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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
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)
Average Balance Percent Average Balance Percent
ASSETS
LIABILITIES &
STOCKHOLDERS’ EQUITY
Deposits:
37
Table of Contents
Net Interest Earnings
Average Balances, Yields and Rates
(Dollars in thousands)
Investment Securities:
38
Table of Contents
Continuation of
Net Interest Earnings
Average Balances, Yields and Rates
(Dollars in thousands)
Interest-Bearing Deposits:
Interest-Bearing
Interest payable and Other Liabilities 16,542 18,565
Net Interest Income and
Net Interest Spread (2) 2.92 % 3.34 %
39
Table of Contents
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.
Volume Interest Rate Change
Increase (Decrease) in Interest Income:
Certificates of Deposit (124 ) 91 (33 )
Investment Securities - Non-taxable 205 97 302
Increase (Decrease) in Interest Expense:
Deposits:
Interest-Bearing Transaction Deposits (193 ) 1,086 893
Increase (decrease) in Net Interest Income: $ (2,223 ) $ 44 $ (2,179 )
40
Table of Contents
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):
Investment securities available-for-sale (at fair value):
Securities of U.S. Government Agencies and Corporations 95,684 115,079
Obligations of State and Political Subdivisions 67,591 51,677
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):
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 %
41
Table of Contents
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):
Balance Percent Balance Percent
Net deferred origination fees and costs 142 78
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
Table of Contents
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.
Loans with fixed interest rates:
Residential Construction 95 — — — 95
Loans with variable interest rates:
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.
Gross Guaranteed Net Gross Guaranteed Net
Commercial $ 139 $ 139 $ — $ — $ — $ —
Commercial real estate 7,993 — 7,993 — — —
Residential construction — — — — — —
Non-accrual loans amounted to $11,212,000 at December 31, 2024, and were comprised of one commercial loan totaling $139,000,
43
Table of Contents
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.
Gross Guaranteed Net Gross Guaranteed Net
(dollars in thousands)
Loans 90 days past due and still accruing — — — 4,336 — 4,336
Other real estate owned — — — — — —
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 %
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
Table of Contents
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
Table of Contents
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
Table of Contents
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
Table of Contents
Analysis of the Allowance for Credit Losses On Loans
(Dollars in thousands)
Impact of adopting ASC 326 — 800 —
Loans Charged-Off:
Commercial Real Estate — — —
Agriculture — (2,567 ) —
Residential Mortgage — (3 ) —
Residential Construction — — —
Recoveries:
Commercial Real Estate — — —
Agriculture — 2,567 —
Residential Mortgage — — —
Residential Construction — — —
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 %
48
Table of Contents
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):
Loan Type:
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
Table of Contents
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:
Deposit Type:
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
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
Table of Contents
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
Table of Contents
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
Table of Contents
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):
Average Balance Percent Average Balance Percent Average Balance Percent
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
Table of Contents
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:
Amount Percent
Salaries and Employee Benefits $ (2,064 ) (8.0 %)
Occupancy and Equipment 407 9.4 %
Stationery and Supplies (36 ) (10.3 %)
Advertising (14 ) (3.0 %)
Directors Fees (18 ) (5.5 %)
Amortization of core deposit intangible (8 ) (1.0 )%
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
Table of Contents
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
Table of Contents
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
Standby Letters of Credit 922 922 — — —
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):
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
Table of Contents
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.
57
Table of Contents
ITEM 8 – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management’s Report on Internal Control over Financial Reporting Page 59
Report of Independent Registered Public Accounting Firm (PCAOB ID #659) Page 60
Consolidated Balance Sheets as of December 31, 2024 and 2023 Page 62
Notes to Consolidated Financial Statements Page 67
58
Table of Contents
Management’s Report
FIRST NORTHERN COMMUNITY BANCORP AND SUBSIDIARY
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of First Northern Community Bancorp and subsidiary (the “Company”) is responsible for establishing and maintaining adequate internal control
over financial reporting, and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 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
59
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of
First Northern Community Bancorp
Opinion on the Financial Statements
We have audited the accompanying consolidated balance
sheets of First Northern Community Bancorp and subsidiary (the “Company”) as of December 31, 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,
60
Table of Contents
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:
/s/MOSS ADAMS LLP
Sacramento, California
March 7, 2025
We have served as the Company’s auditor since 2006.
61
Table of Contents
FIRST NORTHERN COMMUNITY BANCORP
AND SUBSIDIARY
Consolidated Balance Sheets
December 31, 2024 and 2023
(in thousands, except shares and share amounts)