UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________.
Commission File Number 000-30707
First Northern Community Bancorp
(Exact name of Registrant as specified in its charter)
California
  
68-0450397
(State or other jurisdiction of incorporation or organization)
  
(I.R.S. Employer Identification Number)

195 N. First St., Dixon, CA
  
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

Securities registered pursuant to Section 12(g) of the Act: Common Stock, no par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes  ☐
No  ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes  ☐
No  ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 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, if any, 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes  ☐
No  ☒

The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant on June 30, 2024 (based upon the last reported sales price of such stock on the OTC Markets) was $125,391,497.
The number of shares of the registrant’s Common Stock outstanding as of March 3, 2025 was 15,184,687.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 (as to security ownership of certain beneficial owners and management), 13 and 14 of Part III incorporate by reference information from the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s 2025 Annual Meeting of Shareholders.

TABLE OF CONTENTS
PART I
Page
Item   1
  5
     
Item   1A
16
     
Item   1B
 28
     
Item   1C
28
     
Item   2
29
     
Item   3
29
     
Item   4
29
     
PART II
  
Item   5
30
     
Item   6
32
     
Item   7
33
     
Item   7A
57
     
Item   8
58
     
Item   9
116
     
Item   9A
116
     
Item   9B
116
     
Item   9C
116
     
PART III
  
Item 10
117
     
Item 11
117
     
Item 12
118
     
Item 13
118
     
Item 14
118
     
PART IV
  
     
Item 15
119
     
Item 16
122
     
123

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes 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 this report for factors to be considered when reading any forward-looking statements in this filing.

This report includes 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,” “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 the forward-looking statements are made.

In this document, for example, we make forward-looking statements, which discuss our expectations about:


 ●
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


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Our assessment of significant factors and developments that have affected or may affect our results


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Legal and regulatory actions, and future legislative and regulatory developments


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Regulatory and compliance controls, processes and requirements and their impact on our business


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The costs and effects of legal or regulatory actions


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Expectations regarding draws on performance letters of credit and liabilities that may result from recourse provisions in standby letters of credit


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Our intent to sell or hold, and the likelihood that we would be required to sell, various investment securities


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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


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Expectations regarding our non-payment of a cash dividend on our common stock in the foreseeable future


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Credit quality and provision for credit losses and management of asset quality and credit risk, expectations regarding collections and the timing thereof


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Our allowances for credit losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, the adequacy of the allowance for credit losses, underwriting standards, and risk grading


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


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The seasonal nature of our business


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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


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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


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

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


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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


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


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Our pension and retirement plan costs


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Our liquidity strategies and beliefs concerning the adequacy of our liquidity, sources and amounts of funds and ability to satisfactorily manage our liquidity


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


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


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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


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Maintenance of insurance coverages appropriate for our operations


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


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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


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The possible effects on community banks and our business from the failures of other banks


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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


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 this “Note Regarding Forward-Looking Statements,” Part I, Item 1A “Risk Factors,” Part II and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and in our other reports to the SEC.

Readers of this document should not rely unduly on forward-looking information and should consider all uncertainties and risks disclosed throughout this document and in our other reports to the SEC, including, but not limited to, those discussed below. Any factor described in this report could by itself, or together with one or more other factors, adversely affect our business, future prospects, results of operations, or financial condition.  We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions, or events that occur after the date the forward-looking statements are made.

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PART I

ITEM 1 - BUSINESS

General

First Northern Community Bancorp (the “Company”) is a bank holding company registered under the Bank Holding Company Act of 1956, as amended (“BHCA”). Its legal headquarters and principal administrative offices are located at 195 N. First Street, Dixon, CA 95620 and its telephone number is (707) 678-3041. The Company provides a full range of community banking services to individual and corporate customers throughout the California Counties of Solano, Yolo, Placer, and Sacramento as well as portions of El Dorado County through its wholly-owned subsidiary bank, First Northern Bank of Dixon (“First Northern” or the “Bank”). The Company’s operating policy since inception has emphasized the banking needs of individuals and small- to medium-sized businesses. In addition, the Bank owns 100% of the capital stock of Yolano Realty Corporation, a subsidiary created for the purpose of managing selected other real estate owned properties.

The Bank was established in 1910 under a California state charter as Northern Solano Bank, and opened for business on February 1st of that year. On January 2, 1912, the First National Bank of Dixon was established under a federal charter, and until 1955, the two entities operated side by side under the same roof and with the same management. In an effort to increase efficiency of operation, reduce operating expense, and improve lending capacity, the two banks were consolidated on April 8, 1955, with the First National Bank of Dixon as the surviving entity. On January 1, 1980, the Bank's federal charter was relinquished in favor of a California state charter, and the Bank's name was changed to First Northern Bank of Dixon.

In April of 2000, the shareholders of First Northern approved a corporate reorganization, which provided for the creation of the bank holding company. This reorganization, effected May 19, 2000, enabled the Company to better compete and grow in its competitive and rapidly changing marketplace.

On January 20, 2023, the Company completed the acquisition of three branches of Columbia State Bank, a Washington state-chartered commercial bank (“Columbia”), and a wholly-owned subsidiary of Columbia Banking System, Inc., in the California towns of Colusa, Orland and Willows. This acquisition enabled the Company to extend its existing footprint.  The aggregate deposits assumed totaled approximately $116 million, and the aggregate principal balance of the loans acquired totaled approximately $4 million.

The Bank has fourteen full-service branches located in the cities of Auburn, Colusa, Davis, Dixon, Fairfield, Orland, Rancho Cordova, Roseville, Sacramento, Vacaville, West Sacramento, Winters, Willows and Woodland. The Bank has one satellite banking office inside a retirement community in the city of Davis and a residential mortgage loan office in Davis. The Bank engages financial advisors, through Raymond James Financial Services, Inc., who offer non-FDIC insured investment and brokerage services throughout the region from offices strategically located in West Sacramento, Davis and Auburn.  The Bank’s operations center is located in Dixon and provides back-office support including information services, central operations, and the central loan department.  In 2019, the Bank opened an additional administrative office in Sacramento.

The Bank is in the commercial banking business and generates most of its revenue by providing a wide range of products and services to small- and medium-sized businesses and individuals, including accepting demand, interest bearing transaction, savings, and time deposits, and making commercial, consumer, and real estate related loans. It also rents safe deposit boxes and provides other customary banking services.
 
First Northern offers a broad range of alternative investment products, fiduciary and other financial services through Raymond James Financial Services, Inc.  First Northern also offers equipment leasing, credit cards, merchant card processing, payroll services, and limited international banking services through third parties.
 
The Bank’s principal source of revenue is interest income. Interest income is primarily derived from interest and fees on loans and leases, interest on investments, and due from banks interest bearing accounts. For the year ended December 31, 2024, these sources comprised approximately 70%, 19%, and 9%, respectively, of the Company’s interest income.
 
The Bank is a member of the Federal Deposit Insurance Corporation ("FDIC") and all deposit accounts are insured by the FDIC to the maximum amount permitted by law, currently $250,000 per depositor. Most of the Bank's deposits are attracted from the market of northern and central Solano County, southern and central Yolo County and Placer County. The Bank’s deposits are not received from a single depositor or group of affiliated depositors, the loss of any one which would have a materially adverse impact on the business of the Bank. A material portion of the Bank’s deposits are not concentrated within a single industry group of related industries.
 
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As of December 31, 2024, the Company had consolidated assets of approximately $1.89 billion, liabilities of approximately $1.72 billion and stockholders’ equity of approximately $176.3 million. The Company and its subsidiaries employed 187 full-time-equivalent employees as of December 31, 2024.  The Company and the Bank consider their relationship with their employees to be good and have not experienced any interruptions of operations due to labor disagreements.

Available Information

The Company makes available free of charge on its website, www.thatsmybank.com, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC.  These filings are also accessible on the SEC’s website at www.sec.gov.  The information found on the Company’s website shall not be deemed incorporated by reference by any general statement incorporating by reference this report into any filing under the Securities Act of 1933 or under the Securities Exchange Act of 1934 and shall not otherwise be deemed filed under such Acts.

The Effect of Government Policy on Banking

The earnings and growth of the Bank are affected not only by local market area factors and general economic conditions, but also by government monetary and fiscal policies.  For example, the Board of Governors of the Federal Reserve System (“FRB”) influences the supply of money through its open market operations in U.S. Government securities, adjustments to the discount rates applicable to borrowings by depository institutions and others and establishment of reserve requirements against both member and non-member financial institutions’ deposits.  Such actions significantly affect the overall growth and distribution of loans, investments, and deposits and also affect interest rates charged on loans and paid on deposits.  The nature and impact of future changes in economic conditions and governmental policies on the business and earnings of the Company cannot be predicted.  Additionally, state and federal tax policies can impact banking organizations.

Because of the extensive regulation of commercial banking activities in the United States, the business of the Company is particularly susceptible to being affected by the enactment of federal and state legislation which may have the effect of increasing or decreasing the cost of doing business, modifying permissible activities or enhancing the competitive position of other financial institutions.  Any change in applicable laws, regulations, or policies may have a material adverse effect on the business, financial condition, or results of operations, or prospects of the Company.

In May 2018, President Trump signed into law the Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”) which amended various provisions of the Dodd-Frank Act as well as other federal banking statutes, and generally authorized the FRB to tailor regulation to better reflect the character of the different banking firms that the FRB supervises.  In August 2018, the FRB began implementing the EGRRCPA with several interim final rules which, among other things, revised the FRB’s Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (the “policy statement”) to raise the consolidated assets threshold from $1 billion to $3 billion, allowing the Company to qualify under the policy statement.  This policy statement applies to bank holding companies with pro forma consolidated assets of less than $3 billion that (i) are not engaged in significant nonbanking activities either directly or through a nonbank subsidiary; (ii) do not conduct significant off-balance sheet activities (including securitization and asset management or administration) either directly or through a nonbank subsidiary; and (iii) do not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC.  This policy statement permits qualifying bank holding companies, such as the Company, to operate with higher levels of debt, facilitating the ability of community banks to issue debt and raise capital.  Qualifying bank holding companies, such as the Company, also are permitted to be examined by a Federal banking agency every 18 months (as opposed to every 12 months) and are eligible to use shorter call report forms.  Whether and to what extent the EGRRCPA or new legislation will result in additional regulatory initiatives and policies, or modifications of existing regulations and policies, which may impact our business, cannot be predicted at this time.  See "Possible Future Legislation and Regulatory Initiatives" below for more information.

The new Trump Administration has indicated a desire to reduce the regulatory burden on U.S. companies, including financial institutions.  See “Possible Future Legislation and Regulatory Initiatives” below for additional information.

Supervision and Regulation of Bank Holding Companies

The Company is a bank holding company subject to the BHCA.  The Company reports to, registers with, and is subject to regulation, supervision and examination by, the FRB.  The FRB also has the authority to examine the Company’s subsidiaries.  The costs of any examination by the FRB are payable by the Company.

The FRB has significant supervisory, regulatory and enforcement authority over the Company and its affiliates.  The FRB requires the Company to maintain certain levels of capital.  See “Capital Standards” below for more information.  The FRB also has the authority

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to take enforcement action against any bank holding company that commits any unsafe or unsound practice, or violates certain laws, regulations, or conditions imposed in writing by the FRB.  See “Prompt Corrective Action and Other Enforcement Mechanisms” below for more information.  Such enforcement powers include the power to assess civil money penalties against any bank holding company violating any provision of the BHCA or any regulation or order of the FRB under the BHCA. Knowing violations of the BHCA or regulations or orders of the FRB can also result in criminal penalties for the bank holding company and any individuals participating in such conduct.  Under long-standing FRB policy and provisions of the Dodd-Frank Act, bank holding companies are required to act as a source of financial and managerial strength to their subsidiary banks, and to commit resources to support their subsidiary banks.  This support may be required at times when a bank holding company may not have the resources to provide such support, or may not be inclined to provide such support under the then-existing circumstances.

Under the BHCA, a company generally must obtain the prior approval of the FRB before it exercises a controlling influence over a bank, or acquires, directly or indirectly, more than 5% of the voting shares or substantially all of the assets of any bank or bank holding company.  Thus, the Company is required to obtain the prior approval of the FRB before it acquires, merges, or consolidates with any bank or bank holding company.  Any company seeking to acquire, merge, or consolidate with the Company also would be required to obtain the prior approval of the FRB.

The Company is generally prohibited under the BHCA from acquiring ownership or control of more than 5% of the voting shares of any company that is not a bank or bank holding company and from engaging directly or indirectly in activities other than banking, managing banks, or providing services to affiliates of the holding company.  However, a bank holding company, with the approval of the FRB, may engage, or acquire the voting shares of companies engaged, in activities that the FRB has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.  A bank holding company must demonstrate that the benefits to the public of the proposed activity will outweigh the possible adverse effects associated with such activity.

The FRB generally prohibits a bank holding company from declaring or paying a cash dividend which would impose undue pressure on the capital of subsidiary banks or would be funded only through borrowing or other arrangements that might adversely affect a bank holding company’s financial position.  The FRB’s policy is that a bank holding company should not continue its existing rate of cash dividends on its common stock unless its net income is sufficient to fully fund each dividend and its prospective rate of earnings retention appears consistent with its capital needs, asset quality, and overall financial condition.  The Company is also subject to restrictions relating to the payment of dividends under California corporate law.  See “Restrictions on Dividends and Other Distributions” below for additional restrictions on the ability of the Company and the Bank to pay dividends.

Supervision and Regulation of the Bank

The Bank is subject to regulation, supervision and regular examination by the Financial Institutions Division of the California Department of Financial Protection and Innovation ("DFPI") and the FDIC.  The regulations of and laws administered by these agencies affect most aspects of the Bank’s business and prescribe permissible types of loans and investments, the amount of required reserves, requirements for branch offices, the permissible scope of the Bank’s activities and various other requirements.  While the Bank is not a member of the FRB, it is directly subject to certain regulations of the FRB dealing with such matters as check clearing activities, establishment of banking reserves, Truth-in-Lending (“Regulation Z”), and Equal Credit Opportunity (“Regulation B”).  The FDIC regularly conducts compliance examinations of insured depository institutions to determine whether the institution is meeting its responsibility to comply with the requirements of consumer protection laws and regulations.  The Bank is also subject to regulations of (although not direct supervision and examination by) the Consumer Financial Protection Bureau (“CFPB”), which was created by the Dodd-Frank Act. Among the CFPB’s responsibilities are implementing and enforcing federal consumer financial protection laws, reviewing the business practices of financial services providers for legal compliance, monitoring the marketplace for transparency on behalf of consumers and receiving complaints and questions from consumers about consumer financial products and services. The Dodd-Frank Act added prohibitions on unfair, deceptive or abusive acts and practices to the scope of consumer protection regulations overseen and enforced by the CFPB.

Many states and local jurisdictions have consumer protection laws analogous, and in addition, to those listed above. These federal, state and local laws regulate the manner in which financial institutions deal with customers when taking deposits, making loans or conducting other types of transactions. Failure to comply with these laws and regulations could give rise to regulatory sanctions, customer rescission rights, action by state and local attorneys general and civil or criminal liability. Failure to comply with consumer protection requirements may also result in our failure to obtain any required bank regulatory approval for merger or acquisition transactions we may wish to pursue or our prohibition from engaging in such transactions even if approval is not required.  See “Possible Future Legislation and Regulatory Initiatives” below for additional information about potential changes to the CFPB and consumer protection laws and enforcement.

The banking industry is also subject to significantly increased regulatory controls and processes regarding the Bank Secrecy Act and anti-money laundering laws.  Over the past decade, a number of banks and bank holding companies announced the imposition of regulatory sanctions, including regulatory agreements and cease and desist orders and, in some cases, fines and penalties, by the bank

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regulators due to failures to comply with the Bank Secrecy Act and other anti-money laundering legislation.  In a number of these cases, the fines and penalties have been significant.  Failure to comply with these additional requirements may also adversely affect the Bank's ability to obtain regulatory approvals for future initiatives requiring regulatory approval, including acquisitions.

Under California law, the Bank is subject to various restrictions on, and requirements regarding, its operations and administration including the maintenance of branch offices and automated teller machines, capital and reserve requirements, deposits and borrowings, and investment and lending activities.

California law permits a state-chartered bank to invest in the stock and securities of other corporations, subject to a state-chartered bank receiving either general authorization or, depending on the amount of the proposed investment, specific authorization from the DFPI.  Federal banking laws, however, impose limitations on the activities and equity investments of state-chartered, federally insured banks.  The FDIC rules on investments prohibit a state bank from acquiring an equity investment of a type, or in an amount, not permissible for a national bank.  FDIC rules also prohibit a state bank from engaging as a principal in any activity that is not permissible for a national bank, unless the bank is adequately capitalized and the FDIC approves the activity after determining that such activity does not pose a significant risk to the deposit insurance fund.  The FDIC rules on activities generally permit subsidiaries of banks, without prior specific FDIC authorization, to engage in those activities that have been approved by the FRB for bank holding companies because such activities are so closely related to banking to be a proper incident thereto.  Other activities generally require specific FDIC prior approval, and the FDIC may impose additional restrictions on such activities on a case-by-case basis in approving applications to engage in otherwise impermissible activities.

The USA Patriot Act

Title III of the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”) includes numerous provisions for fighting international money laundering and blocking terrorism access to the U.S. financial system.  The USA Patriot Act requires certain additional due diligence and record keeping practices, including, but not limited to, new customers, correspondent and private banking accounts.

Part of the USA Patriot Act is the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (“IMLAFATA”).  Among its provisions, IMLAFATA requires each financial institution to: (i) establish an anti-money laundering program; (ii) establish appropriate anti-money laundering policies, procedures, and controls; (iii) appoint a Bank Secrecy Act officer responsible for day-to-day compliance; and (iv) conduct independent audits.  In addition, IMLAFATA contains a provision encouraging cooperation among financial institutions, regulatory authorities, and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities.  IMLAFATA expands the circumstances under which funds in a bank account may be forfeited and requires covered financial institutions to respond under certain circumstances to requests for information from federal banking agencies within 120 hours.  IMLAFATA also amends the BHCA and the federal Bank Merger Act to require the federal banking agencies to consider the effectiveness of a financial institution’s anti-money laundering activities when reviewing an application under these Acts.

Pursuant to IMLAFATA, the Secretary of the Treasury, in consultation with the heads of other government agencies, has adopted measures applicable to banks, bank holding companies, and/or other financial institutions.  These measures include enhanced record keeping and reporting requirements for certain financial transactions that are of primary money laundering concern, due diligence requirements concerning the beneficial ownership of certain types of accounts, and restrictions or prohibitions on certain types of accounts with foreign financial institutions.

Privacy Restrictions

The Gramm-Leach-Bliley Act (“GLBA”), which became law in 1999, in addition to the previous described changes in permissible non-banking activities permitted to banks, bank holding companies and financial holding companies, also requires financial institutions in the U.S. to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to non-affiliated third parties.  In general, the GLBA requires explanations to consumers on policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required by law, prohibits disclosing such information except as provided in the banks’ policies and procedures and applicable law. These regulations also allow consumers to opt-out of the sharing of certain information between affiliates, and impose other requirements.

Certain state laws and regulations designed to protect the privacy and security of customer information also apply to us and our subsidiaries, including laws requiring notification to affected individuals and regulators of data security breaches. For additional information, see “Information Security Breaches or Other Technological Difficulties Could Adversely Affect the Company” in Part I, Item 1A. “Risk Factors” in this Annual Report on Form 10-K.

The Company believes that it complies with all provisions of GLBA and all implementing regulations, and that the Bank has

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developed appropriate policies and procedures to meet its responsibilities in connection with the privacy provisions of GLBA.

California and other state legislatures have adopted privacy laws, including laws prohibiting sharing of customer information without the customer’s prior permission.  These laws may make it more difficult for the Company to share information with its marketing partners, reduce the effectiveness of marketing programs, and increase the cost of marketing programs.
 
In June 2018, the State of California enacted The California Consumer Privacy Act of 2018 (“CCPA”).  This law became effective on January 1, 2020, and provides consumers with expansive rights and controls over their personal information which is obtained by or shared with “covered businesses”, which includes the Bank and most other banking institutions subject to California law. The CCPA gives consumers the right to request disclosure of information collected about them and whether that information has been sold or shared with others, the right to request deletion of personal information subject to certain exceptions, the right to opt out of the sale of the consumer’s personal information and the right not to be discriminated against because of choices regarding the consumer’s personal information. The CCPA provides for certain monetary penalties and for its enforcement by the California Attorney General or consumers whose rights under the law are not observed. It also provides for damages as well as injunctive or declaratory relief if there has been unauthorized access, theft or disclosure of personal information due to failure to implement reasonable security procedures. The CCPA contains several exemptions, including a provision to the effect that the CCPA does not apply where the information is collected, processed, sold or disclosed pursuant to the GLBA if the GLBA is in conflict with the CCPA.
 
In November 2020, California voters approved state-wide Proposition 24, also known as the California Privacy Rights and Enforcement Act of 2020 (the “CPREA") which expanded and amended certain provisions of the CCPA and created the California Privacy Protection Agency to enforce privacy rights for Californians and impose fines for violations of such rights.  The CPREA requires businesses to not share a consumer’s personal information upon the consumer’s request, provides consumers with an opt-out option for having their sensitive personal information used or disclosed for advertising or marketing, to obtain permission for collecting data on certain minors, and to correct a consumer’s inaccurate information upon the consumer’s request.  It also removed the ability of businesses to remedy violations before being penalized for violations and increased the penalties for such violations.
 
These laws could adversely impact the business of the Bank by resulting in increased operating expenses as well as additional exposure to the risk of litigation by or on behalf of consumers.
 
Capital Standards

The FRB and the federal banking agencies have in place risk-based capital standards applicable to U.S. bank holding companies and banks.  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 on Banking Supervision ("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 these rules on January 1, 2015.  The rules implemented higher minimum capital requirements, include a common equity Tier 1 capital requirement, and established 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 provided 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.  First Northern believes that it was in compliance with these requirements at December 31, 2024.

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, 2024, 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.

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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% through calendar year 2021 and 9% 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, while we are a qualifying community banking organization, the Company and the Bank do not intend to elect to use the CBLR framework.

The following table presents the capital ratios for the Bank as of December 31, 2024 (calculated in accordance with the Basel III capital rules):

 
The Bank
  
 
2024
  
Adequately Capitalized
  
Well
Capitalized
  
 
Capital
  
Ratio
  
Ratio*
  
Ratio
  
Tier 1 Leverage Capital (to Average Assets)
  
$
205,326
      
10.5
%
    
4.0
%
    
5.0
%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
    
205,326
      
16.4
%
    
4.5
%
    
6.5
%
Tier 1 Capital (to Risk-Weighted Assets)
    
205,326
      
16.4
%
    
6.0
%
    
8.0
%
Total Risk-Based Capital (to Risk-Weighted Assets)
    
220,977
      
17.7
%
    
8.0
%
    
10.0
%

* Ratio for regulatory requirement excludes the capital conservation buffer of 2.50%.

The federal banking agencies must take into consideration concentrations of credit risk and risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital.  This evaluation will be made as a part of the institution’s regular safety and soundness examination.  The federal banking agencies must also consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in evaluating a Bank’s capital adequacy.

In January 2014, the Basel Committee issued an updated version of its leverage ratio and disclosure guidance ("Basel III leverage ratio"), which were implemented beginning January 1, 2023.  The Basel Committee guidance continues to set a minimum Basel III leverage ratio of 3%.  The Basel Committee, in December 2017, adopted further revisions to the Basel III capital standards ("Basel IV") which refined the definition of the leverage ratio “exposure measures” (the Basel III term for non risk-weighted assets).  On July 27, 2023, the federal banking agencies issued a proposed rule to implement the final components of the Basel III standards set by the Basel Committee on Banking Supervision in 2017. The proposed rule, which would not apply to the Company and the Bank as proposed, would substantially revise the existing regulatory capital framework for institutions with $100 billion or more of assets.

The new Trump Administration may consider adjustments to these capital and liquidity rules. Whether and the extent to which these proposed rules, or modifications of existing regulations and policies, which may impact our business, will be enacted and implemented is uncertain and cannot be predicted at this time.

Prompt Corrective Action and Other Enforcement Mechanisms

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) requires each federal banking agency to take prompt corrective action to resolve the problems of insured depository institutions, including but not limited to those that fall below one or more prescribed minimum capital ratios.  The law required each federal banking agency to promulgate regulations defining the following five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well capitalized, adequately capitalized, under-capitalized, significantly undercapitalized, and critically undercapitalized.

Under the prompt corrective action provisions of FDICIA, an insured depository institution generally will be classified in one of five capital categories ranging from "well capitalized" to "critically under-capitalized."

An institution that, based upon its capital levels, is classified as “well capitalized,” “adequately capitalized” or “under-capitalized” may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment.  At each successive lower capital category, an insured depository institution is subject to increased restrictions on its operations.  Management believes that at December 31, 2024, the Company and the Bank exceeded the required ratios for classification as “well capitalized."  Institutions that are “under-capitalized” or lower are subject to certain mandatory supervisory corrective actions.  Failure to meet regulatory capital guidelines can result in a bank being required to raise additional capital. An

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“under-capitalized” bank must develop a capital restoration plan and its parent holding company must generally guarantee compliance with the plan.

In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement with the agency.  Enforcement actions may include the imposition of a conservator or receiver, the issuance of a cease-and-desist order that can be judicially enforced, the termination of insurance of deposits (in the case of a depository institution), the imposition of civil money penalties, the issuance of directives to increase capital, the issuance of formal and informal agreements, the issuance of removal and prohibition orders against institution-affiliated parties and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.  Additionally, a holding company’s inability to serve as a source of strength to its subsidiary banking organizations could serve as a further basis for a regulatory action against the holding company.

Safety and Soundness Standards

FDICIA also implemented certain specific restrictions on transactions and required federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth.  Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder, or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts.

The federal banking agencies may require an institution to submit to an acceptable compliance plan as well as have the flexibility to pursue other more appropriate or effective courses of action given the specific circumstances and severity of an institution’s non-compliance with one or more standards.

Restrictions on Dividends and Other Distributions

The power of the board of directors of an insured depository institution to declare a cash dividend or other distribution with respect to capital is subject to statutory and regulatory restrictions which limit the amount available for such distribution depending upon the earnings, financial condition and liquidity needs of the institution, as well as general business conditions.  FDICIA prohibits insured depository institutions from paying management fees to any controlling persons or, with certain limited exceptions, making capital distributions, including dividends, if, after such transaction, the institution would be undercapitalized.

The federal banking agencies also have authority to prohibit a depository institution from engaging in business practices, which are considered to be unsafe or unsound, possibly including payment of dividends or other payments under certain circumstances even if such payments are not expressly prohibited by statute.

In addition to the restrictions imposed under federal law, banks chartered under California law generally may only pay cash dividends to the extent such payments do not exceed the lesser of retained earnings of the bank’s net income for its last three fiscal years (less any distributions to shareholders during such period).  In the event a bank desires to pay cash dividends in excess of such amount, the bank may pay a cash dividend with the prior approval of the DFPI in an amount not exceeding the greatest of the bank’s retained earnings, the bank’s net income for its last fiscal year, or the bank’s net income for its current fiscal year.

Premiums for Deposit Insurance

The Bank is a member of the Deposit Insurance Fund (“DIF”) maintained by the FDIC.  Through the DIF, the FDIC insures the deposits of the Bank up to prescribed limits for each depositor.  To maintain the DIF, member institutions are assessed an insurance premium based on their deposits and their institutional risk category.  The FDIC determines an institution’s risk category by combining its supervisory ratings with its financial ratios and other risk measures.  The FDIC also has the authority to impose special assessments at any time it estimates that DIF reserves could fall to a level that would adversely affect public confidence.

In September, 2020, the FDIC board of directors voted to adopt a restoration plan to restore the DIF reserve ratio to at least 1.35% within 8 years as required by the Dodd-Frank Act.  This action was in response to the reserve ratio dropping to 1.30% primarily due to the inflow of more than $1 trillion in estimated insured deposits in the first six month of 2020 resulting mainly from the pandemic, monetary policy actions, direct government assistance and an overall reduction in business spending.  On October 18, 2022, the FDIC adopted a final rule, applicable to all insured depository institutions to increase the initial base deposit insurance assessment rate schedules uniformly by two basis points consistent with the Amended Restoration Plan approved by the FDIC on June 21, 2022. The FDIC indicated that it was taking this action in order to restore the DIF reserve ratio to the required statutory minimum of 1.35% by

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the statutory deadline of September 30, 2028.  Under the final rule, the increase in rates began with the first quarterly assessment period of 2023 and will remain in effect unless and until the reserve ratio meets or exceeds 2% in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2% reserve ratio. The increase in assessment rates will apply to the Bank and is projected to have an insignificant effect on the Company’s capital levels and net income.

Deposit insurance assessments and assessment rates are subject to change by the FDIC and can be impacted by the overall economy and the stability of the banking industry as a whole. On November 16, 2023, the FDIC issued a final rule to implement a special assessment to recover the loss to the DIF associated with protecting uninsured depositors following the closure of Silicon Valley Bank and Signature Bank. Under the final rule, the assessment base for an insured depository institution was equal to the institution’s estimated uninsured deposits as of December 31, 2022, adjusted to exclude the first $5 billion in estimated uninsured deposits. Under the final rule, the FDIC will collect the special assessment at an annual rate of 13.4 basis points beginning with the first quarterly assessment period of 2024 and continuing for an anticipated total of eight quarterly assessment periods.  This special assessment did not apply to the Bank; however, there can be no assurance that the FDIC will not impose special assessments on, or increase annual assessments payable by, the Bank in the future.  The ultimate effect on our business of legislative, regulatory and economic developments on the DIF cannot be predicted with certainty.  Future increases in insurance premiums could have adverse effects on the operating expenses and results of operations of the Company. Management cannot predict what the FDIC insurance assessment rates will be in the future.

Insurance of a bank’s deposits may be terminated by the FDIC upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC or the Bank’s primary regulator. Management of the Company is not aware of any practice, condition or violation that might lead to termination of the Company’s deposit insurance.

Community Reinvestment Act and Fair Lending

The Bank is subject to certain fair lending requirements and reporting obligations involving its home mortgage lending operations and is also subject to the Community Reinvestment Act (“CRA”).  The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of the Bank’s local communities, including low- and moderate-income neighborhoods.  In addition to substantive penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when reviewing other activities by the Bank, particularly applications involving business expansion such as acquisitions or de novo branching.

On October 24, 2023, the federal banking agencies jointly issued a final rule to strengthen and modernize the existing CRA regulations. Under the final rule, the agencies will evaluate a bank’s CRA performance based upon the varied activities that it conducts and the communities in which it operates. CRA evaluations and data collection requirements will be tailored based on bank size and type. Under the final rule, the Bank would be considered an intermediate bank (with assets of at least $600 million and less than $2 billion) and therefore will be evaluated under a new retail lending test and will have the flexibility to remain under the existing CD test under the current rule or opt into a new Community Development Financing Test. The final rule includes CRA assessment areas associated with mobile and online banking, and new metrics and benchmarks to assess retail lending performance.  In addition, the final rule emphasizes smaller loans and investments that can have a high impact and be more responsive to the needs of low- and moderate-income communities. The final rule exempts small and intermediate banks from new data requirements that apply to banks with assets of at least $2 billion and limits certain new data collection and reporting requirements to large banks with assets greater than $10 billion.  The final rule took effect on April 1, 2024; however, on March 21, 2024 the agencies issued a supplemental final rule extending the applicability date for certain provisions. Specifically, the requirements for facility-based assessment areas and public file provisions, initially effective on April 1, 2024, were extended to January 1, 2026. This extension aligns these provisions with the compliance date for other aspects of the final rule. The supplemental final rule also clarifies that banks are not required to make changes to their public files until January 1, 2026, providing institutions additional time to comply with the updated public notice requirements. These developments indicate ongoing legal and regulatory adjustments affecting the implementation timeline of the CRA final rule. The Bank continues to monitor and stay informed on changes to ensure compliance with the evolving regulatory framework.

Cybersecurity

The federal banking regulators regularly issue new guidance and standards, and update existing guidance and standards, regarding cybersecurity intended to enhance cyber risk management among financial institutions. Financial institutions are expected to comply with such guidance and standards and to accordingly develop appropriate security controls and risk management processes. If we fail to observe such regulatory guidance or standards, we could be subject to various regulatory sanctions, including financial penalties. In 2023, the SEC issued a final rule that requires disclosure of material cybersecurity incidents, as well as cybersecurity risk management, strategy and governance. Under this rule, banking organizations that are SEC registrants must generally disclose
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information about a material cybersecurity incident within four business days of determining it is material with periodic updates as to the status of the incident in subsequent filings as necessary.

Under a final rule adopted by federal banking agencies in 2021, banking organizations are required to notify their primary banking regulator within 36 hours of determining that a “computer-security incident” has materially disrupted or degraded, or is reasonably likely to materially disrupt or degrade, the banking organization’s ability to carry out banking operations or deliver banking products and services to a material portion of its customer base, its businesses and operations that would result in material loss, or its operations that would impact the stability of the United States. The federal banking agencies have also adopted guidelines for establishing information security standards and cybersecurity programs for implementing safeguards under the supervision of the board of directors. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. Moreover, recent cyberattacks against banks and other financial institutions that resulted in unauthorized access to confidential customer information have prompted the federal banking regulators to issue more extensive guidance on cybersecurity risk management. Among other things, financial institutions are expected to design multiple layers of security controls to establish lines of defense and ensure that their risk management processes address the risks posed by compromised customer credentials, including security measures to authenticate customers accessing internet-based services. A financial institution also should have a robust business continuity program to recover from a cyberattack and procedures for monitoring the security of third-party service providers that may have access to nonpublic data at the institution.

State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs and many states, including Texas, have also recently implemented or modified their data breach notification, information security and data privacy requirements. We expect this trend of state-level activity in those areas to continue and are continually monitoring developments in the states in which our customers are located.

Risks and exposures related to cybersecurity attacks, including litigation and enforcement risks, are expected to be elevated for the foreseeable future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers.

See Item 1A. “Risk Factors” for a further discussion of risks related to cybersecurity and Item 1C. “Cybersecurity” for a further discussion of risk management strategies and governance processes related to cybersecurity.

Certain CFPB Rules

The Consumer Financial Protection Bureau ("CFPB") has adopted an Ability-to-Repay rule that all newly originated residential mortgages must meet. The Ability-to-Repay rule establishes guidelines that the lender must follow when reviewing an applicant’s income, obligations, assets, liabilities, and credit history and requires that the lender make a reasonable and good faith determination of an applicant’s ability to repay the loan according to its terms. Lenders will be presumed to have met the Ability-to-Repay rule by originating loans that meet the criteria for “Qualified Mortgages”, which are set forth in detail in the rule. The mortgage loans originated by the Bank with the intent to sell them to Freddie Mac meet the Qualified Mortgage criteria.

The CFPB has also adopted a rule on simplified and improved mortgage loan disclosures, otherwise known as Know Before You Owe.  The rule provides that mortgage borrowers receive a loan estimate three business days after application and a closing disclosure three days before closing.  These forms replace disclosure forms previously provided to borrowers under other provisions of federal law.  The rule provides for limitations on application fees and increases in closing costs.

Any new or modified regulatory requirements promulgated by the CFPB could have an adverse impact on our residential mortgage lending business as the industry adapts to the additional regulations.  Our business strategy, product offerings and profitability may change as the market adjusts to any additional or modified regulations and as these requirements are interpreted by the regulators and courts.  See "Possible Future Legislation and Regulatory Initiatives" below for more information about potential changes to the CFPB and consumer protection laws and enforcement.

Conservatorship and Receivership of Insured Depository Institutions

If any insured depository institution becomes insolvent and the FDIC is appointed its conservator or receiver, the FDIC may, under federal law, disaffirm or repudiate any contract to which such institution is a party, if the FDIC determines that performance of the contract would be burdensome, and that disaffirmance or repudiation of the contract would promote the orderly administration of the institution’s affairs.  Such disaffirmance or repudiation would result in a claim by its holder against the receivership or conservatorship.  The amount paid upon such claim would depend upon, among other factors, the amount of receivership assets available for the payment of such claim and its priority relative to the priority of others.  In addition, the FDIC as conservator or receiver may enforce most contracts entered into by the institution notwithstanding any provision providing for termination, default,

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acceleration, or exercise of rights upon or solely by reason of insolvency of the institution, appointment of a conservator or receiver for the institution, or exercise of rights or powers by a conservator or receiver for the institution.  The FDIC as conservator or receiver also may transfer any asset or liability of the institution without obtaining any approval or consent of the institution’s shareholders or creditors.

The Dodd-Frank Act

The Dodd-Frank Act, enacted in 2010, has resulted in sweeping changes to the U.S. financial system and financial institutions, including us.  Many of the law’s provisions have been implemented by rules and regulations of the federal banking agencies.  The law contains many provisions which have particular relevance to our business, including provisions that have resulted in adjustments to our FDIC deposit insurance premiums and that resulted in increased capital and liquidity requirements, increased supervision, increased regulatory and compliance risks and costs and other operational costs and expenses, reduced fee-based revenues and restrictions on some aspects of our operations, and increased interest expense on our demand deposits.  In May 2018, then President Trump signed into law the EGRRCPA, which amended various provisions of the Dodd-Frank Act as well as other federal banking statutes.  See “The Effect of Government Policy on Banking” above for additional information.

The environment in which financial institutions continue to operate since the U.S. financial crisis, including legislative and regulatory changes affecting capital, liquidity, supervision, permissible activities, corporate governance and compensation, and changes in fiscal policy may have long-term effects on the business model and profitability of financial institutions that cannot now be foreseen.

Overdraft and Interchange Fees

The FRB's Regulation E imposes restrictions on banks’ abilities to charge overdraft services and fees. The rule prohibits financial institutions from charging fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. The Dodd-Frank Act, through a provision known as the Durbin Amendment, required the FRB to establish standards for interchange fees that are “reasonable and proportional” to the cost of processing debit card transactions and imposes other requirements on card networks. Under the rule, the maximum permissible interchange fee that a bank may receive is the sum of $0.21 per transaction and five basis points multiplied by the value of the transaction, with an additional upward adjustment of no more than $0.01 per transaction if a bank develops and implements policies and procedures reasonably designed to achieve fraud-prevention standards set by regulation.  This regulation has resulted in decreased revenues and increased compliance costs for the banking industry and the Bank, and there can be no assurance that alternative sources of revenues can be implemented to offset the impact of these developments.

Possible Future Legislation and Regulatory Initiatives

The economic and political environment of the past several years has led to a number of proposed legislative, governmental and regulatory initiatives, at both the federal and state levels, certain of which are described above, that may significantly impact our industry. These and other initiatives could significantly change the competitive and operating environment in which we and our subsidiaries operate. We cannot predict whether these or any other proposals will be enacted or the ultimate impact of any such initiatives on our operations, competitive situation, financial condition or results of operations.

On January 20, 2025, President Donald J. Trump was sworn into office as the next President of the United States.  The Trump Administration has indicated a desire to reduce the regulatory burden on U.S. companies, including financial institutions. Further, in a recent statement, the Acting Chairman of the FDIC indicated that a matter of FDIC focus (among other things) will include conducting a “wholesale” review of the agency’s regulations, guidance and manuals.  President Trump is likely to appoint, or has already appointed, new acting leadership of bank regulatory agencies, including the CFPB, and, once appointed, this new agency leadership can rescind informal agency guidance, including advisory opinions, interpretive rules and policy statements, creating opportunities for deregulation.  On January 20, 2025, President Trump signed an executive order to pause all pending regulations. Sweeping in nature, the order applies to “all executive departments and agencies” while directing them to “not propose or issue any rule in any manner, including by sending a rule to the Office of the Federal Register (the “OFR”), until a department or agency head appointed or designated by the President after noon on January 20, 2025, reviews and approves the rule.” The order also states that agencies must “immediately withdraw any rules that have been sent to the OFR but not published in the Federal Register, so that they can be reviewed and approved.”  The executive order also states that agencies must “consider postponing for 60 days from the date of this memorandum the effective date for any rules that have been published in the Federal Register, or any rules that have been issued in any manner but have not taken effect, for the purpose of reviewing any questions of fact, law, and policy that the rules may raise.”  At this time, no details on potential or proposed reforms have been published, and we are uncertain whether the intended deregulation will, in fact, occur, or have a significant impact on the Company.

In February 2025, the director of the CFPB was dismissed by the new Trump Administration and the new Director of the Office of Management and Budget was appointed as acting director of the CFPB. The new acting director of the CFPB directed agency staff to

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stop virtually all work, including supervision activities and pending investigations, and announced that the CFPB would not be taking its next draw of federal funding.  While the new Trump Administration appointee to lead the CFPB and Administration policies could result in the rollback of rules implementing and enforcing consumer financial law and regulatory enforcement activities, there is an expectation of increased activity at the state level to enforce consumer protection, data privacy, and banking regulations to address potential gaps in federal oversight.  State regulation of financial products and potential enforcement actions could also adversely affect our business, financial condition or results of operations. It cannot be predicted at this time what impact these changes will have on the CFPB and its regulatory responsibilities in the consumer protection area, or on the regulation and enforcement of consumer protection laws generally.
 
In May 2024, several federal financial agencies (including the FDIC) adopted a notice of proposed rulemaking to address incentive-based compensation arrangements for financial institutions, re-proposing the regulatory text previously proposed in June 2016 and seeking public comment on certain related matters.  The 2024 proposed rule requires enhanced disclosure and reporting of compensation arrangements by covered institutions and prohibits incentive compensation arrangements that involve inappropriate risks or could lead to material financial loss. The Federal Reserve and the SEC have not joined in issuing the 2024 proposed rule, which has not yet been published in the Federal Register or opened for formal public comment. At this time, it cannot be predicted whether this proposed rule will be modified or implemented.
 
Following a bankruptcy filing by a financial services company known as Synapse, in October 2024, the FDIC approved a proposal which will require banks and their “fin-tech” partners holding certain custodial accounts to maintain timely and accurate records to determine the actual consumers who own funds held in the pooled custodial accounts and the account balance attributable to each consumer so that the FDIC can meet insured deposit claims to beneficial owners underlying the custody accounts upon the failure of the bank.  At the present time, the Bank does not have any such “fin-tech” partners.

Competition

In the past, an independent bank’s principal competitors for deposits and loans have been other banks, savings and loan associations, and credit unions.  Many of these competitors are large financial institutions that have substantial capital, technology and marketing resources, which are well in excess of ours, although these larger institutions may be required to hold more regulatory capital and as a result, achieve lower returns on equity.  For agricultural loans, the Bank also competes with constituent entities with the Federal Farm Credit System.  To a lesser extent, competition is also provided by thrift and loans, mortgage brokerage companies and insurance companies.  Other institutions, such as brokerage houses, mutual fund companies, credit card companies, and even retail establishments have offered new investment vehicles, which also compete with banks for deposit business.  Additionally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and payment systems.  We also experience competition, especially for deposits, from internet-based banking institutions and other financial companies, which do not always have a presence in our market footprint and have grown rapidly in recent years.

Non-traditional financial technology companies are less regulated and continue to expand their offerings of services traditionally provided by financial institutions.  Further, the new Trump Administration is expected to seek to promote innovation across financial services through a regulatory environment that is favorable to cryptocurrencies, digital assets, open banking initiatives and financial technology companies, which has the potential to further increase competition within the banking industry.

Current federal law has made it easier for out-of-state banks to enter and compete in California.  Competition in our principal markets has further intensified as a result of the Dodd-Frank Act which, among other things, permitted out-of-state de novo branching by national banks, state banks and foreign banks from other states.

The business of banking in California remains highly competitive.  Competition in our industry is likely to further intensify as a result of continued consolidation of financial services companies, including consolidations of significance in our market area.  In order to compete with major financial institutions and other competitors in its primary service areas, the Bank relies upon the experience of its executive and senior officers in serving business clients, and upon its specialized services, local promotional activities and the personal contacts made by its officers, directors and employees.

For customers whose loan demand exceeds the Bank’s legal lending limit, the Bank may arrange for such loans on a participation basis with correspondent banks.  In the past, the seasonal swings, discussed below in “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity”, have had some impact on the Bank’s liquidity.  The management of investment maturities, sale of loan participations, federal fund borrowings, qualification for funds under the Federal Reserve Bank’s seasonal credit program, and the ability to sell mortgages in the secondary market is intended to allow the Bank to satisfactorily manage its liquidity.

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ITEM 1A – RISK FACTORS

In addition to factors mentioned elsewhere in this Report, the factors contained below, among others, could cause our financial condition and results of operations to be materially and adversely affected.  If this were to happen, the value of our common stock could decline, perhaps significantly, and you could lose all or part of your investment.

Recent Negative Developments in the Banking Industry, and any Legislative and/or Bank Regulatory Actions that may Result, Could Adversely Affect our Business Operations, Results of Operations and Financial Condition.

The high-profile bank failures of Silicon Valley Bank, Signature Bank and First Republic Bank in 2023, and related negative media attention, generated significant market trading volatility among publicly-traded bank holding companies and, in particular, regional and community banks, such as the Company. These developments negatively impacted customer confidence in the safety and soundness of regional and community banks.  Defaults by, or even rumors or questions about, one or more financial institutions or the financial services industry generally, may lead to market-wide liquidity problems and losses of client, creditor and counterparty confidence and could lead to losses or defaults by us or by other financial institutions.

While we currently do not anticipate liquidity constraints of the kind that caused these other financial services institutions to fail or require external support, constraints on our liquidity could occur as a result of customers choosing to maintain their deposits with larger financial institutions or to invest in higher yielding short-term fixed income securities, which could materially adversely impact our liquidity, cost of funding, loan funding capacity, net interest margin, capital and results of operations. If we were required to sell a portion of our securities portfolio to address liquidity needs, we may incur losses, including as a result of the negative impact of rising interest rates on the value of our securities portfolio, which could negatively affect our earnings and our capital. While the Company has taken actions to maintain adequate and diversified sources of funding and management believes that its liquidity measures are reasonable in light of the nature of the Bank’s customer base, there can be no assurance that such actions will be sufficient in the event of a sudden liquidity crisis.

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

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

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

In response, various significant economic and monetary stimulus measures were implemented by the U.S. government.  The FRB also pursued a highly accommodative monetary policy aimed at keeping interest rates at historically low levels.  The more recent tightening of the Federal Reserve’s monetary policies, including repeated and aggressive increases in target range for the federal funds rate as well as the conclusion of the Federal Reserve’s tapering of asset purchases, together with ongoing economic and geopolitical instability, increases the risk of an economic recession. The Federal Reserve has signaled caution in easing monetary policy citing strong robust GDP growth, and persistent inflation as reasons to delay rate cuts.

We, and other financial services companies, are impacted to a significant degree by current economic conditions. If the U.S. economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained and our asset quality, deposit levels, loan demand and results of operations may be adversely affected.

The U.S. government continues to face significant fiscal and budgetary challenges which, if not resolved, could result in renewed adverse U.S. economic conditions. These challenges may be intensified over time if federal budget deficits were to increase and Congress and the Administration cannot effectively work to address them. The overall level of the federal government's debt, the extensive political disagreements regarding the government's statutory debt limit and the continuing substantial federal budget deficits led to a downgrade from “AAA” to “AA+” of the long-term sovereign credit rating of United States debt by one credit rating agency in 2023. This risk could be exacerbated over time.

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If substantial federal budget deficits were to continue or increase in the years ahead, further downgrades by the credit rating agencies with respect to the obligations of the U.S. federal government could occur. Any such further downgrades could increase over time the U.S. federal government’s cost of borrowing, which may worsen its fiscal challenges, as well as generate further upward pressure on interest rates generally in the U.S. which could, in turn, have adverse consequences for borrowers and the level of business activity. The long-term impact of this situation, including the impact to the Bank's investment securities portfolio and other assets, cannot be predicted.
 
The Bank is Subject to Lending Risks of Loss and Repayment Associated with Commercial Banking Activities

The Bank’s business strategy is to focus on commercial business loans (which includes agricultural loans), construction loans, and commercial and multi-family real estate loans.  The principal factors affecting the Bank’s risk of loss in connection with commercial business loans include the borrower’s ability to manage its business affairs and cash flows, general economic conditions, and, with respect to agricultural loans, weather and climate conditions.
 
For a number of years, California has also experienced severe drought, wildfires or other natural disasters. It can be expected that these events will continue to occur from time to time in the areas served by the Bank, and that the consequences of these natural disasters, including public utility public safety power outages when weather conditions and fire danger warrant, may adversely affect the Bank’s business and that of its commercial loan customers, particularly in the agricultural sector.
 
Loans secured by commercial real estate are generally larger and involve a greater degree of credit and transaction risk than residential mortgage (one to four family) loans. Because payments on loans secured by commercial and multi-family real estate properties are often dependent on successful operation or management of the underlying properties, repayment of such loans may be dependent on factors other than the prevailing conditions in the real estate market or the economy.  Real estate construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate.  Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development compared to the estimated cost (including interest) of construction.  If the estimate of value proves to be inaccurate, the Bank may be confronted with a project which, when completed, has a value which is insufficient to assure full repayment of the construction loan. For additional information, see “The Bank’s Dependence on Real Estate Lending Increases Our Risk of Losses”, below in these “Risk Factors” in this Annual Report on Form 10-K.
 
Although the Bank manages lending risks through its underwriting and credit administration policies, no assurance can be given that such risks will not materialize, in which event, the Company’s financial condition, results of operations, cash flows, and business prospects could be materially adversely affected.

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 $15.9 million, or 1.49% of total loans, at December 31, 2024, compared to $16.6 million, or 1.55% of total loans, at December 31, 2023, and 143.5% of total non-performing loans net of guaranteed portions at December 31, 2024, compared to 199.1% of total non-performing loans, net of guaranteed portions at December 31, 2023.  Reversal of provision for credit losses totaled $0.3 million for the year ended December 31, 2024, and provision for credit losses totaled $1.1 million for the year ended December 31, 2023. The reversal of provision for credit losses in 2024 was primarily due to decreases in loans outstanding and unfunded commitments.

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 provisions for estimated losses on loans and foreclosed assets would adversely affect the Bank’s financial condition and results of operations.

The Bank’s Dependence on Real Estate Lending Increases Our Risk of Losses
 
The Bank’s primary lending focus has historically been commercial (including agricultural), construction, and real estate mortgage.  At December 31, 2024, real estate mortgage (excluding loans held-for-sale) and construction loans (residential and other) comprised
 
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approximately 90% and 3%, respectively, of the total loans in the Bank’s portfolio.  At December 31, 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 may continue to impact, our residential mortgage lending business.

Adverse Economic Factors Affecting Certain Industries the Bank Serves Could Adversely Affect Our Business
 
The Bank is subject to certain industry-specific economic factors. For example, a portion of the Bank’s total loan portfolio is related to residential and commercial real estate, especially in California.  Increases in residential mortgage loan interest rates could have an adverse effect on the Bank’s operations by depressing new mortgage loan originations, which in turn could negatively impact the Bank’s title and escrow deposit levels.  Additionally, a downturn in the residential real estate and housing industries in California could have an adverse effect on the Bank’s operations and the quality of its real estate and construction loan portfolio.  Although the Bank does not engage in subprime or negative amortization lending, we are not immune to volatility in the real estate market. Real estate valuations are influenced by demand, and demand is driven by economic factors such as employment rates and interest rates, which have been, and may continue to be, affected by the pandemic.  These factors could adversely impact the quality of the Bank’s residential construction, residential mortgage and construction related commercial portfolios in various ways, including by decreasing the value of the collateral for our loans, and thereby negatively affecting the Bank’s overall loan portfolio.
 
The Bank provides financing to, and receives deposits from, businesses in a number of other industries that may be particularly vulnerable to industry-specific economic factors, including the home building, commercial real estate, retail, agricultural, industrial, and commercial industries. Following the financial crisis of 2008, the home building industry in California was especially adversely impacted by the deterioration in residential real estate markets, which lead the Bank to take additional provisions and charge-offs against credit losses in this portfolio. The recessionary economic and market conditions resulting from the COVID-19 pandemic also significantly affected the commercial and residential real estate markets in the U.S. generally, and in California in particular, decreasing property values, increasing the risk of defaults and reducing the value of real estate collateral.  Continued volatility in fuel prices and energy costs and drought conditions in California could also adversely affect businesses in several of these industries.
 
In February 2025, the new Trump Administration announced that it would be imposing increases in tariffs on goods imported to the U.S. from Canada, Mexico, and China and has also indicated that tariffs may be imposed at increased levels on imports to the U.S. from other countries. If other countries, in retaliation to the U.S.’s tariff measures, were to impose increased levels of tariffs on goods exported to such countries by companies in the U.S. such tariff increases may negatively impact companies in the U.S. whose business involves exports to other countries. This could be of particular concern to U.S. companies operating in the agricultural sector who export to other countries. The Company’s customers included a number of agricultural business, which could be negatively affected. Preliminary indications have been that the new Trump Administration tariff increases to Canada and Mexico may be delayed or decreased if such countries adopt various policies urged by the U.S., such as enhanced border security and control measures. The outcome of this process cannot be predicted with any certainty at this time.
 
Industry specific risks are beyond the Bank’s control and could adversely affect the Bank’s portfolio of loans, potentially resulting in an increase in non-performing loans or charge-offs and a slowing of growth or reduction in our loan portfolio.
 
In recent years, wildfires across California and in our market areas resulted in significant damage and destruction of property and equipment. The fire damage caused resulted in adverse economic impacts to those affected markets and beyond and on the Bank's customers.  In addition, the major electric utility company in our region has adopted programs of electrical power shut-offs, often for multiple days, in wide areas of Northern California during periods of high winds and high fire danger.  Shut-offs of power by this utility have adversely impacted the business of some of our customers and also have resulted in some of our branches being temporarily closed.  It can be expected that these events will continue to occur from time to time in the areas served by the Bank, and that the consequences of these natural disasters, including programs of public utility public safety power outages when weather conditions and fire danger warrant, may adversely affect the Bank’s business and that of its customers. It is also possible that climate change may be increasing the severity or frequency of adverse weather conditions, thus increasing the impact of these types of natural disasters on our business and that of our customers.  For additional information, see "Our Operations, Business and Customers Could be Materially Adversely Affected by the Physical Effects of Climate Change, as well as Governmental and Societal Responses to Climate Change," below in these "Risk Factors" in this Annual Report on Form 10-K.
 
The long-term impact of these developments on the markets we serve cannot be predicted at this time.
 
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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 December 31, 2024, loans secured by real estate comprised approximately 87% of the total loans in the Bank’s portfolio.  At December 31, 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 recent catastrophic fires in Southern California, with preliminary estimates of resulting property damage and other claims exceeding $30 billion, are expected to further exacerbate these challenges.
 
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 December 2024, the California Department of Insurance adopted 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, or other proposed legislation, will increase insurance availability or stabilize and strengthen California’s insurance market. particularly in light of the recent catastrophic fires in Southern California.
 
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” above in these “Risk Factors” in this Annual Report on Form 10-K.

The Effects of Changes or Increases in, or Supervisory Enforcement of, Banking or Other Laws and Regulations or Governmental Fiscal or Monetary Policies Could Adversely Affect Us

We are subject to significant federal and state banking regulation and supervision, which is primarily for the benefit and protection of our customers and the Deposit Insurance Fund and not for the benefit of investors in our securities.  In the past, our business has been materially affected by these regulations. This will continue and likely intensify in the future. Laws, regulations or policies, including accounting standards and interpretations, currently affecting us may change at any time. Regulatory authorities may also change their interpretation of and intensify their examination of compliance with these statutes and regulations. Therefore, our business may be adversely affected by changes in laws, regulations, policies or interpretations or regulatory approaches to compliance and enforcement, as well as by supervisory action or criminal proceedings taken as a result of noncompliance, which could result in the imposition of significant civil money penalties or fines. Changes in laws and regulations may also increase our expenses by imposing additional supervision, fees, taxes or restrictions on our operations. Compliance with laws and regulations, especially new laws and regulations, increases our operating expenses and may divert management attention from our business operations.

Following the imposition in 2008 of a federal government conservatorship on the two government-sponsored enterprises (“GSEs”) in the housing finance industry, the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, various proposals have been advanced from time to time to reform the role of the GSEs in the housing finance market.  These proposals, among other things, include reducing or eliminating over time the role of the GSEs in guaranteeing mortgages and providing funding for mortgage loans, as well as the implementation of reforms relating to borrowers, lenders, and investors in the mortgage market, including reducing the maximum size of a loan that the GSEs can guarantee, phasing in a minimum down payment requirement for

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borrowers, improving underwriting standards, and increasing accountability and transparency in the securitization process.

The GSEs remain in federal government conservatorship at this time and proposals for the reform of their role are not being actively pursued in Congress.  However, this could change at any time, particularly since GSE reform was a priority during the first Trump Administration.  GSE reform could again become a subject under active consideration and if adopted, could well have a substantial impact on the mortgage market and could reduce our income from mortgage originations by increasing mortgage costs or lowering originations.  GSE reforms could also reduce real estate prices, which could reduce the value of collateral securing outstanding mortgage loans. This reduction of collateral value could negatively impact the value or perceived collectability of these mortgage loans and may increase our allowance for credit loan losses. Such reforms may also include changes to the Federal Home Loan Bank System, which could adversely affect a significant source of term funding for lending activities by the banking industry, including the Bank. These reforms may also result in higher interest rates on residential mortgage loans, thereby reducing demand, which could have an adverse impact on our residential mortgage lending business.

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 Basel III Global Regulatory Framework for Capital and Liquidity.  For additional information, see “Business-Capital Standards” in Item 1 of this Form 10-K.
 
We maintain systems and procedures designed to comply with applicable laws and regulations. However, some legal/regulatory frameworks provide for the imposition of criminal or civil penalties (which can be substantial) for noncompliance. In some cases, liability may attach even if the noncompliance was inadvertent or unintentional and even if compliance systems and procedures were in place at the time. There may be other negative consequences from a finding of noncompliance, including restrictions on certain activities and damage to our reputation.

Additionally, our business is affected significantly by the fiscal and monetary policies of the U.S. federal government and its agencies. We are particularly affected by the policies of the FRB, which regulates the supply of money and credit in the U.S. Under the Dodd-Frank Act and a long-standing policy of the FRB, a bank holding company is expected to act as a source of financial and managerial strength for its subsidiary banks. As a result of that policy, we may be required to commit financial and other resources to our subsidiary bank in circumstances where we might not otherwise do so. Among the instruments of monetary policy available to the FRB are (a) conducting open market operations in U.S. Government securities, (b) changing the discount rates on borrowings by depository institutions and the federal funds rate, and (c) imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These methods are used in varying degrees and combinations to directly affect the availability of bank loans and deposits, as well as the interest rates charged on loans and paid on deposits. The policies of the FRB can be expected to have a material effect on our business, prospects, results of operations and financial condition.

Refer to “Business – Supervision and Regulation of Bank Holding Companies" and "Business – Supervision and Regulation of the Bank” in Item 1 of this Form 10-K for discussion of certain existing and proposed laws and regulations that may affect our business.
 
The Bank is Subject to Interest Rate Risk

The income of the Bank depends to a great extent on “interest rate differentials” and the resulting net interest margins (i.e., the difference between the interest rates earned on the Bank’s interest-earning assets such as loans and investment securities, and the interest rates paid on the Bank’s interest-bearing liabilities such as deposits and borrowings). Changes in the relationship between short-term and long-term market interest rates or between different interest rate indices can impact our interest rate differential, possibly resulting in a decrease in our interest income relative to interest expense. Interest rates are highly sensitive to many factors, which are beyond the Bank’s control, including, but not limited to, general economic conditions and the policies of various governmental and regulatory agencies, in particular, the FRB. Changes in monetary policy, including changes in interest rates, influence the origination of loans, the purchase of investments and the generation of deposits and affect the rates received on loans and investment securities and paid on deposits.  In addition, an increase in interest rates could adversely affect clients’ ability to pay the principal or interest on existing loans or reduce their borrowings. This may lead to an increase in our non-performing assets, a decrease in loan originations, or a reduction in the value of and income from our loans, any of which could have a material and negative effect on our operations.

Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may adversely affect our financial condition and earnings.  Since 2022, inflationary pressures have affected many aspects of the U.S. economy, including gasoline and fuel prices, and global and domestic supply-chain issues have also had a disruptive effect on many industries, including the agricultural industry. In January 2022, due to elevated levels of inflation and corresponding pressure to raise interest rates, the FRB announced after several periods of historically low federal funds rates and yields on Treasury notes that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time. The FOMC increased the target range 525 basis points from March 2022 through July 2023.  The target range remained unchanged through much of 2024 until the FOMC decreased the rate 100 basis points during the last four months of the year.  As of December 31, 2024, the target range for the federal

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funds rate had been decreased to 4.25% to 4.50%. It remains uncertain whether the FOMC will further decrease the target range for the federal funds rate to attain a monetary policy sufficiently restrictive to return inflation to more normalized levels, further reduce the federal funds rate or leave the rate at its current elevated level for a lengthy period of time. As noted previously, the new Trump Administration has taken steps to increase tariffs on goods imported to the U.S. from certain countries. Retaliation by such countries through the imposition of higher tariffs on exports from the U.S. appears to be a possibility. The imposition of increased tariffs on imports and exports is believed by some economists to entail the possibility of increased inflationary pressures on the U.S. economy. The impact of these developments on the business of our clients and on our business cannot be predicted with certainty but could present challenges in 2025 and beyond.

Beginning in 2021, the U.S. Economy Began to Reflect Relatively Rapid Rates of Increase in the Consumer Price Index and Other Economic Indices; a Prolonged Elevated Rate of Inflation Could Present Risks for the U.S. Banking Industry and Our Business.

Beginning in 2021, the U.S. economy exhibited relatively rapid rates of increase in the consumer price index and other economic indices. If the U.S. economy encounters a significant, prolonged rate of inflation, this could pose higher relative risks to the banking industry and our business.  Such inflationary periods have historically corresponded with relatively weaker earnings and higher credit losses for banks.  In the past, inflationary environments have caused financing conditions to tighten and have increased borrowing costs for some marginal borrowers which, in turn, has impacted bank credit quality and loan growth.  Additionally, a sustained period of inflation well above the FRB’s long-term target could prompt broad-based selling of longer-duration, fixed-rate debt, which could have negative implications for equity and real estate markets.  Lower interest rates enable less credit-worthy borrowers to more readily meet their debt obligations.  Small businesses and leveraged loan borrowers can be challenged in a materially higher-rate environment.  Higher interest rates can also present challenges for commercial real estate projects, pressuring valuations and loan-to-value ratios.  The FRB initiated a series of significant interest rate increases in response to the recent economic developments.  For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Net Interest Income" below in this Annual Report on Form 10-K.

In addition, the war between Russia and Ukraine and global reactions thereto have increased U.S. domestic and global energy prices.  Oil supply disruptions related to the Russia-Ukraine conflict, and sanctions and other measures taken by the U.S. or its allies, could lead to higher costs for gas, food and goods in the U.S. and exacerbate the inflationary pressures on the economy. As noted previously, the new Trump Administration has taken steps to increase tariffs on goods imported to the U.S. from certain countries. The imposition of increased tariffs on imports and exports is believed by some economists to entail the possibility of increased inflationary pressures on the U.S. economy. The impact of these developments cannot be predicted with certainty, but they could have potentially adverse impacts on our customers and on our business, results of operations and financial condition.

Our Ability to Pay Dividends is Subject to Legal Restrictions

As a bank holding company, our cash flow typically comes from dividends of the Bank.  Various statutory and regulatory provisions restrict the amount of dividends the Bank can pay to the Company without regulatory approval.  The ability of the Company to pay cash dividends in the future also depends on the Company’s profitability, growth, and capital needs.  In addition, California law restricts the ability of the Company to pay dividends.  For a number of years, the Company has paid stock dividends, but not cash dividends, to its shareholders.  No assurance can be given that the Company will pay any dividends in the future or, if paid, such dividends will not be discontinued.  See “Business - Restrictions on Dividends and Other Distributions” above.

Competition Adversely Affects our Profitability

In California generally, and in the Bank’s primary market area specifically, major banks dominate the commercial banking industry.  By virtue of their larger capital bases, such institutions have substantially greater lending limits than those of the Bank.  Competition is likely to further intensify as a result of the recent and increasing level of consolidation of financial services companies, particularly in our market area resulting from various economic and market conditions.  In obtaining deposits and making loans, the Bank competes with these larger commercial banks and other financial institutions, such as savings and loan associations, credit unions and member institutions of the Farm Credit System, which offer many services that traditionally were offered only by banks.  Using the financial holding company structure, insurance companies and securities firms may compete more directly with banks and bank holding companies.  In addition, the Bank competes with other institutions such as mutual fund companies, brokerage firms, and even retail stores seeking to penetrate the financial services market.  Current federal law has also made it easier for out-of-state banks to enter and compete in the states in which we operate. Competition in our principal markets has further intensified as a result of the Dodd-Frank Act which, among other things, permitted out-of-state de novo branching by national banks, state banks and foreign banks from other states. We also experience competition, especially for deposits, from internet-based banking institutions and other non-traditional financial services firms, such as financial technology companies, which do not always have a physical presence in our market footprint and have grown rapidly in recent years.  Also, technology and other changes increasingly allow parties to complete financial transactions electronically, and in many cases, without banks.  For example, consumers can pay bills and transfer

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funds over the internet and by telephone without banks.  Non-bank financial service providers may have lower overhead costs, are subject to fewer regulatory constraints and continue to expand their offerings of services traditionally provided by financial institutions.  Further, the new Trump Administration is expected to seek to promote innovation across financial services through a regulatory environment that is favorable to cryptocurrencies, digital assets, open banking initiatives and financial technology companies, which has the potential to further increase competition within the banking industry.  If consumers do not use banks to complete their financial transactions, we could potentially lose fee income, deposits and income generated from those deposits.  During periods of declining interest rates, competitors with lower costs of capital may solicit the Bank’s customers to refinance their loans.  Furthermore, during periods of economic slowdown or recession, the Bank’s borrowers may face financial difficulties and be more receptive to offers from the Bank’s competitors to refinance their loans.  No assurance can be given that the Bank will be able to compete with these lenders.  See “Business – Competition” in Item 1 of this Form 10-K.

Government Regulation and Legislation Could Adversely Affect the Company

The Company and the Bank are subject to extensive state and federal regulation, supervision, and legislation, which govern almost all aspects of the operations of the Company and the Bank.  The business of the Bank is particularly susceptible to being affected by the enactment of federal and state legislation, which may have the effect of increasing the cost of doing business, modifying permissible activities, or enhancing the competitive position of other financial institutions.  Such laws are subject to change from time to time and are primarily intended for the protection of consumers, depositors and the Deposit Insurance Fund and not for the benefit of shareholders of the Company.  Regulatory authorities may also change their interpretation of these laws and regulations.  The Company cannot predict what effect any presently contemplated or future changes in the laws or regulations or their interpretations would have on the business and prospects of the Company, but it could be material and adverse.  See “Business – Supervision and Regulation of the Bank” in Item 1 of this Form 10-K and "The Effects of Changes or Increases in, or Supervisory Enforcement of, Banking or Other Laws and Regulations or Governmental Fiscal or Monetary Policies Could Adversely Affect Us" above in these "Risk Factors" in this Form 10-K.

We maintain systems and procedures designed to comply with applicable laws and regulations.  However, some legal/regulatory frameworks provide for the imposition of criminal or civil penalties (which can be substantial) for non-compliance.  In some cases, liability may attach even if the non-compliance was inadvertent or unintentional and even if compliance systems and procedures were in place at the time.  There may be other negative consequences from a finding of non-compliance, including restrictions on certain activities and damage to the Company’s reputation.

Our Controls and Procedures May Fail or be Circumvented Which Could Have a Material Adverse Effect on the Company's Financial Condition or Results of Operations

The Company maintains controls and procedures to mitigate against risks such as processing system failures and errors, and customer or employee fraud, and maintains insurance coverage for certain of these risks.  Any system of controls and procedures, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.  Events could occur which are not prevented or detected by the Company’s internal controls or are not insured against or are in excess of the Company’s insurance limits.  Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.

Changes in Deposit Insurance Premiums Could Adversely Affect Our Business

As discussed above in Part I under the caption “Business – Premiums for Deposit Insurance,” in September, 2020, the FDIC board of directors voted to adopt a restoration plan for the Deposit Insurance Fund to ensure that the ratio of the fund’s reserves to insured deposits reaches 1.35% within the next 8 years, as required by the Dodd-Frank Act.  This action was in response to the reserve ratio dropping to 1.30% primarily due to the inflow of more than $1 trillion in estimated insured deposits in the first six month of 2020 resulting mainly from the pandemic, monetary policy actions, direct government assistance and an overall reduction in business spending.  On October 18, 2022, the FDIC adopted a final rule, applicable to all insured depository institutions to increase the initial base deposit insurance assessment rate schedules uniformly by two basis points consistent with the Amended Restoration Plan approved by the FDIC on June 21, 2022. The FDIC indicated that it was taking this action in order to restore the DIF reserve ratio to the required statutory minimum of 1.35% by the statutory deadline of September 30, 2028.  Under the final rule, the increase in rates began with the first quarterly assessment period of 2023 and will remain in effect unless and until the reserve ratio meets or exceeds 2% in order to support growth in the DIF in progressing toward the FDIC’s long-term goal of a 2% reserve ratio.

On November 16, 2023, the FDIC issued a final rule to implement a special assessment to recover the loss to the DIF associated with protecting uninsured depositors following the closure of Silicon Valley Bank and Signature Bank. This special assessment did not apply to the Bank; however, there can be no assurance that the FDIC will not impose special assessments on, or increase annual assessments payable by, the Bank in the future.

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Any further increases in the deposit insurance assessments the Bank pays would further increase our costs.

Negative Public Opinion Could Damage Our Reputation and Adversely Affect Our Earnings

Reputational risk, or the risk to our earnings and capital from negative public opinion, is inherent in our business.  Negative public opinion can result from the actual or perceived manner in which we conduct our business activities, management of actual or potential conflicts of interest and ethical issues, lending practices, governmental enforcement actions, corporate governance deficiencies, use of social media, cyber-security breaches and our protection of confidential client information, the implementation of environmental, social and governance (ESG) practices, or from actions taken by regulators or community organizations in response to such actions.  Negative public opinion can adversely affect our ability to keep and attract customers and employees and can expose us to claims and litigation and regulatory action and increased liquidity risk and could have a material adverse effect on the price of our stock.

We May Not Be Able to Hire or Retain Additional Qualified Personnel and Recruiting and Compensation Costs May Increase as a Result of Turnover, Both of Which May Increase Costs and Reduce Profitability and May Adversely Impact Our Ability to Implement Our Business Strategy

Our success depends upon the ability to attract and retain highly motivated, well-qualified personnel. We face significant competition in the recruitment and retention of qualified employees.  Executive compensation in the financial services sector has been controversial and the subject of regulation.  The FDIC has proposed rules which would increase deposit premiums for institutions with compensation practices deemed to increase risk to the institution. Over time, this guidance and the proposed rules, upon their adoption, could have the effect of making it more difficult for banks to attract and retain skilled personnel.

We May Be Adversely Affected by Unpredictable Catastrophic Events or Terrorist Attacks and Our Business Continuity and Disaster Recovery Plans May Not Adequately Protect Us from Serious Disaster

The occurrence of catastrophic events such as wildfires (including programs of public utility public safety power outages when weather conditions and fire danger warrant), earthquakes, flooding or other large-scale catastrophes and terrorist attacks could adversely affect our business, financial condition or results of operations if a catastrophe rendered both our production data center in Sacramento and our recovery data center in Las Vegas unusable. There can be no assurance that our current disaster recovery plans and capabilities will protect us from serious disaster.

Changes in Accounting Standards Could Materially Impact Our Financial Statements

The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America, called GAAP.  The financial information contained within our consolidated financial statements is, to a significant extent, financial information that is based on approximate measures of the financial effects of transactions and events that have already occurred.  A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability.  Along with other factors, we use historical loss factors to determine the inherent loss that may be present in our loan portfolio.  Actual losses could differ significantly from the historical loss factors that we use.  Other estimates that we use are fair value of our securities, expected useful lives of our depreciable assets, fair value of stock options, calculation of deferred tax assets and liabilities, and the value of our mortgage servicing rights.  We have not entered into derivative contracts for our customers or for ourselves, which relate to interest rate, credit, equity, commodity, energy, or weather-related indices, other than forward commitments related to our loans held for sale portfolio.  From time to time, the FASB and SEC change the financial accounting and reporting standards that govern the preparation of our financial statements or new interpretations of existing standards emerge as standard industry practice. These changes can be difficult to predict and operationally complex to implement and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, resulting in our restating prior period financial statements.

There is a Limited Public Market for the Company’s Common Stock Which May Make It Difficult for Shareholders to Dispose of Their Shares

The Company’s common stock is not listed on any exchange.  However, trades may be reported on the OTC Markets under the symbol “FNRN.”  The Company is aware that JWTT, Inc., Monroe Financial Partners and Raymond James all currently make a market in the Company’s common stock.  Management is aware that there are also private transactions in the Company’s common stock.  However, the limited trading market for the Company’s common stock may make it difficult for shareholders to dispose of their shares.  Also, the price of the Company’s common stock may be affected by general market price movements as well as developments specifically related to the financial services sector, including interest rate movements, quarterly variations, or changes in financial estimates by securities analysts and a significant reduction in the price of the stock of another participant in the financial

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services industry.

Advances and Changes in Technology, and the Company’s Ability to Adapt Its Technology, May Strain Our Available Resources and Could Adversely Impact Our Ability to Compete and the Company’s Business and Operations

Advances and changes in technology can significantly impact the business and operations of the Company. The financial services industry is undergoing rapid technological change which regularly involves the introduction of new products and services based on new or enhanced technologies. Examples include cloud computing, artificial intelligence and machine learning, biometric authentication and data protection enhancements, as well as increased online and mobile device interaction with customers and increased demand for providing computer access to Bank accounts and the systems to perform banking transactions electronically.  The Company’s merchant processing services require the use of advanced computer hardware and software technology and rapidly changing customer and regulatory requirements.  The Company’s ability to compete effectively depends on its ability to continue to adapt its technology on a timely and cost-effective basis to meet these requirements. Our continued success and the maintenance of our competitive position depends, in part, upon our ability to meet the needs of our customers through the application of new technologies. If we fail to maintain or enhance our competitive position with regard to technology, whether because we fail to anticipate customer needs and expectations or because our technological initiatives fail to perform as desired or are not timely implemented, we may lose market share or incur additional expense.  Our ability to execute our core operations and to implement technology and other important initiatives may be adversely affected if our resources are insufficient or if we are unable to allocate available resources effectively.

In addition, the Company’s business and operations are susceptible to negative impacts from computer system failures, communication and power disruption, and unethical individuals with the technological ability to cause disruptions or failures of the Company’s data processing systems.

Information Security Breaches or Other Technological Difficulties Could Adversely Affect the Company

Our operations rely on the secure processing, storage, transmission and reporting of personal, confidential and other sensitive information in our computer systems, networks and business applications. Although we take protective measures, our computer systems, as well as the systems of our third-party providers, may be vulnerable to breaches or attacks, unauthorized access, misuse, computer viruses or other malicious code, operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or telecommunications systems, and other events that could have significant negative consequences to us. Such events could result in interruptions or malfunctions in our or our customers’ operations, interception, misuse or mishandling of personal or confidential information, or processing of unauthorized transactions or loss of funds. These events could result in litigation, regulatory enforcement actions, and financial losses that are either not insured against or not fully covered by our insurance, or result in regulatory consequences or reputational harm, any of which could harm our competitive position, operating results and financial condition. We maintain cyber insurance, but this insurance may not cover all costs associated with cyber incidents or the consequences of personal or confidential information being compromised.  These types of incidents can remain undetected for extended periods of time, thereby increasing the associated risks. We may also be required to expend significant resources to modify our protective measures or to investigate and remediate vulnerabilities or exposures arising from cybersecurity risks.

We depend on the continued efficacy of our technical systems, operational infrastructure, relationships with third parties and our employees in our day-to-day and ongoing operations. Our increasing dependence upon automated systems to record and process transactions may further increase the risk that technical system flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. With regard to the physical infrastructure that supports our operations, we have taken measures to implement backup systems and other safeguards, but our ability to conduct business may be adversely affected by any disruption to that infrastructure. Failures in our internal control or operational systems, security breaches or service interruptions could impair our ability to operate our business and result in potential liability to customers, reputational damage and regulatory intervention, any of which could harm our operating results and financial condition.

We may also be subject to disruptions of our operating systems arising from other events that are wholly or partially beyond our control, such as outages related to electrical, internet or telecommunications, natural disasters (such as major seismic events), or unexpected difficulties with the implementation of our technology enhancement and replacement projects, which may give rise to disruption of service to customers and to financial loss or liability. Our business recovery plan may not work as intended or may not prevent significant interruptions of our operations.

In recent years, it has been reported that several of the larger U.S. banking institutions have been the target of various denial-of-service, ransomware or other cyberattacks (including attempts to inject malicious code and viruses into computer systems) that have, for limited periods, resulted in the disruption of various operations of the targeted banks. These cyber-attacks originate from a variety of sophisticated sources who may be involved with organized crime, linked to terrorist organizations or hostile countries and have extensive resources to disrupt the operations of the Bank or the financial system more generally. The potential for denial-of-service,

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ransomware and other attacks requires substantial resources to defend and may affect customer satisfaction and behavior. To date we have not experienced any material losses relating to cyberattacks or other information security breaches, but there can be no assurance that we will not suffer such losses or information security breaches in the future. A successful cyber-attack could result in a material disruption of the Bank’s operations, exposure of confidential information and financial loss to the Bank, its clients, customers and counterparties and could lead to significant exposure to litigation and regulatory fines, penalties and other sanctions as well as reputational damage. While we have a variety of cyber-security measures in place, the consequences to our business, if we were to become a target of such attacks, cannot be predicted with any certainty.

In addition, there have been increasing efforts on the part of third parties to breach data security at financial institutions or with respect to financial transactions, including through the use of social engineering schemes such as “phishing.” The ability of our customers to bank remotely, including online and though mobile devices, requires secure transmission of confidential information and increases the risk of data security breaches which would expose us to claims by customers or others and which could adversely affect our reputation and could lead to a material loss.

We, and other banking institutions, are also at risk of increased losses from fraudulent conduct of criminals using increasingly sophisticated techniques which, in some cases, are part of larger criminal organizations which allow them to be more effective. This criminal activity is taking many forms, including information theft, debit/credit card fraud, check fraud, mechanical devices affixed to ATM’s, social engineering, phishing attacks to obtain personal information, or impersonation of customers through falsified or stolen credentials, business email compromise, and other criminal endeavors. We, and other banking institutions are also at risk of fraudulent or criminal activities by employees, contractors, vendors and others with whom we do business. There is also the risk of errors by our employees and others responsible for the systems and controls on which we depend and any resulting failures of these systems and controls could significantly harm the Company, including customer remediation costs, regulatory fines and penalties, litigation or enforcement actions, or limitations on our business activities.

Even if cyber-attacks and similar tactics are not directed specifically at the Bank, such attacks on other large financial institutions could disrupt the overall functioning of the financial system and undermine consumer confidence in banks generally, to the detriment of other financial institutions, including the Bank.  A data security breach at a large U.S. retailer resulted in the compromise of data related to credit and debit cards of large numbers of customers requiring many banks, including the Bank, to reissue credit and debit cards for affected customers and reimburse these customers for losses sustained.

We maintain insurance which we believe provides sufficient coverage against these risks at a manageable expense for an institution of our size and scope with similar technological systems. However, we cannot assure that this insurance would be sufficient to cover all financial losses, damages, penalties, including lost revenues, should we experience any one or more of our or a third-party’s systems failing or experiencing attack.

Environmental Hazards Could Have a Material Adverse Effect on the Company’s Business, Financial Condition, and Results of Operations

The Company, in its ordinary course of business, acquires real property securing loans that are in default, and there is a risk that hazardous substances or waste, contaminants or pollutants could exist on such properties.  The Company may be required to remove or remediate such substances from the affected properties at its expense, and the cost of such removal or remediation may substantially exceed the value of the affected properties or the loans secured by such properties.  Furthermore, the Company may not have adequate remedies against the prior owners or other responsible parties to recover its costs.  Finally, the Company may find it difficult or impossible to sell the affected properties either prior to or following any such removal.  In addition, the Company may be considered liable for environmental liabilities in connection with its borrowers’ properties, if, among other things, it participates in the management of its borrowers’ operations.  The occurrence of such an event could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows.

The Company May Not Be Successful in Raising Additional Capital Needed in the Future

If additional capital is needed in the future as a result of losses or growth or our business strategy or regulatory requirements, there is no assurance that our efforts to raise such additional capital will be successful or that shares sold in the future will be sold at prices or on terms equal to or better than the current market price.  The inability to raise additional capital when needed or at prices and terms acceptable to us could adversely affect our ability to implement our business strategies.

In the Future, the Company May Be Required to Recognize an Allowance for Credit Losses With Respect to Investment Securities, Which May Adversely Affect our Results of Operations
 
The Company’s securities portfolio currently includes securities with unrecognized losses.  The Company may continue to observe declines in the fair market value of these securities.  Management evaluates the need for an allowance for credit losses on the

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securities portfolio, as required by generally accepted accounting principles.  There can be no assurance, however, that future evaluations of the securities portfolio will not require us to recognize losses with respect to these and other holdings, which could adversely affect our results of operations.

Changes in the U.S. Tax Laws Have Impacted Our Business and Results of Operations in a Variety of Ways, Some of Which Are Positive, and Others Which May Be Negative

The Tax Cuts and Jobs Act (“TCJA”), signed into law on December 22, 2017, enacted sweeping changes to the U.S. federal tax laws generally effective January 1, 2018.  These changes have impacted our business and results of operations in a variety of ways, some of which are positive and others which are negative.  The TCJA reduced the corporate tax rate to 21% from 35%, which resulted in a net reduction in our annual income tax expense and which has also benefited many of our corporate and other small business borrowers.  However, our ability to utilize tax credits, such as those arising from low-income housing and alternative energy investments, is constrained by the lower tax rate.  Increases in the U.S. corporate tax rate could adversely impact our profitability and that of our business and commercial customers.

Our Operations, Businesses and Customers Could be Materially Adversely Affected by the Physical Effects of Climate Change, as well as Governmental and Societal Responses to Climate Change

There is increasing concern over the risks of climate change and related environmental sustainability matters. The physical effects of climate change include rising average global temperatures, rising sea levels and an increase in the frequency and severity of extreme weather events and natural disasters, including droughts, wildfires, floods, hurricanes and tornados. Most of the Company’s operations and customers are located in California, which could be adversely impacted by severe weather events and the physical effects of climate change. Agriculture is especially dependent on climate, and climate impacts could include shifting average growing conditions, increased climate and weather variability, decreases in available water sources, and more uncertainty in predicting climate and weather conditions, any or all of which could have a particularly adverse impact on our agricultural customers.  Elevated temperatures and carbon dioxide levels can have large impacts on appropriate nutrient levels, soil moisture, water availability, working condition, and various other critical performance conditions. Such climate-related impacts could disrupt our operations or the operations of customers or third parties on which we rely, result in market volatility, negatively impact our customers’ ability to pay outstanding loans, damage collateral or result in the deterioration of the value of collateral or insurance shortfalls. Our borrowers may have collateral properties or operations located in areas at risk of wildfires or subject to the risk of drought in California. The properties pledged as collateral on our loan portfolio could also be damaged by wildfires, earthquakes or other natural disasters, and thereby the recoverability of loans could be impaired. A number of factors can affect credit losses, including the extent of damage to the collateral, the extent of damage not covered by insurance, the extent to which unemployment and other economic conditions caused by the natural disaster adversely affect the ability of borrowers to repay their loans, and the cost of collection and foreclosure to us. Additionally, there could be increased insurance premiums and deductibles, or a decrease in the availability of coverage, due to severe losses resulting from wildfires or other climate-related physical hazards. The ultimate outcome on our business of a natural disaster, whether or not caused by climate change, is difficult to predict but these events could reduce the Company’s earnings and cause volatility in the Company’s financial results for any fiscal quarter or year and have a material adverse effect on the Company’s financial condition and results of operations.

In recent years, the federal banking agencies have increased their focus on climate-related risks impacting the operations of banks, the communities they serve and the broader financial system. Accordingly, the agencies have begun to enhance their supervisory expectations regarding the climate risk management practices of larger banking organizations, including by encouraging such banks to: ensure that management of climate-related risk exposures has been incorporated into existing governance structures; evaluate the potential impact of climate-related risks on the bank’s financial condition, operations and business objectives as part of its strategic planning process; account for the effects of climate change in stress testing scenarios and systemic risk assessments; revise expectations for credit portfolio concentrations based on climate-related factors; consider investments in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change; evaluate the impact of climate change on the bank’s borrowers and consider possible changes to underwriting criteria to account for climate-related risks to mortgaged properties; incorporate climate-related financial risk into the bank’s internal reporting, monitoring and escalation processes; and prepare for the transition risks to the bank associated with the adjustment to a low-carbon economy and related changes in laws, regulations, governmental policies, technology, and consumer behavior and expectations.  The FDIC has indicated that all banks, regardless of their size, may have material exposures to climate-related financial and other risks that require prudent management. As climate-related supervisory guidance is formalized, and relevant risk areas and corresponding control expectations are further refined, we may be required to expend significant capital and incur compliance, operating, maintenance and remediation costs in order to conform to such requirements.

Additional legislation and regulatory requirements and changes in consumer preferences, including those associated with the transition to a low-carbon economy, could increase expenses of, or otherwise adversely impact, the Company, its businesses or its customers.  We and our customers may face cost increases, asset value reductions, operating process changes, reduced availability of
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insurance, and the like, as a result of governmental actions or societal responses to climate change.  New and/or more stringent regulatory requirements relating to climate change or environmental sustainability could materially affect the Company’s results of operations by increasing our compliance costs. Regulatory changes or market shifts to low-carbon products could also impact the creditworthiness of some of our customers or reduce the value of assets securing loans, which may require the Company to adjust our lending portfolios and business strategies.
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ITEM 1B – UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 1C –
CYBERSECURITY

Cybersecurity Risk Management and Strategy

The Company recognizes the security of our banking operations and the confidentiality, security and availability of the information that the Company collects and stores, is critical to protecting our customers, maintaining our reputation and preserving the value of the Company.  Cybersecurity risks are constantly evolving and becoming increasingly pervasive across all industries. The Company has implemented a comprehensive cybersecurity risk management program that we believe is reasonably designed to mitigate these risks and protect sensitive customer data, financial transactions and our information systems. Key components of the cybersecurity risk management program include:


•
A risk assessment process that identifies and prioritizes material cybersecurity risks; defines and evaluates the effectiveness of controls to mitigate the risks; and reports results to executive management and the Board of Directors.

•
A third-party Managed Detection and Response (“MDR”) service, which monitors the security of our information systems around-the-clock, including intrusion detection and alerting.

•
A third-party Managed Security Service Provider (“MSSP”) covering all critical cyber defense functions such as data protection, identity and access management, insider risk management, security operations and threat intelligence.

•
A training program that educates employees and management about cybersecurity risks and how to protect themselves from cyberattacks.

•
An incident response plan that outlines the steps the Company will take to respond to a cybersecurity incident, which is tested on a periodic basis.

The Company engages reputable third-party auditors and security assessors to conduct various independent risk assessments on a regular basis, including cybersecurity program maturity assessments and network and systems testing to identify and address potential vulnerabilities. Following a defense-in-depth strategy, the Company leverages both in-house resources and third-party service providers to implement and maintain processes and controls to manage the identified risks.

Our vendor management program is designed to ensure that our vendors meet current cybersecurity and information security standards. This includes conducting periodic reviews of independent control audits of the security, infrastructure, application standards or controls, and recovery plans of our most critical vendors.

The Company’s cybersecurity risk management program and strategy are designed to ensure the Company’s information and information systems are appropriately protected from a variety of threats, both natural and man-made. Periodic risk assessments are performed to validate control requirements and ensure that the Company’s information is protected at a level commensurate with its sensitivity, value, and criticality. Preventative and detective security controls are employed on all media where information is stored, the systems that process it, and infrastructure components that facilitate its transmission, to ensure the confidentiality, integrity, and availability of Company information. These controls include, but are not limited to, access control, data encryption, data loss prevention, incident response, security monitoring, third-party risk management, and vulnerability management.

The Company has an incident response program in place that is designed to enable a coordinated response to mitigate the impact of cyber-attacks, recover from the attack and provide for the prompt escalation of certain cybersecurity incidents to management, including for decisions regarding timely reporting of material incidents in accordance with SEC rules.

The Company’s cybersecurity risk management program and strategy are regularly reviewed and updated to ensure that they are aligned with the Company’s business objectives and are designed to address evolving cybersecurity threats and satisfy regulatory requirements and industry standards.

Material Effects of Cybersecurity Threats

While cybersecurity risks have the potential to materially affect the Company’s business, financial condition, and results of operations, the Company does not believe that risks from cybersecurity threats or attacks, including as a result of any previous cybersecurity incidents, have materially affected the Company, including its business strategy, results of operations or financial condition. However, the sophistication of cyber threats continues to increase, and the Company’s cybersecurity risk management and strategy may be insufficient or may not be successful in protecting against all cyber incidents. Accordingly, no matter how well designed or implemented the Company’s controls are, it will not be able to anticipate all cyber security breaches, preventative measures cannot provide absolute security and may not be sufficient in all circumstances or mitigate all potential risks, and the Company may not be

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able to implement effective preventive measures against cyber security breaches in a timely manner. For more information on how cybersecurity risk may materially affect the Company’s business strategy, results of operations or financial condition, please refer to Part I, Item 1A, “Risk Factors” in this report.

Governance

Board of Directors Oversight
The Company’s Board of Directors is charged with overseeing the establishment and execution of the Company’s cybersecurity risk management framework and monitoring adherence to related policies required by applicable statutes, regulations and principles of safety and soundness. Consistent with this responsibility, the Board has delegated primary oversight responsibility over the Company’s cybersecurity risk and cybersecurity risk management to the Information Services Steering Committee of the Board of Directors. The Information Services Steering Committee receives regular updates on cybersecurity risks and incidents and the cybersecurity program through direct interaction with the Information Security Officer (“ISO”) and/or the Chief Information Officer (“CIO”). The ISO and/or CIO also provide periodic updates regarding cybersecurity risks and the cybersecurity program to the Audit Committee of the Board of Directors and to the full Board of Directors. Additionally, awareness and training on cybersecurity topics is provided to the Board on an annual basis.

Management’s Role
The ISO and the CIO are responsible for implementing and maintaining the Company’s cybersecurity risk management program.  Information Security is led by the ISO, who reports directly to the President/Chief Executive Officer. The Company’s ISO has over 35 years of experience in IT management, information security, and cybersecurity with the Company. The ISO and CIO are responsible for ensuring the protection of electronic and physical information through the identification and management of risk activities. Information security risk is reported by the ISO or the CIO through quarterly metric reporting to the Information Services Steering Committee. This Committee establishes and oversees policies, programs, and other guidance to provide specific expectations for managing the Company’s cybersecurity risk.

ITEM 2 – PROPERTIES

As of December 31, 2024, the Company and the Bank are engaged in the banking business through 15 offices in five counties in Northern California operating out of three offices in Solano County, five in Yolo County, two in Sacramento County, two in Placer County, two in Glenn County and one in Colusa County.  In addition, the Company owns three vacant lots, two in northern Solano County and one in eastern Sacramento County.

As of December 31, 2024, the Bank owns six branch office locations and two administrative facilities and leases 10 facilities.  Most of the leases contain multiple renewal options and provisions for rental increases, principally for changes in the cost of living index, property taxes and maintenance.

See Item 1 “Business - General” in this report for more information regarding our properties.

ITEM 3 - LEGAL PROCEEDINGS

Neither the Company nor the Bank is a party to any material pending legal proceeding, nor is any of its 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 4 – MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company’s common stock is not listed on any exchange.  However, trades may be reported on the OTC Markets under the symbol “FNRN.”  The Company is aware that JWTT, Inc., Monroe Financial Partners and Raymond James all currently make a market in the Company’s common stock.  Management is aware that there are also private transactions in the Company’s common stock, and the data set forth below may not reflect all such transactions.

The following table summarizes the range of reported high and low bid quotations of the Company’s Common Stock for each quarter during the last two fiscal years and is based on information provided by D.A. Davidson.  The quotations reflect the price that would be received by the seller without retail mark-up, mark-down or commissions and may not have represented actual transactions:

QUARTER/YEAR
  
HIGH*
    
LOW*
  
 
            
4th Quarter 2024
   $
9.81
     $
9.39
  
3rd Quarter 2024
   $
10.00
     $
8.62
  
2nd Quarter 2024
   $
8.63
     $
8.33
  
1st Quarter 2024
   $
8.62
     $
7.80
  
 
  
           
4th Quarter 2023
   $
8.61
     $
7.26
  
3rd Quarter 2023
   $
8.84
     $
6.34
  
2nd Quarter 2023
   $
6.82
     $
6.07
  
1st Quarter 2023
   $
7.80
     $
6.70
  

*  Price adjusted for stock dividends in the indicated periods for the 5% stock dividends payable March 25, 2025 and March 25, 2024, as described below.

As of March 1, 2025, there were approximately 1,334 holders of record of the Company’s common stock, no par value.

In the prior two fiscal years and to date, the Company has declared the following stock dividends:

Shareholder Record Date
  
Dividend Percentage
  
Date Payable
February 28, 2023
    
5
%
March 24, 2023
February 29, 2024
    
5
%
March 25, 2024
February 28, 2025
    
5
%
March 25, 2025

The Company does not expect to pay a cash dividend in the foreseeable future.  Our ability to declare and pay dividends is affected by certain regulatory restrictions.  See “Business – Restrictions on Dividends and Other Distributions” in Part I, Item 1 above.

For information regarding securities authorized for issuance under equity compensation plans, see Part III, Item 12 of this Annual Report on Form 10-K.

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Issuer Purchases of Equity Securities

The Company made the following purchases of its common stock during the three months ended December 31, 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)
  
October 1 - October 31, 2024
    
—
      
—
      
—
      
639,765
  
November 1 - November 30, 2024
    
18,988
    
$
10.17
      
18,988
      
620,777
  
December 1 - December 31, 2024
    
76,805
    
$
10.11
      
76,805
      
543,972
  
Total
    
95,793
              
95,793
          

(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 for 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 979,695 eligible for repurchase at May 1, 2024.  The total number of shares eligible for repurchase has been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 23, 2025, payable on March 25, 2025 to shareholders of record as of February 28, 2025.

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ITEM 6 - RESERVED

32
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Introduction

This overview highlights selected information in this Annual Report on Form 10-K 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 estimates, you should carefully read this entire Annual Report on Form 10-K. For a discussion of changes in results of operations comparing the years ended December 31, 2023 and 2022, for the Company and its subsidiary, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 8, 2024.

Our subsidiary, First Northern Bank of Dixon, 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 environment and competition can challenge our ability to generate those revenues.

Financial highlights for 2024 include:

The Company reported net income of $20.0 million for 2024, a 7.1% decrease compared to net income of $21.6 million for 2023. Net income per common share for 2024 was $1.26, a decrease of 6.7% compared to net income per common share of $1.35 for 2023.  Net income per common share on a fully diluted basis was $1.24 for 2024, a decrease of 7.5% compared to net income per common share on a fully diluted basis of $1.34 for 2023.

Net interest income totaled $64.4 million for 2024, a decrease of 3.3% from $66.5 million in 2023, primarily due to an increase in interest expense due to an increase in average rate paid on average interest-bearing deposits, which was partially offset by an increase in interest and dividend income due to an increase in yield on average earning assets.  Net interest margin was 3.60% for the year ended 2024 which was a 2.6% or 10 basis point decrease from the 3.70% reported for the year ended 2023.

Reversal of provision for credit losses totaled $0.3 million in 2024, compared to provision for credit losses of $1.1 million in 2023.  The reversal of provision for credit losses in 2024 was primarily due to decreases in unfunded commitments.

Non-interest income totaled $6.0 million in 2024, a decrease of 23.3% from $7.8 million in 2023.  The decrease was primarily due to a gain on bargain purchase of $1.4 million as a result of the acquisition of the Colusa, Willows, and Orland branches in 2023, which was not repeated in 2024.

Non-interest expenses totaled $42.8 million for 2024, down 2.0% from $43.6 million in 2023.  The decrease was primarily due to decreases in salaries and employee benefits, which was partially offset by increases in occupancy and equipment, data processing and consulting fees.  The decrease in salaries and benefits was primarily due to decreases in commissions, contingent compensation and profit sharing expense.  The increases in occupancy and equipment and data processing were primarily due to increases in service contracts.  The increase in consulting fees was primarily due to staffing searches.

The Company reported total assets of $1.89 billion and $1.87 billion for the years ended December 31, 2024 and 2023, respectively.

Investments totaled $633.9 million as of December 31, 2024, a 10.7% increase from $572.4 million as of December 31, 2023.  U.S. Treasury securities totaled $105.5 million as of December 31, 2024, up 21.1% from $87.2 million as of December 31, 2023; securities of U.S. government agencies and corporations totaled $95.7 million, down 16.9% from $115.1 million as of December 31, 2023; obligations of state and political subdivisions totaled $67.6 million, up 30.8% from $51.7 million as of December 31, 2023; collateralized mortgage obligations totaled $95.0 million, up 4.4% from $90.9 million as of December 31, 2023; and mortgage-backed securities totaled $270.1 million, up 18.7% from $227.5 million as of December 31, 2023.

Loans (including loans held-for-sale), net of allowance, totaled $1.047 billion as of December 31, 2024, a 0.5% decrease from $1.052 billion as of December 31, 2023.  Commercial loans totaled $117.9 million as of December 31, 2024, up 10.3% from $106.9 million as of December 31, 2023; commercial real estate loans were $723.6 million, up 0.3% from $721.7 million as of December 31, 2023; agriculture loans were $92.6 million, down 12.5% from $105.8 million as of December 31, 2023; residential mortgage loans were $105.9 million, down 1.3% from $107.3 million as of December 31, 2023; residential construction loans were $6.9 million, down 44.3% from $12.3 million as of December 31, 2023; and consumer loans totaled $15.7 million, up 5.7% from $14.9 million as of December 31, 2023.

Deposits totaled $1.70 billion as of December 31, 2024, a 0.5% increase from $1.69 billion as of December 31, 2023.

33
There were no FHLB advances outstanding as of December 31, 2024 and December 31, 2023.

Stockholders' equity increased to $176.3 million as of December 31, 2024, a 10.7% increase from $159.2 million as of December 31, 2023.  The increase was primarily due to 2024 net income of $20.0 million.

Critical Accounting Policies and Estimates

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, income and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluates its estimates, including those related to the allowance for credit losses and business combinations.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements:

Allowance for Credit Losses on Loans

The Company believes the allowance for credit losses (ACL) accounting policy is critical because the loan portfolio represents the largest asset on the consolidated balance sheet, and there is significant judgment used in determining the adequacy of the ACL.  Management estimates the ACL using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.  Loan losses are charged off against the allowance, while recoveries of amounts previously charged off are credited to the allowance.  A provision for credit losses is based on the Company’s periodic evaluation of the factors mentioned below, as well as other pertinent factors.

In determining the ACL, accruing loans with similar risk characteristics are generally evaluated collectively. To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. The Company utilized a reasonable and supportable forecast period of approximately four quarters and obtained the forecast data from Moody’s Analytics. Individual loan credit quality indicators, including historical credit losses, have been statistically correlated with various econometrics, including national unemployment rate, and national gross domestic product. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process. Increases in external risk factors due to more pessimistic business and economic conditions could potentially add $5.6 million based on existing loan balances, if not more, to the ACL. While management utilizes its best judgment and information available, the ultimate adequacy of our allowance accounts is dependent upon a variety of factors beyond our control, including the performance of our portfolios, the economy and changes in interest rates.

Business Combinations

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

Goodwill and intangible assets acquired in a business combination and that are determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate the necessity for such impairment tests to be performed. The Company has no goodwill arising from business combinations. The Company recognized a bargain purchase gain arising from business combinations. The Company recorded the fair values based on the valuations available as of reporting date. In accordance with business combination accounting guidance, the Company continued to evaluate these fair values for one year following the acquisition date. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Core deposit intangible assets arising from business combinations are amortized on an accelerated basis reflecting the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. The estimated life of the core deposit intangible is approximately 10 years.

34
Impact of Recently Issued Accounting Standards

Accounting Standards Adopted in 2024

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

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures.  This ASU requires that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this ASU and all existing disclosures in Topic 280.  The Company has determined that its current business and operations consist of a single business segment and a single reporting unit.  The amendments in ASU 2023-07 are intended to improve segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses.  The Company applied this ASU retrospectively with no material impact on the Company's consolidated financial statements; however, new disclosures have been added as applicable for a single reportable operating segment.  For additional information, see Note 22 to the Consolidated Financial Statements in this Form 10-K.

Recently Issued Accounting Pronouncements

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 has evaluated this ASU and does not expect the adoption to have a material impact on the Company's 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)

35
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.
In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.  This ASU requires public companies to disclose, in the notes to financial statements, specified information about certain costs and expenses at each interim and annual reporting period.  In January 2025, the FASB issued ASU 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date.  ASU 2025-01 amends the effective date of ASU 2024-03 to clarify that all public business entities are required to adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027.  Early adoption of ASU 2024-03 is 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.

36
STATISTICAL INFORMATION AND DISCUSSION

The following statistical information and discussion should be read in conjunction with the audited consolidated financial statements and accompanying notes included in Part II (Item 8) of this Annual Report on Form 10-K.

The following tables present information regarding the consolidated average assets, liabilities and stockholders’ equity, the amounts of interest income from average earning assets and the resulting yields, and the amount of interest expense paid on interest-bearing liabilities.  Average loan balances include non-performing loans.  Interest income includes proceeds from loans on non-accrual status only to the extent cash payments have been received and applied as interest income.  Tax-exempt income is not shown on a tax equivalent basis.

Distribution of Assets, Liabilities and Stockholders’ Equity;
Interest Rates and Interest Differential
(Dollars in thousands)

   
2024
    
2023
  
                         
   
Average
Balance
    
Percent
    
Average
Balance
    
Percent
  
ASSETS
                        
Cash and Due From Banks
  
$
159,998
      
8.4
%
  
$
212,944
      
11.1
%
Certificates of Deposit
    
17,780
      
0.9
%
    
20,995
      
1.1
%
Investment Securities
    
591,225
      
31.3
%
    
595,044
      
31.1
%
Loans (1)
    
1,045,419
      
55.3
%
    
1,005,066
      
52.6
%
Stock in Federal Home Loan Bank and other equity securities, at cost
    
10,518
      
0.6
%
    
10,119
      
0.5
%
Other Assets
    
65,713
      
3.5
%
    
68,796
      
3.6
%
Total Assets
  
$
1,890,653
      
100.0
%
  
$
1,912,964
      
100.0
%
                                 
LIABILITIES &
                                
STOCKHOLDERS’ EQUITY
                                
Deposits:
                                
Demand
  
$
743,419
      
39.2
%
  
$
783,005
      
40.9
%
Interest-Bearing Transaction Deposits
    
375,639
      
19.9
%
    
421,493
      
22.0
%
Savings and MMDAs
    
435,160
      
23.0
%
    
454,854
      
23.8
%
Time Certificates
    
152,285
      
8.1
%
    
97,639
      
5.1
%
Other Liabilities
    
16,542
      
0.9
%
    
18,565
      
1.0
%
Stockholders’ Equity
    
167,608
      
8.9
%
    
137,408
      
7.2
%
Total Liabilities and Stockholders’ Equity
  
$
1,890,653
      
100.0
%
  
$
1,912,964
      
100.0
%

(1)
Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for credit losses.

37
Net Interest Earnings
 Average Balances, Yields and Rates
(Dollars in thousands)

   
2024
    
2023
  
Assets
  
Average
Balance
    
Interest
Income/
Expense
    
Yields
Earned/
Rates
Paid
    
Average
Balance
    
Interest
Income/
Expense
    
Yields
Earned/
Rates
Paid
  
                                     
Total Loans, Including Loan Fees(1)
  
$
1,045,419
    
$
55,389
      
5.30
%
  
$
1,005,066
    
$
52,203
      
5.19
%
                                                 
Due From Banks
    
121,308
      
6,477
      
5.34
%
    
167,850
      
8,594
      
5.12
%
                                                 
Certificates of Deposit
    
17,780
      
724
      
4.07
%
    
20,995
      
757
      
3.61
%
                                                 
Investment Securities:
                                                
Taxable
    
548,661
      
13,795
      
2.51
%
    
559,905
      
10,850
      
1.94
%
                                                 
Non-taxable (2)
    
42,564
      
1,216
      
2.86
%
    
35,139
      
914
      
2.60
%
                                                 
Total Investment Securities
    
591,225
      
15,011
      
2.54
%
    
595,044
      
11,764
      
1.98
%
                                                 
Other Earning Assets
    
10,518
      
1,051
      
9.99
%
    
10,119
      
805
      
7.96
%
                                                 
Total Earning Assets
  
$
1,786,250
    
$
78,652
      
4.40
%
  
$
1,799,074
    
$
74,123
      
4.12
%
                                                 
Cash and Due from Banks
    
38,690
                      
45,094
                  
                                                 
Interest Receivable and Other Assets
    
65,713
                      
68,796
                  
                                                 
Total Assets
  
$
1,890,653
                    
$
1,912,964
                  

(1)
Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for credit losses, but non-accrued interest thereon is excluded. Includes amortization of deferred loan fees and costs.

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

38
Continuation of
Net Interest Earnings
Average Balances, Yields and Rates
(Dollars in thousands)

   
2024
    
2023
  
                                     
Liabilities and Stockholders' Equity
  
Average
Balance
    
Interest
Income/
Expense
    
Yields
Earned/
Rates
Paid
    
Average
Balance
    
Interest
Income/
Expense
    
Yields
Earned/
Rates
Paid
  
                                     
Interest-Bearing Deposits:
                                    
Interest-Bearing
                                    
Transaction Deposits
  
$
375,639
    
$
2,507
      
0.67
%
  
$
421,493
    
$
1,614
      
0.38
%
 
                                                
Savings and MMDAs
    
435,160
      
5,478
      
1.26
%
    
454,854
      
2,937
      
0.65
%
 
                                                
Time Certificates
    
152,285
      
6,307
      
4.14
%
    
97,639
      
3,033
      
3.11
%
                                                 
Total Interest-Bearing Deposits
    
963,084
      
14,292
      
1.48
%
    
973,986
      
7,584
      
0.78
%
                                                 
Demand Deposits
    
743,419
                      
783,005
                  
                                                 
Total Deposits
    
1,706,503
    
$
14,292
      
0.84
%
    
1,756,991
    
$
7,584
      
0.43
%
                                                 
Interest payable and Other Liabilities
    
16,542
                      
18,565
                  
                                                 
Stockholders’ Equity
    
167,608
                      
137,408
                  
                                                 
Total Liabilities and Stockholders’ Equity
  
$
1,890,653
                    
$
1,912,964
                  
                                                 
Net Interest Income and
                                                
Net Interest Margin (1)
          
$
64,360
      
3.60
%
          
$
66,539
      
3.70
%
                                                 
Net Interest Spread (2)
                    
2.92
%
                    
3.34
%

(1)
Net interest margin is computed by dividing net interest income by total average interest-earning assets.

(2)
Net interest spread represents the average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities.

39
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 2024 over 2023.  Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume.

   
2024 Over 2023
  
   
Volume
    
Interest
Rate
    
Change
  
                   
Increase (Decrease) in Interest Income:
                  
                   
Loans
  
$
2,085
    
$
1,101
    
$
3,186
  
                         
Due From Banks
    
(2,472
)
    
355
      
(2,117
)
 
                        
Certificates of Deposit
    
(124
)
    
91
      
(33
)
 
                        
Investment Securities - Taxable
    
(220
)
    
3,165
      
2,945
  
 
                        
Investment Securities - Non-taxable
    
205
      
97
      
302
  
 
                        
Other Earning Assets
    
33
      
213
      
246
  
                         
     
(493
)
    
5,022
      
4,529
  
                         
Increase (Decrease) in Interest Expense:
                        
                         
Deposits:
                        
                         
Interest-Bearing Transaction Deposits
    
(193
)
    
1,086
      
893
  
 
                        
Savings and MMDAs
    
(133
)
    
2,674
      
2,541
  
 
                        
Time Certificates
    
2,056
      
1,218
      
3,274
  
                         
     
1,730
      
4,978
      
6,708
  
Increase (decrease) in Net Interest Income:
  
$
(2,223
)
  
$
44
    
$
(2,179
)

40
INVESTMENT PORTFOLIO

Composition of Investment Securities

The mix of investment securities held by the Company at December 31 of the previous two fiscal years is as follows (dollars in thousands):

   
2024
    
2023
  
Investment securities available-for-sale (at fair value):
            
             
U.S. Treasury Securities
  
$
105,545
    
$
87,182
  
Securities of U.S. Government Agencies and Corporations
    
95,684
      
115,079
  
Obligations of State and Political Subdivisions
    
67,591
      
51,677
  
Collateralized Mortgage Obligations
    
94,945
      
90,947
  
Mortgage-Backed Securities
    
270,088
      
227,472
  
                 
Total Investments
  
$
633,853
    
$
572,357
  

Maturities of Investment Securities

The following table summarizes the contractual maturity (dollars in thousands) and projected yields of the Company’s investment securities as of December 31, 2024.  The yields on tax-exempt securities are shown on a tax equivalent basis.  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 carrying value of mortgage related securities.

Period to Maturities

 
  
Within One Year
    
After One But
Within Five Years
    
After Five But
Within Ten Years
  
 
  
Amount
    
Yield
    
Amount
    
Yield
    
Amount
    
Yield
  
 
                                    
Investment securities available-for-sale (at fair value):
                                    
U.S. Treasury Securities
  
$
35,601
      
3.09
%
  
$
68,967
      
3.35
%
  
$
977
      
4.07
%
Securities of U.S. Government Agencies and Corporations
    
25,807
      
2.08
%
    
51,227
      
2.12
%
    
18,650
      
3.88
%
Obligations of State and Political Subdivisions
    
699
      
4.96
%
    
6,877
      
2.68
%
    
18,743
      
3.21
%
Collateralized Mortgage Obligations
    
94
      
1.86
%
    
5,062
      
4.28
%
    
2,680
      
2.95
%
Mortgage-Backed Securities
    
72
      
2.01
%
    
15,066
      
3.38
%
    
104,865
      
3.05
%
 
                                                
TOTAL
  
$
62,273
      
2.69
%
  
$
147,199
      
2.93
%
  
$
145,915
      
3.18
%

   
After Ten Years
    
Total
  
   
Amount
    
Yield
    
Amount
    
Yield
  
                         
Investment securities available-for-sale (at fair value):
                        
U.S. Treasury Securities
  
$
—
      
—
    
$
105,545
      
3.27
%
Securities of U.S. Government Agencies and Corporations
    
—
      
—
      
95,684
      
2.45
%
Obligations of State & Political Subdivisions
    
41,272
      
3.88
%
    
67,591
      
3.58
%
Collateralized Mortgage Obligations
    
87,109
      
2.25
%
    
94,945
      
2.38
%
Mortgage-Backed Securities
    
150,085
      
2.85
%
    
270,088
      
2.96
%
                                 
TOTAL
  
$
278,466
      
2.82
%
  
$
633,853
      
2.91
%

41
LOAN PORTFOLIO

Composition of Loans

The mix of loans, net of deferred origination fees and costs and allowance for credit losses and excluding loans held-for-sale, at December 31, 2024 and December 31, 2023 is as follows (dollars in thousands):

   
2024
    
2023
  
                         
   
Balance
    
Percent
    
Balance
    
Percent
  
                         
Commercial
  
$
117,921
      
11.1
%
  
$
106,897
      
10.0
%
Commercial Real Estate
    
723,650
      
68.1
%
    
721,729
      
67.5
%
Agriculture
    
92,564
      
8.7
%
    
105,838
      
9.9
%
Residential Mortgage
    
105,886
      
10.0
%
    
107,328
      
10.0
%
Residential Construction
    
6,858
      
0.6
%
    
12,323
      
1.2
%
Consumer
    
15,716
      
1.5
%
    
14,868
      
1.4
%
     
1,062,595
      
100.0
%
    
1,068,983
      
100.0
%
Allowance for credit losses
    
(15,885
)
            
(16,596
)
        
Net deferred origination fees and costs
    
142
              
78
          
TOTAL
  
$
1,046,852
            
$
1,052,465
          

As shown in the comparative figures for loan mix during 2024 and 2023, total loans decreased primarily as a result of decreases in agriculture, residential mortgage and residential construction loans, which was partially offset by increases in commercial, commercial real estate and consumer loans.

Commercial loans are primarily for financing the needs of a diverse group of businesses located in the Bank’s market areas.  Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied.  Real estate construction loans are generally for financing the construction of single-family residential homes for individuals and builders we believe are well-qualified.  These loans are secured by real estate and have short maturities.  Residential mortgage loans, which are secured by real estate, include owner-occupied and non-owner-occupied properties in the Bank’s market areas.  Loans are considered agriculture loans when the primary source of repayment is from the sale of an agricultural or agricultural-related product or service.  Such loans are secured and/or unsecured to producers and processors of crops and livestock.  The Bank also makes loans to individuals for investment purposes.

42
Maturities and Sensitivities of Loans to Changes in Interest Rates

The following table presents the maturity distribution of our loan portfolio at December 31, 2024 (dollars in thousands) (excludes loans held-for-sale).  The table also presents the portion of loans that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.

   
Due in One Year or Less
    
After One but Within Five Years
    
After Five but Within Fifteen Years
    
After Fifteen Years
    
Total
  
Commercial
  
$
16,805
    
$
63,951
    
$
37,135
    
$
30
    
$
117,921
  
Commercial Real Estate
    
20,816
      
146,762
      
511,730
      
44,342
      
723,650
  
Agriculture
    
19,852
      
3,119
      
25,519
      
44,074
      
92,564
  
Residential Mortgage
    
—
      
1,765
      
24,454
      
79,667
      
105,886
  
Residential Construction
    
795
      
—
      
825
      
5,238
      
6,858
  
Consumer
    
1,143
      
5,606
      
7,495
      
1,472
      
15,716
  
Total
  
$
59,411
    
$
221,203
    
$
607,158
    
$
174,823
    
$
1,062,595
  
Loans with fixed interest rates:
                                        
Commercial
  
$
1,792
    
$
50,411
    
$
27,349
    
$
—
    
$
79,552
  
Commercial Real Estate
    
18,209
      
88,640
      
234,425
      
19,494
      
360,768
  
Agriculture
    
3,321
      
1,337
      
17,114
      
—
      
21,772
  
Residential Mortgage
    
—
      
1,086
      
21,550
      
10,212
      
32,848
  
Residential Construction
    
95
      
—
      
—
      
—
      
95
  
Consumer
    
415
      
192
      
—
      
606
      
1,213
  
Total
  
$
23,832
    
$
141,666
    
$
300,438
    
$
30,312
    
$
496,248
  
Loans with variable interest rates:
                                        
Commercial
  
$
15,013
    
$
13,540
    
$
9,786
    
$
30
    
$
38,369
  
Commercial Real Estate
    
2,607
      
58,122
      
277,305
      
24,848
      
362,882
  
Agriculture
    
16,531
      
1,782
      
8,405
      
44,074
      
70,792
  
Residential Mortgage
    
—
      
679
      
2,904
      
69,455
      
73,038
  
Residential Construction
    
700
      
—
      
825
      
5,238
      
6,763
  
Consumer
    
728
      
5,414
      
7,495
      
866
      
14,503
  
Total
  
$
35,579
    
$
79,537
    
$
306,720
    
$
144,511
    
$
566,347
  

Non-Accrual, Past Due, OREO and Loan Modifications

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.  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 and an appropriate period of performance has been demonstrated.

The following table summarizes the Company’s non-accrual loans by loan category (dollars in thousands), net of guarantees of the State of California and U.S. Government, including its agencies and its government-sponsored agencies, at December 31, 2024 and 2023.

   
At December 31, 2024
    
At December 31, 2023
  
   
Gross
    
Guaranteed
    
Net
    
Gross
    
Guaranteed
    
Net
  
                                     
Commercial
  
$
139
    
$
139
    
$
—
    
$
—
    
$
—
    
$
—
  
Commercial real estate
    
7,993
      
—
      
7,993
      
—
      
—
      
—
  
Agriculture
    
2,236
      
—
      
2,236
      
2,871
      
—
      
2,871
  
Residential mortgage
    
202
      
—
      
202
      
424
      
—
      
424
  
Residential construction
    
—
      
—
      
—
      
—
      
—
      
—
  
Consumer
    
642
      
—
      
642
      
703
      
—
      
703
  
Total non-accrual loans
  
$
11,212
    
$
139
    
$
11,073
    
$
3,998
    
$
—
    
$
3,998
  

Non-accrual loans amounted to $11,212,000 at December 31, 2024, and were comprised of one commercial loan totaling $139,000,
43
one commercial real estate loan totaling $7,993,000, two agriculture loans totaling $2,236,000, three residential mortgage loans totaling $202,000 and four consumer loans totaling $642,000.  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 loan totaling $424,000 and four consumer loans totaling $703,000.

If interest on non-accrual loans had been accrued, such interest income would have approximated $1,529,000 and $364,000 during the years ended December 31, 2024 and 2023, respectively.  Income actually recognized on nonaccrual loans at payoff approximated $450,000 and $1,626,000 for the years ended December 31, 2024 and 2023, respectively.

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.

As the following table illustrates, total non-performing assets, which consists of loans on non-accrual status, loans past due 90-days and still accruing and Other Real Estate Owned ("OREO") net of guarantees of the State of California and U.S. Government, including its agencies and its government-sponsored agencies, increased $2,739,000, or 32.9%, to $11,073,000 from December 31, 2023 to December 31, 2024.  Non-performing assets net of guarantees represented 0.6% and 0.5% of total assets at December 31, 2024 and 2023, respectively.  The Bank’s management believes that the $11,212,000 in non-accrual loans were appropriately reflected at their fair value at December 31, 2024.  However, no assurance can be given that the existing or any additional collateral will be sufficient to secure full recovery of the obligations owed under these loans.

   
At December 31, 2024
    
At December 31, 2023
  
   
Gross
    
Guaranteed
    
Net
    
Gross
    
Guaranteed
    
Net
  
(dollars in thousands)
                                    
Non-accrual loans
  
$
11,212
    
$
139
    
$
11,073
    
$
3,998
    
$
—
    
$
3,998
  
Loans 90 days past due and still accruing
    
—
      
—
      
—
      
4,336
      
—
      
4,336
  
Total non-performing loans
    
11,212
      
139
      
11,073
      
8,334
      
—
      
8,334
  
Other real estate owned
    
—
      
—
      
—
      
—
      
—
      
—
  
Total non-performing assets
    
11,212
      
139
      
11,073
      
8,334
      
—
      
8,334
  
Non-performing loans (net of guarantees) to total loans
                    
1.0
%
                    
0.8
%
Non-performing assets (net of guarantees) to total assets
                    
0.6
%
                    
0.5
%
Allowance for credit losses to non-performing loans (net of guarantees)
                    
143.5
%
                    
199.1
%

The Company had no loans that were 90 days or more past due and still accruing at December 31, 2024.  The Company had two loans totaling $4,336,000 that were 90 days or more past due and still accruing at December 31, 2023.  The two loans totaling $4,336,000 that were 90 days or more past due and still accruing at December 31, 2023 were comprised of one residential construction loan totaling $3,420,000 and one residential mortgage loan totaling $916,000 that were both well secured and in process of collection.

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 the years ended December 31, 2024 and 2023.

44
Potential Problem Loans

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 credit 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 banking 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 must 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 and improbable.  OREO 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.

Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses.  These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above.  Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. When repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.  Appropriate valuations are obtained at origination of the credit and periodically thereafter (generally every 3-12 months depending on the collateral type and market conditions), once repayment is questionable, and the loan has been deemed classified.

Commercial real estate loans generally fall into two categories, owner-occupied and non-owner occupied.  Loans secured by owner occupied real estate are primarily susceptible to changes in the market conditions of the related business.  This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles. These same risks apply to commercial loans whether secured by equipment, receivables, or other personal property or unsecured.  Problem commercial real estate loans are generally identified by periodic review of financial information that may include financial statements, tax returns, payment history of the borrower, and site inspections.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Losses on loans secured by owner-occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral.  When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default.  Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resultant over-supply of space.  Losses are dependent on the value of underlying collateral at the time of default.  Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means.  Appropriate valuations are obtained at origination of the credit and periodically thereafter (generally every 3-12 months depending on the collateral type and market conditions), once repayment is questionable, and the loan has been deemed classified.

Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock.  Repayment is primarily from the sale of an agricultural product or service.  Agricultural loans are generally secured by inventory, receivables, equipment, and other real property.  Agricultural loans primarily are susceptible to changes in market demand for specific commodities.  This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as changing weather conditions.  Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or
45
additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.  Appropriate valuations are obtained at origination of the credit and periodically thereafter (generally every 3-12 months depending on the collateral type and market conditions), once repayment is questionable, and the loan has been deemed classified.

Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’s cash flow to sustain payments, and shortfalls in collateral value.  In general, non-payment is due to loss of employment and follows general economic trends in the marketplace, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts. Problem residential mortgage loans are generally identified via payment default. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. When repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.  Appropriate valuations are obtained at origination of the credit and periodically thereafter (generally every 3-12 months depending on the collateral type and market conditions), once repayment is questionable, and the loan has been deemed classified.

Construction loans, whether owner occupied or non-owner occupied residential development loans, are not only susceptible to the related risks described above but the added risks of construction itself, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion.  Again, losses are primarily related to underlying collateral value and changes therein as described above.  Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.  Appropriate valuations are obtained at origination of the credit and periodically thereafter (generally every 3-12 months depending on the collateral type and market conditions), once repayment is questionable, and the loan has been deemed classified.

Consumer loans, whether unsecured or secured, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’s cash flow to sustain payments, and shortfall in collateral value.  In general, non-payment is due to loss of employment and will follow general economic trends in the marketplace, particularly the upward movements in the unemployment rate, loss of collateral value, and demand shifts.  Problem consumer loans are generally identified via payment default. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. When repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.  Appropriate valuations are obtained at origination of the credit and periodically thereafter (generally every 3-12 months depending on the collateral type and market conditions), once repayment is questionable, and the loan has been deemed classified.

Once a loan becomes delinquent or repayment becomes questionable, a Company collection officer will address collateral shortfalls with the borrower and attempt to obtain additional collateral or a principal payment.  If this is not forthcoming and payment of principal and interest in accordance with the contractual terms of the loan agreement becomes unlikely, the Company will consider the loan to be individually evaluated and will estimate its probable loss, using the present value of future cash flows discounted at the loan's effective interest rate, the loan's observable market price, or the fair value of the collateral if the loan is collateral dependent.  For collateral dependent loans, the Company will utilize a recent valuation of the underlying collateral less estimated costs of sale, and charge-off the loan down to the estimated net realizable amount.  Depending on the length of time until final collection, the Company may periodically revalue the estimated loss and take additional charge-offs or specific reserves as warranted. Revaluations may occur as often as every 3-12 months depending on the underlying collateral and volatility of values.  Final charge-offs or recoveries are taken when the collateral is liquidated and the actual loss is confirmed.  Unpaid balances on loans after or during collection and liquidation may also be pursued through legal action and attachment of wages or judgment liens on the borrower's other assets.

46
Excluding the non-performing loans, net of guarantees cited previously, loans totaling $11,782,000 and $12,327,000 were classified as substandard or doubtful loans, representing potential problem loans at December 31, 2024 and 2023, respectively.  In Management’s opinion, the potential loss related to these problem loans was sufficiently covered by the Bank’s existing loan loss reserve (Allowance for Credit Losses) at December 31, 2024 and 2023.  The ratio of the allowance for credit losses to total loans at December 31, 2024 and 2023 was 1.49% and 1.55%, respectively.  Management considered the allowance for credit losses of $15,885,000 to be adequate as a reserve against expected losses as of December 31, 2024.

47
Analysis of the Allowance for Credit Losses On Loans
(Dollars in thousands)

   
2024
    
2023
    
2022
  
                   
Balance at Beginning of Year
  
$
16,596
    
$
14,792
    
$
13,952
  
Impact of adopting ASC 326
    
—
      
800
      
—
  
Provision for Credit Losses
    
200
      
1,150
      
900
  
Loans Charged-Off:
                        
Commercial
    
(956
)
    
(366
)
    
(297
)
Commercial Real Estate
    
—
      
—
      
—
  
Agriculture
    
—
      
(2,567
)
    
—
  
Residential Mortgage
    
—
      
(3
)
    
—
  
Residential Construction
    
—
      
—
      
—
  
Consumer
    
(28
)
    
(13
)
    
(48
)
                         
Total Charged-Off
    
(984
)
    
(2,949
)
    
(345
)
                         
Recoveries:
                        
Commercial
    
60
      
235
      
275
  
Commercial Real Estate
    
—
      
—
      
—
  
Agriculture
    
—
      
2,567
      
—
  
Residential Mortgage
    
—
      
—
      
—
  
Residential Construction
    
—
      
—
      
—
  
Consumer
    
13
      
1
      
10
  
                         
Total Recoveries
    
73
      
2,803
      
285
  
                         
Net Charge-offs
    
(911
)
    
(146
)
    
(60
)
                         
Balance at End of Year
  
$
15,885
    
$
16,596
    
$
14,792
  
                         
Ratio of Net Charge-Offs
                        
During the Year to Average Loans
                        
Outstanding During the Year
    
(0.09
)%
    
(0.01
)%
    
(0.01
)%
Allowance for Credit Losses to Total Loans
    
1.49
%
    
1.55
%
    
1.50
%
Nonaccrual loans to Total Loans
    
1.06
%
    
0.37
%
    
0.80
%
Allowance for Credit Losses to Nonaccrual loans
    
141.68
%
    
415.11
%
    
180.90
%

48
Allocation of the Allowance for Credit Losses

The Allowance for Credit Losses has been established as a general component available to absorb expected credit losses throughout the loan portfolio.  The following table is an allocation of the Allowance for Credit Losses balance on the dates indicated (dollars in thousands):

   
December 31, 2024
    
December 31, 2023
  
             
   
Allocation of Allowance for Credit Losses Balance
    
Allowance as a % of Total Allowance
    
Loans as a % of Total Loans, net
    
Allocation of Allowance for Credit Losses Balance
    
Allowance as a % of Total Allowance
    
Loans as a % of Total Loans, net
  
Loan Type:
                                    
                                     
Commercial
  
$
1,622
      
10.2
%
    
11.1
%
  
$
2,041
      
12.3
%
    
10.0
%
Commercial Real Estate
    
10,245
      
64.5
%
    
68.1
%
    
10,864
      
65.5
%
    
67.5
%
Agriculture
    
1,555
      
9.8
%
    
8.7
%
    
997
      
6.0
%
    
9.9
%
Residential Mortgage
    
1,779
      
11.2
%
    
10.0
%
    
2,005
      
12.1
%
    
10.0
%
Residential   Construction
    
433
      
2.7
%
    
0.6
%
    
334
      
2.0
%
    
1.2
%
Consumer
    
251
      
1.6
%
    
1.5
%
    
355
      
2.1
%
    
1.4
%
                                                 
Total
  
$
15,885
      
100.0
%
    
100.0
%
  
$
16,596
      
100.0
%
    
100.0
%

The Bank believes that any breakdown or allocation of the allowance into loan categories lends an appearance of exactness, which does not exist, because the allowance is available for all loans.  The allowance breakdown shown above is computed taking actual experience into consideration but should not be interpreted as an indication of the specific amount and allocation of actual charge-offs that may ultimately occur.  For additional information, see Note 3 to the Consolidated Financial Statements in this Form 10-K.

49
Deposits

The following table sets forth the average amount and the average rate paid on each of the listed deposit categories (dollars in thousands) during the periods specified:

   
2024
    
2023
    
2022
  
   
Average Amount
    
Average Rate
    
Average Amount
    
Average Rate
    
Average Amount
    
Average Rate
  
                                     
Deposit Type:
                                    
                                     
Non-interest-Bearing Demand
  
$
743,419
      
—
    
$
783,005
      
—
    
$
805,738
      
—
  
                                                 
Interest-Bearing Demand (NOW)
  
$
375,639
      
0.67
%
  
$
421,493
      
0.38
%
  
$
441,543
      
0.08
%
                                                 
Savings and MMDAs
  
$
435,160
      
1.26
%
  
$
454,854
      
0.65
%
  
$
449,169
      
0.16
%
                                                 
Time
  
$
152,285
      
4.14
%
  
$
97,639
      
3.11
%
  
$
47,022
      
0.28
%

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

Time Deposits include brokered deposits totaling $9,999,000 and $39,986,000 as of December 31, 2024 and December 31, 2023, respectively.  The brokered deposits purchased are time deposits $250,000 (dollars in thousands) or less that mature within twelve months.

The following table sets forth by time remaining to maturity for the Bank’s time deposits over $250,000 (dollars in thousands) as of December 31, 2024:

Three months or less
  
$
11,741
  
         
Over three months through six months
    
14,051
  
         
Over six months through twelve months
    
13,180
  
         
Over twelve months
    
2,400
  
         
Total
  
$
41,372
  

Short-Term Borrowings

The Company had no secured borrowings and no Federal Funds purchased at December 31, 2024 and 2023.

Additional short-term borrowings available to the Company consist of a line of credit and advances with the Federal Home Loan Bank ("FHLB") secured under terms of a blanket collateral agreement by a pledge of FHLB stock and all loans held by the Company. At December 31, 2024, the Company had a current collateral borrowing capacity with the FHLB of $403,087,000 and, at such date, also had unsecured formal lines of credit totaling $130,000,000 with correspondent banks.

The Company had no Federal Funds purchased during the years ended December 31, 2024 and 2023.

Long-Term Borrowings

The Company had no long-term borrowings at December 31, 2024 and 2023.  There were no average outstanding balances of long-term borrowings during 2024 and 2023.

50
Supplemental Compensation Plans

The Company and the Bank maintain an unfunded non-contributory defined benefit pension plan (“Salary Continuation Plan”) and related split dollar plan for a select group of highly compensated employees.  Eligibility to participate in the Salary Continuation Plan is limited to a select group of management or highly compensated employees of the Bank that are designated by the Board.  Additionally, the Company and the Bank adopted a supplemental executive retirement plan (“SERP”) in 2006.  The SERP is intended to integrate the various forms of retirement payments offered to executives.  At December 31, 2024, the benefit obligation was $4,500,000, of which $4,793,000 was recorded in interest payable and other liabilities and $(293,000) was recorded in accumulated other comprehensive loss, net, in the Consolidated Balance Sheets.  At December 31, 2023, the benefit obligation was $4,979,000, of which $4,879,000 was recorded in interest payable and other liabilities and $100,000 was recorded in accumulated other comprehensive loss, net, in the Consolidated Balance Sheets.

The Company and the Bank maintain an unfunded non-contributory defined benefit pension plan (“Directors’ Retirement Plan”) and related split dollar plan for the directors of the Bank.  At December 31, 2024, the benefit obligation was $397,000, of which $539,000 was recorded in interest payable and other liabilities and $(142,000) was recorded in accumulated other comprehensive loss, net, in the Consolidated Balance Sheets.  At December 31, 2023, the benefit obligation was $424,000, of which $596,000 was recorded in interest payable and other liabilities and $(172,000) was recorded in accumulated other comprehensive loss, net, in the Consolidated Balance Sheets.

For additional information, see Note 16 to the Consolidated Financial Statements in this Form 10-K.

Overview

Year Ended December 31, 2024 Compared to Year Ended December 31, 2023

Net income for the year ended December 31, 2024, was $20.0 million, representing a decrease of $1.6 million, or 7.1%, compared to net income of $21.6 million for the year ended December 31, 2023.  The decrease in net income was attributable to a decrease in net interest income of $2.2 million and a decrease in non-interest income of $1.8 million, which was partially offset by a decrease in provision for credit losses of $1.4 million and a decrease in non-interest expenses of $0.8 million.  The decrease in non-interest income was primarily due to the bargain purchase gain of $1.4 million as a result of the branch acquisitions in 2023 which was not repeated in 2024.  The decrease in provision for credit losses was due to decreases in unfunded commitments.

Total assets were $1.89 billion as of December 31, 2024, representing an increase of $19.9 million, or 1.1%, compared to total assets of $1.87 billion as of December 31, 2023.  For the year ended December 31, 2024 compared to the year ended December 31, 2023, there was a $61.5 million increase in investment securities, which was partially offset by a $29.8 million decrease in cash, $3.6 million decrease in certificates of deposit, $5.6 million decrease in net loans (including loans held-for-sale), $0.7 million decrease in premises and equipment, $0.8 million decrease in core deposit intangible and $1.1 million decrease in interest receivable and other assets.  Total deposits increased $7.6 million, or 0.5%, to $1.70 billion as of December 31, 2024, compared to $1.69 billion at December 31, 2023.

51
Results of Operations

Net Interest Income

Net interest income is the excess of interest and fees earned on the Bank’s loans, investment securities, federal funds sold and banker’s acceptances over the interest expense paid on deposits and other borrowed funds which are used to fund those assets.  Net interest income is primarily affected by the yields and mix of the Bank’s interest-earning assets and interest-bearing liabilities outstanding during the period.  The $4,529,000 increase in the Bank's interest and dividend income in 2024 from 2023 was primarily driven by an increase in interest rates and an increase in average balance of loans, which was partially offset by a decrease in average balances of due from banks and certificates of deposit.  The $3,186,000 increase in the Bank’s interest income on loans was primarily driven by an increase of $1,101,000 attributable to an increase in interest rates compounded by an increase of $2,085,000 driven by an increase in average loans outstanding.  The $2,117,000 decrease in the Bank’s interest income on due from banks was primarily driven by a decrease of $2,472,000 due to the decreased average due from bank balances outstanding, which was partially offset by an increase of $355,000 attributable to an increase in average interest rates paid on excess reserves at the FRB.  The $33,000 decrease in the Bank's interest income on certificates of deposit was driven by a decrease of $124,000 due to the decrease in average certificates of deposit outstanding, which was partially offset by an increase of $91,000 due to the increase in average interest rates paid on certificates of deposit. The $3,247,000 increase in the Bank’s interest income on investment securities was driven by an increase of $3,262,000 due to an increase in interest rates, which was partially offset by a decrease of $15,000 driven by decreased investment securities balances outstanding.  The $6,708,000 increase in the Bank's interest expense on deposits was primarily driven by an increase of $4,978,000 due to increases in interest rates coupled with an increase of $1,730,000 due to an increase in average time certificates balances outstanding.  See “Analysis of Changes in Interest Income and Interest Expense” set forth on page 40 of this Annual Report on Form 10-K for the effects of interest rates and loan/deposit volume on net interest income.

The FRB influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is significantly affected by changes in the prime interest rate.  As of December 31, 2023, the prime rate was 8.50%.
The prime rate decreased several times beginning in September 2024, decreasing to 7.50% as of December 31, 2024.

As of December 31, 2023, the target range for the federal funds rate was 5.25% to 5.50%.  To support economic growth, the FRB cut interest rates in September, November and December.  As of December 31, 2024, the target rate for the federal funds rate was 4.25% to 4.50%.  For additional information, see “The Bank is Subject to Interest Rate Risk” and “Beginning in 2021, the U.S. Economy Began to Reflect Relatively Rapid Rates of Increase in the Consumer Price Index and Other Economic Indices; a Prolonged Elevated Rate of Inflation Could Present Risks for the U.S. Banking Industry and Our Business”, in “Risk Factors” (Item 1A) of this Annual Report on Form 10-K.

We are primarily funded by core deposits, with non-interest-bearing demand deposits historically being a significant source of funds. This lower-cost funding base is expected to have a positive impact on our net interest income and net interest margin in a rising interest rate environment.

The nature and impact of future changes in interest rates and monetary policy on the business and earnings of the Company cannot be predicted.  For additional information, see “The Effects of Changes or Increases in, or Supervisory Enforcement of, Banking or Other Laws and Regulations or Governmental Fiscal or Monetary Policies Could Adversely Affect Us”, and “The Bank is Subject to Interest Rate Risk” and “Beginning in 2021, the U.S. Economy Began to Reflect Relatively Rapid Rates of Increase in the Consumer Price Index and Other Economic Indices; a Prolonged Elevated Rate of Inflation Could Present Risks for the U.S. Banking Industry and Our Business” in “Risk Factors" (Item 1A) of this Annual Report on Form 10-K.

Interest income on loans for 2024 was up 6.1% from 2023, increasing from $55,389,000 to $52,203,000.  The increase in interest income on loans was primarily due to higher yields earned on newly originated loans and loans repricing at higher rates coupled with a 4.0% increase in average balance of loans.

Interest income on interest-bearing due from banks for 2024 was down 24.6% from 2023, decreasing from $8,594,000 to $6,477,000.  The decrease in interest income on interest-bearing due from banks was the result of a 27.7% decrease in average balances of interest-bearing due from banks, which was partially offset by a 22 basis point increase in yield on interest-bearing due from banks.

Interest income on certificates of deposit for 2024 was down 4.4% from 2023, decreasing from $757,000 to $724,000.  The decrease in interest income on certificates of deposit was primarily due to a 15.3% decrease in average balances of certificates of deposit, which was partially offset by a 46 basis point increase in yield on certificates of deposit.

Interest income on investment securities for 2024 was up 27.6% from 2023, increasing from $11,764,000 to $15,011,000.  The increase in interest income on investment securities was the result of a 56 basis point increase in investment securities yields, which was partially offset by a 0.6% decrease in average investment securities volume.  The Bank deployed excess liquidity into the

52
investment portfolio over the course of 2024 at higher reinvestment rates.  Investment securities yields were 2.54% and 1.98% for 2024 and 2023, respectively.

Interest expense on deposits for 2024 was up 88.5% from 2023, increasing from $7,584,000 to $14,292,000.  The increase in interest expense on deposits was the result of a 70 basis point increase in interest rates paid on interest-bearing deposits, which was partially offset by a 1.1% decrease in average balances of interest-bearing deposits.

The mix of deposits for the previous three years was as follows (dollars in thousands):

   
2024
    
2023
    
2022
  
                                     
   
Average Balance
    
Percent
    
Average Balance
    
Percent
    
Average Balance
    
Percent
  
                                     
Non-interest-Bearing Demand
  
$
743,419
      
43.6
%
  
$
783,005
      
44.5
%
  
$
805,738
      
46.2
%
                                                 
Interest-Bearing Demand (NOW)
    
375,639
      
22.0
%
    
421,493
      
24.0
%
    
441,543
      
25.3
%
                                                 
Savings and MMDAs
    
435,160
      
25.5
%
    
454,854
      
25.9
%
    
449,169
      
25.8
%
                                                 
Time
    
152,285
      
8.9
%
    
97,639
      
5.6
%
    
47,022
      
2.7
%
                                                 
Total
  
$
1,706,503
      
100.0
%
  
$
1,756,991
      
100.0
%
  
$
1,743,472
      
100.0
%

The Bank’s net interest margin (net interest income divided by average earning assets) was 3.60% in 2024 and 3.70% in 2023.  The net interest spread (average yield earned on interest-earning assets less the average rate paid on interest-bearing liabilities) was 2.92% in 2023 and 3.34% in 2023.  The 42 basis point decrease in net spread in 2024 over 2023 was due to an overall increase in interest rates on interest-bearing deposits, which was partially offset by an overall increase in interest rates on earning assets.

Provision for Credit Losses

The provision for credit losses is established by charges to earnings on management’s evaluation of expected losses on the loan portfolio.  Based on this evaluation, the Company recorded a reversal of provision for credit losses of $250,000 in 2024 and a provision for credit losses of $1,100,000 in 2023.  The reversal of provision for credit losses in 2024 was primarily due to a decrease in loans outstanding and a decrease in unfunded commitments.  The provision for credit losses in 2023 was primarily due to loan growth.  The ratio of the Allowance for Credit Losses to total loans at December 31, 2024 was 1.49% compared to 1.55% at December 31, 2023.  The ratio of the Allowance for Credit Losses to total non-accrual loans and loans past due 90 days or more, net of guarantees was 143.5% at December 31, 2024, compared to 199.1% at December 31, 2023.

53
Non-Interest Income and Expenses

Non-interest income consisted primarily of service charges on deposit accounts, net losses on sale of available-for-sale securities, net realized gains on sales of loans held-for-sale, debit card income, gain on bargain purchase and other income.  Non-interest income decreased to $6,019,000 in 2024 from $7,845,000 in 2023, representing a decrease of $1,826,000, or 23.3%. The decrease was primarily driven by a bargain purchase gain in 2023 which was not repeated in 2024.  The Company recognized a bargain purchase gain totaling $1.4 million as a result of the acquisition of the Colusa, Willows, and Orland branches in 2023.

Non-interest expenses consisted primarily of salaries and employee benefits, occupancy and equipment expense, data processing expense, amortization of core deposit intangible and other expenses.  Non-interest expenses decreased to $42,789,000 in 2024 from $43,638,000 in 2023, representing a decrease of $849,000, or 2.0%.

Following is an analysis of the increase or decrease in the components of non-interest expenses (dollars in thousands) during the periods specified:
   
2024 over 2023
  
             
   
Amount
    
Percent
  
             
Salaries and Employee Benefits
  
$
(2,064
)
    
(8.0
%)
Occupancy and Equipment
    
407
      
9.4
%
Data Processing
    
181
      
4.5
%
Stationery and Supplies
    
(36
)
    
(10.3
%)
Advertising
    
(14
)
    
(3.0
%)
Directors Fees
    
(18
)
    
(5.5
%)
Amortization of core deposit intangible
    
(8
)
    
(1.0
)%
Other Expense
    
703
      
9.5
%
                 
Total
  
$
(849
)
    
(2.0
)%

The decrease in salaries and employee benefits in 2024 was primarily due to a 18.9% decrease in commissions, 55.8% decrease in contingent compensation and 42.3% decrease in profit sharing plan contributions, partially offset by a 67.5% increase in group insurance.  The decrease in commissions is primarily due to a decrease in mortgage loan production volumes and deposit growth.  The decrease in contingent compensation is primarily due to a decrease in incentive goals met.  The decrease in profit sharing plan contributions is primarily due to a change in the calculation of profit sharing plan contributions.  The increase in group insurance is primarily due to increased costs of insurance provided to employees.  The increase in occupancy and equipment and data processing expense was primarily due to a full year of expenses related to the branches acquired in the first quarter of 2023.  The increase in other expenses was primarily due to a 95.4% increase in contributions, a 30.5% increase in consulting fees and a 200.2% increase in loan collection expense, which was partially offset by a 51.5% decrease in legal fees.

54
Income Taxes

The provision for income taxes is primarily affected by the tax rate, the level of earnings before taxes and the level of tax-exempt income.  In 2024, tax expense decreased to $7,806,000 from $8,092,000 in 2023, due to a decrease in income before taxes.  Non-taxable municipal bond income was $1,216,000 and $914,000 for the years ended December 31, 2024 and 2023, respectively.

Liquidity

Liquidity is defined as the ability to generate cash at a reasonable cost to fulfill lending commitments and support asset growth, while satisfying the withdrawal demands of deposit customers and any debt repayment requirements.  The Bank’s principal sources of liquidity are core deposits and loan and investment payments and proceeds of sale and prepayments.  Providing secondary sources of liquidity are excess reserves at the Federal Reserve Bank and the available-for-sale investment portfolio. The Company held $59,816,000 in excess reserves at the Federal Reserve Bank and $633,853,000 total investment securities at December 31, 2024.  Under certain deposit, borrowing, and other arrangements, the Company must hold and pledge investment securities as collateral.  At December 31, 2024, such collateral requirements totaled approximately $53,589,000.  As a smaller source of liquidity, the Bank can utilize existing credit arrangements.

The Company’s primary source of liquidity on a stand-alone basis is dividends from the Bank.  As discussed in Part I (Item 1) of this Annual Report on Form 10-K, dividends from the Bank are subject to regulatory and corporate law restrictions.

Liquidity risk can result from the mismatching of asset and liability cash flows, or from disruptions in the financial markets.  The Bank experiences seasonal swings in deposits, which can impact liquidity.  Management has sought to address these seasonal swings by scheduling investment maturities and developing seasonal credit arrangements with the FHLB, Federal Reserve Bank and Federal Funds lines of credit with correspondent banks.  The Company maintains short-term unsecured lines of credit with other banks which totaled $130,000,000 at December 31, 2024.  Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity at December 31, 2024 of $403,087,000; credit availability is subject to certain collateral requirements.

In addition, the ability of the Bank’s real estate department to originate and sell loans into the secondary market has provided another tool for the management of liquidity.  As of December 31, 2024, the Company has not created any special purpose entities to securitize assets or to obtain off-balance sheet funding.

The liquidity position of the Bank is managed daily, thus enabling the Bank to adapt its position according to market fluctuations.  Liquidity is measured by various ratios, the most common of which is the ratio of net loans (including loans held-for-sale) to deposits.  This ratio was 61.6% on December 31, 2024, and 62.2% on December 31, 2023.  The Bank’s ratio of core deposits to total assets was 87.0% for each of the years ended December 31, 2024 and December 31, 2023.  Core deposits include demand deposits, interest-bearing transaction deposits, savings and money market deposit accounts, and non-brokered time deposits of $250,000 or less.  Core deposits are important in maintaining a strong liquidity position as they represent a stable and relatively low-cost source of funds.  Management believes that the Bank’s liquidity position was adequate in 2024.  This is best illustrated by the change in the Bank’s net non-core ratio, which explains the degree of reliance on non-core liabilities to fund long-term assets.  At December 31, 2024, the Bank’s net core funding dependence ratio, the difference between non-core funds, time deposits $250,000 or more and brokered time deposits under $250,000, and short-term investments to long-term assets, was (5.17)% as of December 31, 2024, and (8.45%) as of December 31, 2023.  This ratio indicated that, at December 31, 2024, the Bank did not significantly rely upon non-core deposits and borrowings to fund the Bank’s long-term assets, namely loans and investments.  The Bank believes that by maintaining adequate volumes of short-term investments and implementing competitive pricing strategies on deposits, it can ensure adequate liquidity to support future growth.  The Bank also believes that its liquidity position remains strong to meet both present and future financial obligations and commitments, events or uncertainties that have resulted or are reasonably likely to result in material changes with respect to the Bank’s liquidity.

55
Commitments

The following table details the amounts and expected maturities of commitments as of December 31, 2024 (amounts in thousands):

   
Maturities by period
  
Commitments
  
Total
    
Less than 1 year
    
1-3 years
    
3-5 years
    
More than 5 years
  
                               
Commitments to extend credit
                              
Commercial
  
$
69,040
    
$
45,546
    
$
1,451
    
$
11,008
    
$
11,035
  
Commercial Real Estate
    
14,202
      
179
      
5,019
      
104
      
8,900
  
Agriculture
    
12,513
      
9,725
      
551
      
55
      
2,182
  
Residential Construction
    
738
      
700
      
—
      
—
      
38
  
Consumer
    
43,599
      
13,620
      
5,521
      
6,415
      
18,043
  
Standby Letters of Credit
    
922
      
922
      
—
      
—
      
—
  
Total
  
$
141,014
    
$
70,692
    
$
12,542
    
$
17,582
    
$
40,198
  

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.

Off-Balance Sheet Arrangements

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.  These loans have been sold to third parties without recourse, subject to customary default, representations and warranties, recourse for breaches of the terms of the sales contracts and payment default recourse.

Financial instruments, whose contract amounts represent credit risk at December 31 of the indicated years, were as follows (amounts in thousands):

   
2024
    
2023
  
             
Undisbursed loan commitments
  
$
140,092
    
$
187,401
  
Standby letters of credit
    
922
      
1,251
  
                 
   
$
141,014
    
$
188,652
  

Our liquidity position is continuously monitored and adjustments are made to balance between sources and uses of funds as deemed appropriate.  The Bank believes that it has the means to provide adequate liquidity for funding normal operations in 2025.

56
Capital

The Company believes a strong capital position is essential to the Company’s continued growth and profitability.  A solid capital base provides depositors and shareholders with a margin of safety, while allowing the Company to take advantage of profitable opportunities, support future growth and provide protection against any unforeseen losses.

At December 31, 2024, stockholders’ equity totaled $176.3 million, an increase of $17.1 million from $159.2 million at December 31, 2023.  The increase in 2024 was primarily due to net income of $20.0 million.  Also affecting capital in 2024 were stock repurchases totaling $3.8 million and paid-in capital in the amount of $0.9 million resulting from employee stock purchases and stock plan accruals.

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 for 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 31, 2024.  This represented total shares of 979,695 eligible for repurchase at May 1, 2024.  The total number of shares eligible for repurchase has been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 23, 2025, payable on March 25, 2025 to shareholders of record as of February 28, 2025.  The Company repurchased 389,071 shares of the Company's outstanding common stock during the year ended December 31, 2024, and 590,624 shares remained available for repurchase under the stock repurchase program at December 31, 2024.  The purpose of the stock repurchase program was to give management the ability to manage capital and create liquidity for shareholders who want to sell their stock.  Management believed that the stock repurchase program was a prudent use of excess capital.

The capital of the Company and the Bank historically have been maintained at a level that is in excess of regulatory guidelines for a “well capitalized” institution.  The policy of annual stock dividends rather than cash dividends has, over time, allowed the Company to match capital and asset growth through retained earnings and a managed program of geographic growth.

ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

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ITEM 8 –
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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Management’s Report

FIRST NORTHERN COMMUNITY BANCORP AND SUBSIDIARY

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of First Northern Community Bancorp and subsidiary (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2024.  Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management and the board of directors; and (iii) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Management recognizes that even a highly effective internal control system has inherent risks, including the possibility of human error and the circumvention or overriding of controls, and that the effectiveness of an internal control system can change with circumstances.  Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.  

Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, the Company conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2024, based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment, management of the Company has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2024.

/s/ Jeremiah Z. Smith
   
 
Jeremiah Z. Smith
 
President/Chief Executive Officer/Director
 
(Principal Executive Officer)
   
 
/s/ Kevin Spink
   
 
Kevin Spink
 
Executive Vice President/Chief Financial Officer
 
(Principal Financial Officer and Principal Accounting Officer)

March 7, 2025

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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
First Northern Community Bancorp

Opinion on the Financial Statements
 
We have audited the accompanying consolidated balance sheets of First Northern Community Bancorp and subsidiary (the “Company”) as of December 31, 2024 and 2023, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2024 and 2023, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
Basis for Opinion
 
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting in accordance with the standards of the PCAOB. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses on Loans – Qualitative and Environmental Factors

As described in Notes 1 and 3 to the consolidated financial statements, the Company’s allowance for credit losses balance was $15.9 million as of December 31, 2024, and is estimated using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The allowance for credit losses is a valuation account that is deducted from the loan’s amortized cost basis to present the net amount expected to be collected on the loans and is a material and complex estimate requiring significant management judgement in the estimation of expected lifetime losses within the loan portfolio at the balance sheet date.

We identified management’s estimation of qualitative and environmental factors within the calculation of the allowance for credit losses as a critical audit matter. To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. The qualitative and environmental factors are used to adjust the allowance for credit losses model forecasts for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. Qualitative and environmental factors also consider the impact of portfolio concentrations, changes in underwriting practices,
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imprecision of economic forecasts, and other risk factors that might influence the Company’s loss estimation process. Auditing management’s judgements regarding the qualitative and environmental factors applied to the allowance for credit losses involved a high degree of subjectivity.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.  Our audit procedures related to the allowance for credit losses included the following, among others:

  •
Tested the mathematical accuracy and computation of the allowance for credit losses on loans, including the mathematical accuracy of the application of the qualitative and environmental factor adjustments used in the calculation.
 
•
Performed an independent sensitivity analysis to evaluate the reasonableness of the qualitative and environmental factors used by management.
 
  •
Obtained management’s analysis and supporting documentation related to the qualitative and environmental factors and tested whether the qualitative and environmental factors used in the calculation of the allowance for credit losses are supported by the documentation provided by management.
     
/s/ MOSS ADAMS LLP
Sacramento, California
   
March 7, 2025
   
We have served as the Company’s auditor since 2006.
61
FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2024 and 2023
(in thousands, except shares and share amounts)

 
2024
    
2023
  
Assets
            
Cash and cash equivalents
  
$
119,448
    
$
149,211
  
Certificates of deposit
    
16,074
      
19,710
  
Investment securities – available-for-sale, at estimated fair value, net of allowance for credit losses of $0; amortized cost of $682,346 at December 31, 2024 and $620,314 at December 31, 2023
    
633,853
      
572,357
  
Loans (net of allowance for credit losses of $15,885 at December 31, 2024 and $16,596 at December 31, 2023)
    
1,046,852
      
1,052,465
  
Stock in Federal Home Loan Bank and other equity securities, at cost
    
10,518
      
10,518
  
Premises and equipment, net
    
9,248
      
9,962
  
Core deposit intangible, net
     3,321       4,141  
Interest receivable and other assets
    
52,408
      
53,468
  
                 
Total Assets
  
$
1,891,722
    
$
1,871,832
  
                 
Liabilities and Stockholders’ Equity
                
Liabilities:
                
Deposits:
                
Demand
  
$
715,424
    
$
744,799
  
Interest-bearing transaction deposits
    
376,250
      
380,477
  
Savings and MMDAs
    
458,445
      
431,472
  
Time, $250,000 or less
    
108,598
      
109,373
  
Time, over $250,000
    
41,372
      
26,323
  
                 
Total Deposits
    
1,700,089
      
1,692,444
  
                 
Interest payable and other liabilities
    
15,301
      
20,143
  
                 
Total Liabilities
    
1,715,390
      
1,712,587
  
                 
Commitments and contingencies (Note 9 and 10)
      
        
  
                 
Stockholders’ Equity:
                
Common stock, no par value; 32,000,000 shares authorized; 15,943,051 and 15,482,332 shares issued and outstanding at December 31, 2024 and 2023, respectively
    
127,902
      
123,235
  
Additional paid-in capital
    
977
      
977
  
Retained earnings
    
81,304
      
68,760
  
Accumulated other comprehensive loss, net
    
(33,851
)
    
(33,727
)
Total Stockholders’ Equity
    
176,332
      
159,245
  
                 
Total Liabilities and Stockholders’ Equity
  
$
1,891,722
    
$
1,871,832
  

See accompanying notes to consolidated financial statements.

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FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Consolidated Statements of Income
Years Ended December 31, 2024 and 2023
(in thousands, except per share amounts)

 
2024
    
2023
  
Interest and dividend income:
            
Interest and fees on loans
  
$
55,389
    
$
52,203
  
Due from banks interest bearing accounts
    
7,201
      
9,351
  
Investment securities:
                
Taxable
    
13,795
      
10,850
  
Non-taxable
    
1,216
      
914
  
Other earning assets
    
1,051
      
805
  
Total interest and dividend income
    
78,652
      
74,123
  
Interest expense:
                
Time deposits over $250,000
    
1,045
      
410
  
Other deposits
    
13,247
      
7,174
  
Total interest expense
    
14,292
      
7,584
  
Net interest income
    
64,360
      
66,539
  
(Reversal) of provision for credit losses
    
(250
)
    
1,100
  
Net interest income after (reversal of) provision for credit losses
    
64,610
      
65,439
  
Non-interest income:
                
Service charges on deposit accounts
    
1,718
      
1,699
  
Losses on sales/calls of available-for-sale securities
    
(234
)
    
(112
)
Gains on sales of loans held-for-sale
    
52
      
111
  
Debit card income
    
2,762
      
2,798
  
Gain on bargain purchase
    —       1,405  
Other income
    
1,721
      
1,944
  
Total non-interest income
    
6,019
      
7,845
  
Non-interest expenses:
                
Salaries and employee benefits
    
23,850
      
25,914
  
Occupancy and equipment
    
4,736
      
4,329
  
Data processing
    
4,224
      
4,043
  
Stationery and supplies
    
313
      
349
  
Advertising
    
460
      
474
  
Director fees
    
309
      
327
  
Amortization of core deposit intangible
    820       829  
Other expense
    
8,077
      
7,373
  
Total non-interest expenses
    
42,789
      
43,638
  
Income before provision for income tax
    
27,840
      
29,646
  
Provision for income tax
    
7,806
      
8,092
  
Net income
  
$
20,034
    
$
21,554
  
Basic income per share
  
$
1.26
    
$
1.35
  
Diluted income per share
  
$
1.24
    
$
1.34
  

See accompanying notes to consolidated financial statements.

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FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2024 and 2023
(in thousands)

 
2024
    
2023
  
Net income
  
$
20,034
    
$
21,554
  
Other comprehensive (loss) income, net of tax:
                
Unrealized holding (losses) gains on securities arising during the current period, net of tax effect of ($224) and $5,208 for the years ended December 31, 2024 and 2023, respectively
    
(546
)
    
12,415
  
Reclassification adjustment due to losses realized on sales of securities, net of tax effect of $67 and $32 for the years ended December 31, 2024 and 2023, respectively
    
167
      
80
  
Officers’ retirement plan equity adjustments,  net of tax effect of $116 and $100 for the years ended December 31, 2024 and 2023, respectively
    
277
      
238
  
Directors’ retirement plan equity adjustments, net of tax effect of ($8) and $28 for the years ended December 31, 2024 and 2023, respectively
    
(22
)
    
68
  
Total other comprehensive (loss) income, net of tax effect of ($49) and $5,368 for the years ended December 31, 2024 and 2023, respectively
    
(124
)
    
12,801
  
Comprehensive income
 
$
19,910
    
$
34,355
  

See accompanying notes to consolidated financial statements.

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FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Consolidated Statement of Stockholders’ Equity
Years Ended December 31, 2024 and 2023
(in thousands, except share data)

 
Common Stock
    
Additional
Paid-in
     Retained    
Accumulated
Other
Comprehensive
        
   
Shares
    
Amounts
    
Capital
    
Earnings
    
Income/(Loss)
    
Total
  
Balance at December 31, 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
                            
21,554
              
21,554
  
Other comprehensive income, net of tax
                                    
12,801
      
12,801
  
Stock dividend adjustment
    
3,525
      
296
              
(296
)
            
—
  
5% stock dividend declared in 2024
    
737,253
      
6,067
              
(6,067
)
            
—
  
Cash in lieu of fractional shares
    
(164
)
                    
(7
)
            
(7
)
Stock-based compensation
            
820
                              
820
  
Common shares issued related to restricted stock grants and ESPP, net of restricted stock forfeited
    
76,261
      
96
                              
96
  
Stock options exercised, net
    
32,927
      
—
                              
—
  
Stock repurchase and retirement
     (20,054 )  
(143 )  
     
     
     
(143 )
Balance at December 31, 2023
    
15,482,332
    
$
123,235
    
$
977
    
$
68,760
    
$
(33,727
)
  
$
159,245
  
Net income
                             20,034               20,034  
Other comprehensive loss, net of tax
                                     (124 )     (124 )
Stock dividend adjustment
     2,671       325               (325 )             —  
5% stock dividend declared in 2025     759,192       7,158               (7,158 )             —  
Cash in lieu of fractional shares     (148 )                     (7 )             (7 )
Stock-based compensation
             846                               846  
Common shares issued related to restricted stock grants and ESPP, net of restricted stock forfeited
     77,816       102                               102  
Stock options exercised, net
     10,259       —                               —  
Stock repurchase and retirement
     (389,071 )     (3,764 )                             (3,764 )
Balance at December 31, 2024     15,943,051     $ 127,902     $ 977     $ 81,304     $ (33,851 )   $ 176,332  

See accompanying notes to consolidated financial statements.

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FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years Ended December 31, 2024 and 2023
(in thousands)

 
2024
    
2023
  
Cash flows from operating activities:
            
Net income
  
$
20,034
    
$
21,554
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
(Reversal of) provision for credit losses
    
(250
)
    
1,100
  
Amortization of core deposit intangible
    820       829  
Stock-based compensation
    
846
      
820
  
Depreciation and amortization of bank premises and equipment
    
1,057
      
1,002
  
Accretion and amortization of securities, net
    
230
      
1,941
  
Net loss on sales/calls of available-for-sale securities
    
234
      
112
  
Gain on sale of loans held-for-sale
    
(52
)
    
(111
)
Provision (benefit) for deferred income taxes
    
603
      
(404
)
Proceeds from sales of loans held-for-sale
    
4,590
      
5,918
  
Originations of loans held-for-sale
    
(4,538
)
    
(5,807
)
(Decrease) increase in deferred loan origination fees and costs, net
    
(64
)
    
752
  
Amortization of operating lease right-of-use asset
    
918
      
1,077
  
Gain on bargain purchase
    —       (1,405 )
Increase in interest receivable and other assets
    
(412
)
    
(961
)
(Decrease) increase in interest payable and other liabilities
    
(4,479
)
    
883
  
Net cash provided by operating activities
    
19,537
      
27,300
  
Cash flows from investing activities:
                
Proceeds from maturities of available-for-sale securities
    
85,775
      
62,765
  
Proceeds from sales of available-for-sale securities
    
6,563
      
18,067
  
Principal repayments on available-for-sale securities
    
75,500
      
71,909
  
Purchase of available-for-sale securities
    
(230,334
)
    
(91,324
)
Proceeds from maturities of certificates of deposit
     9,336       5,169  
Purchase of certificates of deposit
     (5,700 )     (3,931 )
Purchases of stock in Federal Home Loan Bank and other equity securities, at cost
    
—
      
(1,078
)
Net decrease (increase) in loans
    
5,927
      
(80,173
)
Purchases of bank premises and equipment, net
    
(343
)
    
(1,221
)
Cash and cash equivalents acquired in acquisition
    —       103,425  
Net cash (used in) provided by investing activities
    
(53,276
)
    
83,608
  
Cash flows from financing activities:
                
Net increase (decrease) in deposits
    
7,645
      
(149,060
)
Cash dividends paid in lieu of fractional shares
    
(7
)
    
(7
)
Common stock issued
    
102
      
96
  
Repurchases of common stock
     (3,764 )     (143 )
Net cash provided by (used in) financing activities
    
3,976
      
(149,114
)
Net decrease in cash and cash equivalents
    
(29,763
)
    
(38,206
)
Cash and cash equivalents at beginning of year
    
149,211
      
187,417
  
Cash and cash equivalents at end of year
  
$
119,448
    
$
149,211
  

Supplemental Consolidated Statements of Cash Flows Information (Note 19)
See accompanying notes to consolidated financial statements.
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FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Notes to Consolidated Financial Statements
Years Ended December 31, 2024 and 2023
(in thousands, except shares and share amounts)

(1)
Summary of Significant Accounting Policies

First Northern Community Bancorp (the “Company”) is a bank holding company whose only subsidiary, First Northern Bank of Dixon (“Bank”), a California state-chartered bank, conducts general banking activities, including collecting deposits and originating loans, and serves Solano, Yolo, Sacramento, Placer, El Dorado, Glenn, and Colusa Counties. All intercompany transactions between the Company and the Bank have been eliminated in consolidation. The consolidated financial statements also include the accounts of Yolano Realty Corporation, a wholly-owned subsidiary of the Bank. Yolano Realty Corporation was formed in September 2009 for the purpose of managing selected other real estate owned properties. Yolano Realty Corporation was an inactive subsidiary in 2024.

The accounting and reporting policies of the Company conform with accounting principles generally accepted in the United States of America.  In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period.  Actual results could differ from those estimates applied in the preparation of the accompanying consolidated financial statements.  For the Company, the most significant accounting estimates are the allowance for credit losses on loans and business combinations.  A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.

(a)
Cash Equivalents

For purposes of the consolidated statements of cash flows, the Company considers due from banks, federal funds sold for one-day periods and short-term bankers acceptances to be cash equivalents.  At times, the Company maintains deposits with other financial institutions in amounts that may exceed federal deposit insurance coverage. Management regularly evaluates the credit risk associated with correspondent banks.

(b)
Investment Securities and Allowance for Credit Losses

Investment securities consist of U.S. Treasury securities, U.S. Agency securities, obligations of states and political subdivisions, obligations of U.S. Corporations, collateralized mortgage obligations and mortgage-backed securities. At the time of purchase of a security the Company designates the security as held-to-maturity or available-for-sale, based on its investment objectives, operational needs, and intent to hold. The Company does not purchase securities with the intent to engage in trading activity.

Held-to-maturity securities are recorded at amortized cost, adjusted for amortization or accretion of premiums or discounts. Available-for-sale securities are recorded at fair value with unrealized holding gains and losses, net of the related tax effect, reported as a separate component of stockholders’ equity until realized. The amortized cost of securities is adjusted for amortization of premiums and accretion of discounts to the earliest call date using the effective interest method. Such amortization and accretion is included in investment income, along with interest and dividends. The cost of securities sold is based on the specific identification method; realized gains and losses resulting from such sales are included in earnings.

For available-for-sale debt securities in an unrealized loss position, the Company first assesses whether it intends to sell, or it is more likely than not that it will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, an allowance for credit losses is recorded to bring the security’s amortized cost basis down to fair value.  For debt securities available-for-sale that do not meet the aforementioned criteria, the Company evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any unrealized losses that have not been recorded through an allowance for credit losses is recognized in other comprehensive income.

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale security is confirmed or when

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either of the criteria regarding intent or requirement to sell is met.

Accrued interest receivable on available-for-sale debt securities is excluded from the estimate of credit losses. Accrued interest receivable on available-for-sale debt securities totaled $2,785 and $2,096 as of December 31, 2024 and December 31, 2023, respectively, and is included in interest receivable and other assets on the Consolidated Balance Sheets.

(c)
Federal Home Loan Bank Stock and Other Equity Securities, at Cost

The Bank is a member of the Federal Home Loan Bank of San Francisco (“FHLB”) and is required to obtain and hold a specific number of shares of capital stock of the FHLB.  FHLB stock represents an equity interest that does not have a readily determinable fair value because its ownership is restricted and it lacks a market (liquidity).  FHLB stock and other equity securities are recorded at cost and evaluated for impairment as of each reporting period.

(d)
Loans and Allowance for Credit Losses

Loans are reported at the principal amount outstanding, net of deferred loan fees and costs and the allowance for credit losses.  Loan fees net of certain direct costs of origination, which represent an adjustment to interest yield are deferred and amortized over the contractual term of the loan using the interest method. Unearned discount on installment loans is recognized as income over the terms of the loans by the interest method.  Interest on other loans is calculated by using the simple interest method on the daily balance of the principal amount outstanding.

Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal or when a loan becomes contractually past due by ninety days or more with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when they are brought fully current with respect to interest and principal and when, in the judgment of management, the loans are estimated to be fully collectible as to both principal and interest.  Accrual of interest on loans that are modified commence after a sustained period of performance.  Interest is generally accrued on such loans in accordance with the new terms.

The allowance for credit losses (ACL) is a valuation account that is deducted from the loan’s amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the recorded loan balance is confirmed as uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company measures its ACL using the current expected credit loss (CECL) methodology in accordance with Accounting Standards Codification Topic 326, Financial Instruments - Credit Losses (Topic 326).

Management estimates the ACL using relevant information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. In determining the ACL, accruing loans with similar risk characteristics are generally evaluated collectively. To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators, including historical credit losses, have been statistically correlated with various econometrics, including national unemployment rate and national gross domestic product. 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. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. The Company utilized a reasonable and supportable forecast period of approximately four quarters and obtained the forecast data from Moody’s Analytics. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process.

Loans that do not share similar risk characteristics are individually evaluated by management for potential impairment.  Included in loans individually evaluated are collateral dependent loans.  A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. Collateral dependent loans are considered to have unique risk characteristics and are individually evaluated. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken.

The ACL is measured on a collective (pool) basis when similar risk characteristics exist. The Company has identified the

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following portfolio segments to evaluate and measure the ACL:

Commercial:
Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses.  These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above.  Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

Commercial Real Estate:
Commercial real estate loans generally fall into two categories: owner-occupied and non-owner occupied.  Loans secured by owner-occupied real estate are primarily susceptible to changes in the market conditions of the related business.  This may be driven by, among other things, industry changes, geographic business changes, changes in the individual financial capacity of the business owner, general economic conditions, and changes in business cycles. These same risks apply to commercial loans whether secured by equipment, receivables or other personal property or unsecured.  Problem commercial real estate loans are generally identified by periodic review of financial information that may include financial statements, tax returns, payment history of the borrower, and site inspections.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Losses on loans secured by owner occupied real estate, equipment, or other personal property generally are dictated by the value of underlying collateral at the time of default and liquidation of the collateral.  When default is driven by issues related specifically to the business owner, collateral values tend to provide better repayment support and may result in little or no loss. Alternatively, when default is driven by more general economic conditions, underlying collateral generally has devalued more and results in larger losses due to default.  Loans secured by non-owner occupied real estate are primarily susceptible to risks associated with swings in occupancy or vacancy and related shifts in lease rates, rental rates or room rates. Most often, these shifts are a result of changes in general economic or market conditions or overbuilding and resulting over-supply of space.  Losses are dependent on the value of underlying collateral at the time of default.  Values are generally driven by these same factors and influenced by interest rates and required rates of return as well as changes in occupancy costs.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, sales invoices, or other appropriate means.

Agriculture:
Agricultural loans, whether secured or unsecured, generally are made to producers and processors of crops and livestock.  Repayment is primarily from the sale of an agricultural product or service.  Agricultural loans are generally secured by inventory, receivables, equipment, and other real property.  Agricultural loans primarily are susceptible to changes in market demand for specific commodities.  This may be exacerbated by, among other things, industry changes, changes in the individual financial capacity of the business owner, general economic conditions and changes in business cycles, as well as adverse weather conditions such as drought, fire, or floods.  Problem agricultural loans are generally identified by periodic review of financial information that may include financial statements, tax returns, crop budgets, payment history, and crop inspections.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower’s income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.

Residential mortgage loans: Residential mortgage loans, which are secured by real estate, are primarily susceptible to four risks; non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’s cash flow to sustain payments, and shortfalls in collateral value.  In general, non-payment is usually due to loss of employment and follows general economic trends in the economy, particularly the upward movement in the unemployment rate, loss of collateral value, and demand shifts.

Residential construction loans:  Construction loans, whether owner-occupied or non-owner occupied residential development loans, are not only susceptible to the risks related to residential mortgage loans, but the added risks of construction, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion.  Losses are primarily related to underlying collateral value and changes therein as described above.  Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax

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returns and payment history of the borrower.  Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

Consumer:
Consumer loans, whether unsecured or secured, are primarily susceptible to four risks: non-payment due to diminished or lost income, over-extension of credit, a lack of borrower’s cash flow to sustain payments, and shortfall in collateral value.  In general, non-payment is usually due to loss of employment and will follow general economic trends in the economy, particularly the upward movements in the unemployment rate, loss of collateral value, inflation and demand shifts.

Unfunded commitments: The estimated credit losses associated with these unfunded lending commitments is calculated using the same models and methodologies noted above and incorporate utilization assumptions at time of default. The reserve for unfunded commitments is maintained on the Consolidated Balance Sheets in other liabilities.

Accrued interest receivable on loans is not included in the calculation of the allowance for credit losses. Accrued interest receivable on loans totaled $4,875 and $4,713 as of December 31, 2024 and December 31, 2023, respectively, and is included in interest receivable and other assets on the Consolidated Balance Sheets.

(e)
Loans Held-for-Sale

Loans originated and held-for-sale are carried at the lower of cost or estimated fair value in the aggregate. Net fees and costs of originating loans held for sale are deferred and are included in the basis for determining the gain or loss on sales of loans held for sale. Net unrealized losses are recognized through a valuation allowance by charges to income.

(f)
Premises and Equipment

Premises and equipment are stated at cost, less accumulated depreciation. Depreciation is computed substantially by the straight-line method over the estimated useful lives of the related assets.  Leasehold improvements are depreciated over the estimated useful lives of the improvements or the terms of the related leases, whichever is shorter. The useful lives used in computing depreciation are as follows:

Buildings and improvements
15 to 50 years
Furniture and equipment
3 to 10 years

(g)
Other Real Estate Owned

Other real estate acquired by foreclosure is carried at fair value less estimated selling costs.  Prior to foreclosure, the value of the underlying loan is written down to the fair value of the real estate to be acquired by a charge to the allowance for credit losses, if necessary. Fair value of other real estate owned is generally determined based on an appraisal of the property.  Any subsequent operating expenses or income, reduction in estimated values and gains or losses on disposition of such properties are included in other operating expenses.

Gain recognition on the disposition of real estate is dependent upon the transaction meeting certain criteria relating to the nature of the property sold and the terms of the sale.  Under certain circumstances, revenue recognition may be deferred until these criteria are met.

The Bank held no other real estate owned (“OREO”) as of December 31, 2024 and 2023.

(h)
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of

Long-lived assets and certain identifiable intangibles are required to be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

70
(i)
 Pension Benefit Plans


The Company and the Bank maintain unfunded non-contributory defined benefit pension plans for a select group of highly compensated employees and directors, as well as a supplemental executive retirement plan.  Net periodic benefit cost is recognized over the approximate service period of plan participants and includes discount rate assumptions.  See Note 16 of Notes to Consolidated Financial Statements.

(j)
Revenue from Contracts with Customers

The following are descriptions of the Company’s sources of Non-interest income within the scope of the FASB’s Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (Topic 606):

Service charges on deposit accounts

Service charges on deposit accounts include account maintenance and analysis fees and transaction-based fees. Account maintenance and analysis fees consist primarily of account fees and analyzed account fees charged on deposit accounts on a monthly basis. The performance obligation is satisfied and the fees are recognized on a monthly basis as the service period is completed. Transaction-based fees consist of non-sufficient funds fees, wire fees, overdraft fees and fees on other products and services and are charged to deposit customers for specific services provided to the customer. The performance obligation is completed as the transaction occurs and the fees are recognized at the time each specific service is provided to the customer.

Investment and brokerage services income

The Bank earns investment and brokerage services fees for providing a broad range of alternative investment products and services through Raymond James Financial Services, Inc. Brokerage fees are generally earned in two ways. Brokerage fees for managed accounts charge a set annual percentage fee based on the underlying portfolio value and are earned and recognized on a quarterly basis.  Brokerage fees for a standard commission account are charged on a per transaction fee and are earned and recognized at the time of the transaction.

Debit card income

Debit card income represents fees earned on Bank-issued debit card transactions. The Bank earns interchange fees from debit cardholder transactions through the related payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to the cardholder. The performance obligation is satisfied and the fees are earned when the cost of the transaction is charged to the cardholders’ account. Certain expenses directly associated with the debit card are recorded on a net basis with the interchange income.

Other income

Other income within the scope of Topic 606 includes check sales fees, bankcard fees, and merchant fees. Check sales fees, based on check sales volume, are received from check printing companies and are recognized monthly. Bankcard fees are earned from the Bank’s credit card program and are recognized monthly as the service period is completed. Merchant fees are earned for card payment services provided to its merchant customers. The Bank has a contract with a third party to provide card payment services to merchants that contract for those services. Merchant fees are recognized monthly as the service period is completed.

(k)
Gain or Loss on Sale of Loans and Servicing Rights

Transfers and servicing of financial assets are accounted for and reported based on consistent application of a financial-components approach that focuses on control. Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings. A sale is recognized when the transaction closes and the proceeds are other than beneficial interests in the assets sold. A gain or loss is recognized to the extent that the sales proceeds and the fair value of the servicing asset exceed or are less than the book value of the loan.

The Company recognizes an asset for the fair value of the rights to service loans for others when loans are sold on a servicing-retained basis.  The Company sold substantially all of its conforming long-term residential mortgage loans originated during the years ended December 31, 2024 and 2023, for cash proceeds equal to the fair value of the loans.

Mortgage servicing rights (“MSR”) in loans sold are measured by allocating the previous carrying amount of the transferred

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assets between the loans sold and retained interest, if any, based on their relative fair value at the date of transfer.  The Company determines its classes of servicing assets based on the asset type being serviced along with the methods used to manage the risk inherent in the servicing assets, which includes the market inputs used to value the servicing assets. The Company measures and reports its residential mortgage servicing assets initially at fair value and amortizes the servicing rights in proportion to, and over the period of, estimated net servicing revenues. Management assesses servicing rights for impairment as of each financial reporting date. Fair value adjustments that encompass market-driven valuation changes and the runoff in value that occurs from the passage of time are each separately reported.

In determining the fair value of the MSR, the Company uses quoted market prices when available. Subsequent fair value measurements are determined using a discounted cash flow model. In order to determine the fair value of the MSR, the present value of expected future cash flows is estimated. Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income. This model is periodically validated by an independent external model validation group. The model assumptions and the MSR fair value estimates are also compared to observable trades of similar portfolios as well as to MSR broker valuations and industry surveys, as available. Key assumptions used in measuring the fair value of the MSR as of December 31, were as follows:

 
2024
    
2023
  
Constant prepayment rate
    
6.76
%
    
6.09
%
Discount rate
    
10.00
%
    
10.50
%
Weighted average life (years)
    
7.55
      
7.99
  

The expected life of the loan can vary from management’s estimates due to prepayments by borrowers, especially when rates fall. Prepayments in excess of management’s estimates would negatively impact the recorded value of the mortgage servicing rights. The value of the mortgage servicing rights is also dependent upon the discount rate used in the model, which we base on current market rates.  Management reviews this rate on an ongoing basis based on current market rates.  A significant increase in the discount rate would reduce the value of mortgage servicing rights.

(l)
Income Taxes

The Company accounts for income taxes under the asset and liability method.  Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A liability for uncertain tax positions is recorded for unrecognized tax benefits related to uncertain tax positions where it is more likely than not that the position will be sustained upon examination by a taxing authority.  Interest and/or penalties related to income taxes are reported as a component of provision for income taxes.

(m)
Share Based Compensation

The Company accounts for share based compensation transactions whereby the Company receives employee services in exchange for equity instruments, including stock options and restricted stock. The Company recognizes in the Consolidated Statements of Income the grant-date fair value of stock options and other equity-based forms of compensation issued to employees over their requisite service period (generally the vesting period).  The fair value of options granted is determined on the date of the grant using a Black-Scholes-Merton pricing model. The grant date fair value of restricted stock is determined by the closing market price of the day prior to the grant date. The Company issues new shares of common stock upon the exercise of stock options. See Note 14 of Notes to Consolidated Financial Statements.

(n)
Earnings Per Share (“EPS”)

Basic EPS includes no dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period, excluding non-vested restricted shares. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity. The number of potential common shares included in annual diluted EPS is a year-to-date average of the number of potential common shares included in each quarter’s diluted EPS computation under the treasury stock method. The calculation of weighted average shares includes two classes of the Company’s outstanding common stock:  common stock and restricted stock awards. Holders of restricted stock also receive dividends at the same rate as common shareholders, subject to vesting restrictions, and they both share equally in undistributed earnings. There are no unvested share-based payment awards that contain nonforfeitable rights to dividends. See Note 13 of Notes to Consolidated Financial Statements.

72
(o)
Advertising Costs

Advertising costs were $460 and $474 for the years ended December 31, 2024 and 2023, respectively. Advertising costs are expensed as incurred.

(p)
Comprehensive Income

Accounting principles generally accepted in the United States require that recognized revenue, expenses, gains, and losses be included in net income.  Certain changes in assets and liabilities, such as unrealized gain and losses on available-for-sale securities and directors’ and officers’ retirement plans, are reported as a separate component of the equity section of the Consolidated Balance Sheet. Such items, along with net income, are components of comprehensive income.

(q)
Stock Dividend

On January 25, 2024, the Company announced that its Board of Directors had declared a 5% stock dividend which resulted in 739,924 shares, which was paid on March 25, 2024 to shareholders of record as of February 29, 2024. On January 23, 2025, the Company announced that its Board of Directors had declared a 5% stock dividend which will result in approximately 759,192 shares, which will be paid on March 25, 2025 to shareholders of record as of February 28, 2025. 

Data for earnings per share and stock compensation plans for all periods presented have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 23, 2025.  December 31, 2024 figures included in the Consolidated Balance Sheets and Consolidated Statement of Stockholders’ Equity have been adjusted to reflect the estimated impact of the 2025 stock dividend.  Figures that have been adjusted include common stock shares issued and outstanding, common stock balance and retained earnings balance. The December 31, 2023 and 2022 balances included in the Consolidated Balance Sheets and Statement of Stockholders’ Equity have not been adjusted to retroactively reflect the stock dividends, but instead show the historical rollforward of stock dividends declared.

(r)
Segment Reporting

The Company is a holding company for a community bank, which offers a wide array of products and services to its customers. The Bank’s primary business is that of a traditional banking institution, gathering deposits and originating loans in its respective primary market areas. Pursuant to its banking strategy, emphasis is placed on building relationships with its customers, as opposed to building specific lines of business. As a result, the Company is not organized around discernible lines of business and prefers to work as an integrated unit to customize solutions for its customers, with business line emphasis and product offerings changing over time as needs and demands change. The Company’s operations are managed, and financial performance is evaluated by our chief operating decision maker on a Company-wide basis. The performance of the Company is reviewed monthly by the Company’s executive management and Board of Directors. As resource allocation and performance decisions are not made based on discrete financial information of individual lines of business, the Company considers its current business and operations as a single reportable operating segment. See Note 22 of Notes to Consolidated Financial Statements.

(s)
Business Combinations


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

Goodwill and intangible assets acquired in a business combination and that are determined to have an indefinite useful life are not amortized, but tested for impairment at least annually or more frequently if events and circumstances exist that indicate the necessity for such impairment tests to be performed. The Company has no goodwill arising from business combinations. The Company recognized a bargain purchase gain arising from business combinations in 2023. The Company recorded the fair values based on the valuations available as of reporting date. In accordance with business combination accounting guidance, the Company continued to evaluate these fair values for upto one year following the acquisition date. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Core deposit intangible assets arising from business combinations are amortized on an accelerated basis reflecting the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up. The total estimated life of the core deposit intangible is approximately 10 years.

73
(t)
Impact of Recently Issued Accounting Standards

Accounting Standards Adopted in 2024

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

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU requires that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this ASU and all existing disclosures in Topic 280. The Company has determined that its current business and operations consist of a single business segment and a single reporting unit. The amendments in ASU 2023-07 are intended to improve segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The Company applied this ASU retrospectively with no material impact on the Company’s consolidated financial statements, however, new disclosures have been added as applicable for a single reportable operating segment.

Recently Issued Accounting Pronouncements

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 has evaluated this ASU and does not expect the adoption to have a material impact on the Company’s 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

74
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.

In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses.  This ASU requires public companies to disclose, in the notes to financial statements, specified information about certain costs and expenses at each interim and annual reporting period.  In January 2025, the FASB issued ASU 2025-01, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Clarifying the Effective Date.  ASU 2025-01 amends the effective date of ASU 2024-03 to clarify that all public business entities are required to adopt the guidance in annual reporting periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027.  Early adoption of ASU 2024-03 is 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.
75
(2)
Investment Securities

The amortized cost, unrealized gains and losses, estimated fair values and related allowance for credit losses on investments in debt and other securities at December 31, 2024 are summarized as follows:

 
Amortized
cost
    
Unrealized
gains
    
Unrealized
losses
    
Estimated
fair value
     ACL
  
Investment securities available-for-sale:
                              
U.S. Treasury securities
  
$
107,188
    
$
134
    
$
(1,777
)
  
$
105,545
     $
 —  
Securities of U.S. government agencies and corporations
    
100,218
      
62
      
(4,596
)
    
95,684
       —  
Obligations of states and political subdivisions
    
72,576
      
87
      
(5,072
)
    
67,591
       —  
Collateralized mortgage obligations
    
113,641
      
5
      
(18,701
)
    
94,945
       —  
Mortgage-backed securities
    
288,723
      
70
      
(18,705
)
    
270,088
       —  
                                     
 
Total debt securities
  
$
682,346
    
$
358
    
$
(48,851
)
  
$
633,853
     $
 —  

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

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

Gross realized gains from sales and calls of available-for-sale securities were $0 and $96 for the years ended December 31, 2024 and 2023, respectively. Gross realized losses from sales of available-for-sale securities were $234 and $208 for the years ended December 31, 2024 and 2023, respectively.

The amortized cost and estimated fair value of debt and other securities at December 31, 2024, by contractual maturity, are shown in the following table:

 
Amortized
cost
    
Estimated
fair value
  
             
Maturity in years:
            
Due in one year or less
  
$
62,647
    
$
62,107
  
Due after one year through five years
    
131,918
      
127,071
  
Due after five years through ten years
    
40,745
      
38,370
  
Due after ten years
    
44,672
      
41,272
  
Subtotal
    
279,982
      
268,820
  
Mortgage-backed securities and Collateralized mortgage obligations
    
402,364
      
365,033
  
Total
  
$
682,346
    
$
633,853
  

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.

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Table of Contents
An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of December 31, 2024, follows:

 
Less than 12 months
    
12 months or more
    
Total
  
   
Fair Value
    
Unrealized
losses
    
Fair Value
    
Unrealized
losses
    
Fair Value
    
Unrealized
losses
  
U.S. Treasury securities
  
$
27,055
    
$
(431
)
  
$
42,603
    
$
(1,346
)
  
$
69,658
    
$
(1,777
)
Securities of U.S. government agencies and corporations
    
22,383
      
(471
)
    
58,585
      
(4,125
)
    
80,968
      
(4,596
)
Obligations of states and political subdivisions
    
33,078
      
(1,083
)
    
29,025
      
(3,989
)
    
62,103
      
(5,072
)
Collateralized mortgage obligations
    
28,937
      
(1,860
)
    
62,320
      
(16,841
)
    
91,257
      
(18,701
)
Mortgage-backed securities
    
110,599
      
(2,715
)
    
143,892
      
(15,990
)
    
254,491
      
(18,705
)
                                                 
Total
  
$
222,052
    
$
(6,560
)
  
$
336,425
    
$
(42,291
)
  
$
558,477
    
$
(48,851
)

One hundred fifty-five securities, all considered investment grade, which had a fair value of $222,052 and a total unrealized loss of $6,560, have been in an unrealized loss position for less than twelve months as of December 31, 2024. Three hundred seventy-five securities, all considered investment grade, which had a fair value of $336,425 and total unrealized loss of $42,291, have been in an unrealized loss position for more than twelve months as of December 31, 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 December 31, 2024 and December 31, 2023, the Company had not recorded an allowance for credit losses on these securities and the unrecognized or unrealized losses on these securities have not been recognized into income.

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


 
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 corporation
    
3,424
      
(7
)
    
97,057
      
(6,324
)
    
100,481
      
(6,331
)
Obligations of states and political subdivision
    
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 $53,589 and $43,884 at December 31, 2024 and 2023, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.

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Table of Contents
(3)
Loans and Allowance for Credit Losses

The composition of the Company’s loan portfolio, by loan class, as of December 31, is as follows:


 
2024
    
2023
  
Commercial
  
$
117,921
    
$
106,897
  
Commercial Real Estate
    
723,650
      
721,729
  
Agriculture
    
92,564
      
105,838
  
Residential Mortgage
    
105,886
      
107,328
  
Residential Construction
    
6,858
      
12,323
  
Consumer
    
15,716
      
14,868
  
                 
     
1,062,595
      
1,068,983
  
Allowance for credit losses
    
(15,885
)
    
(16,596
)
Net deferred origination fees and costs
    
142

   
78
                 
Loans, net
  
$
1,046,852
    
$
1,052,465
  

At December 31, 2024 and 2023, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank.
  
Allowance for Credit Losses
The following table summarizes 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 Consolidated Balance Sheets within other liabilities as of December 31, 2024:

   
Allowance for Credit Losses – Year ended December 31, 2024
  
($ in thousands)
  
Beginning balance
    
Charge-offs
    
Recoveries
    
Provision
(Recovery)
   
Ending Balance
  
Commercial
  
$
2,041
    
$
(956
)
  
$
60
    
$
477
    
$
1,622
  
Commercial Real Estate
    
10,864
      
—
      
—
      
(619
)
    
10,245
  
Agriculture
    
997
      
—
      
—
      
558
      
1,555
  
Residential Mortgage
    
2,005
      
—
      
—
      
(226
)
    
1,779
  
Residential Construction
    
334
      
—
      
—
      
99
      
433
  
Consumer
    
355
      
(28
)
    
13
      
(89
)
    
251
  
Allowance for credit losses on loans
    
16,596
      
(984
)
    
73
      
200
      
15,885
  
Reserve for unfunded commitments
    
1,150
      
—
      
—
      
(450
)
    
700
  
Total
  
$
17,746
    
$
(984
)
  
$
73
    
$
(250
)
  
$
16,585
  

The following table summarizes 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 Consolidated Balance Sheets within other liabilities as of December 31, 2023:

   
Allowance for Credit Losses – Year ended December 31, 2023
  
($ in thousands)
  
Beginning balance
    
Adoption of CECL
    
Charge-offs
    
Recoveries
    
Provision
(Recovery)
   
Ending Balance
  
Commercial
  
$
1,491
    
$
689
    
$
(366
)
  
$
235
    
$
(8
)
  
$
2,041
  
Commercial Real Estate
    
10,259
      
(513
)
    
—
      
—
      
1,118
      
10,864
  
Agriculture
    
1,789
      
(742
)
    
(2,567
)
    
2,567
      
(50
)
    
997
  
Residential Mortgage
    
896
      
923
      
(3
)
    
—
      
189
      
2,005
  
Residential Construction
    
181
      
221
      
—
      
—
      
(68
)
    
334
  
Consumer
    
176
      
222
      
(13
)
    
1
      
(31
)
    
355
  
Allowance for credit losses on loans
    
14,792
      
800
      
(2,949
)
    
2,803
      
1,150
      
16,596
  
Reserve for unfunded commitments
    
700
      
500
      
—
      
—
      
(50
)
    
1,150
  
Total
  
$
15,492
    
$
1,300
    
$
(2,949
)
  
$
2,803
    
$
1,100
    
$
17,746
  

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. The levels of forecasted national unemployment and forecasted gross domestic product are forecasted to be relatively stable. A decrease in unfunded commitments was the primary driver for the reversal of provision expense of $250 recognized for the year ended December

78
31, 2024. Management believes that the allowance for credit losses at December 31, 2024 appropriately reflected expected credit losses in the loan portfolio at that date.

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

December 31, 2024
  
($ in thousands)
  
Secured by 1-4
Family Residential
Properties-1st lien
    
Secured by 1-4 Family
Residential Properties-
junior lien
    
Secured by 1-4
Family Residential
Properties-
revolving
    
Commercial
    
Construction and
land development
  
Commercial
  
$
—
    
$
—
    
$
—
    
$
139
    
$
—
  
Commercial Real Estate
    
—
      
—
      
—
      
—
      
—
  
Agriculture
    
—
      
—
      
—
      
—
      
—
  
Residential Mortgage
    
202
      
—
      
—
      
—
      
—
  
Residential Construction
    
—
      
—
      
—
      
—
      
—
  
Consumer
    
—
      
282
      
360
      
—
      
—
  
Total
  
$
202
    
$
282
    
$
360
    
$
139
    
$
—
  


 
($ in thousands)
  
Secured by farmland
    
Agriculture production
loans
    
Loans secured
by owner-
occupied,
nonfarm
nonresidential
properties
    
Loans secured by
other nonfarm
nonresidential
properties
    
Total
  
Commercial
  
$
—
    
$
—
    
$
—
    
$
—
    
$
139
  
Commercial Real Estate
    
—
      
—
      
—
      
7,993
      
7,993
  
Agriculture
    
740
      
1,496
      
—
      
—
      
2,236
  
Residential Mortgage
    
—
      
—
      
—
      
—
      
202
  
Residential Construction
    
—
      
—
      
—
      
—
      
—
  
Consumer
    
—
      
—
      
—
      
—
      
642
  
Total
  
$
740
    
$
1,496
    
$
—
    
$
7,993
    
$
11,212
  

December 31, 2023
  
($ in thousands)
  
Secured by 1-4
Family Residential
Properties-1st lien
    
Secured by 1-4 Family
Residential Properties-
junior lien
    
Secured by 1-4
Family Residential
Properties-
revolving
    
Commercial
    
Construction and
land development
  
Commercial
  
$
—
    
$
—
    
$
—
    
$
—
    
$
—
  
Commercial Real Estate
  
—
      
—
      
—
      
—
      
—
  
Agriculture
    
—
      
—
      
—
      
—
      
—
  
Residential Mortgage
    
424
      
—
      
—
      
—
      
—
  
Residential Construction
    
—
      
—
      
—
      
—
      
—
  
Consumer
    
—
      
351
      
352
      
—
      
—
  
Total
  
$
424
    
$
351
    
$
352
    
$
—
    
$
—
  


 
($ in thousands)
  
Secured by farmland
    
Agriculture production
loans
    
Loans secured
by owner-
occupied,
nonfarm
nonresidential
properties
    
Loans secured by
other nonfarm
nonresidential
properties
    
Total
  
Commercial
  
$
—
    
$
—
    
$
—
    
$
—
    
$
—
  
Commercial Real Estate
    
—
      
—
      
—
      
—
      
—
  
Agriculture
    
946
      
1,925
      
—
      
—
      
2,871
  
Residential Mortgage
    
—
      
—
      
—
      
—
      
424
  
Residential Construction
    
—
      
—
      
—
      
—
      
—
  
Consumer
    
—
      
—
      
—
      
—
      
703
  
Total
  
$
946
    
$
1,925
    
$
—
    
$
—
    
$
3,998
  
79

Foreclosure Proceedings



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


Non-accrual and Past Due Loans

The Company’s loans by delinquency and non-accrual status, as of December 31, 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
  
December 31, 2024
                                                
Commercial
  
$
2,287
    
$
—
    
$
—
    
$
139
     $ 2,426     $ 115,495    
$
117,921
     $ 139  
Commercial Real Estate
    
—
      
—
      
—
      
7,993
       7,993       715,657      
723,650
       7,993  
Agriculture
    
1,354
      
500
      
—
      
2,236
       4,090       88,474      
92,564
       2,236  
Residential Mortgage
    
749
      
—
      
—
      
202
       951       104,935      
105,886
       202  
Residential Construction
    
—
      
—
      
—
      
—
       —       6,858      
6,858
       —  
Consumer
    
—
      
10
      
—
      
642
       652       15,064      
15,716
       642  
Total
  
$
4,390
    
$
510
    
$
—
    
$
11,212
     $ 16,112     $ 1,046,483    
$
1,062,595
     $ 11,212  
                                                                 
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 $450 and $1,626 of interest income on nonaccrual loans during the years ended December 31, 2024 and December 31, 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.

80
Table of Contents
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 year ended December 31, 2024 were as follows:

($ in thousands)
  
Term Extension
    
Combination Term Extension
and Interest Rate Reduction
    
Total Class of Financing
Receivable
  
 
                  
Commercial
  
$
1,832
    
$
45
      
1.59
%
Commercial Real Estate
    
—
      
—
      
—
  
Agriculture
    
—
      
—
      
—
  
Residential Mortgage
    
—
      
—
      
—
  
Residential Construction
    
—
      
—
      
—
Consumer
    
—
      
—
      
—
  
Total
  
$
1,832
    
$
45
      
0.18
%

The Company had no commitments to lend additional funds to borrowers whose loans were modified at December 31, 2024.

The amortized cost basis of loans that were experiencing both financial difficulty and modification during the year ended December 31, 2023 were as follows:

($ in thousands)
  
Term Extension
    
Combination Term Extension
and Interest Rate Reduction
    
Total Class of Financing
Receivable
  
 
                  
Commercial
  
$
1,990
    
$
41
      
1.90
%
Commercial Real Estate
    
—
      
395
      
0.05
%
Agriculture
    
4,005
      
—
      
3.78
%
Residential Mortgage
    
—
      
—
      
—
  
Residential Construction
    
3,420
      
—
      
27.75
%
Consumer
    
—
      
—
      
—
  
Total
  
$
9,415
    
$
436
      
0.92
%

The Company had no commitments to lend additional funds to borrowers whose loans were modified at December 31, 2023.

The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the year ended December 31, 2024:

($ in thousands)
  
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
  
81
Table of Contents
The following table presents the financial effect of the loan modifications to borrowers experiencing financial difficulty during the year ended December 31, 2023:

($ in thousands)
  
Weighted-Average
Interest Rate
Reduction
    
Weighted-Average
Term Extension (in
months)
  
Commercial
    
0.50
%
  
$
3
  
Commercial Real Estate
    
0.25
%
    
26
  
Agriculture
    
—
      
4
  
Residential Mortgage
    
—
      
—
  
Residential Construction
    
—
      
1
  
Consumer
    
—
      
—
  
Total
    
0.27
%
  
$
3
  

Loans that were modified within the previous twelve months were current on payments as of December 31, 2024. There were no loans modified within the previous twelve months and for which there was a payment default during the year ended December 31, 2024. There were two agricultural loans totaling $4,005 and a residential construction loan totaling $3,420 that were modified within the previous twelve months and for which there was a payment default during the year ended December 31, 2023. In 2023, the Company recorded charge-offs on two agricultural loans totaling $2,567 that were subsequently recovered later in the year at payoff. The residential construction loan was 90 days or more past due as of December 31, 2023 and was subsequently paid off in 2024.

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.

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Table of Contents
Credit Quality Indicators

All new loans are rated using the credit risk ratings and criteria adopted by the Company. Risk ratings are adjusted as future circumstances warrant. All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State regulatory agencies; a 5 equates to a Special Mention; a 6 equates to Substandard; a 7 equates to Doubtful; and an 8 equates to a Loss. General definitions for each risk rating are as follows:

Risk Rating “1” – Pass (High Quality):  This category is reserved for loans fully secured by Company CDs or savings accounts and properly margined (as defined in the Company’s Credit Policy) and actively traded securities (including stocks, as well as corporate, municipal and U.S. Government bonds).

Risk Rating “2” – Pass (Above Average Quality): This category is reserved for borrowers with strong balance sheets that are well structured with manageable levels of debt and good liquidity. Cash flow is sufficient to service all debt, including the Company’s, as agreed. Historical earnings, cash flow, and payment performance have all been strong and trends are positive and consistent.  Collateral protection is better than the Company’s Credit Policy guidelines.

Risk Rating “3” – Pass (Average Quality): Credits within this category are considered to be of average, but acceptable, quality.  Loan characteristics, including term and collateral advance rates, meet the Company’s Credit Policy guidelines; unsecured lines to borrowers with above average liquidity and cash flow may be considered for this category; the borrower’s financial strength is well documented, with adequate, but consistent, cash flow to meet all obligations. Liquidity should be sufficient and leverage should be moderate. Monitoring of collateral may be required, including a borrowing base or construction budget. Alternative financing is typically available.

Risk Rating “4” – Pass (Below Average Quality): Credits within this category are considered sound, but merit additional attention due to industry concentrations within the borrower’s customer base, problems within their industry, deteriorating financial or earnings trends, declining collateral values, increased frequency of past due payments and/or overdrafts, discovery of documentation deficiencies which may impair our borrower’s ability to repay, or the Company’s ability to liquidate collateral. Financial performance is average but inconsistent. There also may be changes of ownership, management or professional advisors, which could be detrimental to the borrower’s future performance.

Risk Rating “5” – Special Mention (Criticized): Loans in this category are currently protected by their collateral value and have no loss potential identified, but have potential weaknesses which may, if not monitored or corrected, weaken our ability to collect payments from the borrower or satisfactorily liquidate our collateral position. Loans where terms have been modified due to their failure to perform as agreed may be included in this category. Adverse trends in the borrower’s operation, such as reporting losses or inadequate cash flow, increasing and unsatisfactory leverage, or an adverse change in economic or market conditions may have weakened the borrower’s business and impaired their ability to repay based on original terms. The condition or value of the collateral has deteriorated to the point where adequate protection for our loan may be jeopardized in the future. Loans in this category are in transition and, generally, do not remain in this category beyond 12 months. During this time, efforts are focused on strategies aimed at upgrading the credit or locating alternative financing.

Risk Rating “6” – Substandard (Classified): Loans in this category are inadequately protected by the borrower’s net worth, capacity to repay or collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. There exists a strong possibility of loss if the deficiencies are not corrected. Loans that are dependent on the liquidation of collateral to repay are included in this category, as well as borrowers in bankruptcy or where legal action is required to effect collection of our debt.

Risk Rating “7” – Doubtful (Classified): Loans in this category indicate all of the weaknesses of a Substandard classification, however, collection of loan principal, in full, is highly questionable and improbable; possibility of loss is very high, but there is still a possibility that certain collection strategies may, yet, be successful, rendering a definitive loss difficult to estimate, at this time. Loans in this category are in transition and, generally, do not remain in this category more than 6 months.

Risk Rating “8” – Loss (Classified):

Active Charge-Off. Loans in this category are considered uncollectible and of such little value that their removal from the Company’s books is required. The charge-off is pending or already processed. Collateral positions have been or are in the process of being liquidated and the borrower/guarantor may or may not be cooperative in repayment of the debt. Recovery prospects are unknown, but the Company is actively engaged in the collection of the loan.

Inactive Charge-Off. Loans in this category are considered uncollectible and of such little value that their removal from the Company’s books is required. The charge-off is pending or already processed. Collateral positions have been liquidated and the

83
Table of Contents
borrower/guarantor has nothing of any value remaining to apply to the repayment of our loan. Any further collection activities would be of little value.

The following tables present the loan portfolio by loan class, origination year, and internal risk rating as of December 31, 2024 and December 31, 2023. Generally, existing term loans that were re-underwritten are reflected in the table in the year of renewal. Lines of credit that have a conversion feature at the time of origination, such as construction to permanent loans, are presented by year of origination. Revolving loans converted to term loans totaled $3,121 and $881 as of December 31, 2024 and December 31, 2023, respectively.

(in thousands)
                 

 
Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2024
              
 
  
2024
    
2023
    
2022
    
2021
    
2020
    
Prior
    
Revolving
Loans
Amortized
Cost Basis
    
Total
  
Commercial
                                                
Pass
  
$
36,065
    
$
14,319
    
$
11,885
    
$
11,894
    
$
3,442
    
$
8,030
    
$
27,272
    
$
112,907
  
Special Mention
    
—
      
—
      
874
      
1,561
      
—
      
—
      
1,590
      
4,025
  
Substandard
    
227
      
—
      
—
      
32
      
471
      
—
      
259
      
989
  
Doubtful/Loss
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Total Commercial loans
  
$
36,292
    
$
14,319
    
$
12,759
    
$
13,487
    
$
3,913
    
$
8,030
    
$
29,121
    
$
117,921
  
Year-to-date Charge-offs
    
(47
)
    
(508
)
    
(224
)
    
(5
)
    
(163
)
    
(9
)
    
—
      
(956
)
Year-to-date Recoveries
    
—
      
—
      
4
      
—
      
—
      
56
      
—
      
60
  
Year-to-date Net Charge-offs
    
(47
)
    
(508
)
    
(220
)
    
(5
)
    
(163
)
    
47
      
—
      
(896
)
 
                                                                
Commercial Real Estate
                                                                
Pass
  
$
68,278
    
$
113,937
    
$
178,142
    
$
160,484
    
$
39,913
    
$
121,862
    
$
6,529
    
$
689,145
  
Special Mention
    
2,909
      
—
      
—
      
7,156
      
—
      
5,737
      
—
      
15,802
  
Substandard
    
—
      
381
      
—
      
2,052
      
1,638
      
14,632
      
—
      
18,703
  
Doubtful/Loss
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Total Commercial Real Estate loans
  
$
71,187
    
$
114,318
    
$
178,142
    
$
169,692
    
$
41,551
    
$
142,231
    
$
6,529
    
$
723,650
  
Year-to-date Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Year-to-date Recoveries
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Year-to-date Net Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
 
                                                                
Agriculture
                                                                
Pass
  
$
4,857
    
$
6,562
    
$
14,846
    
$
17,245
    
$
5,675
      
10,252
    
$
20,420
    
$
79,857
  
Special Mention
    
—
      
—
      
3,884
      
5,477
      
726
      
—
      
300
      
10,387
  
Substandard
    
—
      
—
      
—
      
740
      
—
      
—
      
1,580
      
2,320
  
Doubtful/Loss
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Total Agriculture loans
  
$
4,857
    
$
6,562
    
$
18,730
    
$
23,462
    
$
6,401
    
$
10,252
    
$
22,300
    
$
92,564
  
Year-to-date Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Year-to-date Recoveries
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Year-to-date Net Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
 
84
(in thousands)
                 

 
Term Loans Amortized Cost Basis by Origination Year - As of December 31, 2024
              
 
  
2024
    
2023
    
2022
    
2021
    
2020
    
Prior
    
Revolving
Loans
Amortized
Cost Basis
    
Total
  
Residential Mortgage
                                                
Pass
  
$
4,873
    
$
20,162
    
$
22,408
    
$
26,123
    
$
13,233
    
$
18,886
    
$
—
    
$
105,685
  
Special Mention
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Substandard
    
79
      
—
      
—
      
34
      
—
      
88
      
—
      
201
  
Doubtful/Loss
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Total Residential Mortgage loans
  
$
4,952
    
$
20,162
    
$
22,408
    
$
26,157
    
$
13,233
    
$
18,974
    
$
—
    
$
105,886
  
Year-to-date Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Year-to-date Recoveries
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Year-to-date Net Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
 
                                                                
Residential Construction
                                                                
Pass
  
$
1,525
    
$
2,117
    
$
1,998
    
$
1,218
    
$
—
    
$
—
    
$
—
    
$
6,858
  
Special Mention
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Substandard
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Doubtful/Loss
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Total Residential Construction loans
  
$
1,525
    
$
2,117
    
$
1,998
    
$
1,218
    
$
—
    
$
—
    
$
—
    
$
6,858
  
Year-to-date Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Year-to-date Recoveries
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Year-to-date Net Charge-offs
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
 
                                                                
Consumer
                                                                
Pass
  
$
212
    
$
145
    
$
1,129
    
$
109
    
$
122
    
$
286
    
$
13,071
    
$
15,074
  
Special Mention
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Substandard
    
—
      
—
      
—
      
—
      
—
      
—
      
642
      
642
  
Doubtful/Loss
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Total Consumer loans
  
$
212
    
$
145
    
$
1,129
    
$
109
    
$
122
    
$
286
    
$
13,713
    
$
15,716
  
Year-to-date Charge-offs
    
(28
)
    
—
      
—
      
—
      
—
      
—
      
—
      
(28
)
Year-to-date Recoveries
    
10
      
—
      
—
      
—
      
—
      
3
      
—
      
13
  
Year-to-date Net Charge-offs
    
(18
)
    
—
      
—
      
—
      
—
      
3
      
—
      
(15
)
 
                                                                
Total Loans
                                                                
Pass
  
$
115,810
    
$
157,242
    
$
230,408
    
$
217,073
    
$
62,385
    
$
159,316
    
$
67,292
    
$
1,009,526
  
Special Mention
    
2,909
      
—
      
4,758
      
14,194
      
726
      
5,737
      
1,890
      
30,214
  
Substandard
    
306
      
381
      
—
      
2,858
      
2,109
      
14,720
      
2,481
      
22,855
  
Doubtful/Loss
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  
Total Loans
  
$
119,025
    
$
157,623
    
$
235,166
    
$
234,125
    
$
65,220
    
$
179,773
    
$
71,663
    
$
1,062,595
  
Year-to-date Charge-offs
  
$
(75
)
  
$
(508
)
  
$
(224
)
  
$
(5
)
  
$
(163
)
  
$
(9
)
  
$
—
    
$
(984
)
Year-to-date Recoveries
  
$
10
    
$
—
    
$
4
    
$
—
    
$
—
    
$
59
    
$
—
    
$
73
  
Year-to-date Net Charge-offs
  
$
(65
)
  
$
(508
)
  
$
(220
)
  
$
(5
)
  
$
(163
)
  
$
50
    
$
—
    
$
(911
)

85
(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 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
    
—
      
—
      
—
      
—
      
—
      
—
      
—
      
—
  

86
Table of Contents
(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
)

87
Table of Contents
(4)
Mortgage Operations

The Company recognizes a gain or loss and a related asset for the fair value of the rights to service loans for others when loans are sold and servicing is retained.  The Company sold a substantial portion of its portfolio of conforming long-term residential mortgage loans originated during the year ended December 31, 2024 on a servicing retained basis, for cash proceeds equal to the fair value of the loans. At December 31, 2024 and 2023, the Company serviced real estate mortgage loans for others totaling $174,464 and $184,288, respectively.

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

The following table summarizes the activity related to the Company’s mortgage servicing rights assets for the years ended December 31, 2024 and 2023. Mortgage servicing rights are included in Interest Receivable and Other Assets on the Consolidated Balance Sheets.

 
December 31,
2023
    
Additions
    
Reductions
    
December 31,
2024
  
Mortgage servicing rights
  
$
1,482
    
$
38
    
$
(208
)
  
$
1,312
  
Valuation allowance
    
—
   
—
      
—
      
—
  
Mortgage servicing rights, net of valuation allowance
  
$
1,482
    
$
38
    
$
(208
)
  
$
1,312
  

 
December 31,
2022
    
Additions
    
Reductions
    
December 31,
2023
  
Mortgage servicing rights
  
$
1,650
    
$
67
    
$
(235
)
  
$
1,482
  
Valuation allowance
    
—
   
—
      
—
      
—
Mortgage servicing rights, net of valuation allowance
  
$
1,650
    
$
67
    
$
(235
)
  
$
1,482
  

At December 31, 2024 and December 31, 2023, the estimated fair market value of the Company’s mortgage servicing rights asset was $1,910 and $2,094, respectively. The changes in fair value of mortgage servicing rights during 2024 and 2023 were primarily due to amortization and increase in estimated prepayment speeds.

The Company received contractually specified servicing fees of $450 and $473 for the years ended December 31, 2024 and 2023, respectively. Contractually specified servicing fees are included in Other Income on the Consolidated Statements of Income.

88
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(5)
Premises and Equipment

Premises and equipment consisted of the following at December 31, of the indicated years:

 
2024
    
2023
  
Land
  
$
2,823
    
$
2,823
  
Buildings
    
8,703
      
8,659
  
Furniture and equipment
    
15,279
      
14,980
  
Leasehold improvements
    
2,673
      
2,673
  
                 
     
29,478
      
29,135
  
Less accumulated depreciation and amortization
    
20,230
      
19,173
  
                 
   
$
9,248
    
$
9,962
  

Depreciation and amortization expense, included in occupancy and equipment expense, was $1,057 and $1,002 for the years ended December 31, 2024 and 2023, respectively.

(6)
Interest Receivable and Other Assets

Interest receivable and other assets consisted of the following at December 31, of the indicated years:

 
2024
    
2023
  
Interest receivable
  
$
7,660
    
$
6,810
  
Mortgage servicing rights asset (see Note 4)
    
1,312
      
1,482
  
Officer’s life insurance
    
16,058
      
15,638
  
Deferred tax assets, net (see Note 17)
    
19,042
      
19,594
  
Operating lease right-of-use asset (see Note 8)
    
3,155
      
4,073
  
Prepaid and other
    
5,181
      
5,871
  
                 
   
$
52,408
    
$
53,468
  

(7)
Short-Term and Long-Term Borrowings

The Company had no secured borrowings and no Federal Funds purchased at December 31, 2024 and December 31, 2023.

Additional short-term borrowings available to the Company consist of a line of credit and advances with the Federal Home Loan Bank (“FHLB”) secured under terms of a blanket collateral agreement by a pledge of FHLB stock and all loans. At December 31, 2024, the Company had a current collateral borrowing capacity with the FHLB of $403,087 and, at such date, also had unsecured formal lines of credit totaling $130,000 with correspondent banks.

The Company had no long-term borrowings at December 31, 2024 and 2023.

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Table of Contents
(8)
Leases

The Company leases ten branch and administrative locations under operating leases expiring on various dates through 2031.  Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term.  For lease agreements entered into or reassessed after the adoption of Topic 842, the Company combines lease and nonlease components. The Bank had no financing leases as of December 31, 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 $3,155 and $4,073 as of December 31, 2024 and December 31, 2023, respectively. Right-of-use assets are included in Interest receivable and other assets on the Consolidated Balance Sheets. The Company had lease liabilities totaling $3,645 and $4,585 as of December 31, 2024 and December 31, 2023, respectively. Lease liabilities are included in Interest payable and other liabilities on the Consolidated Balance Sheets. The Company recognized lease expenses totaling $1,228 and $1,217 for the years ended December 31, 2024 and December 31, 2023, respectively.  Lease expense is included in Occupancy and Equipment expense on the Consolidated Statements of Income.

The table below summarizes the payments of remaining lease liabilities at December 31:

(in thousands)
  
2024
  
2025
   $
1,052
  
2026
    
672
  
2027
    
611
  
2028
    
625
  
2029     566  
2030 and thereafter
    
329
  
Total lease payments
    
3,855
  
Less: interest
    
(210
)
Present value of lease liabilities
  
$
3,645
  

The following table presents supplemental cash flow information related to leases for the year ended December 31:

(in thousands)
  
2024
    
2023
  
Cash paid for amounts included in the measurement of lease liabilities
            
Operating cash flows from operating leases
  
$
1,098
    
$
1,207
  
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 at December 31:

 
2024
    
2023
  
Weighted-average remaining lease term - operating leases, in years
    
4.87
      
5.43
  
Weighted-average discount rate - operating leases
    
2.36
%
    
2.42
%

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Table of Contents
(9)
Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit in addition to entering into commitments to sell loans in conjunction with our mortgage banking activities. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

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

Financial instruments, whose contract amounts represent credit risk at December 31 of the indicated periods, were as follows:

 
2024
    
2023
  
Undisbursed loan commitments
  
$
140,092
    
$
187,401
  
Standby letters of credit
    
922
      
1,251
  
                 
   
$
141,014
    
$
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. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank issues both financial and performance standby letters of credit. The financial standby letters of credit are primarily to guarantee payment to third parties. At December 31, 2024, there were no financial standby letters of credit outstanding. The performance standby letters of credit are typically issued to municipalities as specific performance bonds. At December 31, 2024, there was $922 issued in performance standby letters of credit and the Bank carried no liability. The Bank has experienced no draws on these letters of credit and does not expect to in the future; however, should a triggering event occur, the Bank either has collateral in excess of the letter of credit or imbedded agreements of recourse from the customer. The Bank has set aside a reserve for unfunded commitments in the amount of $700 and $1,150 at December 31, 2024 and 2023, respectively, which is recorded in “interest payable and other liabilities” on the Consolidated Balance Sheets.

Commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans. As of December 31, 2024, 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. There were no interest rate lock commitments at December 31, 2024 and 2023. 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. There were no commitments at December 31, 2024 and 2023. 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 2023, the Company had to repurchase one loan totaling $420 due to deficiencies in underwriting or loan documentation. Management believes that any liabilities that may result from such recourse provisions are not significant.

91
Table of Contents
(10)
Commitments and Contingencies

At December 31, 2024, the aggregate maturities for time deposits were as follows:

Year ending December 31:
      
2025
  
$
141,580
  
2026
    
4,332
  
2027
    
2,242
  
2028
    
1,422
  
2029
    
394
  
Thereafter
     —  
         
   
$
149,970
  

The Company is subject to various legal proceedings in the normal course of its business.  In the opinion of management, after having consulted with legal counsel, the outcome of the pending legal proceedings should not have a material adverse effect on the consolidated financial condition or results of operations of the Company.

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(11)
Capital Adequacy and Restriction on Dividends

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s and the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.

Quantitative measures established by regulation to help ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below).

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

Banks, such as First Northern, became subject to the final rules on January 1, 2015. The final rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and established 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 provided 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, 2024, 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% through calendar year 2021 and is 9% 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, while First Northern is a qualifying community banking organization, the Company and the Bank do not intend to elect to use the CBLR framework.

Management believes, as of December 31, 2024, that the Bank met all capital adequacy requirements to which it is subject. As of December 31, 2024, the most recent notification from the FDIC categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must meet the minimum ratios as set forth below. As of the date hereof, there have been no conditions or events since that notification that management believes have changed the institution’s category.

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The Bank had Tier I Leverage, Common Equity Tier 1, Tier I Risk-Based and Total Risk-Based capital above the “well capitalized” levels at December 31, 2024 and 2023, respectively, as set forth in the following table (calculated in accordance with the Basel III capital rules):

 
The Bank
  
   
2024
    
2023
    
Adequately
Capitalized
    
Well
Capitalized
  
   
Capital
    
Ratio
    
Capital
    
Ratio
    
Ratio*
    
Ratio
  
Tier 1 Leverage Capital (to Average Assets)
  
$
205,326
      
10.5
%
  
$
187,248
      
9.7
%
    
4.0
%
    
5.0
%
Common Equity Tier 1 Capital (to Risk-Weighted Assets)
    
205,326
      
16.4
%
    
187,248
      
14.8
%
    
4.5
%
    
6.5
%
Tier 1 Capital (to Risk-Weighted Assets)
    
205,326
      
16.4
%
    
187,248
      
14.8
%
    
6.0
%
    
8.0
%
Total Risk-Based Capital (to Risk-Weighted Assets)
    
220,977
      
17.7
%
    
203,096
      
16.0
%
    
8.0
%
    
10.0
%

* Ratio for regulatory requirement excludes the capital conservation buffer of 2.50%.

Cash dividends declared by the Bank are restricted under California State banking laws to the lesser of the Bank’s retained earnings or the Bank’s net income for the latest three fiscal years, less dividends previously declared during those periods.

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Fair Value Measurement

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

Assets Recorded at Fair Value on a Recurring Basis

The tables below present the recorded amount of assets and liabilities measured at fair value on a recurring basis as of December 31, 2024 and 2023.

December 31, 2024
  
Total
    
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
  
U.S. Treasury securities
  
$
105,545
    
$
105,545
    
$
—
    
$
—
  
Securities of U.S. government agencies and corporations
    
95,684
      
—
      
95,684
      
—
  
Obligations of states and political subdivisions
    
67,591
      
—
      
67,591
      
—
  
Collateralized mortgage obligations
    
94,945
      
—
      
94,945
      
—
  
Mortgage-backed securities
    
270,088
      
—
      
270,088
      
—
  
                                 
Total investments at fair value
  
$
633,853
    
$
105,545
    
$
528,308
    
$
—
  

December 31, 2023
  
Total
    
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
  
U.S. Treasury securities
  
$
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
    
$
—
  

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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 December 31, 2024.


 
(in thousands)
  
December 31, 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 December 31, 2024 and 2023.



Key methods and assumptions used in measuring the fair value of collateral dependent loans as of December 31, 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 recorded at fair value.

Investment Securities Available-for-Sale

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

Individually Evaluated Loans

The Company does not record loans at fair value on a recurring basis.  Loans that do not share similar risk characteristics are individually evaluated by management.  Included in loans individually evaluated are collateral dependent loans.  A loan is considered to be collateral dependent when repayment is expected to be provided substantially through the operation or sale of the collateral. Collateral dependent loans are considered to have unique risk characteristics and are individually evaluated. The ACL on collateral dependent loans is measured using the fair value of the underlying collateral, adjusted for costs to sell when applicable, less the amortized cost basis of the financial asset. If the value of underlying collateral is determined to be less than the recorded amount of the loan, a charge-off will be taken.  Collateral dependent loans where a charge-off is recorded based on the fair value of collateral require classification in the fair value hierarchy.  When a loan is evaluated based on the fair value of the underlying collateral securing the loan, the Company records the collateral dependent loan as non-recurring Level 3 given the valuation includes significant unobservable assumptions.
 
96
Disclosures about Fair Value of Financial Instruments

The following table summarizes fair value estimates for financial instruments for the years ended December 31, 2024 and 2023, excluding financial instruments recorded at fair value on a recurring basis (summarized in the first table in this note).

       
2024
    
2023
  
   
Level
    
Carrying
amount
    
Fair value
    
Carrying
amount
    
Fair value
  
Financial assets:
                              
Cash and cash equivalents
    
1
    
$
119,448
    
$
119,448
    
$
149,211
    
$
149,211
  
Certificates of deposit
    
2
      
16,074
      
16,129
      
19,710
      
19,570
  
Stock in Federal Home Loan Bank and other equity securities, at cost
    
3
      
10,518
      
10,518
      
10,518
      
10,518
  
Loans receivable:
                                        
Net loans
    
3
      
1,046,852
      
974,746
      
1,052,465
      
958,077
  
Interest receivable
    
2
      
7,660
      
7,660
      
6,810
      
6,810
  
Mortgage servicing rights
    
3
      
1,312
      
1,910
      
1,482
      
2,094
  
Financial liabilities:
                                        
Time deposits
    
3
      
149,970
      
149,752
      
135,696
      
135,540
  
Interest payable
    
2
      
1,215
      
1,215
      
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.

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Outstanding Shares and Earnings Per Share

All income per share amounts have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 23, 2025, payable on March 25, 2025, to shareholders of record as of February 28, 2025.

Earnings Per Share

Basic and diluted earnings per share for the years ended December 31, were computed as follows:

   
2024
    
2023
  
Basic earnings per share:
            
Net income
  
$
20,034
    
$
21,554
  
                 
Weighted average common shares outstanding
    
15,896,475
      
15,932,056
  
                 
Basic earnings per share
  
$
1.26
    
$
1.35
  
                 
Diluted earnings per share:
                
Net income
  
$
20,034
    
$
21,554
  
                 
Weighted average common shares outstanding
    
15,896,475
      
15,932,056
  
                 
Effect of dilutive shares
    
212,565
      
150,815
  
                 
Adjusted weighted average common shares outstanding
    
16,109,040
      
16,082,871
  
                 
Diluted earnings per share
  
$
1.24
    
$
1.34
  

Options not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 247,729 shares and 494,769 shares for the years ended December 31, 2024 and 2023, respectively.  Restricted stock not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 2,037 shares and 37,372 shares for the years ended December 31, 2024 and 2023, respectively.

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(14)
Stock Compensation Plans

The total number of shares authorized, number of shares outstanding, weighted average exercise prices, exercise prices and weighted average grant date fair value have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 23, 2025, payable on March 25, 2025 to shareholders of record as of February 28, 2025.

Under the Company’s 2016 Stock Incentive Plan (the “Plan”), the Company may grant option grants, stock appreciation rights, restricted stock, or stock units to an employee for an amount up to 50,000 total shares in any calendar year.  With respect to awards granted to non-employee directors under the Plan during the term of the Plan, the total number of shares of common stock which may be issued upon exercise or settlement of such awards is 100,000 shares and no outside director may receive option grants, stock appreciation rights, restricted stock or stock units for more than 3,000 shares total in any calendar year.  There are 1,593,465 shares authorized under the Plan.  The Plan will terminate on March 15, 2026.

The Compensation Committee of the Board of Directors is authorized to prescribe the terms and conditions of each option, including exercise price, vestings, or duration of the option.  Generally, option grants vest at a rate of 25% per year after the first anniversary of the date of grant and restricted stock awards vest at a rate of 100% after four years.  Options expire 10 years after the date of grant. Options are granted with an exercise price of the fair value of the related common stock on the date of grant.

Stock option activity under the Plan during the year ended December 31, 2024, was as follows:

 
Stock Options
  
   
Number
of shares
    
Weighted
average
exercise
price
  
Balance at December 31, 2023
    
674,918
    
$
8.00
  
Granted
    
—
      
—
  
Exercised
    
(52,905
)
    
6.59
  
Cancelled/Forfeited
    
(15,825
)
    
9.26
  
Expired
    (92,981 )     8.66  
Balance at December 31, 2024
    
513,207
    
$
7.99
  

The following table presents information on stock options for the year ended December 31, 2024:

 
Number of
Shares
    
Weighted
Average
Exercise Price
    
Aggregate
Intrinsic
Value
    
Weighted
Average
Remaining
Contractual
Term
  
Options exercised
    
52,905
    
$
6.59
    
$
90
      
—
  
                                 
Stock options outstanding and expected to vest:
    
513,207
    
$
7.99
    
$
784
      
3.77
  
                                 
Stock options vested and currently exercisable:
    
488,339
    
$
7.94
    
$
768
      
3.60
  

There were no stock options granted by the Company during the year ended December 31, 2024 and December 31, 2023.

The intrinsic value of options exercised during the years ended December 31, was $90 in 2024 and $305 in 2023.  The fair value of awards vested during the years ended December 31 was $88 in 2024 and $123 in 2023.

As of December 31, 2024, there was $31 of total unrecognized compensation related to non-vested stock options.  This cost is expected to be recognized over a weighted average period of approximately 1.2 years.

For the years ended December 31, 2024 and 2023, there was $35 and $93, respectively, of recognized compensation related to stock options.

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The Company determines fair value at grant date using the Black-Scholes-Merton pricing model that takes into account the stock price at the grant date, the exercise price, the risk-free interest rate, the volatility of the underlying stock and the expected life of the option.

The expected term of options granted is derived from historical data on employee exercise and post-vesting employment termination behavior.  The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.  Expected volatility is based on both the implied volatilities from the traded option on the Company’s stock and historical volatility on the Company’s stock.

The Company expenses the fair value of the option on a straight line basis over the vesting period.  The Company estimates forfeitures and only recognizes expense for those shares that actually vest.

In addition to stock options, the Company also grants restricted stock awards to directors, certain officers and employees.  The restricted shares awarded become fully vested after four years of continued employment or service from the date of grant.  Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions.

The following table presents information about non-vested restricted stock awards outstanding for the year ended December 31, 2024:

 
Restricted Stock Awards
  
   
Number of
shares
    
Weighted
average
grant date
fair value
  
Balance at December 31, 2023
    
287,981
    
$
8.30
  
Granted
    
90,378
      
7.96
  
Vested
    
(84,068
)
    
8.50
  
Cancelled/Forfeited
    
(21,530
)
    
8.33
  
                 
Balance at December 31, 2024
    
272,761
    
$
8.12
  

The aggregate intrinsic value of restricted stock awards vested in calendar years 2024 and 2023, was $687 and $446, respectively.

The weighted average fair value per share of restricted stock awards granted during the years ended December 31, was $7.96 in 2024 and $7.72 in 2023.

As of December 31, 2024, there was $941 of total unrecognized compensation related to non-vested restricted stock awards.  This cost is expected to be recognized over a weighted average period of approximately 2.4 years.

For the years ended December 31, 2024 and 2023, there was $761 and $701, respectively, of recognized compensation related to restricted stock awards.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (“ESPP”).  Under the ESPP, the Company is authorized to issue to an eligible employee shares of common stock.  There are 395,699 shares authorized under the ESPP, which include authorized but unissued shares under the 2016 Amended ESPP.  The ESPP will expire on March 16, 2026.

The ESPP is implemented by participation periods of not more than twenty-seven months each.  The Board of Directors determines the commencement date and duration of each participation period.  An eligible employee is one who has been continually employed for at least ninety (90) days prior to commencement of a participation period.  Under the terms of the ESPP, employees can choose to have up to 10 percent of their compensation withheld to purchase the Company’s common stock each participation period.  The purchase price of the stock is 85% of the lower of the fair value on the last trading day before the Date of Participation or the fair value on the last trading day during the participation period.  Approximately 42% of eligible employees are participating in the ESPP in the current participation period, which began November 24, 2024 and will end November 23, 2025.

Under the ESPP, at the annual stock purchase date of November 23, 2024, there were $102 in contributions, and 15,878 shares were purchased at a price of $6.40.  For the years ended December 31, 2024 and 2023, there was $50 and $26, respectively, of recognized compensation related to ESPP issuances.  Compensation cost is reported in salaries and employee benefits expense in the Consolidated Statements of Income.

The total number of shares authorized, number of shares purchased and stock price have been adjusted to give retroactive effect to
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stock dividends and stock splits, including the 5% stock dividend declared on January 23, 2025, payable March 25, 2025, to shareholders of record as of February 28, 2025.


(15)
Profit Sharing Plan

The Bank maintains a profit sharing plan for the benefit of its employees. Employees who have completed 1,000 hours of service and are actively employed on the last day of the plan year are eligible. Under the terms of this plan, a portion of the Bank’s profits, as determined by the Board of Directors, will be set aside and maintained in a trust fund for the benefit of qualified employees. Contributions to the plan, included in salaries and employee benefits in the Consolidated Statements of Income, were $1,870 and $3,240 in 2024 and 2023, respectively. The profit sharing plan also has a 401(k) feature that allows employees to contribute to the profit sharing plan, even if they are not eligible for a contribution from the Bank. An employee is eligible to make contributions through the 401(k) feature on the 1st of the month following 90 days of employment.

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Supplemental Compensation Plans

EXECUTIVE RETIREMENT PLAN

Pension Benefit Plans

The Company and the Bank maintain an unfunded non-contributory defined benefit pension plan (“Salary Continuation Plan”) and related split dollar plan for a select group of highly compensated employees.  The Salary Continuation Plan provides defined annual benefit levels between $50 and $100 depending on responsibilities at the Bank.  The retirement benefits are paid for 10 years following retirement at age 65.  Reduced retirement benefits are available after age 55 and 10 years of service. There are currently one active and four retired participants in the Salary Continuation Plan.

Eligibility to participate in the Salary Continuation Plan is limited to a select group of management or highly compensated employees of the Bank that are designated by the Board.

Additionally, the Company and the Bank adopted a supplemental executive retirement plan (“SERP”) in 2006.  The SERP is intended to integrate the various forms of retirement payments offered to executives.  There are currently two active and one retired participant in the SERP.

The SERP benefit is calculated using 3-year average salary plus 7-year average bonus (average compensation). For each year of service, the benefit formula credits 2% to 2.5% of average compensation up to a cumulative maximum of 50%.  Therefore, for an executive serving 20 to 25 years, the target benefit is 50% of average compensation.

The target benefit is reduced for other forms of retirement income provided by the Bank.  Reductions are made for 50% of the social security benefit expected at age 65 and for the accumulated value of contributions the Bank makes to the executive’s profit sharing plan.  For purposes of this reduction, contributions to the profit sharing plan are accumulated each year at a 3-year average of the yields on 10-year Treasury securities.  Retirement benefits are paid monthly for 120 months, plus 6 months for each full year of service over 10 years, up to a maximum of 180 months.

Reduced benefits are payable for retirement prior to age 65.  Should retirement occur prior to age 65, the benefit determined by the formula described above is reduced 5% for each year payments commence prior to age 65.  Therefore, the new SERP benefit is reduced 50% for retirement at age 55.  No benefit is payable for voluntary terminations prior to age 55.

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The following table sets forth the status of the Salary Continuation Plan and SERP as of December 31, 2024 and December 31, 2023:

   
2024
    
2023
  
Change in benefit obligation
            
Benefit obligation at beginning of year
  
$
4,979
    
$
5,339
  
Service cost
    
138
      
158
  
Interest cost
    
258
      
263
  
Plan gain
    
(391
)
    
(336
)
Benefits paid
    
(484
)
    
(445
)
Benefit obligation at end of year
  
$
4,500
    
$
4,979
  
                 
Change in plan assets
                
Employer contribution
  
$
484
    
$
445
  
Benefits paid
    
(484
)
    
(445
)
Fair value of plan assets at end of year
  
$
—
    
$
—
  
                 
Reconciliation of funded status
                
Funded status
  
$
(4,500
)
  
$
(4,979
)
Unrecognized net plan loss
    
(322
)
    
69
  
Unrecognized prior service cost
    
29
      
31
  
Net amount recognized
  
$
(4,793
)
  
$
(4,879
)
                 
Amounts recognized in the consolidated balance sheets consist of:
                
Accrued benefit liability
  
$
(4,500
)
  
$
(4,979
)
Accumulated other comprehensive loss
    
(293
)
    
100
  
Net amount recognized
  
$
(4,793
)
  
$
(4,879
)

The Company expects to recognize approximately $2 of the unrecognized net actuarial loss and prior service cost as a component of net periodic benefit cost in 2025.


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For the Year ended December 31,
  
   
2024
    
2023
  
Components of net periodic benefit cost
            
Service cost
  
$
138
    
$
158
  
Interest cost
    
258
      
263
  
Amortization of prior service cost
    
2
      
2
  
Recognized actuarial loss
    
—
      
—
  
Net periodic benefit cost
    
398
      
423
  
                 
Additional Information
                
Minimum benefit obligation at year end
  
$
4,500
    
$
4,979
  
Decrease in minimum liability included in other comprehensive loss
  
$
(393
)
  
$
(338
)

Assumptions used to determine benefit obligations at December 31
  
2024
    
2023
  
Discount rate used to determine net periodic benefit cost for years ended December 31
    
5.30
%
    
5.00
%
                 
Discount rate used to determine benefit obligations at December 31
    
5.50
%
    
5.30
%
                 
Future salary increases
    
5.30
%
    
5.60
%

Plan Assets

The Bank informally funds the liabilities of the Salary Continuation Plan through life insurance purchased on the lives of plan participants.  This informal funding does not meet the definition of “plan assets” under pension accounting standards.  Therefore, assets held for this purpose are not disclosed as part of the Salary Continuation Plan.

Cash Flows

Contributions and Estimated Benefit Payments

For unfunded plans, contributions to the Salary Continuation Plan are the benefit payments made to participants. The Bank paid $484 in benefit payments during fiscal 2024. The following benefit payments, which reflect expected future service, are expected to be paid in future fiscal years:

Year ending December 31,
  
Pension Benefits
  
2025
  
$
437
  
2026
    
352
  
2027
    
302
  
2028
    
302
  
2029
    
302
  
2030-2034
    
1,478
  

Disclosure of settlements and curtailments:

There were no events during fiscal 2024 that would constitute a curtailment or settlement.

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DIRECTORS’ RETIREMENT PLAN

On July 19, 2001, the Company and the Bank approved an unfunded non-contributory defined benefit pension plan (“Directors’ Retirement Plan”) and related split dollar plan for the directors of the Bank.  The Directors’ Retirement Plan provides a retirement benefit equal to $1 per year of service as a director, up to a maximum benefit amount of $15.  The retirement benefit is payable for ten years following retirement at age 65.  Reduced retirement benefits are available after age 55 and ten years of service.

The following table sets forth the status of the Directors’ Retirement Plan as of December 31, 2024 and December 31, 2023:

   
2024
    
2023
  
Change in benefit obligation
            
Benefit obligation at beginning of year
  
$
424
    
$
560
  
Service cost
    
—
      
—
  
Interest cost
    
20
      
24
  
Plan gain
    
(2
)
    
(100
)
Benefits paid
    
(45
)
    
(60
)
Benefit obligation at end of year
  
$
397
    
$
424
  
                 
Change in plan assets
                
Employer contribution
  
$
45
    
$
60
  
Benefits paid
    
(45
)
    
(60
)
Fair value of plan assets at end of year
  
$
—
    
$
—
  
                 
Reconciliation of funded status
                
Funded status
  
$
(397
)
  
$
(424
)
Unrecognized net plan gain
    
(142
)
    
(172
)
Net amount recognized
  
$
(539
)
  
$
(596
)
                 
Amounts recognized in the consolidated balance sheets consist of:
                
Accrued benefit liability
  
$
(397
)
  
$
(424
)
Accumulated other comprehensive gain
    
(142
)
    
(172
)
Net amount recognized
  
$
(539
)
  
$
(596
)

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For the Year Ended December 31,
  
   
2024
    
2023
  
Components of net periodic benefit cost
            
Service cost
  
$
—
    
$
—
  
Interest cost
    
20
      
24
  
Recognized actuarial gain
    
(33
)
    
(4
)
Net periodic benefit cost
    
(13
)
    
20
  
                 
Additional Information
                
Minimum benefit obligation at year end
  
$
397
    
$
424
  
Decrease in minimum liability included in other comprehensive loss
  
$
30
    
$
(96
)

Assumptions used to determine benefit obligations at December 31
  
2024
    
2023
  
Discount rate used to determine net periodic benefit cost for years ended December 31
    
5.00
%
    
4.60
%
                 
Discount rate used to determine benefit obligations at December 31
    
5.10
%
    
5.00
%

Plan Assets

The Bank informally funds the liabilities of the Directors’ Retirement Plan through life insurance purchased on the lives of plan participants.  This informal funding does not meet the definition of “plan assets” under pension accounting standards.  Therefore, assets held for this purpose are not disclosed as part of the Directors’ Retirement Plan.

Cash Flows

Contributions and Estimated Benefit Payments

For unfunded plans, contributions to the Directors’ Retirement Plan are the benefit payments made to participants. The Bank paid $45 in benefit payments during fiscal year 2024. The following benefit payments, which reflect expected future service, are expected to be paid in future fiscal years:

Year ending December 31,
  
Pension Benefits
  
2025
  
$
50
  
2026
    
45
  
2027
    
31
  
2028
    
20
  
2029
    
39
  
2030-2039
    
360
  

Disclosure of settlements and curtailments:

There were no events during fiscal year 2024 that would constitute a curtailment or settlement.

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EXECUTIVE ELECTIVE DEFERRED COMPENSATION PLAN — 2001 EXECUTIVE DEFERRAL PLAN

On July 19, 2001, the Bank approved a revised Executive Elective Deferred Compensation Plan (“2001 Executive Deferral Plan”) for certain officers to provide them the ability to make elective deferrals of compensation due to tax law limitations on benefit levels under qualified plans.  Deferred amounts earn interest at an annual rate determined by the Bank’s Board.  The 2001 Executive Deferral Plan is a non-qualified plan funded with bank owned life insurance policies taken on the lives of the participating officers.  During the year ended December 31, 2001, the Bank purchased insurance making a single-premium payment aggregating $1,125, which is reported in other assets on the Consolidated Balance Sheets.  The Bank is the beneficiary and owner of the policies.  The cash surrender value of the related insurance policies as of December 31, 2024 and 2023 totaled $2,966 and $2,892, respectively.  The net decrease in accrued liability for the 2001 Executive Deferral Plan totaled $60 and $58 for the years ended December 31, 2024 and 2023, respectively.  The net decrease was due to payments totaling $65 for each of the years ended December 31, 2024 and 2023, which was partially offset by interest accrued totaling $5 and $7 for the years ended December 31, 2024 and 2023, respectively.  Interest expense for the 2001 Executive Deferral Plan totaled $5 and $7 for the years ended December 31, 2024 and 2023, respectively.

DIRECTOR ELECTIVE DEFERRED FEE PLAN — 2001 DIRECTOR DEFERRAL PLAN

On July 19, 2001, the Bank approved a Director Elective Deferred Fee Plan (“2001 Director Deferral Plan”) for directors to provide them the ability to make elective deferrals of director’s fees.  Deferred amounts earn interest at an annual rate determined by the Bank’s Board.  The 2001 Director Deferral Plan is a non-qualified plan funded with bank owned life insurance policies taken on the lives of the participating directors.  The Bank is the beneficiary and owner of the policies.  The cash surrender value of the related insurance policies as of December 31, 2024 and 2023 totaled $167 and $162, respectively.  The net decrease in accrued liability for the 2001 Director Deferral Plan totaled $4 for each of the years ended December 31, 2024 and 2023.  The net decrease was due to payments totaling $4 and $5 for the years ended December 31, 2024 and 2023, respectively, which was partially offset by interest accrued totaling $0 and $1 for the years ended December 31, 2024 and 2023, respectively.  Interest expense for the 2001 Director Deferral Plan totaled $0 and $1 for the years ended December 31, 2024 and 2023, respectively.

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Income Taxes

The provision for income tax expense consisted of the following for the years ended December 31:

 
2024
    
2023
  
Current:
            
Federal
  
$
4,525
    
$
5,349
  
State
    
2,678
      
3,147
  
                 
     
7,203
      
8,496
  
Deferred:
                
Federal
    
324
   
(400
)
State
    
279
   
(4
)
                 
     
603
   
(404
)
                 
   
$
7,806
    
$
8,092
  

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2024 and 2023, consisted of:

 
2024
    
2023
  
Deferred tax assets:
            
Allowance for credit losses
  
$
4,903
    
$
5,246
  
Deferred compensation
    
45
      
64
  
Retirement compensation
    
1,575
      
1,617
  
Stock option compensation
    
467
      
453
  
Current state franchise taxes
    
578
      
657
  
Non-accrual interest
    
426
      
333
  
Lease liability
    
1,065
      
1,349
  
Investment securities unrealized loss
     14,337       14,178  
Other
    
394
      
281
  
                 
Deferred tax assets
    
23,790
      
24,178
  
                 
Deferred tax liabilities:
                
Fixed assets depreciation
    
761
      
970
  
FHLB dividends
    
184
      
184
  
Tax credit – loss on pass-through
    
824
      
489
  
Deferred loan costs
    
848
      
940
  
Mortgage servicing rights
    
388
      
383
  
Right of Use Asset
    
933
      
1,204
  
Postretirement benefits
     129       21  
Other
    
681
      
393
  
                 
Total deferred tax liabilities
    
4,748
      
4,584
  
                 
Net deferred tax assets (see Note 6)
  
$
19,042
    
$
19,594
  

Based upon the level of historical taxable income and projections for future taxable income over the periods during which the deferred tax assets are deductible, management believed it is more-likely-than-not the Company will realize the benefits of these deductible differences.

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At December 31, 2024, the Company had no state net operating loss carry forwards and no federal tax credit carry forwards.

A reconciliation of income taxes computed at the federal statutory rate and the provision for income taxes for the years ended December 31, is as follows:

 
2024
    
2023
  
Federal statutory income tax rate
    
21.0
%
    
21.0
%
                 
Increase (decrease) in tax rate due to:
                
State franchise tax, net of federal benefit
    
8.4
%
    
8.4
%
Reduction for tax exempt interest
    
(1.5
)%
    
(1.2
)%
Cash surrender value of life insurance
    
(0.3
)%
    
(0.4
)%
Other
    
0.4
%
    
(0.5
)%
                 
Effective income tax rate
    
28.0
%
    
27.3
%

Accounting for Uncertainty in Income Taxes

The Company had no unrecognized tax benefits for the years ended December 31, 2024 and 2023.  The Company recognized no changes in unrecognized tax benefits during 2024 and 2023, due to the expiration of a statute of limitations.  The Company had no significant uncertain tax positions as of December 31, 2024 and December 31, 2023.  The Company does not currently anticipate any significant increase or decrease in unrecognized tax benefits during 2025.

The Company classifies interest and penalties as a component of the provision for income taxes.  At December 31, 2024, there were no unrecognized interest and penalties.  The tax years ended December 31, 2023, 2022, and 2021 remain subject to examination by the Internal Revenue Service.  The tax years ended December 31, 2023, 2022, 2021, and 2020 remain subject to examination by the California Franchise Tax Board.  The deductibility of these tax positions will be determined through examination by the appropriate tax authorities or the expiration of the tax statute of limitations.

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Accumulated Other Comprehensive Income/(Loss)

The following table details activity in accumulated other comprehensive loss for the year ended December 31, 2024.

 
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 (loss), net of tax
    
(379
)
    
277
      
(22
)
    
(124
)
Balance as of December 31, 2024
  
$
(34,157
)
  
$
207
    
$
99
    
$
(33,851
)

The following table details activity in accumulated other comprehensive income/(loss) for the year ended December 31, 2023.

 
Unrealized Gains
(Losses) on
Securities
    
Officers’
retirement
plan
    
Directors’
retirement
plan
    
Accumulated
Other
Comprehensive
Income/(loss)
  
Balance as of December 31, 2022
  
$
(46,273
)
  
$
(308
)
  
$
53
    
$
(46,528
)
Current period other comprehensive income, net of tax
    
12,495
      
238
      
68
      
12,801
  
Balance as of December 31, 2023
  
$
(33,778
)
  
$
(70
)
  
$
121
    
$
(33,727
)

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Supplemental Consolidated Statements of Cash Flows Information

Supplemental disclosures to the Consolidated Statements of Cash Flows for the years ended December 31, are as follows:

 
2024
    
2023
  
Supplemental disclosure of cash flow information:
            
Cash paid during the year for:
            
Interest
  
$
14,644
    
$
6,110
  
Income taxes
    
7,670
      
8,500
  
                 
Supplemental disclosure of non-cash investing and financing activities:
                
Stock dividend distributed
    
6,392
      
5,652
  
Fair value adjustment of securities available for sale, net of tax of $(157) and 5,240 for the years ended December 31, 2024 and 2023, respectively
    
(379
)
    
12,495
  
Recognition of right-of-use assets obtained in exchange for operating lease liabilities
    
—
      
245
  
Market value of shares tendered in-lieu of cash to pay for exercise of options
     348       361  
                 
Non-cash assets acquired (liabilities assumed) in acquisition:
               
Total assets acquired
     —       12,612  
Total liabilities assumed
     —       (115,916 )

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Parent Company Financial Information

This information should be read in conjunction with the other notes to the consolidated financial statements. The following presents summary balance sheets and summary statements of income and cash flows information for the years ended December 31:

Balance Sheets
  
2024
    
2023
  
Assets
            
Cash
  
$
1,097
    
$
1,359
  
Investment in wholly-owned subsidiary
    
174,796
      
157,662
  
Interest receivable and other assets
     439       224  
                 
Total assets
  
$
176,332
    
$
159,245
  
Liabilities and stockholders’ equity
                
Liabilities
    
—
      
—
  
Stockholders’ equity
    
176,332
      
159,245
  
                 
Total liabilities and stockholders’ equity
  
$
176,332
    
$
159,245
  

Statements of Income
  
2024
    
2023
  
Dividends from subsidiary
   $
3,000     $
—  
Other operating expenses
    
(318
)
    
(308
)
Income tax benefit
    
94
      
91
  
Loss before undistributed earnings of subsidiary
    
2,776
   
(217
)
Equity in undistributed earnings of subsidiary
    
17,258
      
21,771
  
                 
Net income
  
$
20,034
    
$
21,554
  

Statements of Cash Flows
  
2024
    
2023
  
Net income
  
$
20,034
    
$
21,554
  
Adjustments to reconcile net income to net cash provided by operating activities
                
Stock-based compensation
    
846
      
820
  
   Increase in interest receivable and other assets
     (215 )     (224 )
Equity in undistributed earnings of subsidiary
    
(17,258
)
    
(21,771
)
                 
Net cash provided by operating activities
    
3,407
      
379
  
                 
Cash flows from financing activities:
                
Common stock issued
    
102
      
96
  
Stock repurchases
     (3,764 )     (143 )
Cash dividends paid in lieu of fractional shares
    
(7
)
    
(7
)
                 
Net cash provided by financing activities
    
(3,669
)
    
(54
)
                 
Net change in cash
    
(262
)
    
325
  
                 
Cash at beginning of year
    
1,359
      
1,034
  
                 
Cash at end of year
  
$
1,097
    
$
1,359
  

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Related Party Transactions

The Bank, in the ordinary course of business, has loan and deposit transactions with directors and executive officers.  In management’s opinion, these transactions were on substantially the same terms as comparable transactions with other customers of the Bank.  The amount of such deposits totaled approximately $3,963 and $4,058 at December 31, 2024 and 2023, respectively.

The following is an analysis of the activity of loans to executive officers and directors for the years ended December 31:

 
2024
    
2023
  
Outstanding balance, beginning of year
  
$
2,422
    
$
2,583
  
Credit granted
    
—
      
25
  
Repayments / Reductions
    
(865
)
    
(186
)
                 
Outstanding balance, end of year
  
$
1,557
    
$
2,422
  

(22)
Segment Disclosures

The Company has one reportable segment: banking operations.  The Company is engaged in a single line of business, indicative of a traditional banking institution, gathering deposits and originating loans in its primary market areas.  Loans, interest bearing accounts, investment securities, deposits, and non-interest income provide the revenues of the banking operation.  Loan products offered to customers generate a majority of the Company’s interest and dividend income.  Deposit products offered to customers generate non-interest income such as fees and service charges.  Interest income on securities, net gains on sales of loans, and debit card income are other sources of revenue.  Interest expense, provisions for credit losses, salaries and employee benefits, occupancy and equipment, and data processing provide significant expenses in banking operations. The Company manages its operations, allocates resources and monitors and reports its financials as a single operating segment.  The Company's Chief Executive Officer is considered the Chief Operating Decision Maker.  The Chief Operating Decision Maker evaluates segment performance using consolidated net income.

Accounting policies for segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements.

   
For the Year Ended December 31
  
 
  
2024
    
2023
  
   Interest and dividend income
  
$
78,652
    
$
74,123
  
                 
Reconciliation of revenue:
                
   Other revenues
    
6,019
      
7,845
  
      Total consolidated revenue
    
84,671
      
81,968
  
                 
Less:
                
   Interest expense
    
14,292
      
7,584
  
      Segment net interest income and noninterest income
    
70,379
      
74,384
  
Less:
                
   (Reversal of) provision for credit losses
    
(250
)
    
1,100
  
   Salaries and employee benefits
    
23,850
      
25,914
  
   Occupancy and equipment
    
4,736
      
4,329
  
   Data processing
    
4,224
      
4,043
  
   Other banking segment items
    
9,979
      
9,352
  
   Provision for income taxes
    
7,806
      
8,092
  
      Segment net income/consolidated net income
  
$
20,034
    
$
21,554
  
                 
Reconciliation of assets:
                
   Total assets for reportable segment
  
$
1,891,722
    
$
1,871,832
  
   Other assets
    
—
      
—
  
      Total consolidated assets
  
$
1,891,722
    
$
1,871,832
  

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Business Combinations

On January 20, 2023, the Company completed the acquisition from Columbia State Bank of three branches located in the California cities of Colusa, Willows, and Orland, in accordance with a Purchase and Assumption Agreement dated as of November 5, 2022. The acquired assets included all the real property, cash on hand, personal property, safe deposit agreements, books and records along with certain loans (including accrued interest and fees) booked at the branches or allocated by the seller to the acquired branches. The assumed liabilities primarily consisted of the deposits booked in the branches or allocated by the seller to the acquired branches.
 
In accordance with ASC 805, Business Combinations, the Company recorded a bargain purchase gain of $1,405 and $4,970 of core deposit intangibles on the acquisition date. The core deposit intangible will be amortized using the sum of the year’s digits method over the expected life of 10 years with no significant residual value. For tax purposes, acquisition accounting adjustments including the core deposit intangible are all non-taxable and/or non-deductible. Acquisition related costs of approximately $0 and $250 are included in the income statement for the years ended December 31, 2024 and 2023, respectively.

The Company recorded the fair values based on the valuations available as of reporting date. In accordance with business combination accounting guidance, we evaluated these fair values for up to one year following the acquisition date of January 20, 2023. The valuations below were final one year following the acquisition date.

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

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

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

114
A summary of the estimated fair value adjustments resulting in the bargain purchase gain recorded in the branch acquisition are presented below (in thousands):

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

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

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

The Company assumed net liabilities, at fair value, of $102,020 at acquisition in exchange for cash consideration received of $103,425. Under accounting guidance, a bargain purchase gain results if the fair value of consideration received is more than the fair value of the liabilities assumed. Because the cash consideration received exceeded the fair value of liabilities assumed, the Company recorded a bargain purchase gain of $1,405 related to the branch acquisitions during the first quarter of 2023. The bargain purchase gain is separately reported as a component of non-interest income in our Consolidated Statements of Income for the year ended December 31, 2023.

We believe that we were able to negotiate a bargain purchase price primarily as a result of Columbia State Bank being required to divest of certain branches (along with the associated deposits and loans) for competitive reasons in accordance with a Letter of Agreement between Columbia State Bank, Umpqua and the Department of Justice Antitrust Division. This agreement was reached in conjunction with the Department of Justice’s required approval of the merger of Columbia State Bank and Umpqua. The required divestiture, in conjunction with the rural location of the branches acquired, allowed the Company to negotiate a favorable purchase price that, when combined with changes in market conditions between the date of agreement and the closing date, resulted in the recognition of the bargain purchase gain. The Company completed the required reassessment prior to concluding recognition of a bargain purchase was appropriate.


115
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 
None.
 
ITEM 9A – CONTROLS AND PROCEDURES

Disclosure controls and procedures  
 
The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”), that are designed to ensure that information required to be disclosed in reports that the Company files or submits 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 management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.  The Company’s disclosure controls and procedures have been designed to meet and management believes that they meet reasonable assurance standards.  Based on their evaluation as of the end of the period covered by this Annual Report on Form 10-K, the chief executive officer and chief financial officer have concluded that the Company’s disclosure controls and procedures were effective to ensure that material information relating to the Company, including its consolidated subsidiary, is made known to them by others within those entities.

Internal controls over financial reporting

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.  This internal control system has been designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of the Company’s published consolidated financial statements.  All internal control systems, no matter how well designed, have inherent limitations.  Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.  As required by Rule 13a-15(d), management, including the chief executive officer and chief financial officer, conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that there has been no such change during the last quarter of the fiscal year covered by this Annual Report on Form 10-K that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.  See “Management’s Report” included in Item 8 of this Annual Report on Form 10-K for management’s report on the adequacy of internal control over financial reporting.

ITEM 9B – OTHER INFORMATION

During the quarter ended December 31, 2024, none of the Company's directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) adopted, modified or terminated a “Rule 10b5-1 trading arrangement” or a “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408 of Regulation S-K).

ITEM 9C –  DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.

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PART III

ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

The information called for by this item with respect to director and executive officer information is incorporated by reference herein from the sections of the Company’s proxy statement for its 2025 Annual Meeting of Shareholders entitled “Executive Officers,” “Security Ownership of Certain Beneficial Owners and Management,” “Executive Compensation” “Report of Audit Committee,” and “Nomination and Election of Directors.”  Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Exchange Act.  To the extent disclosure for delinquent reports is being made, it can be found in, and is incorporated herein by reference to, the section of the Company’s proxy statement for its 2025 Annual Meeting of Shareholders entitled “Delinquent Section 16(a) Reports”.

The information required by Item 10 regarding our insider trading policies is incorporated by reference from the section entitled “Securities Trading Guidelines” in the Company’s proxy statement for its 2025 Annual Meeting of Shareholders.  Refer to Exhibit 19.1 The Company's Insider Trading Policy and Exhibit 14.1 The Company's Code of Conduct to this Annual Report on Form 10-K.

The Company has adopted a Code of Conduct, which complies with the Code of Ethics requirements of the Securities and Exchange Commission.  A copy of the Code of Conduct is posted on the “Investor Relations” page of the Company’s website, or is available, without charge, upon the written request of any shareholder directed to Devon Camara-Soucy, Corporate Secretary, First Northern Community Bancorp, 195 North First Street, Dixon, California 95620.  The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendment to, and waivers from any provision of, the Code of Conduct by posting such information on the “Investor Relations” page of its website, at www.thatsmybank.com.

The Company’s website address is www.thatsmybank.com.

ITEM 11 - EXECUTIVE COMPENSATION

The information called for by this item is incorporated by reference herein from the sections of the Company’s proxy statement for its 2025 Annual Meeting of Shareholders entitled “Nomination and Election of Directors,” “Transactions with Related Persons,” “Director Compensation,” and “Executive Compensation.”

117
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning ownership of the equity stock of the Company by certain beneficial owners and management is incorporated herein by reference from the sections of the Company’s proxy statement for the 2025 Annual Meeting of Shareholders entitled “Security Ownership of Certain Beneficial Owners and Management” and “Nomination and Election of Directors.”

Stock Purchase Equity Compensation Plan Information

The following table shows the Company’s equity compensation plans approved by security holders.  The table also indicates the number of securities to be issued upon exercise of outstanding options, weighted-average exercise price of outstanding options, non-vested restricted stock and the number of securities remaining available for future issuance under the Company’s equity compensation plans as of December 31, 2024.  All amounts have been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 23, 2025, payable on March 25, 2025 to shareholders of record as of February 28, 2025.  The plans included in this table are the Company’s 2006 Stock Incentive Plan and 2016 Stock Incentive Plan.  See "Stock Compensation Plans" in Note 14 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.

Plan category
  
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
    
Weighted-average
exercise price of
outstanding
options, warrants
and rights
    
Number of
securities to be
issued upon
vesting of
restricted stock
    
Weighted-
average grant
date fair value
of restricted
stock
    
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in the first column)
  
                               
Equity compensation plans approved by security holders
    
513,207
    
$
7.99
      
272,761
    
$
8.12
      
518,499
  
Equity compensation plans not approved by security holders
    
—
      
—
      
—
      
—
      
—
  
Total
    
513,207
    
$
7.99
      
272,761
    
$
8.12
      
518,499
  

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

The information called for by this item is incorporated herein by reference from the sections of the Company’s proxy statement for its 2025 Annual Meeting of Shareholders entitled “Director Independence” and “Transactions with Related Persons.”

ITEM 14 – PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by this item is incorporated herein by reference from the section of the Company’s proxy statement for its 2025 Annual Meeting of Shareholders entitled “Audit and Non-Audit Fees.”

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PART IV

ITEM 15 – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)  Financial Statements:

Reference is made to the Index to Financial Statements under Item 8 in Part II of this Annual Report on Form 10-K.

(a)(2) Financial Statement Schedules:

All schedules to the Company’s Consolidated Financial Statements are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or accompanying notes.

(a)(3) Exhibits:

The following is a list of all exhibits filed as part of this Annual Report on Form 10-K:

   
Exhibit
Exhibit Number
    
     
3.01
  
Amended Articles of Incorporation of the Company – incorporated herein by reference to Exhibit 3.01 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023
     
3.2
  
Amended and Restated Bylaws of the Company (as amended)  – incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated January 27, 2022
     
4.1
  
Description of the Registrant’s Common Stock – incorporated herein by reference to Exhibit 4.1 to the Company's Annual Report for the year ended December 31, 2019
     
10.1
  
First Northern Community Bancorp 2000 Stock Option Plan – incorporated herein by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-8 dated May 25, 2000*
     
10.2
  
First Northern Community Bancorp Outside Directors 2000 Non-statutory Stock Option Plan – incorporated herein by reference to Exhibit 4.3 of the Company’s Registration Statement dated Form S-8 on May 25, 2000*
     
10.3
  
Amended First Northern Community Bancorp Employee Stock Purchase Plan – incorporated herein by reference to Appendix B of the Company’s Definitive Proxy Statement on Schedule 14A for its 2006 Annual Meeting of Shareholders*
     
10.4
  
First Northern Community Bancorp 2000 Stock Option Plan Forms “Incentive Stock Option Agreement” and “Notice of Exercise of Stock Option” – incorporated herein by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-8 dated May 25, 2000*
     
10.5
  
First Northern Community Bancorp 2000 Outside Directors 2000 Non-statutory Stock Option Plan Forms “Non-statutory Stock Option Agreement” and “Notice of Exercise of Stock Option” – incorporated herein by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-8 dated May 25, 2000*
     
10.6
  
First Northern Community Bancorp 2000 Employee Stock Purchase Plan Forms “Participation Agreement” and “Notice of Withdrawal” – incorporated herein by reference to Exhibit 4.6 of the Company’s Registration Statement on Form S-8 dated May 25, 2000*
     
10.11
  
     
10.13
  

119
10.17
  
First Northern Bancorp 2006 Stock Incentive Plan – incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A for its 2006 Annual Meeting of Shareholders*
     
10.18
  
First Northern Bank Annual Incentive Compensation Plan – incorporated herein by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2006*
     
10.20
  
First Northern Community Bancorp 2006 Stock Option Plan Forms “Stock Option Agreement” and “Notice of Exercise of Stock Option” – incorporated herein by reference to Exhibit 10.20 to the Company’s Annual Report for the year ended December 31, 2009  *
     
10.21
 
  
First Northern Community Bancorp 2006 Stock Incentive Plan “Restricted Stock Agreement – incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 *
     
10.24  
First Northern Bancorp Amended and Restated 2016 Stock Incentive Plan – incorporated by reference to Appendix A of the Company’s Definitive Proxy Statement on Schedule 14A for its 2021 Annual Meeting of Shareholders*.
     
10.25
  
First Northern Bancorp 2016 Employee Stock Purchase Plan – incorporated by reference to Appendix B of the Company’s Definitive Proxy Statement on Schedule 14A for its 2015 Annual Meeting of Shareholders*.
     
10.26
  
Amended and Restated Executive Deferral Plan of First Northern Bank effective July 20, 2017 – incorporated herein by reference to Exhibit 10.26 of the Company’s Quarterly Report on Form 10-Q for the quarter-ended September 30, 2017*
     
10.28
  
Executive Retirement/Retention Participation Agreement for Jeremiah Z. Smith – incorporated herein by reference to Exhibit 10.28 of the Company’s Quarterly Report on Form 10-Q for the quarter-ended September 30, 2017*
     
10.29
  
Form of Supplemental Executive Retirement Plan Agreement between First Northern Bank of Dixon and Jeremiah Z. Smith – incorporated herein by reference to Exhibit 10.29 of the Company’s Quarterly Report on Form 10-Q for the quarter-ended March 31, 2018*
     
10.30
  
Form of Supplemental Executive Retirement Plan Agreement between First Northern Bank of Dixon and Kevin Spink, Executive Vice President and Chief Financial Officer.– incorporated herein by reference to Exhibit 10.30 of the Company’s Quarterly Report on Form 10-Q for the quarter-ended March 31, 2018*
     
10.32
  
Change of Control Agreement between First Northern Bank of Dixon and Jeffrey Adamski, Executive Vice President and Senior Loan Officer.– incorporated herein by reference to Exhibit 10.32 of the Company’s Quarterly Report on Form 10-Q for the quarter-ended March 31, 2018*
     
10.33
  
Executive Retirement/Retention Participation Agreement for Jeffrey Adamski, Executive Vice President and Senior Loan Officer.– incorporated herein by reference to Exhibit 10.33 of the Company’s Quarterly Report on Form 10-Q for the quarter-ended March 31, 2018*
     
10.35
  
Change of Control Agreement between First Northern Bank of Dixon and Denise Burris, Executive Vice President and Chief Information Officer - incorporated herein by reference to Exhibit 10.36 of the Company's Quarterly Report on Form 10-Q for the quarter-ended June 30, 2021*
     
10.36
  
Executive Retirement/Retention Participation Agreement for Denise Burris, Executive Vice President and Chief Information Officer - incorporated herein by reference to Exhibit 10.37 of the Company's Quarterly Report on Form 10-Q for the quarter-ended June 30, 2021*
     
10.37
  
     
10.38
  
     
10.39
  

120
    the Company's Form 8-K/A dated December 26, 2022*
     
10.40
  
     
10.41
  
Supplemental Executive Retirement Plan 2006 - incorporated herein by reference to Exhibit 10.41 of the Company's Form 10K dated March 8, 2024*
     
10.42
  
Supplemental Executive Retirement Plan First Amendment 2009 - incorporated herein by reference to Exhibit 10.42 of the Company's Form 10K dated March 8, 2024*
     
10.43
  
Supplemental Executive Retirement Plan Second Amendment 2022 - incorporated herein by reference to Exhibit 10.43 of the Company's Form 10K dated March 8, 2024*
     
10.44
  
     
 
The Company's Code of Conduct – provided herewith
     
 
The Company's Insider Trading Policy – included in Exhibit 14.1
     
 
Subsidiary of the Company – provided herewith

 
Consent of independent registered public accounting firm – provided herewith
     
 
Rule 13(a) – 14(a) / 15(d) –14(a) Certification of the Company’s Chief Executive Officer – provided herewith
     
 
Rule 13(a) – 14(a) / 15(d) –14(a) Certification of the Company’s Chief Financial Officer – provided herewith
     
 
Section 1350 Certification of the Chief Executive Officer – provided herewith
     
 
Section 1350 Certification of the Chief Financial Officer – provided herewith
     
101.INS
  
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH
  
Inline XBRL Taxonomy Extension Schema Document.
101.CAL
  
Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF
  
Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB
  
Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
  
Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104
  
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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

**   In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-K 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.

121
ITEM 16 – FORM 10-K SUMMARY

Not applicable.

122
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on March 7, 2025.

 
FIRST NORTHERN COMMUNITY BANCORP
     
 
By:
/s/ Jeremiah Z. Smith
     
   
Jeremiah Z. Smith
   
President/Chief Executive Officer/Director
   
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

123
Name
Title
Date
     
/s/ Jeremiah Z. Smith
President/Chief Executive Officer/Director
March 7, 2025
Jeremiah Z. Smith
(Principal Executive Officer)
  
     
/s/ Kevin Spink
Executive Vice President/Chief Financial Officer
March 7, 2025
Kevin Spink
(Principal Financial Officer and Principal Accounting Officer)
  
     
/s/ PATRICK R. BRADY
Director and Chairman of the Board
March 7, 2025
Patrick R. Brady
    
     
/s/ JOHN M. CARBAHAL
Director and Vice Chairman of the Board
March 7, 2025
John M. Carbahal
    
     
/s/ GREGORY DUPRATT
Director
March 7, 2025
Gregory DuPratt
    
     
/s/ BARBARA HAYES
Director
March 7, 2025
Barbara Hayes
    
     
/s/ RICHARD M. MARTINEZ
Director
March 7, 2025
Richard M. Martinez
    
     
/s/ FOY S. MCNAUGHTON
Director
March 7, 2025
Foy S. McNaughton
    
     
/s/ SEAN P. QUINN
Director
March 7, 2025
Sean P. Quinn
    

/s/ MARK C. SCHULZE
Director
March 7, 2025
Mark C. Schulze
    

/s/ LOUISE A. WALKER
Director
March 7, 2025
Louise A. Walker
    

124