,592 ) Mortgage-backed securities 12,370 ( 80 ) 155,966 ( 12,570 ) 168,336 ( 12,650 ) Total $ 41,264 $ ( 1,375 ) $ 376,722 $ ( 34,475 ) $ 417,986 $ ( 35,850 ) Thirty-seven securities, all considered investment grade, which had an aggregate fair value of $ 41,264 ,000 and a total unrealized loss of $ 1,375 ,000, have been in an unrealized loss position for less than twelve months as of September 30, 2024. Three hundred and eighty-one securities, all considered investment grade, which had an aggregate fair value of $ 376,722 ,000 and a total unrealized loss of $ 34,475 ,000, have been in an unrealized loss position for more than twelve months as of September 30, 2024. The unrealized losses on the Company’s investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates. The decline in fair value is attributable to changes in interest rates and not credit quality, and the Company does not intend to sell the securities. The Company has concluded it is not more likely than not that the Company will be required to sell these securities prior to recovery of their anticipated cost basis. Therefore, as of September 30, 2024, the Company has 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 $ 58,273 ,000 and $ 43,884 ,000 at September 30, 2024 and December 31, 2023, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law. 11 Index 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES The composition of the Company’s loan portfolio, by loan class, as of September 30, 2024 and December 31, 2023 was as follows: ($ in thousands) September 30, 2024 December 31, 2023 Commercial $ 109,380 $ 106,897 Commercial Real Estate 724,986 721,729 Agriculture 94,994 105,838 Residential Mortgage 106,049 107,328 Residential Construction 7,055 12,323 Consumer 16,227 14,868 1,058,691 1,068,983 Allowance for credit losses ( 16,422 ) ( 16,596 ) Deferred origination fees and costs, net 35 78 Loans, net $ 1,042,304 $ 1,052,465 At September 30, 2024 and December 31, 2023, all loans were pledged under a blanket collateral lien to secure actual or potential borrowings from the Federal Home Loan Bank (“FHLB”). Allowance for Credit Losses The following tables summarize the activity in the allowance for credit losses on loans which is recorded as a contra asset, and the reserve for unfunded commitments which is recorded on the balance sheet within other liabilities as of and for the three and nine months ended September 30, 2024 . Allowance for credit losses – Three months ended September 30, 2024 ($ in thousands) Beginning balance Charge-offs Recoveries Provision (recovery) Ending Balance Commercial $ 2,359 $ ( 49 ) $ — $ ( 739 ) $ 1,571 Commercial Real Estate 10,439 — — 83 10,522 Agriculture 1,680 — — ( 29 ) 1,651 Residential Mortgage 1,862 — — 50 1,912 Residential Construction 380 — — 86 466 Consumer 304 ( 5 ) 2 ( 1 ) 300 Allowance for credit losses on loans 17,024 ( 54 ) 2 ( 550 ) 16,422 Reserve for unfunded commitments 950 — — — 950 Total $ 17,974 $ ( 54 ) $ 2 $ ( 550 ) $ 17,372 Allowance for credit losses – Nine months ended September 30, 2024 ($ in thousands) Beginning balance Charge-offs Recoveries Provision (recovery) Ending Balance Commercial $ 2,041 $ ( 606 ) $ 47 $ 89 $ 1,571 Commercial Real Estate 10,864 — — ( 342 ) 10,522 Agriculture 997 — — 654 1,651 Residential Mortgage 2,005 — — ( 93 ) 1,912 Residential Construction 334 — — 132 466 Consumer 355 ( 19 ) 4 ( 40 ) 300 Allowance for credit losses on loans 16,596 ( 625 ) 51 400 16,422 Reserve for unfunded commitments 1,150 — — ( 200 ) 950 Total $ 17,746 $ ( 625 ) $ 51 $ 200 $ 17,372 12 Index The following tables summarize the activity in the allowance for credit losses on loans which is recorded as a contra asset, and the reserve for unfunded commitments which is recorded on the balance sheet within other liabilities as of and for the three and nine months ended September 30, 2023 . Allowance for credit losses – Three months ended September 30, 2023 ($ in thousands) Beginning balance Charge-offs Recoveries Provision (recovery) Ending Balance Commercial $ 1,792 $ ( 91 ) $ 20 $ 39 $ 1,760 Commercial Real Estate 10,139 — — 584 10,723 Agriculture 947 — — 86 1,033 Residential Mortgage 1,840 — — 89 1,929 Residential Construction 491 — — ( 154 ) 337 Consumer 370 ( 9 ) — 6 367 Allowance for credit losses on loans 15,579 ( 100 ) 20 650 16,149 Reserve for unfunded commitments 1,200 — — ( 150 ) 1,050 Total $ 16,779 $ ( 100 ) $ 20 $ 500 $ 17,199 Allowance for credit losses – Nine months ended September 30, 2023 ($ in thousands) Beginning balance Adoption of CECL Charge-offs Recoveries Provision (recovery) Ending Balance Commercial $ 1,491 $ 689 $ ( 269 ) $ 155 $ ( 306 ) $ 1,760 Commercial Real Estate 10,259 ( 513 ) — — 977 10,723 Agriculture 1,789 ( 742 ) ( 2,567 ) — 2,553 1,033 Residential Mortgage 896 923 ( 3 ) — 113 1,929 Residential Construction 181 221 — — ( 65 ) 337 Consumer 176 222 ( 10 ) 1 ( 22 ) 367 Allowance for credit losses on loans 14,792 800 ( 2,849 ) 156 3,250 16,149 Reserve for unfunded commitments 700 500 — — ( 150 ) 1,050 Total $ 15,492 $ 1,300 $ ( 2,849 ) $ 156 $ 3,100 $ 17,199 The Company utilizes two economic variables, forecasted unemployment and gross domestic product, as loss drivers for its allowance for credit losses. The Company moved from California state loss drivers to national loss drivers at the beginning of 2024. The reason for the change is a higher credit loss correlation between the national loss driver variables than the state loss driver variables. During the quarter ended September 30, 2024, the levels of forecasted national unemployment and forecasted gross domestic product remained relatively stable. The Company recognized a reversal of provision of $ 550 ,000 during the three months ended September 30, 2024, primarily due to a substantial payoff of a non-performing commercial loan relationship. Management believes the allowance for credit losses at September 30, 2024 appropriately reflected expected credit losses in the loan portfolio at that date. 13 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 September 30, 2024 and December 31, 2023. The following table presents the amortized cost basis of collateral-dependent loans by class, which are individually evaluated to determine expected credit losses as of September 30, 2024 and December 31, 2023: September 30, 2024 ($ in thousands) Secured by 1-4 Family Residential Properties- 1st lien Secured by 1-4 Family Residential Properties- junior lien Secured by 1-4 Family Residential Properties- revolving Secured by owner-occupied, nonfarm nonresidential properties Commercial $ — $ — $ — $ — Commercial Real Estate — — — 466 Agriculture — — — — Residential Mortgage 469 — — — Residential Construction — — — — Consumer — 298 263 — Total $ 469 $ 298 $ 263 $ 466 ($ in thousands) Commercial Construction and land development Secured by farmland Agriculture production loans Total Commercial $ 139 $ — $ — $ — $ 139 Commercial Real Estate — — — — 466 Agriculture — — 787 1,593 2,380 Residential Mortgage — — — — 469 Residential Construction — — — — — Consumer — — — — 561 Total $ 139 $ — $ 787 $ 1,593 $ 4,015 December 31, 2023 ($ in thousands) Secured by 1-4 Family Residential Properties- 1st lien Secured by 1-4 Family Residential Properties- junior lien Secured by 1-4 Family Residential Properties- revolving Secured by owner-occupied, nonfarm nonresidential properties Commercial $ — $ — $ — $ — Commercial Real Estate — — — — Agriculture — — — — Residential Mortgage 424 — — — Residential Construction — — — — Consumer — 351 352 — Total $ 424 $ 351 $ 352 $ — ($ in thousands) Commercial Construction and land development Secured by farmland Agriculture production loans Total Commercial $ — $ — $ — $ — $ — Commercial Real Estate — — — — — Agriculture — — 946 1,925 2,871 Residential Mortgage — — — — 424 Residential Construction — — — — — Consumer — — — — 703 Total $ — $ — $ 946 $ 1,925 $ 3,998 Foreclosure Proceedings The Company had no residential real estate property in the process of foreclosure at September 30, 2024 and December 31, 2023. 14 Index Non-accrual and Past Due Loans The Company’s loans by delinquency and non-accrual status, as of September 30, 2024 and December 31, 2023, was as follows: ($ in thousands) 30-59 days Past Due & Accruing 60-89 days Past Due & Accruing 90 days or More Past Due & Accruing Nonaccrual Loans Total Past Due & Nonaccrual Loans Current & Accruing Loans Total Loans Nonaccrual loans with No ACL September 30 , 2024 Commercial $ 603 $ 41 $ 48 $ 139 $ 831 $ 108,549 $ 109,380 $ 139 Commercial Real Estate — — — 466 466 724,520 724,986 466 Agriculture — 2 — 2,380 2,382 92,612 94,994 2,380 Residential Mortgage 116 81 — 469 666 105,383 106,049 469 Residential Construction — — — — — 7,055 7,055 — Consumer — 100 — 561 661 15,566 16,227 561 Total $ 719 $ 224 $ 48 $ 4,015 $ 5,006 $ 1,053,685 $ 1,058,691 $ 4,015 December 31, 2023 Commercial $ 91 $ 178 $ — $ — $ 269 $ 106,628 $ 106,897 $ — Commercial Real Estate — — — — — 721,729 721,729 — Agriculture — — — 2,871 2,871 102,967 105,838 2,871 Residential Mortgage 976 — 916 424 2,316 105,012 107,328 424 Residential Construction — — 3,420 — 3,420 8,903 12,323 — Consumer 194 — — 703 897 13,971 14,868 703 Total $ 1,261 $ 178 $ 4,336 $ 3,998 $ 9,773 $ 1,059,210 $ 1,068,983 $ 3,998 The Company recognized $ 119 ,000 and $ 4 ,000 of interest income on nonaccrual loans during the three months ended September 30, 2024 and September 30, 2023, respectively. The Company recognized $ 438 ,000 and $ 1,289 ,000 of interest income on nonaccrual loans during the nine months ended September 30, 2024 and September 30, 2023, respectively. Loan Modifications Occasionally, the Company modifies loans to borrowers in financial difficulty by providing principal forgiveness, term extension, payment delays or interest rate reduction. When principal forgiveness is provided, the amount of forgiveness is charged-off against the ACL. In some cases, the Company provides multiple types of concessions on one loan. Typically, one type of concession, such as a term extension, is granted initially. If the borrower continues to experience financial difficulty, another concession, such as principal forgiveness, may be granted. For the loans included in the “combination” columns below, multiple types of modifications have been made on the same loan within the current reporting period. The combination is at least two of the following: a term extension, principal forgiveness, an other-than-insignificant payment delay and/or an interest rate reduction. 15 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 September 30, 2024 were as follows: ($ in thousands) Term Extension Combination Term Extension and Interest Rate Reduction Total Class of Financing Receivable Commercial $ 11 $ 47 0.05 % Commercial Real Estate — — — Agriculture — — — Residential Mortgage — — — Residential Construction — — — Consumer — — — Total $ 11 $ 47 0.01 % The amortized cost basis of loans that were experiencing both financial difficulty and modification during the nine months ended September 30, 2024 were as follows: ($ in thousands) Term Extension Combination Term Extension and Interest Rate Reduction Total Class of Financing Receivable Commercial $ 2,102 $ 47 1.96 % Commercial Real Estate — — — Agriculture — — — Residential Mortgage — — — Residential Construction — — — Consumer — — — Total $ 2,102 $ 47 0.20 % The amortized cost basis of loans that were experiencing both financial difficulty and modification during the three months ended September 30, 2023 were as follows: ($ in thousands) Term Extension Combination Term Extension and Interest Rate Reduction Total Class of Financing Receivable Commercial $ — $ — — Commercial Real Estate — — — Agriculture — — — Residential Mortgage — — — Residential Construction 3,420 — 24.39 % Consumer — — — Total $ 3,420 $ — 0.32 % The amortized cost basis of loans that were experiencing both financial difficulty and modification during the nine months ended September 30, 2023 were as follows: ($ in thousands) Term Extension Combination Term Extension and Interest Rate Reduction Total Class of Financing Receivable Commercial $ — $ 44 0.05 % Commercial Real Estate — 398 0.06 % Agriculture 4,005 — 3.64 % Residential Mortgage — — — Residential Construction 3,420 — 24.39 % Consumer — — — Total $ 7,425 $ 442 0.75 % The Company had no commitments to lend additional funds to borrowers whose loans were modified at September 30, 2024. 16 Index The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the three-month period ended September 30, 2024: Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (in months) Commercial 3.00 % 19 Commercial Real Estate — — Agriculture — — Residential Mortgage — — Residential Construction — — Consumer — — Total 3.00 % 19 The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the nine-month period ended September 30, 2024: Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (in months) Commercial 3.00 % 9 Commercial Real Estate — — Agriculture — — Residential Mortgage — — Residential Construction — — Consumer — — Total 3.00 % 9 The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the three-month period ended September 30, 2023: Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (in months) Commercial — — Commercial Real Estate — — Agriculture — — Residential Mortgage — — Residential Construction — 1 Consumer — — Total — 1 The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the nine-month period ended September 30, 2023: Weighted-Average Interest Rate Reduction Weighted-Average Term Extension (in months) Commercial 0.50 % 38 Commercial Real Estate 0.25 % 26 Agriculture — 4 Residential Mortgage — — Residential Construction — 1 Consumer — — Total 0.27 % 4 17 Index There were no loans modified within the previous twelve months and for which there was a payment default during the three- and nine- month periods ended September 30, 2024. There were no loans modified within the previous twelve months and for which there was a payment default during the three months ended September 30, 2023. There were two agricultural loans totaling $ 4,005 ,000 that were modified within the previous twelve months and for which there was a payment default during the nine months ended September 30, 2023. The Company recorded charge-offs on these two agricultural loans totaling $ 2,567 ,000 during the nine months ended September 30, 2023. Upon the Company’s determination that a modified loan (or portion of a loan) has subsequently become uncollectible, the loan (or a portion of the loan) is written off. Therefore, the amortized cost basis of the loan is reduced by the uncollectible amount and the ACL is adjusted by the same amount. 18 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 September 30, 2024. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to permanent loans, are presented by year of origination. Revolving loans converted to term loans totaled $ 6,718 ,000 as of September 30, 2024. (in thousands) Term Loans Amortized Cost Basis by Origination Year - As of September 30, 2024 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Total Commercial Pass $ 28,566 $ 17,624 $ 12,776 $ 13,570 $ 4,091 $ 8,495 $ 18,645 $ 103,767 Special Mention — — 891 1,807 — — 1,590 4,288 Substandard 559 41 — — 349 — 237 1,186 Doubtful/Loss — — — — 139 — — 139 Total Commercial loans $ 29,125 $ 17,665 $ 13,667 $ 15,377 $ 4,579 $ 8,495 $ 20,472 $ 109,380 Year-to-date Period Charge-offs — ( 162 ) ( 224 ) ( 5 ) ( 13 ) ( 2 ) ( 200 ) ( 606 ) Year-to-date Recoveries — — 4 — — 43 — 47 Year-to-date Net Charge-offs — ( 162 ) ( 220 ) ( 5 ) ( 13 ) 41 ( 200 ) ( 559 ) Commercial Real Estate Pass $ 67,094 $ 111,516 $ 171,046 $ 161,470 $ 40,235 $ 136,443 $ 6,616 $ 694,420 Special Mention 516 — — 7,845 — 9,231 — 17,592 Substandard — 385 1,003 2,536 1,650 7,400 — 12,974 Doubtful/Loss — — — — — — — — Total Commercial Real Estate loans $ 67,610 $ 111,901 $ 172,049 $ 171,851 $ 41,885 $ 153,074 $ 6,616 $ 724,986 Year-to-date Charge-offs — — — — — — — — Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — — — — Agriculture Pass $ 4,428 $ 6,621 $ 16,939 $ 20,367 $ 6,471 10,828 $ 21,983 $ 87,637 Special Mention — — 1,890 2,996 — — — 4,886 Substandard — — — 787 — — 1,684 2,471 Doubtful/Loss — — — — — — — — Total Agriculture loans $ 4,428 $ 6,621 $ 18,829 $ 24,150 $ 6,471 $ 10,828 $ 23,667 $ 94,994 Year-to-date Charge-offs — — — — — — — — Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — — — — 19 Index (in thousands) Term Loans Amortized Cost Basis by Origination Year - As of September 30, 2024 2024 2023 2022 2021 2020 Prior Revolving Loans Amortized Cost Basis Total Residential Mortgage Pass $ 2,986 $ 20,029 $ 22,785 $ 27,358 $ 13,416 $ 19,006 $ — $ 105,580 Special Mention — — — — — — — — Substandard 79 — — 36 — 354 — 469 Doubtful/Loss — — — — — — — — Total Residential Mortgage loans $ 3,065 $ 20,029 $ 22,785 $ 27,394 $ 13,416 $ 19,360 $ — $ 106,049 Year-to-date Charge-offs — — — — — — — — Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — — — — Residential Construction Pass $ 2,037 $ 2,124 $ 1,637 $ 1,257 $ — $ — $ — $ 7,055 Special Mention — — — — — — — — Substandard — — — — — — — — Doubtful/Loss — — — — — — — — Total Residential Construction loans $ 2,037 $ 2,124 $ 1,637 $ 1,257 $ — $ — $ — $ 7,055 Year-to-date Charge-offs — — — — — — — — Year-to-date Recoveries — — — — — — — — Year-to-date Net Charge-offs — — — — — — — — Consumer Pass $ 240 $ 161 $ 1,139 $ 117 $ 125 $ 274 $ 13,610 $ 15,666 Special Mention — — — — — — — — Substandard — — — — — — 561 561 Doubtful/Loss — — — — — — — — Total Consumer loans $ 240 $ 161 $ 1,139 $ 117 $ 125 $ 274 $ 14,171 $ 16,227 Year-to-date Charge-offs ( 19 ) — — — — — — ( 19 ) Year-to-date Recoveries 2 — — — — 2 — 4 Year-to-date Net Charge-offs ( 17 ) — — — — 2 — ( 15 ) Total Loans Pass $ 105,351 $ 158,075 $ 226,322 $ 224,139 $ 64,338 $ 175,046 $ 60,854 $ 1,014,125 Special Mention 516 — 2,781 12,648 — 9,231 1,590 26,766 Substandard 638 426 1,003 3,359 1,999 7,754 2,482 17,661 Doubtful/Loss — — — — 139 — — 139 Total Loans $ 106,505 $ 158,501 $ 230,106 $ 240,146 $ 66,476 $ 192,031 $ 64,926 $ 1,058,691 Year-to-date Charge-offs $ ( 19 ) $ ( 162 ) $ ( 224 ) $ ( 5 ) $ ( 13 ) $ ( 2 ) $ ( 200 ) $ ( 625 ) Year-to-date Recoveries $ 2 $ — $ 4 $ — $ — $ 45 $ — $ 51 Year-to-date Net Charge-offs $ ( 17 ) $ ( 162 ) $ ( 220 ) $ ( 5 ) $ ( 13 ) $ 43 $ ( 200 ) $ ( 574 ) 20 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 — — — — — — — — 21 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 ) 22 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 nine months ended September 30, 2024 for cash proceeds equal to the fair value of the loans. The Company serviced real estate mortgage loans for others totaling $ 175,691 ,000 and $ 184,288 ,000 at September 30, 2024 and December 31, 2023, respectively. The recorded value of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. The Company assesses capitalized mortgage servicing rights for impairment based upon the fair value of those rights at each reporting date. For purposes of measuring impairment, the rights are stratified based upon the product type, term and interest rates. Fair value is determined by discounting estimated net future cash flows from mortgage servicing activities using discount rates that approximate current market rates and estimated prepayment rates, among other assumptions. The amount of impairment recognized, if any, is the amount by which the capitalized mortgage servicing rights for a stratum exceeds their fair value. Impairment, if any, is recognized through a valuation allowance for each individual stratum. Changes in the carrying amount of mortgage servicing rights are reported in earnings under loan servicing income on the condensed consolidated statements of income. Key assumptions used in measuring the fair value of mortgage servicing rights as of September 30, 2024 and December 31, 2023 were as follows: September 30, 2024 December 31, 2023 Constant prepayment rate 7.33 % 6.09 % Discount rate 10.00 % 10.50 % Weighted average life (years) 7.40 7.99 The following tables summarize the changes to the Company’s mortgage servicing rights assets as of the periods presented. Mortgage servicing rights are included in Interest Receivable and Other Assets on the condensed consolidated balance sheets. (in thousands) June 30, 2024 Additions Reductions September 30, 2024 Mortgage servicing rights $ 1,387 $ 16 $ ( 53 ) $ 1,350 Valuation allowance — — — — Mortgage servicing rights, net of valuation allowance $ 1,387 $ 16 $ ( 53 ) $ 1,350 (in thousands) December 31, 2023 Additions Reductions September 30, 2024 Mortgage servicing rights $ 1,482 $ 27 $ ( 159 ) $ 1,350 Valuation allowance — — — — Mortgage servicing rights, net of valuation allowance $ 1,482 $ 27 $ ( 159 ) $ 1,350 At September 30, 2024 and December 31, 2023, the estimated fair market value of the Company’s mortgage servicing rights assets was $ 1,880 ,000 and $ 2,094 ,000, respectively. The change in fair value of mortgage servicing rights during 2024 was primarily due to a decrease in the amount of mortgage loans serviced coupled with changes in prepayment speeds and the discount rate. The Company received contractually specified servicing fees of $ 112 ,000 and $ 117 ,000 for the three months ended September 30, 2024 and September 30, 2023, respectively. The Company received contractually specified servicing fees of $ 340 ,000 and $ 357 ,000 for the nine months ended September 30, 2024 and September 30, 2023, respectively. Loan servicing income on the condensed consolidated statements of income includes contractually specified servicing fees, mortgage servicing rights additions, amortization and changes in the valuation allowance. 23 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 September 30, 2024 and December 31, 2023. (in thousands) September 30 , 2024 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury securities $ 93,683 $ 93,683 $ — $ — Securities of U.S. government agencies and corporations 110,739 — 110,739 — Obligations of states and political subdivisions 68,679 — 68,679 — Collateralized mortgage obligations 95,236 — 95,236 — Mortgage-backed securities 264,067 — 264,067 — Total investments at fair value $ 632,404 $ 93,683 $ 538,721 $ — (in thousands) December 31, 2023 Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. Treasury securities $ 87,182 $ 87,182 $ — $ — Securities of U.S. government agencies and corporations 115,079 — 115,079 — Obligations of states and political subdivisions 51,677 — 51,677 — Collateralized mortgage obligations 90,947 — 90,947 — Mortgage-backed securities 227,472 — 227,472 — Total investments at fair value $ 572,357 $ 87,182 $ 485,175 $ — 24 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 September 30, 2024 . (in thousands) September 30 , 2024 Carrying Value Level 1 Level 2 Level 3 Individually evaluated loans $ 139 $ — $ — $ 139 Total assets at fair value $ 139 $ — $ — $ 139 There were no assets measured at fair value on a non-recurring basis as of December 31, 2023. There were no liabilities measured at fair value on a recurring or non-recurring basis at September 30, 2024 and December 31, 2023. Key methods and assumptions used in measuring the fair value of collateral dependent loans as of September 30, 2024 were as follows: Method Assumption Inputs Individually evaluated loans Collateral, market, income, enterprise, liquidation External appraised values, management assumptions regarding market trends or other relevant factors, selling costs generally ranging from 6 % to 10 % The following section describes the valuation methodologies used for assets and liabilities recorded at fair value. Investment Securities Available-for-Sale Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, if available. If quoted market prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions, and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets where valuations include significant unobservable assumptions. Individually Evaluated Loans The Company does not record loans at fair value on a recurring basis. Loans that do not share similar risk characteristics are individually evaluated by management. Included in loans individually evaluated are collateral dependent loans. A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. Collateral dependent loans are considered to have unique risk characteristics and are individually evaluated. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken. Collateral dependent loans where a charge-off is recorded based on the fair value of collateral require classification in the fair value hierarchy. When a loan is evaluated based on the fair value of the underlying collateral securing the loan, the Company records the collateral dependent loan as non-recurring Level 3 given the valuation includes significant unobservable assumption s. 25 Index Disclosures about Fair Value of Financial Instruments The estimated fair values of the Company’s financial instruments for the periods ended September 30, 2024 and December 31, 2023 were approximately as follows: (in thousands) September 30, 2024 December 31, 2023 Level Carrying amount Fair value Carrying amount Fair value Financial assets: Cash and cash equivalents 1 $ 163,918 $ 163,918 $ 149,211 $ 149,211 Certificates of deposit 2 19,244 19,351 19,710 19,570 Stock in Federal Home Loan Bank and other equity securities 3 10,518 10,518 10,518 10,518 Loans receivable: Net loans 3 1,042,304 961,748 1,052,465 958,077 Interest receivable 2 7,678 7,678 6,810 6,810 Mortgage servicing rights 3 1,350 1,880 1,482 2,094 Financial liabilities: Time deposits 3 153,936 153,887 135,696 135,540 Interest payable 2 1,345 1,345 1,567 1,567 Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument and expected exit prices. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. 26 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) September 30, 2024 December 31, 2023 Undisbursed loan commitments $ 158,836 $ 187,401 Standby letters of credit 895 1,251 Commitments to sell loans 960 — $ 160,691 $ 188,652 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. The types of collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank issues both financial and performance standby letters of credit. The financial standby letters of credit are primarily to guarantee payment to third parties. At September 30, 2024 and December 31, 2023, there were no financial standby letters of credit outstanding. The performance standby letters of credit are typically issued to municipalities as specific performance bonds. Performance standby letters of credit totaled $ 895 ,000 and $ 1,251 ,000 at September 30, 2024 and December 31, 2023, respectively. The Bank had experienced no draws on outstanding letters of credit, resulting in no related liability included on its balance sheet; however, should a triggering event occur, the Bank either has collateral in excess of the letter of credit or embedded agreements of recourse from the customer. The Bank has set aside a reserve for unfunded commitments in the amount of $ 950 ,000 and $ 1,150 ,000 at September 30, 2024 and December 31, 2023, respectively, which is recorded in “interest payable and other liabilities” on the condensed consolidated balance sheets. Commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans. As of September 30, 2024 and December 31, 2023, the Company had no off-balance sheet derivatives requiring additional disclosure. The Company may enter into interest rate lock commitments in connection with its mortgage banking activities to fund residential mortgage loans within specified times in the future. These commitments expose the Company to the risk that the price of the loan underlying the interest rate lock commitment might decline from the inception of the interest rate lock to the funding of the mortgage loan. To protect against this risk, the Company may enter into commitments to sell loans to economically hedge the risk of potential changes in the value of the loans that would result from the commitment. These commitments totaled $ 960 ,000 and $ 0 at September 30, 2024 and December 31, 2023, respectively. Mortgage loans sold to investors may be sold with servicing rights retained, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards. In the past two years, the Company had to repurchase one loan totaling $ 420 ,000 due to deficiencies in underwriting or loan documentation. Management believes that any liabilities that may result from suc h recourse provisions are not significant. 27 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 September 30, 2024. Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value Weighted Average Remaining Contractual Term (in years) Options outstanding at Beginning of Period 592,393 $ 8.52 Granted — — Expired — — Cancelled / Forfeited — — Exercised — — Options outstanding at End of Period 592,393 $ 8.52 $ 1,051,764 4.11 Exercisable (vested) at End of Period 568,709 $ 8.49 $ 1,028,080 3.97 The following table presents the activity related to stock options for the nine months ended September 30, 2024. Number of Shares Weighted Average Exercise Price Aggregate Intrinsic Value Weighted Average Remaining Contractual Term (in years) Options outstanding at Beginning of Period 642,779 $ 8.40 Granted — — Expired — — Cancelled / Forfeited — — Exercised ( 50,386 ) 6.92 Options outstanding at End of Period 592,393 $ 8.52 $ 1,051,764 4.11 Exercisable (vested) at End of Period 568,709 $ 8.49 $ 1,028,080 3.97 The intrinsic value of options exercised was $ 90,000 and $ 305,000 during the nine months ended September 30, 2024 and September 30, 2023, respectively. The fair value of awards vested was $ 88,000 and $ 123,000 during the nine months ended September 30, 2024 and Se ptember 30, 2023, respectively. As of September 30, 2024, there was $ 38,000 of total unrecognized compensation cost related to non-vested stock options. This cost is expected to be recognized over a weighted average period of approximately 1.49 years. There was $ 6,000 and $ 30,000 of recognized compensation cost related to stock options granted for the three and nine months ended September 30, 2024, respectively. 28 Index The following table presents the activity related to non-vested restricted stock for the three months ended September 30, 2024. Number of Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Weighted Average Remaining Contractual Term (in years) Non-vested Restricted stock outstanding at Beginning of Period 259,886 $ 8.51 Granted — — Cancelled / Forfeited ( 768 ) 8.55 Exercised/Released/Vested ( 849 ) 6.58 Non-vested restricted stock outstanding at End of Period 258,269 $ 8.52 $ 2,660,171 2.58 The following table presents the activity related to non-vested restricted stock for the nine months ended September 30, 2024. Number of Shares Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Weighted Average Remaining Contractual Term (in years) Non-vested Restricted stock outstanding at Beginning of Period 274,268 $ 8.72 Granted 84,046 8.33 Cancelled / Forfeited ( 19,980 ) 8.76 Exercised/Released/Vested ( 80,065 ) 8.93 Non-vested restricted stock outstanding at End of Period 258,269 $ 8.52 $ 2,660,171 2.58 The weighted average fair value of restricted stock granted during the nine months ended September 30, 2024 was $ 8.33 per share. As of September 30, 2024, there was $ 1,116,000 of total unrecognized compensation cost related to non-vested restricted stock. This cost is expected to be recognized over a weighted average period of approximately 2.58 years. There was $ 149,000 and $ 565,000 of recognized compensation cost related to restricted stock awards for the three and nine months ended September 30, 2024, respectively. 29 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 September 30, 2024, there was no unrecognized compensation cost related to ESPP issuances. There was $ 15,000 and $ 31,000 of recognized compensation cost related to ESPP issuances for the three and nine months ended September 30, 2024, respectively. The weighted average fair value option at issuance date during the nine months ended September 30, 2024 was $ 2.14 per share. A summary of the weighted average assumptions used in valuing ESPP issuances during the three and nine months ended September 30, 2024 is presented below. Three Months Ended September 30, 2024 Nine Months Ended September 30, 2024 Risk Free Interest Rate 5.27 % 5.27 % Expected Dividend Yield 0.00 % 0.00 % Expected Life in Years 1.00 1.00 Expected Price Volatility 25.96 % 25.96 % 30 Index 9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) The following table details activity in accumulated other comprehensive income (loss) for the three months ended September 30, 2024. (in thousands) Unrealized losses on securities Officers’ retirement plan Directors’ retirement plan Accumulated other comprehensive loss Balance as of June 30, 2024 $ ( 35,205 ) $ ( 70 ) $ 121 $ ( 35,154 ) Current period other comprehensive income 12,167 — — 12,167 Balance as of September 30 , 2024 $ ( 23,038 ) $ ( 70 ) $ 121 $ ( 22,987 ) The following table details activity in accumulated other comprehensive loss for the nine months ended September 30, 2024. (in thousands) Unrealized losses on securities Officers’ retirement plan Directors’ retirement plan Accumulated other comprehensive loss Balance as of December 31, 2023 $ ( 33,778 ) $ ( 70 ) $ 121 $ ( 33,727 ) Current period other comprehensive income 10,740 — — 10,740 Balance as of September 30, 2024 $ ( 23,038 ) $ ( 70 ) $ 121 $ ( 22,987 ) The following table details activity in accumulated other comprehensive loss for the three months ended September 30, 2023. (in thousands) Unrealized losses on securities Officers’ retirement plan Directors’ retirement plan Accumulated other comprehensive loss Balance as of June 30, 2023 $ ( 43,950 ) $ ( 308 ) $ 53 $ ( 44,205 ) Current period other comprehensive loss ( 4,999 ) — — ( 4,999 ) Balance as of September 30 , 2023 $ ( 48,949 ) $ ( 308 ) $ 53 $ ( 49,204 ) The following table details activity in accumulated other comprehensive loss for the nine months ended September 30, 2023. (in thousands) Unrealized losses on securities Officers’ retirement plan Directors’ retirement plan Accumulated other comprehensive loss Balance as of December 31, 2022 $ ( 46,273 ) $ ( 308 ) $ 53 $ ( 46,528 ) Current period other comprehensive loss ( 2,676 ) — — ( 2,676 ) Balance as of September 30, 2023 $ ( 48,949 ) $ ( 308 ) $ 53 $ ( 49,204 ) 31 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 nine months ended September 30, 2024 and 2023 (dollars in thousands except share and per share amounts): Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Basic earnings per share: Net income $ 5,488 $ 4,619 $ 14,188 $ 14,672 Weighted average common shares outstanding 15,123,404 15,191,973 15,209,757 15,182,554 Basic EPS $ 0.36 $ 0.30 $ 0.93 $ 0.97 Diluted earnings per share: Net income $ 5,488 $ 4,619 $ 14,188 $ 14,672 Weighted average common shares outstanding 15,123,404 15,191,973 15,209,757 15,182,554 Effect of dilutive shares 221,923 168,013 190,954 135,920 Adjusted weighted average common shares outstanding 15,345,327 15,359,986 15,400,711 15,318,474 Diluted EPS $ 0.36 $ 0.30 $ 0.92 $ 0.96 Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 27,499 shares and 355,263 shares for the three months ended September 30, 2024 and 2023, respectively. Unvested restricted stock which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 0 shares and 0 shares for the three months ended September 30, 2024 and 2023, respectively. Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 306,120 shares and 476,883 shares for the nine months ended September 30, 2024 and 2023, respectively. Unvested restricted stock which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 2,592 shares and 47,231 shares for the nine months ended September 30, 2024 and 2023, respectively. 32 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 September 30, 2024. Most leases include options to renew, with renewal terms that can extend the lease term from 3 to 10 years. The exercise of lease renewal options is at the Company’s sole discretion. Most leases are currently in the extension period. For the remaining leases with options to renew, the Company has not included the extended lease terms in the calculation of lease liabilities as the options are not reasonably certain of being exercised. Certain lease agreements include rental payments that are adjusted periodically for inflation. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants. The Company uses its FHLB advance fixed rates, which are its incremental borrowing rates for secured borrowings, as the discount rates to calculate lease liabilities. The Company had right-of-use assets totaling $ 3,372 ,000 and $ 4,073 ,000 as of September 30, 2024 and December 31, 2023, respectively. Right-of-use assets are included in Interest receivable and other assets on the condensed consolidated balance sheets. The Company had lease liabilities totaling $ 3,880 ,000 and $ 4,585 ,000 as of September 30, 2024 and December 31, 2023, respectively. Lease liabilities are included in Interest payable and other liabilities on the condensed consolidated balance sheets. The Company recognized lease expense totaling $ 323 ,000 and $ 315 ,000 for the three-month periods ended September 30, 2024 and 2023, respectively, and $ 928 ,000 and $ 916 ,000 for the nine-month periods ended September 30, 2024 and 2023, respectively. Lease expense includes operating lease costs, short-term lease costs and variable lease costs. Lease expense is included in occupancy and equipment expense on the condensed consolidated statements of income. The table below summarizes the maturity of remaining lease liabilities at September 30, 2024: (in thousands) September 30, 2024 2024 (remaining 3 months) $ 259 2025 1,051 2026 672 2027 611 2028 625 2029 and thereafter 895 Total lease payments 4,113 Less: interest ( 233 ) Present value of lease liabilities $ 3,880 The following table presents supplemental cash flow information related to leases for the three and nine months ended September 30, 2024: Three months ended September 30, Nine months ended September 30 , (in thousands) 2024 2023 2024 2023 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows from operating leases $ 244 $ 296 $ 839 $ 910 Right-of-use assets obtained in exchange for new operating lease liabilities — — — 245 The following table presents the weighted average operating lease term and discount rate as of September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 Weighted-average remaining lease term – operating leases, in years 5.03 5.43 Weighted-average discount rate – operating leases 2.38 % 2.42 % 33 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 34 Index ● The seasonal nature of our business ● The impact of changes in interest rates and our strategy to manage our interest rate risk profile and the possible effect of changes in residential mortgage interest rates on new originations and refinancing of existing residential mortgage loans ● Loan portfolio composition and risk grade trends, expected charge-offs, portfolio credit quality, loan demand, our strategy regarding loan modifications, delinquency rates and our underwriting standards and our expectations regarding our recognition of interest income on loans that were provided payment deferrals upon completion of the payment forbearance period ● Our deposit base including renewal of time deposits and the outlook for deposit balances ● The impact on our net interest income and net interest margin of changes in interest rates ● The effect of possible changes in the initiatives and policies of the federal and state bank regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, the Securities and Exchange Commission and other standard setters ● Tax rates and the impact of changes in the U.S. tax laws ● Our pension and retirement plan costs ● Our liquidity strategies and beliefs concerning the adequacy of our liquidity, sources and amounts of funds and ability to satisfactorily manage our liquidity ● Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements or changes in accounting principles ● Expected rates of return, maturities, loss exposure, growth rates, yields, and projected results ● The possible impact of weather-related or other natural conditions, including drought, fire or flooding, seismic events, and related governmental responses, including related electrical power outages, on economic conditions, especially in the agricultural sector ● Maintenance of insurance coverages appropriate for our operations ● Threats to the banking sector and our business due to cybersecurity issues and attacks and regulatory expectations related to cybersecurity ● Possible changes in the fair values recorded on our financial statements of the assets acquired and liabilities assumed in our business combination completed in January 2023 ● The possible effects on community banks and our business from the failures of other banks ● The possible adverse impacts on the banking industry and our business from a period of significant, prolonged inflation ● Descriptions of assumptions underlying or relating to any of the foregoing Readers of this document should not rely on any forward-looking statements, which reflect only our management’s belief as of the date of this report. There are numerous risks and uncertainties that could and will cause actual results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our financial condition and results of operations or prospects. Such risks and uncertainties include, but are not limited to those listed in Item 1A “Risk Factors” of Part II of this Form 10-Q, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I of this Form 10-Q and “Risk Factors” and “Supervision and Regulation” in our 2023 Annual Report on Form 10-K, and in our other reports to the SEC. 35 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 third quarter and year-to-date 2024 included: • Net income of $14.2 million for the nine months ended September 30, 2024, down 3.3% from net income of $14.7 million earned for the same period last year. Net income of $5.5 million for the three months ended September 30, 2024, up 18.8% from net income of $4.6 million earned for the same period last year. • Diluted income per share of $0.92 for the nine months ended September 30, 2024, down 4.2% from diluted income per share of $0.96 in the same period last year. Diluted income per share of $0.36 for the three months ended September 30, 2024, up 20.0% from diluted income per share of $0.30 for the same period last year. • Net interest income of $47.8 million for the nine months ended September 30, 2024, down 3.6% from net interest income of $49.6 million for the same period last year. Net interest income of $16.5 million for the three months ended September 30, 2024, up 3.9% from net interest income of $15.9 million for the same period last year. • Net interest margin of 3.60% for the nine months ended September 30, 2024, down 2.2% from net interest margin of 3.68% for the same period last year. Net interest margin of 3.65% for the three months ended September 30, 2024, up 4.0% from net interest margin of 3.51% for the same period last year. • Provision for credit losses of $200 thousand for the nine months ended September 30, 2024, down 93.6% from $3.1 million for the same period last year. Reversal of provision for credit losses of $550 thousand for the three months ended September 30, 2024 compared to provision for credit losses of $500 thousand for the same period last year. The Company recognized a reversal of provision of $550 thousand during the three months ended September 30, 2024, primarily due to a substantial payoff of a non-performing commercial loan relationship. • Total assets of $1.93 billion as of September 30, 2024, up 3.1% from $1.87 billion as of December 31, 2023. • Total net loans (including loans held-for-sale) of $1.04 billion as of September 30, 2024, down 1.0% from $1.05 billion as of December 31, 2023. • Total investment securities of $632.4 million as of September 30, 2024, up 10.5% from $572.4 million as of December 31, 2023. • Total deposits of $1.73 billion as of September 30, 2024, up 2.3% from $1.69 billion as of December 31, 2023. 36 Index SUMMARY FINANCIAL DATA The Company recorded net income of $14,188,000 for the nine months ended September 30, 2024, representing a decrease of $484,000, or 3.3%, from net income of $14,672,000 for the same period in 2023. The Company recorded net income of $5,488,000 for the three months ended September 30, 2024, representing an increase of $869,000, or 18.8%, from net income of $4,619,000 for the same period in 2023. The following tables present a summary of the results for the three and nine months ended September 30, 2024 and 2023, and a summary of financial condition at September 30, 2024 and December 31, 2023. Three Months Ended September 30, 2024 Three Months Ended September 30, 2023 Nine Months Ended September 30, 2024 Nine Months Ended September 30, 2023 (dollars in thousands except for per share amounts) For the Period: Net Income $ 5,488 $ 4,619 $ 14,188 $ 14,672 Basic Earnings Per Common Share $ 0.36 $ 0.30 $ 0.93 $ 0.97 Diluted Earnings Per Common Share $ 0.36 $ 0.30 $ 0.92 $ 0.96 Return on Average Assets (annualized) 1.15 % 0.96 % 1.01 % 1.02 % Return on Average Equity (annualized) 12.73 % 13.11 % 11.50 % 14.41 % Average Equity to Average Assets 9.02 % 7.30 % 8.77 % 7.09 % September 30, 2024 December 31, 2023 (in thousands except for ratios) At Period End: Total Assets $ 1,930,690 $ 1,871,832 Total Investment Securities, at fair value $ 632,404 $ 572,357 Total Loans, Net (including loans held-for-sale) $ 1,042,304 $ 1,052,465 Total Deposits $ 1,732,042 $ 1,692,444 Loan-To-Deposit Ratio 60.2 % 62.2 % 37 Index Distribution of Average Statements of Condition and Analysis of Net Interest Income (in thousands, except percentage amounts) Three months ended September 30, 2024 Three months ended September 30, 2023 Average Balance Interest Yield/ Rate (4) Average Balance Interest Yield/ Rate (4) Assets Interest-earning assets: Loans (1) $ 1,048,639 $ 14,315 5.43 % $ 1,031,647 $ 13,098 5.04 % Certificate of deposits 18,052 188 4.14 % 20,794 194 3.70 % Interest bearing due from banks 126,903 1,632 5.12 % 148,250 1,870 5.00 % Investment securities, taxable 550,360 3,586 2.59 % 551,555 2,685 1.93 % Investment securities, non-taxable (2) 42,736 312 2.90 % 31,765 199 2.49 % Other interest earning assets 10,518 261 9.87 % 10,518 214 8.07 % Total average interest-earning assets 1,797,208 20,294 4.49 % 1,794,529 18,260 4.04 % Non-interest-earning assets: Cash and due from banks 40,401 49,630 Premises and equipment, net 9,470 9,704 Interest receivable and other assets 55,357 59,579 Total average assets $ 1,902,436 $ 1,913,442 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing transaction deposits 381,356 718 0.75 % 415,232 472 0.45 % Savings and MMDA’s 431,446 1,443 1.33 % 443,536 819 0.73 % Time, $250,000 or less 117,985 1,341 4.52 % 98,898 968 3.88 % Time, over $250,000 38,453 296 3.06 % 17,554 127 2.87 % Total average interest-bearing liabilities 969,240 3,798 1.56 % 975,220 2,386 0.97 % Non-interest-bearing liabilities: Non-interest-bearing demand deposits 745,700 779,615 Interest payable and other liabilities 15,924 18,858 Total liabilities 1,730,864 1,773,693 Total average stockholders’ equity 171,572 139,749 Total average liabilities and stockholders’ equity $ 1,902,436 $ 1,913,442 Net interest income and net interest margin (3) $ 16,496 3.65 % $ 15,874 3.51 % (1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest thereon is generally excluded. Loan interest income includes loan fees, net of deferred costs of approximately $4 and $(50) for the three months ended September 30, 2024 and 2023, respectively. (2) Interest income and yields on tax-exempt securities are not presented on a taxable-equivalent basis. (3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. (4) For disclosure purposes, yield /rates are annualized by dividing the number of days in the reported period by 365. 38 Index Distribution of Average Statements of Condition and Analysis of Net Interest Income (in thousands, except percentage amounts) Nine months ended September 30, 2024 Nine months ended September 30, 2023 Average Balance Interest Yield/ Rate (4) Average Balance Interest Yield/ Rate (4) Assets Interest-earning assets: Loans (1) $ 1,045,710 $ 41,620 5.32 % $ 994,504 $ 38,197 5.14 % Certificate of deposits 17,935 542 4.04 % 21,115 556 3.52 % Interest bearing due from banks 127,030 5,077 5.34 % 174,391 6,411 4.92 % Investment securities, taxable 531,871 9,519 2.39 % 568,322 8,041 1.89 % Investment securities, non-taxable (2) 39,600 825 2.78 % 36,092 692 2.56 % Other interest earning assets 10,518 784 9.96 % 9,985 557 7.46 % Total average interest-earning assets 1,772,664 58,367 4.40 % 1,804,409 54,454 4.03 % Non-interest-earning assets: Cash and due from banks 38,716 47,135 Premises and equipment, net 9,654 8,713 Interest receivable and other assets 57,104 58,805 Total average assets $ 1,878,138 $ 1,919,062 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing transaction deposits 375,090 1,851 0.66 % 432,741 1,107 0.34 % Savings and MMDA’s 429,227 3,910 1.22 % 460,198 1,926 0.56 % Time, $250,000 or less 114,847 3,908 4.55 % 73,485 1,542 2.81 % Time, over $250,000 37,430 862 3.08 % 13,043 242 2.48 % Total average interest-bearing liabilities 956,594 10,531 1.47 % 979,467 4,817 0.66 % Non-interest-bearing liabilities: Non-interest-bearing demand deposits 740,261 785,634 Interest payable and other liabilities 16,523 17,837 Total liabilities 1,713,378 1,782,938 Total average stockholders’ equity 164,760 136,124 Total average liabilities and stockholders’ equity $ 1,878,138 $ 1,919,062 Net interest income and net interest margin (3) $ 47,836 3.60 % $ 49,637 3.68 % (1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest thereon is generally excluded. Loan interest income includes loan fees, net of deferred costs of approximately $(448) and $(17) for the nine months ended September 30, 2024 and 2023, respectively. (2) Interest income and yields on tax-exempt securities are not presented on a taxable-equivalent basis. (3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. (4) For disclosure purposes, yield /rates are annualized by dividing the number of days in the reported period by 365. 39 Index Distribution of Average Statements of Condition and Analysis of Net Interest Income (in thousands, except percentage amounts) Three months ended September 30, 2024 Three months ended June 30, 2024 Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate (4) Assets Interest-earning assets: Loans (1) $ 1,048,639 $ 14,315 5.43 % $ 1,041,102 $ 13,830 5.34 % Certificates of deposit 18,052 188 4.14 % 17,081 171 4.03 % Interest bearing due from banks 126,903 1,632 5.12 % 130,963 1,913 5.87 % Investment securities, taxable 550,360 3,586 2.59 % 519,789 3,088 2.39 % Investment securities, non-taxable (2) 42,736 312 2.90 % 38,055 261 2.76 % Other interest earning assets 10,518 261 9.87 % 10,518 267 10.21 % Total average interest-earning assets 1,797,208 20,294 4.49 % 1,757,508 19,530 4.47 % Non-interest-earning assets: Cash and due from banks 40,401 39,630 Premises and equipment, net 9,470 9,642 Interest receivable and other assets 55,357 59,523 Total average assets $ 1,902,436 $ 1,866,303 Liabilities and Stockholders’ Equity: Interest-bearing liabilities: Interest-bearing transaction deposits 381,356 718 0.75 % 371,657 622 0.67 % Savings and MMDA’s 431,446 1,443 1.33 % 425,601 1,272 1.20 % Time, $250,000 and under 117,985 1,341 4.52 % 123,303 1,356 4.42 % Time, over $250,000 38,453 296 3.06 % 34,605 302 3.51 % Total average interest-bearing liabilities 969,240 3,798 1.56 % 955,166 3,552 1.50 % Non-interest-bearing liabilities: Non-interest-bearing demand deposits 745,700 732,153 Interest payable and other liabilities 15,924 15,737 Total liabilities 1,730,864 1,703,056 Total average stockholders’ equity 171,572 163,247 Total average liabilities and stockholders’ equity $ 1,902,436 $ 1,866,303 Net interest income and net interest margin (3) $ 16,496 3.65 % $ 15,978 3.66 % (1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest is generally excluded. Loan interest income includes loan fees, net of deferred costs of approximately $4 and $(100) for the three months ended September 30, 2024 and June 30, 2024, respectively. (2) Interest income and yields on tax-exempt securities are not presented on a taxable equivalent basis. (3) Net interest margin is computed by dividing net interest income by total average interest-earning assets. (4) For disclosure purposes, yield/rates are annualized by dividing the number of days in the reported period by 365. 40 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 September 30, 2024 over the three months ended September 30, 2023, the nine months ended September 30, 2024 over the nine months ended September 30, 2023, and the three months ended September 30, 2024 over the three months ended June 30, 2024. Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume. Three Months Ended September 30, 2024 Nine Months Ended September 30, 2024 Three Months Ended September 30, 2024 Over Over Over Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 Three Months Ended June 30, 2024 Volume Interest Rate Change Volume Interest Rate Change Volume Interest Rate Change Increase (Decrease) in Interest Income: Loans $ 213 $ 1,004 $ 1,217 $ 2,038 $ 1,385 $ 3,423 $ 146 $ 339 $ 485 Certificates of Deposit (27 ) 21 (6 ) (91 ) 77 (14 ) 11 6 17 Due From Banks (281 ) 43 (238 ) (1,851 ) 517 (1,334 ) (55 ) (226 ) (281 ) Investment Securities - Taxable (6 ) 907 901 (544 ) 2,022 1,478 206 292 498 Investment Securities - Non-taxable 76 37 113 71 62 133 36 15 51 Other Assets — 47 47 32 195 227 — (6 ) (6 ) $ (25 ) $ 2,059 $ 2,034 $ (345 ) $ 4,258 $ 3,913 $ 344 $ 420 $ 764 Increase (Decrease) in Interest Expense: Deposits: Interest-Bearing Transaction Deposits $ (41 ) $ 287 $ 246 $ (166 ) $ 910 $ 744 $ 17 $ 79 $ 96 Savings & MMDAs (22 ) 646 624 (139 ) 2,123 1,984 19 152 171 Time Certificates 399 143 542 1,887 1,099 2,986 (4 ) (17 ) (21 ) $ 336 $ 1,076 $ 1,412 $ 1,582 $ 4,132 $ 5,714 $ 32 $ 214 $ 246 Increase (Decrease) in Net Interest Income: $ (361 ) $ 983 $ 622 $ (1,927 ) $ 126 $ (1,801 ) $ 312 $ 206 $ 518 41 Index CHANGES IN FINANCIAL CONDITION The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $14,707,000, or 9.9%, increase in cash and cash equivalents, a $466,000, or 2.4%, decrease in certificates of deposit, a $60,047,000, or 10.5%, increase in investment securities available-for-sale, and a $10,161,000, or 1.0%, decrease in net loans held-for-investment from December 31, 2023 to September 30, 2024. The increase in cash and cash equivalents was primarily due to an increase in deposit balances coupled with a decrease in loans due to proceeds from loan payoffs, net of loan originations, which was partially offset by an increase in investment securities due to net purchases of investment securities. The decrease in certificates of deposits was due to net maturities and repayments of certificates of deposit. The decrease in net loans held-for-investment was primarily due to net payoffs of agriculture, residential mortgage, and residential construction loans, which was partially offset by net originations of commercial, commercial real estate and consumer loans. The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an increase in total deposits of $39,598,000, or 2.3%, from December 31, 2023 to September 30, 2024. The overall increase in total deposits was primarily due to seasonal fluctuations due to changes in market conditions and monetary policy. CHANGES IN RESULTS OF OPERATIONS Interest Income The Federal Open Market Committee lowered the benchmark rate by 50 basis points to a target range of 4.75% - 5.00% during the quarter ended September 30, 2024. Interest income on loans for the nine months ended September 30, 2024 was up 9.0% from the same period in 2023, increasing from $38,197,000 to $41,620,000, and was up 9.3% for the three months ended September 30, 2024 over the same period in 2023, increasing from $13,098,000 to $14,315,000. The increase in interest income on loans for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to an increase in average balance of loans coupled with an 18 basis point increase in yield on loans. The increase in interest income on loans for the three months ended September 30, 2024 as compared to the same period a year ago was primarily due to an increase in average balance of loans coupled with a 39 basis point increase in yield on loans. Interest income on certificates of deposit for the nine months ended September 30, 2024 was down 2.5% from the same period in 2023, decreasing from $556,000 to $542,000, and was down 3.1% for the three months ended September 30, 2024 over the same period in 2023, decreasing from $194,000 to $188,000. The decrease in interest income on certificates of deposit for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of certificates of deposit, which was partially offset by a 52 basis point increase in yield on certificates of deposit. The decrease in interest income on certificates of deposit for the three months ended September 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of certificates of deposit, which was partially offset by a 44 basis point increase in yield on certificates of deposit. Interest income on interest-bearing due from banks for the nine months ended September 30, 2024 was down 20.8% from the same period in 2023, decreasing from $6,411,000 to $5,077,000, and was down 12.7% for the three months ended September 30, 2024 over the same period in 2023, decreasing from $1,870,000 to $1,632,000. The decrease in interest income on interest-bearing due from banks for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of interest-bearing due from banks, which was partially offset by a 42 basis point increase in yield on interest-bearing due from banks. The decrease in interest income on interest-bearing due from banks for the three months ended September 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of interest-bearing due from banks, which was partially offset by a 12 basis point increase in yield on interest-bearing due from banks. Interest income on investment securities available-for-sale for the nine months ended September 30, 2024 was up 18.5% from the same period in 2023, increasing from $8,733,000 to $10,344,000, and was up 35.2% for the three months ended September 30, 2024 over the same period in 2023, increasing from $2,884,000 to $3,898,000. The increase in interest income on investment securities for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to a 49 basis point increase in investment yields, which was partially offset by a decrease in average investment securities. The increase in interest income on investment securities for the three months ended September 30, 2024 as compared to the same period a year ago was primarily due to a 65 basis point increase in investment yields coupled with an increase in average investment securities. Interest income on other earning assets for the nine months ended September 30, 2024 was up 40.8% from the same period in 2023, increasing from $557,000 to $784,000, and was up 22.0% for the three months ended September 30, 2024 over the same period in 2023, increasing from $214,000 to $261,000. This income is primarily derived from dividends received from the Federal Home Loan Bank. The increase in interest income on other earning assets for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to a 250 basis point increase in yield on other earning assets coupled with an increase in average balances of other earning assets. The increase in interest income on other earning assets for the three months ended September 30, 2024 as compared to the same period a year ago was due to a 180 basis point increase in yield on other earning assets. 42 Index The Company had no Federal Funds sold balances during the three and nine months ended September 30, 2024 and September 30, 2023. Interest Expense Interest expense on deposits for the nine months ended September 30, 2024 was up 118.6% from the same period in 2023, increasing from $4,817,000 to $10,531,000, and was up 59.2% for the three months ended September 30, 2024 over the same period in 2023, increasing from $2,386,000 to $3,798,000. The increase in interest expense for the nine months ended September 30, 2024 as compared to the same period a year ago was primarily due to an 81 basis point increase in average interest-bearing deposit yield, which was partially offset by a decrease in average balance of interest-bearing liabilities. The increase in interest expense for the three months ended September 30, 2024 as compared to the same period a year ago was primarily due to a 59 basis point increase in average interest-bearing deposit yield, which was partially offset by a decrease in average balance of interest-bearing liabilities. Provision for Credit Losses Provision for credit losses for the nine months ended September 30, 2024 was down 93.6% from the same period in 2023, decreasing from $3,100,000 to $200,000, and was down 210.0% for the three months ended September 30, 2024 over the same period in 2023, decreasing from $500,000 to a reversal of provision of $550,000. The levels of forecasted national unemployment and forecasted gross domestic product remained relatively stable during the three and nine months ended September 30, 2024. The Company recognized a reversal of provision of $550 thousand during the three months ended September 30, 2024, primarily due to a substantial payoff of a non-performing commercial loan relationship. Non-Interest Income Non-interest income was down 26.4% for the nine months ended September 30, 2024 from the same period in 2023, decreasing from $6,155,000 to $4,529,000. The decrease was primarily driven by a bargain purchase gain recognized during the nine months ended September 30, 2023. The Company recognized a bargain purchase gain totaling approximately $1.4 million resulting from the acquisition of the Colusa, Willows, and Orland branches located in California in the first quarter of 2023. Non-interest income was down 13.4% for the three months ended September 30, 2024 from the same period in 2023, decreasing from $1,776,000 to $1,538,000. The decrease was primarily due to decreases in other income and losses on sales of securities. Non-Interest Expenses Total non-interest expenses were down 0.2% for the nine months ended September 30, 2024 from the same period in 2023, decreasing from $32,534,000 to $32,460,000. The decrease was primarily due to a decrease in salaries and employee benefits, which was partially offset by increases in occupancy and equipment and other expenses. The decrease in salaries and employee benefits was primarily due to a decrease in full-time equivalent employees and decreases in contingent compensation and profit sharing expense. The increase in occupancy and equipment expenses was primarily due to an increase in depreciation expense due to a full nine months of expenses related to the acquired branches in the first quarter of 2023. The increase in other expenses was primarily due to increases in loan collection expenses, which was partially offset by a decrease in legal fees. Total non-interest expenses were up 0.5% for the three months ended September 30, 2024 from the same period in 2023, increasing from $10,883,000 to $10,934,000. The decrease was primarily due to a decrease in salaries and employee benefits, which was partially offset by an increase in occupancy and equipment and data processing expense. The decrease in salaries and employee benefits was primarily due to a decrease in full-time equivalent employees. The increase in occupancy and equipment and data processing expense was primarily due to increases in service contracts partially due to a full year of additional processing related to new branches acquired in the first quarter of 2023. 43 Index The following table sets forth other non-interest expenses by category for the three and nine months ended September 30, 2024 and 2023. (in thousands) Three months ended September 30, 2024 Three months ended September 30, 2023 Nine months ended September 30, 2024 Nine months ended September 30, 2023 Other non-interest expenses FDIC assessments $ 210 $ 231 $ 633 $ 681 Contributions 76 79 242 190 Legal fees 59 88 238 428 Accounting and audit fees 151 134 472 451 Consulting fees 313 163 768 599 Postage expense 36 27 114 123 Telephone expense 35 37 108 124 Public relations 42 87 222 230 Training expense 43 37 127 165 Loan origination expense (39 ) 120 89 248 Computer software depreciation — 1 2 17 Sundry losses 167 80 421 203 Loan collection expense (recovery) 102 160 132 (294 ) Debit card expense 323 305 949 902 Other non-interest expense 460 437 1,522 1,296 Total other non-interest expenses $ 1,978 $ 1,986 $ 6,039 $ 5,363 44 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 increased 0.6% for the nine months ended September 30, 2024 from the same period in 2023, increasing from $5,486,000 to $5,517,000, and increased 31.2% for the three months ended September 30, 2024 from the same period in 2023, increasing from $1,648,000 to $2,162,000. The effective tax rate was 28.0% and 27.2% for the nine months ended September 30, 2024 and September 30, 2023, respectively. The effective tax rate was 28.3% and 26.3% for the three months ended September 30, 2024 and September 30, 2023, respectively. Off-Balance Sheet Commitments The following table shows the distribution of the Company’s undisbursed loan commitments at the dates indicated. (in thousands) September 30, 2024 December 31, 2023 Undisbursed loan commitments $ 158,836 $ 187,401 Standby letters of credit 895 1,251 Commitments to sell loans 960 — $ 160,691 $ 188,652 The reserve for unfunded lending commitments amounted to $950,000 and $1,150,000 as of September 30, 2024 and December 31, 2023, respectively. The reserve for unfunded lending commitments is included in other liabilities on the Condensed Consolidated Balance Sheets. See Note 7 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q, “Financial Instruments with Off-Balance Sheet Risk,” for additional information. 45 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 September 30, 2024 and December 31, 2023: At September 30, 2024 At December 31, 2023 Gross Guaranteed Net Gross Guaranteed Net (in thousands) Commercial $ 139 $ 139 $ — $ — $ — $ — Commercial real estate 466 — 466 — — — Agriculture 2,380 — 2,380 2,871 — 2,871 Residential mortgage 469 — 469 424 — 424 Residential construction — — — — — — Consumer 561 — 561 703 — 703 Total non-accrual loans $ 4,015 $ 139 $ 3,876 $ 3,998 $ — $ 3,998 It is generally the Company’s policy to discontinue interest accruals once a loan is past due for a period of 90 days as to interest or principal payments unless the loan is well secured and in process of collection. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected or there is an extended period of positive performance and a high probability that the loan will continue to pay according to original terms. Non-accrual loans amounted to $4,015,000 at September 30, 2024 and were comprised of one commercial loan totaling $139,000, one commercial real estate loan totaling $466,000, two agriculture loans totaling $2,380,000, four residential mortgage loans totaling $469,000 and three consumer loans totaling $561,000. Non-accrual loans amounted to $3,998,000 at December 31, 2023 and were comprised of two agriculture loans totaling $2,871,000, three residential mortgage loans totaling $424,000 and four consumer loans totaling $703,000. A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. It is generally the Company’s policy that if the value of the underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken. 46 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 $4,410,000, or 52.9%, to $3,924,000 during the first nine months of 2024. Non-performing assets, net of guarantees, represented 0.2% of total assets at September 30, 2024. At September 30, 2024 At December 31, 2023 Gross Guaranteed Net Gross Guaranteed Net (dollars in thousands) Non-accrual loans $ 4,015 $ 139 $ 3,876 $ 3,998 $ — $ 3,998 Loans 90 days past due and still accruing 48 — 48 4,336 — 4,336 Total non-performing loans 4,063 139 3,924 8,334 — 8,334 Other real estate owned — — — — — — Total non-performing assets $ 4,063 $ 139 $ 3,924 $ 8,334 $ — $ 8,334 Non-performing loans (net of guarantees) to total loans 0.4 % 0.8 % Non-performing assets (net of guarantees) to total assets 0.2 % 0.5 % Allowance for credit losses to non-performing loans (net of guarantees) 418.5 % 199.1 % The Company had one loan totaling $48,000 that was 90 days or more past due and still accruing as of September 30, 2024. The Company had two loans totaling $4,336,000 that were 90 days or more past due and still accruing as of December 31, 2023. Excluding the non-performing loans, net of guaranteed loans cited previously, loans totaling $13,876,000 and $12,327,000 were classified as substandard or doubtful loans, representing potential problem loans at September 30, 2024 and December 31, 2023, respectively. Management believes that the allowance for credit losses at September 30, 2024 and December 31, 2023 appropriately reflected expected credit losses in the loan portfolio at that date. The ratio of the allowance for credit losses to total loans was 1.55% at each of the periods ended September 30, 2024 and December 31, 2023. Other real estate owned (“OREO”) consists of property that the Company has acquired by deed in lieu of foreclosure or through foreclosure proceedings, and property that the Company does not hold title to but is in actual control of, known as in-substance foreclosure. The estimated fair value of the property is determined prior to transferring the balance to OREO. The balance transferred to OREO is the estimated fair value of the property less estimated cost to sell. Impairment may be deemed necessary to bring the book value of the loan equal to the appraised value. Appraisals or loan officer evaluations are then conducted periodically thereafter charging any additional impairment to the appropriate expense account. The Company had no OREO as of September 30, 2024 and December 31, 2023. 47 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 nine months ended September 30, 2024 and 2023, and for the year ended December 31, 2023: Analysis of the Allowance for Credit Losses (Amounts in thousands, except percentage amounts) Nine months ended September 30, Year ended December 31, 2024 2023 2023 Balance at beginning of period $ 16,596 $ 14,792 $ 14,792 Impact of adopting ASC 326 — 800 800 Provision for credit losses 400 3,250 1,150 Loans charged-off: Commercial (606 ) (269 ) (366 ) Commercial Real Estate — — — Agriculture — (2,567 ) (2,567 ) Residential Mortgage — (3 ) (3 ) Residential Construction — — — Consumer (19 ) (10 ) (13 ) Total charged-off (625 ) (2,849 ) (2,949 ) Recoveries: Commercial 47 155 235 Commercial Real Estate — — — Agriculture — — 2,567 Residential Mortgage — — — Residential Construction — — — Consumer 4 1 1 Total recoveries 51 156 2,803 Net charge-offs (574 ) (2,693 ) (146 ) Balance at end of period $ 16,422 $ 16,149 $ 16,596 Ratio of net charge-offs to average loans outstanding during the period (annualized) (0.07 %) (0.36 %) (0.01 %) Allowance for credit losses to total loans 1.55 % 1.53 % 1.55 % Nonaccrual loans to total loans 0.4 % 0.6 % 0.4 % Allowance for credit losses to nonaccrual loans 409.0 % 263.9 % 415.1 % 48 Index Deposits Deposits are one of the Company’s primary sources of funds. At September 30, 2024 and December 31, 2023, the Company had the following deposit mix: September 30, 2024 December 31, 2023 Non-interest bearing transaction 43.1 % 44.0 % Interest-bearing transaction 22.4 % 22.5 % Savings and MMDA 25.6 % 25.5 % Time 8.9 % 8.0 % The Company obtains deposits primarily from the communities it serves. The Company believes that no material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company accepts deposits in excess of $250,000 from customers. These deposits are priced to remain competitive. Maturities of time certificates of deposit of over $250,000 outstanding at September 30, 2024 and December 31, 2023 are summarized as follows: (in thousands) September 30, 2024 December 31, 2023 Three months or less $ 15,933 $ 4,321 Over three to six months 3,719 3,653 Over six to twelve months 14,732 13,277 Over twelve months 3,454 5,072 Total $ 37,838 $ 26,323 Approximately 40% and 37% of our deposits were uninsured as of September 30, 2024 and December 31, 2023, respectively. Liquidity and Capital Resources In order to serve our market area and comply with banking regulations, the Company must maintain adequate liquidity and adequate capital. Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be met from either the asset or liability side of the balance sheet. Asset liquidity sources consist of the repayments and maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Condensed Consolidated Statements of Cash Flows. For the nine months ended September 30, 2024, net liquidity used in investing activities totaled $35,296,000. The Company’s available-for-sale investment securities plus cash and cash equivalents in excess of reserve requirements and certificates of deposit totaled $815,566,000 on September 30, 2024, which was 42.2% of assets at that date. This was an increase of $74,288,000 from $741,278,000 and 39.6% of assets as of December 31, 2023. The Company’s investment securities are generally shorter term in nature to provide ongoing cash flows for liquidity needs and/or reinvestment for interest rate risk management. On September 30, 2024, the effective duration of our investment securities was 3.06 with projected principal cashflow of $50,012,000 for the remainder of 2024 available for reinvestment or liquidity needs. The Company had no held-to-maturity securities as of September 30, 2024 and December 31, 2023. Liquidity may also be impacted from liabilities through changes in deposits and borrowings outstanding. These activities are included under financing activities in the Condensed Consolidated Statements of Cash Flows. As of September 30, 2024, the Company had $0 in borrowings outstanding. For the nine months ended September 30, 2024, net liquidity provided by financing activities totaled $36,796,000, primarily due to a net increase in deposits. While these sources of funds are expected to continue to provide significant amounts of funds in the future, their mix, as well as the possible use of other sources, will depend on future economic and market conditions. Liquidity is also provided or used through the results of operating activities. For the nine months ended September 30, 2024, operating activities provided cash of $13,207,000. 49 Index Liquidity is measured by various ratios, in management’s opinion, the most common being the ratio of net loans to deposits (including loans held-for-sale). This ratio was 60.2% and 62.2% as of September 30, 2024 and December 31, 2023, respectively. Loan demand during the remainder of 2024 will depend in part on economic and competitive conditions. The Company emphasizes the solicitation of non-interest-bearing demand deposits and money market checking accounts, which are the least sensitive to interest rates. The outlook for deposit balances during the remainder of 2024 is subject to actions by the Federal Reserve and heightened competition. To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks which totaled $130,000,000 at September 30, 2024. Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity at September 30, 2024 of $394,192,000; credit availability is subject to certain collateral requirements. The Company’s primary source of liquidity on a stand-alone basis is dividends from the Bank. Dividends from the Bank are subject to regulatory restrictions. In July 2013, the FRB and the other U.S. federal banking agencies adopted final rules making significant changes to the U.S. regulatory capital framework for U.S. banking organizations and to conform this framework to the guidelines published by the Basel Committee known as the Basel III Global Regulatory Framework for Capital and Liquidity. The Basel Committee is a committee of banking supervisory authorities from major countries in the global financial system which formulates broad supervisory standards and guidelines relating to financial institutions for implementation on a country-by-country basis. These rules adopted by the FRB and the other federal banking agencies (the U.S. Basel III Capital Rules) replaced the federal banking agencies’ general risk-based capital rules, advanced approaches rule, market risk rule, and leverage rules, in accordance with certain transition provisions. Banks, such as First Northern, became subject to the final rules on January 1, 2015. The final rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. The final rules provide for increased minimum capital ratios as follows: (a) a common equity Tier 1 capital ratio of 4.5%; (b) a Tier 1 capital ratio of 6%; (c) a total capital ratio of 8%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4%. Under these rules, in order to avoid certain limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements (equal to 2.5% of total risk-weighted assets). The capital conservation buffer is designed to absorb losses during periods of economic stress. Pursuant to the EGRRCPA, the FRB adopted a final rule, effective August 31, 2018, amending the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (the “policy statement”) to increase the consolidated assets threshold to qualify to utilize the provisions of the policy statement from $1 billion to $3 billion. Bank holding companies, such as the Company, are subject to capital adequacy requirements of the FRB; however, bank holding companies which are subject to the policy statement are not subject to compliance with the regulatory capital requirements until they hold $3 billion or more in consolidated total assets. As a consequence, as of December 31, 2018, the Company was not required to comply with the FRB’s regulatory capital requirements until such time that its consolidated total assets equal $3 billion or more or if the FRB determines that the Company is no longer deemed to be a small bank holding company. However, if the Company had been subject to these regulatory capital requirements, it would have exceeded all regulatory requirements. In August of 2020, the Federal banking agencies adopted the final version of the community bank leverage ratio framework rule (the “CBLR”), implementing two interim final rules adopted in April of 2020. The rule provides an optional, simplified measure of capital adequacy. Under the optional CBLR framework, the CBLR was 8.5 percent through calendar year 2021 and is 9 percent thereafter. The rule is applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets. Banks not electing the CBLR framework will continue to be subject to the generally applicable risk-based capital rule. At the present time, the Company and the Bank do not intend to elect to use the CBLR framework. 50 Index As of September 30, 2024, the Bank’s capital ratios exceeded applicable regulatory requirements. The following table presents the capital ratios for the Bank, compared to the regulatory standards for well-capitalized depository institutions, excluding the capital conservation buffer, as of September 30, 2024. (amounts in thousands except percentage amounts) Actual Well Capitalized Capital Ratio Ratio Requirement Leverage $ 199,232 10.3 % 5.0 % Common Equity Tier 1 $ 214,812 16.0 % 6.5 % Tier 1 Risk-Based $ 214,812 16.0 % 8.0 % Total Risk-Based $ 214,812 17.3 % 10.0 % 51 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 September 30, 2024, from those presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023, which are incorporated by reference herein. ITEM 4. – CONTROLS AND PROCEDURES (a) We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2024. This conclusion is based on an evaluation conducted under the supervision and with the participation of management. (b) During the quarter ended September 30, 2024, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. PART II – OTHER INFORMATION ITEM 1. – LEGAL PROCEEDINGS Neither the Company nor the Bank is a party to any material pending legal proceeding, nor is any of their property the subject of any material pending legal proceeding, except ordinary routine litigation arising in the ordinary course of the Bank’s business and incidental to its business, none of which is expected to have a material adverse impact upon the Company’s or the Bank’s business, financial position or results of operations. ITEM 1A. – RISK FACTORS For a discussion of risk factors relating to our business, please refer to Part I, Item 1A of our 2023 Form 10-K, which is incorporated by reference herein, and to the following: Several of California’s Largest Home Insurance Providers Have Recently Paused or Severely Limited Their Issuance of New Policies, or Their Renewal of Existing Policies, in the State, Which Could Increase the Bank’s Risk of Loss in its Loan Portfolio At September 30, 2024, loans secured by real estate comprised approximately 87% of the total loans in the Bank’s portfolio. At September 30, 2024, all of the Bank’s real estate mortgage and construction loans were secured fully or in part by deeds of trust on underlying real estate. Most of the Company’s customers, including its loan customers, are located in the State of California. Recently, several of California’s largest home insurance providers, including State Farm, Allstate, Farmers, USAA, Travelers, Nationwide and Chubb, have either paused or severely limited their issuance of new policies, or their renewal of existing policies, in the state. Mounting claims from wildfire damages, the increasing cost of building and repairing homes in California, and a steep increase in reinsurance premiums, as well as state insurance regulations that make it difficult for insurers to adjust premiums in response to the evolving risk landscape, have challenged the capacity of insurance companies to sustainably and profitably offer home insurance in California. The result of these actions has been to significantly limit the availability of home insurance in California, where homeowners already face escalating property values and high wildfire, seismic, severe weather and other risks. The California Department of Insurance enforces some safeguards to temporarily shield homeowners from the cancellation or non-renewal of home insurance policies in high-risk areas, particularly those prone to wildfires. In addition, the California Fair Access to Insurance Requirements (FAIR) Plan, a state-established risk pool, operates as an insurer of last resort, providing temporary coverage for California homeowners unable to obtain (generally at increased premium cost) such coverage from a traditional insurance carrier; however, enrollment in the FAIR Plan as a percentage of the total number of residential insurance policies in California has steadily increased over the past five years, particularly in counties with the highest wildfire risk, threatening the ongoing stability of the Plan. In late 2023, following the California Governor’s declaration of a State of Emergency regarding property insurance, the Insurance Commissioner of the State of California introduced a comprehensive package of executive actions aimed at insurance reform. In August 2024, the California Department of Insurance issued proposed regulations intended to cause insurance companies to write more policies in wildfire distressed areas of California as a condition for using forward-looking wildfire modeling designed to more accurately assess wildfire risks and to reverse FAIR Plan growth. There can be no assurance that these regulatory actions will increase insurance availability or stabilize and strengthen California’s insurance market. 52 Index Many homeowners in the State of California have been negatively impacted by the contraction of insurance options in the State and the resulting lack of access to affordable home insurance, which could adversely impact the ability of prospective homebuyers to obtain insurance, and escalating premiums and limited coverage options could result in limiting coverage in the event of loss. If any loss suffered by a loan customer of the Bank is not insured or exceeds applicable insurance limits, this could increase the risk of loss in the Bank’s loan portfolio, which could have a material adverse effect on the Company’s business, financial condition, and results of operations. For additional information, see “The Bank’s Dependence on Real Estate Lending Increases Our Risk of Losses” in Part I, Item 1A “Risk Factors” in our 2023 Annual Report on Form 10-K. Increases in the Allowance for Credit Losses Would Adversely Affect the Bank’s Financial Condition and Results of Operations The Bank’s allowance for credit losses on loans was approximately $16.4 million, or 1.55% of total loans, at September 30, 2024, compared to $16.6 million, or 1.55% of total loans, at December 31, 2023, and 418.5% of total non-performing loans net of guaranteed portions at September 30, 2024, compared to 199.1% of total non-performing loans, net of guaranteed portions at December 31, 2023. Reversal of provision for credit losses totaling $550 thousand and provision for credit losses totaling $500 thousand for the three-month periods ended September 30, 2024 and September 30, 2023, respectively . Provision for credit losses totaling $200 thousand and $3.1 million for the nine-month periods ended September 30, 2024 and September 30, 2023, respectively . Material future additions to the allowance for estimated losses on loans may be necessary if material adverse changes in economic conditions in our markets were to continue to occur and the performance of the Bank’s loan portfolio were to deteriorate. Other real estate owned is initially recorded at fair value less estimated costs to sell the property, thereby establishing the new cost basis of other real estate. Losses arising at the time of acquisition of such properties are charged against the allowance for credit losses. Subsequent to acquisition, such properties are carried at the lower of cost or fair value less estimated selling expenses, determined on an individual asset basis. Any deficiency resulting from the excess of cost over fair value less estimated selling expenses is recognized as a valuation allowance. Any subsequent increase in fair value up to its cost basis is recorded as a reduction of the valuation allowance. The FDIC and the California DFPI, as an integral part of their examination process, periodically review the Bank’s allowance for credit losses on loans and the carrying value of its assets. Increases in the provision for credit losses on loans and valuation allowance on foreclosed assets would adversely affect the Bank’s financial condition and results of operations. The Bank’s Dependence on Real Estate Lending Increases Our Risk of Losses The Bank’s primary lending focus has historically been commercial (including agricultural), construction, and real estate mortgage. At September 30, 2024, loans secured by real estate comprised approximately 87% of the total loans in the Bank’s portfolio. At September 30, 2024, all of the Bank’s real estate mortgage and construction loans and approximately 1% of its commercial loans were secured fully or in part by deeds of trust on underlying real estate. The Company’s dependence on real estate increases the risk of loss in both the Bank’s loan portfolio and its holdings of other real estate owned if economic conditions in Northern California were to deteriorate. Deterioration of the real estate market in Northern California would have a material adverse effect on the Company’s business, financial condition, and results of operations. The CFPB has adopted various regulations which have impacted, and will continue to impact, our residential mortgage lending business. 53 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 September 30, 2024: (a) (b) (c) (d) Period Total number of shares purchased Average price paid per share Number of shares purchased as part of publicly announced plans or programs Maximum number of shares that may yet be purchased under the plans or programs (1) July 1 - July 31, 2024 — — — 795,543 August 1 - August 31, 2024 52,667 $ 9.81 52,667 742,876 September 1 - September 30, 2024 103,111 $ 10.09 103,111 639,765 Total 155,778 155,778 (1) On March 27, 2024, the Company approved a stock repurchase program effective May 1, 2024. The stock repurchase program, which remains in effect until April 30, 2026 unless terminated sooner, allows repurchases by the Company in an aggregate amount of no more than 6% of the Company’s 15,550,731 outstanding shares of common stock as of March 21, 2024. This represented total shares of 933,043 eligible for repurchase at May 1, 2024. ITEM 3. – DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. – MINE SAFETY DISCLOSURES Not applicable. ITEM 5. – OTHER INFORMATION None . 54 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. 55 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: November 8, 2024 By: /s/ Kevin Spink Kevin Spink, Executive Vice President / Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) 56