FIRST NORTHERN COMMUNITY BANCORP

Previous wording

This report may include forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our forecasts, if any, and expectations. See Part I, Item 1A. “Risk Factors,” and the other risks described in our 2023 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and the other risks described in our Quarterly Reports on Form 10-Q for factors to be considered when reading any forward-looking statements in this filing.

Current wording

This report may include forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our forecasts and expectations. See Part I, Item 1A. “Risk Factors,” and the other risks described in our 2023 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and the other risks described in our Quarterly Reports on Form 10-Q for factors to be considered when reading any forward-looking statements in this filing.

Previous wording

This overview of Management’s Discussion and Analysis highlights selected information in this report and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting estimates, you should carefully read this entire report and any other reports to the Securities and Exchange Commission (“SEC”), together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Current wording

This overview of Management’s Discussion and Analysis highlights selected information in this report and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire report and any other reports to the Securities and Exchange Commission (“SEC”), together with our Consolidated Financial Statements and the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2023.

Previous wording

Significant results and developments during the first quarter 2024 included:

Current wording

Significant results and developments during the second quarter and year-to-date 2024 included:

Previous wording

The Company recorded net income of $4,276,000 for the three months ended March 31, 2024, representing a decrease of $1,213,000 from net income of $5,489,000 for the same period in 2023. Net income for the three months ended March 31, 2023 includes a pre-tax bargain purchase gain totaling approximately $1.4 million.

Current wording

The Company recorded net income of $8,700,000 for the six months ended June 30, 2024, representing a decrease of $1,353,000, or 13.5%, from net income of $10,053,000 for the same period in 2023. The Company recorded net income of $4,424,000 for the three months ended June 30, 2024, representing a decrease of $140,000, or 3.1%, from net income of $4,564,000 for the same period in 2023.

Previous wording

The following tables present a summary of the results for the three months ended March 31, 2024 and 2023, and a summary of our financial condition at March 31, 2024 and December 31, 2023:

Current wording

The following tables present a summary of the results for the three and six months ended June 30, 2024 and 2023, and a summary of financial condition at June 30, 2024 and December 31, 2023.

Previous wording

Following is an analysis of changes in interest income and expense (dollars in thousands) for the three months ended March 31, 2024 over the three months ended March 31, 2023 and the three months ended March 31, 2024 over the three months ended December 31, 2023. Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume.

Current wording

Following is an analysis of changes in interest income and expense (dollars in thousands) for the three months ended June 30, 2024 over the three months ended June 30, 2023, the six months ended June 30, 2024 over the six months ended June 30, 2023, and the three months ended June 30, 2024 over the three months ended March 31, 2024. Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume.

Previous wording

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $37,698,000 or 25.3% increase in cash and cash equivalents, a $1,525,000 or 7.7% decrease in certificates of deposit, a $13,916,000 or 2.4% decrease in investment securities available-for-sale, and a $5,169,000 or 0.5% decrease in net loans held-for-investment from December 31, 2023 to March 31, 2024. The increase in cash and cash equivalents was primarily due to an increase in deposit balances coupled with decreases in investment securities and loans due to proceeds from maturities of available-for-sale securities and loan payoffs. The decreases in investment securities and certificates of deposit were due to maturities and repayments of investment securities and certificates of deposit. The decrease in net loans held-for-investment was primarily due to payoffs of agriculture loans, which was partially offset by originations of commercial, commercial real estate, residential mortgage and consumer loans.

Current wording

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $32,572,000, or 21.8%, increase in cash and cash equivalents, a $2,850,000, or 14.5%, decrease in certificates of deposit, an $11,283,000, or 2.0%, decrease in investment securities available-for-sale, a $3,317,000, or 0.3%, decrease in net loans held-for-investment, and a $267,000, or 100.0%, increase in loans held-for-sale from December 31, 2023 to June 30, 2024. The increase in cash and cash equivalents was primarily due to an increase in deposit balances coupled with decreases in investment securities and loans due to proceeds from maturities of available-for-sale securities and loan payoffs, net of loan originations. The decrease in certificates of deposit and investment securities available-for-sale was due to net maturities and repayments of investment securities and certificates of deposit. The decrease in net loans held-for-investment was primarily due to net payoffs of agriculture and residential construction loans, which was partially offset by net originations of commercial, commercial real estate and consumer loans. The increase in loans held-for-sale was due to the timing of funding and sale of the loans held-for-sale pipeline. Loans held-for-sale as of June 30, 2024 were subsequently sold in July 2024.

Previous wording

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an increase in total deposits of $16,428,000 or 1.0% from December 31, 2023 to March 31, 2024. The overall increase in total deposits was primarily due to seasonal fluctuations due to changes in market conditions and monetary policy.

Current wording

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an increase in total deposits of $14,615,000, or 0.9%, from December 31, 2023 to June 30, 2024. The overall increase in total deposits was primarily due to seasonal fluctuations due to changes in market conditions and monetary policy.

Previous wording

The Federal Open Market Committee kept the Federal Reserve's benchmark rate range at 5.25% to 5.50% during the three months ended March 31, 2024.

Current wording

The Federal Open Market Committee kept the Federal Funds benchmark rate range at 5.25% to 5.50% during the six months ended June 30, 2024.

Previous wording

Interest income on loans for the three months ended March 31, 2024 was up 18.4% from the same period in 2023, increasing from $11,377,000 to $13,475,000. The increase in interest income on loans for the three months ended March 31, 2024 as compared to the same period a year ago was primarily due to an increase in average balance of loans coupled with a 37 basis point increase in yield on loans.

Current wording

Interest income on loans for the six months ended June 30, 2024 was up 8.8% from the same period in 2023, increasing from $25,099,000 to $27,305,000, and was up 0.8% for the three months ended June 30, 2024 over the same period in 2023, increasing from $13,722,000 to $13,830,000. The increase in interest income on loans for the six months ended June 30, 2024 as compared to the same period a year ago was primarily due to an increase in average balance of loans coupled with a 7 basis point increase in yield on loans. The increase in interest income on loans for the three months ended June 30, 2024 as compared to the same period a year ago was primarily due to an increase in average balance of loans, which was partially offset by a 23 basis point decrease in yield on loans.

Previous wording

Interest income on interest-bearing due from banks for the three months ended March 31, 2024 was down 31.2% from the same period in 2023, decreasing from $2,225,000 to $1,532,000. The decrease was primarily due to a decrease in average interest-bearing due from banks balance, which was partially offset by a 62 basis point increase in interest-bearing due from yields.

Current wording

Interest income on interest-bearing due from banks for the six months ended June 30, 2024 was down 24.1% from the same period in 2023, decreasing from $4,541,000 to $3,445,000, and was down 17.4% for the three months ended June 30, 2024 over the same period in 2023, decreasing from $2,315,000 to $1,913,000. The decrease in interest income on interest-bearing due from banks for the six months ended June 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of interest-bearing due from banks, which was partially offset by a 57 basis point increase in yield on interest-bearing due from banks. The decrease in interest income on interest-bearing due from banks for the three months ended June 30, 2024 as compared to the same period a year ago was primarily due to a decrease in average balances of interest-bearing due from banks, which was partially offset by a 38 basis point increase in yield on interest-bearing due from banks.

Previous wording

The Company had no Federal Funds sold balances during the three months ended March 31, 2024 and March 31, 2023.

Current wording

The Company had no Federal Funds sold balances during the three and six months ended June 30, 2024 and June 30, 2023.

Previous wording

The decrease was primarily due to the bargain purchase gain totaling approximately $1.4 million recognized during the three months ended March 31, 2023. The bargain purchase gain was the result of the acquisition of the Colusa, Willows, and Orland branches in the first quarter of 2023.

Current wording

Non-interest income was down 31.7% for the six months ended June 30, 2024 from the same period in 2023, decreasing from $4,379,000 to $2,991,000. The decrease was primarily driven by a bargain purchase gain recognized during the six months ended June 30, 2023. The Company recognized a bargain purchase gain totaling approximately $1.4 million resulting from the acquisition of the Colusa, Willows, and Orland branches located in California in the first quarter of 2023.

Previous wording

Non-interest income was down 47.6% for the three months ended March 31, 2024 from the same period in 2023, decreasing from $2,873,000 to $1,507,000.

Current wording

Non-interest income was down 1.5% for the three months ended June 30, 2024 from the same period in 2023, decreasing from $1,506,000 to $1,484,000. The decrease was primarily due to decreases in other income.

Previous wording

The decrease was primarily due to decreases in salaries and employee benefits, which was partially offset by increases in occupancy and equipment expenses. The decrease in salaries and employee benefits was primarily due to a decrease in profit sharing expense. The increase in occupancy and equipment expenses was partially due to a full quarter of expenses related to the acquired branches in the first quarter of 2023.

Current wording

Total non-interest expenses were down 0.6% for the six months ended June 30, 2024 from the same period in 2023, decreasing from $21,651,000 to $21,526,000. The decrease was primarily due to a decrease in salaries and employee benefits, which was partially offset by increases in occupancy and equipment and other expenses. The decrease in salaries and employee benefits was primarily due to decreases in contingent compensation and profit sharing expense. The increase in occupancy and equipment expenses was primarily due to an increase in depreciation expense due to a full six months of expenses related to the acquired branches in the first quarter of 2023. The increase in other expenses was primarily due to increases in loan collection expenses, which was partially offset by a decrease in legal fees.

Previous wording

The following table sets forth other non-interest expenses by category for the three months ended March 31, 2024 and 2023.

Current wording

The following table sets forth other non-interest expenses by category for the three and six months ended June 30, 2024 and 2023.

Previous wording

The Company’s tax rate, the Company’s income before taxes and the amount of tax relief provided by non-taxable earnings affect the Company’s provision for income taxes. Provision for income taxes decreased 19.9% for the three months ended March 31, 2024 from the same period in 2023, decreasing from $2,081,000 to $1,666,000 primarily due to a decrease in pre-tax income. The effective tax rate was 28.0% and 27.5% for the three months ended March 31, 2024 and March 31, 2023, respectively.

Current wording

The Company’s tax rate, the Company’s income before taxes and the amount of tax relief provided by non-taxable earnings affect the Company’s provision for income taxes. Provision for income taxes decreased 12.6% for the six months ended June 30, 2024 from the same period in 2023, decreasing from $3,838,000 to $3,355,000, and decreased 3.9% for the three months ended June 30, 2024 from the same period in 2023, decreasing from $1,757,000 to $1,689,000. The decrease in provision for income taxes was primarily due to a decrease in pre-tax income. The effective tax rate was 27.8% and 27.6% for the six months ended June 30, 2024 and June 30, 2023, respectively. The effective tax rate was 27.6% and 27.8% for the three months ended June 30, 2024 and June 30, 2023, respectively.

Previous wording

The reserve for unfunded lending commitments amounted to $1,100,000 and $1,150,000 as of March 31, 2024 and December 31, 2023, respectively. The reserve for unfunded lending commitments is included in other liabilities on the Condensed Consolidated Balance Sheets. See Note 7 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q, "Financial Instruments with Off-Balance Sheet Risk," for additional information.

Current wording

The reserve for unfunded lending commitments amounted to $950,000 and $1,150,000 as of June 30, 2024 and December 31, 2023, respectively. The reserve for unfunded lending commitments is included in other liabilities on the Condensed Consolidated Balance Sheets. See Note 7 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q, "Financial Instruments with Off-Balance Sheet Risk," for additional information.

Previous wording

The following tables summarize the Company’s non-accrual loans net of guarantees of the State of California and U.S. Government, including its agencies and its government-sponsored enterprises, by loan category at March 31, 2024 and December 31, 2023:

Current wording

The following table summarizes the Company’s non-accrual loans net of guarantees of the State of California and U.S. Government by loan category at June 30, 2024 and December 31, 2023:

Previous wording

Non-accrual loans amounted to $8,784,000 at March 31, 2024 and were comprised of one commercial loan totaling $139,000, two agriculture loans totaling $2,728,000, four residential mortgage loans totaling $1,315,000, one residential construction loan totaling $4,000,000 and three consumer loans totaling $602,000. Non-accrual loans amounted to $3,998,000 at December 31, 2023 and were comprised of two agriculture loans totaling $2,871,000, three residential mortgage loans totaling $424,000 and four consumer loans totaling $703,000.

Current wording

Non-accrual loans amounted to $6,805,000 at June 30, 2024 and were comprised of seven commercial loans totaling $2,374,000, two agriculture loans totaling $2,572,000, four residential mortgage loans totaling $1,275,000 and three consumer loans totaling $584,000. Non-accrual loans amounted to $3,998,000 at December 31, 2023 and were comprised of two agriculture loans totaling $2,871,000, three residential mortgage loans totaling $424,000 and four consumer loans totaling $703,000.

Previous wording

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 allowance for credit losses, or 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.

Current wording

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.

Previous wording

As the following table illustrates, total non-performing assets, net of guarantees of the State of California and U.S. Government, including its agencies and its government-sponsored enterprises, increased $450,000 or 5.4% to $8,784,000 during the first three months of 2024. Non-performing assets, net of guarantees, represented 0.5% of total assets at March 31, 2024.

Current wording

As the following table illustrates, total non-performing assets, net of guarantees of the State of California and U.S. Government, including its agencies and its government-sponsored agencies, decreased $1,529,000, or 18.4%, to $6,805,000 during the first six months of 2024. Non-performing assets, net of guarantees, represented 0.4% of total assets at June 30, 2024.

Previous wording

The Company had no loans 90 days or more past due and still accruing interest at March 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.

Current wording

The Company had no loans that were 90 days or more past due and still accruing as of June 30, 2024. The Company had two loans totaling $4,336,000 that were 90 days or more past due and still accruing as of December 31, 2023.

Previous wording

Excluding the non-performing loans cited previously, loans totaling $18,438,000 and $12,327,000 were classified as substandard loans, representing potential problem loans at March 31, 2024 and December 31, 2023, respectively. Management believes that the allowance for credit losses at March 31, 2024 and December 31, 2023 appropriately reflected expected credit losses inherent in the loan portfolio at that date. The ratio of the allowance for credit losses to total loans at March 31, 2024 and December 31, 2023 was 1.52% and 1.55%, respectively.

Current wording

Excluding the non-performing loans cited previously, loans totaling $19,411,000 and $12,327,000 were classified as substandard or doubtful loans, representing potential problem loans at June 30, 2024 and December 31, 2023, respectively. Management believes that the allowance for credit losses at June 30, 2024 and December 31, 2023 appropriately reflected expected credit losses in the loan portfolio at that date. The ratio of the allowance for credit losses to total loans at June 30, 2024 and December 31, 2023 was 1.60% and 1.55%, respectively.

Previous wording

The following table summarizes the ACL of the Company during the three months ended March 31, 2024 and 2023, and for the year ended December 31, 2023:

Current wording

The following table summarizes the ACL of the Company during the six months ended June 30, 2024 and 2023, and for the year ended December 31, 2023:

Previous wording

The Company obtains deposits primarily from the communities it serves. The Company believes that no material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company accepts deposits in excess of $250,000 (the current FDIC insurance limit) from customers. These deposits are priced to remain competitive.

Current wording

The Company obtains deposits primarily from the communities it serves. The Company believes that no material portion of its deposits has been obtained from or is dependent on any one person or industry. The Company accepts deposits in excess of $250,000 from customers. These deposits are priced to remain competitive.

Previous wording

Maturities of time certificates of deposits of over $250,000 or more outstanding at March 31, 2024 and December 31, 2023 are summarized as follows:

Current wording

Maturities of time certificates of deposit of over $250,000 outstanding at June 30, 2024 and December 31, 2023 are summarized as follows:

Previous wording

Approximately 37% of our deposits were uninsured as of each of the periods ended March 31, 2024 and December 31, 2023.

Current wording

Approximately 38% and 37% of our deposits were uninsured as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

Asset liquidity sources consist of the repayments and maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Condensed Consolidated Statement of Cash Flows. For the three months ended March 31, 2024, net liquidity provided by investing activities totaled $18,626,000.

Current wording

Asset liquidity sources consist of the repayments and maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Condensed Consolidated Statement of Cash Flows. For the six months ended June 30, 2024, net liquidity provided by investing activities totaled $14,007,000.

Previous wording

The Company’s available-for-sale investment securities plus cash and cash equivalents in excess of reserve requirements and certificates of deposit totaled $763,535,000 on March 31, 2024, which was 40.5% of assets at that date. This was an increase of $22,257,000 from $741,278,000 and 39.6% as of December 31, 2023. The Company’s investment securities are generally shorter term in nature to provide ongoing cash flows for liquidity needs and/or reinvestment for interest rate risk management. On March 31, 2024, the effective duration of our investment securities was 2.99 with projected principal cashflow of $128,448,000 for the remainder of 2024 available for reinvestment or liquidity needs. The Company had no held-to-maturity securities as of March 31, 2024 and December 31, 2023.

Current wording

The Company’s available-for-sale investment securities plus cash and cash equivalents in excess of reserve requirements and certificates of deposit totaled $759,717,000 on June 30, 2024, which was 40.2% of assets at that date. This was an increase of $18,439,000 from $741,278,000 and 39.6% of assets as of December 31, 2023. The Company’s investment securities are generally shorter term in nature to provide ongoing cash flows for liquidity needs and/or reinvestment for interest rate risk management. On June 30, 2024, the effective duration of our investment securities was 3.10 with projected principal cashflow of $79,699,000 for the remainder of 2024 available for reinvestment or liquidity needs. The Company had no held-to-maturity securities as of June 30, 2024 and December 31, 2023.

Previous wording

Liquidity may also be impacted from liabilities through changes in deposits and borrowings outstanding. These activities are included under financing activities in the Condensed Consolidated Statement of Cash Flows. As of March 31, 2024, the Company had $0 in borrowings outstanding. For the three months ended March 31, 2024, net liquidity provided by financing activities totaled $16,421,000. While these sources of funds are expected to continue to provide significant amounts of funds in the future, their mix, as well as the possible use of other sources, will depend on future economic and market conditions.

Current wording

Liquidity may also be impacted from liabilities through changes in deposits and borrowings outstanding. These activities are included under financing activities in the Condensed Consolidated Statement of Cash Flows. As of June 30, 2024, the Company had $0 in borrowings outstanding. For the six months ended June 30, 2024, net liquidity provided by financing activities totaled $13,369,000, primarily due to a net increase in deposits. While these sources of funds are expected to continue to provide significant amounts of funds in the future, their mix, as well as the possible use of other sources, will depend on future economic and market conditions.

Previous wording

Liquidity is also provided or used through the results of operating activities. For the three months ended March 31, 2024, operating activities provided cash of $2,651,000.

Current wording

Liquidity is also provided or used through the results of operating activities. For the six months ended June 30, 2024, operating activities provided cash of $5,196,000.

Previous wording

Liquidity is measured by various ratios, in management’s opinion, the most common being the ratio of net loans to deposits (including loans held-for-sale). This ratio was 61.3% and 62.2% as of March 31, 2024 and December 31, 2023, respectively.

Current wording

Liquidity is measured by various ratios, in management’s opinion, the most common being the ratio of net loans to deposits (including loans held-for-sale). This ratio was 61.5% and 62.2% as of June 30, 2024 and December 31, 2023, respectively.

Previous wording

Loan demand during 2024 will depend in part on economic and competitive conditions. The Company emphasizes the solicitation of non-interest-bearing demand deposits and money market checking accounts, which are the least sensitive to interest rates. The outlook for deposit balances during 2024 is subject to actions by the Federal Reserve and heightened competition.

Current wording

Loan demand during the remainder of 2024 will depend in part on economic and competitive conditions. The Company emphasizes the solicitation of non-interest-bearing demand deposits and money market checking accounts, which are the least sensitive to interest rates. The outlook for deposit balances during the remainder of 2024 is subject to actions by the Federal Reserve and heightened competition.

Previous wording

To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks which totaled $130,000,000 at March 31, 2024. Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity at March 31, 2024 of $404,630,000; credit availability is subject to certain collateral requirements.

Current wording

To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks which totaled $132,000,000 at June 30, 2024. Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity at June 30, 2024 of $407,031,000; credit availability is subject to certain collateral requirements.

Previous wording

As of March 31, 2024, the Bank’s capital ratios exceeded applicable regulatory requirements. The following table presents the capital ratios for the Bank, compared to the regulatory standards for well-capitalized depository institutions, as of March 31, 2024.

Current wording

As of June 30, 2024, the Bank’s capital ratios exceeded applicable regulatory requirements. The following table presents the capital ratios for the Bank, compared to the regulatory standards for well-capitalized depository institutions, excluding the capital conservation buffer, as of June 30, 2024.