UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark one)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended September 30, 2022
 
OR
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
 
Commission File Number 000-30707
 
First Northern Community Bancorp
(Exact name of registrant as specified in its charter)
 
California
 
68-0450397
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
 
195 N. First Street, Dixon, California
 
95620
(Address of principal executive offices)
 
(Zip Code)

707 -678-3041
(Registrant’s telephone number including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbols(s)
 
Name of each exchange on which registered
None
 
Not Applicable
 
Not Applicable

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
 
Yes 
No
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
 
Yes 
No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
Accelerated filer
Non-accelerated filer 
Smaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes
No  
 
The number of shares of Common Stock outstanding as of November 7, 2022 was 13,918,905.



FIRST NORTHERN COMMUNITY BANCORP
 
INDEX

 
Page
3
3
3
4
5
6
7
8
33
50
50
50
50
50
52
52
52
52
52
53

2

PART I – FINANCIAL INFORMATION
 
FIRST NORTHERN COMMUNITY BANCORP
 
ITEM I.    – FINANCIAL STATEMENTS (UNAUDITED) 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
(in thousands, except share amounts)
 
September 30, 2022
   
December 31, 2021
 
 
           
Assets
           
 
           
Cash and cash equivalents
 
$
264,403
   
$
345,929
 
Certificates of deposit
   
11,091
     
13,272
 
Investment securities – available-for-sale
   
607,985
     
632,213
 
Loans, net of allowance for loan losses of $14,771 at September 30, 2022 and $13,952 at December 31, 2021
   
971,249
     
852,717
 
Loans held-for-sale
   
     
1,063
 
Stock in Federal Home Loan Bank and other equity securities, at cost
   
9,440
     
7,097
 
Premises and equipment, net
   
6,018
     
6,552
 
Interest receivable and other assets
   
62,527
     
40,244
 
 
               
Total Assets
 
$
1,932,713
   
$
1,899,087
 
 
               
Liabilities and Stockholders’ Equity
               
 
               
Liabilities:
               
 
               
Demand deposits
 
$
846,037
   
$
820,412
 
Interest-bearing transaction deposits
   
455,365
     
432,479
 
Savings and MMDA's
   
452,696
     
426,026
 
Time, $250,000 or less
   
35,328
     
38,388
 
Time, over $250,000
   
10,179
     
10,997
 
Total deposits
   
1,799,605
     
1,728,302
 
 
               
Interest payable and other liabilities
   
19,748
     
19,874
 
 
               
Total Liabilities
   
1,819,353
     
1,748,176
 
                 
Commitments and contingencies (Note 7)
           
                 
Stockholders' Equity:
               
Common stock, no par value; 16,000,000 shares authorized; 13,922,049 shares issued and outstanding at September 30, 2022 and 13,848,904 shares issued and outstanding at December 31, 2021
   
110,557
     
109,793
 
Additional paid-in capital
   
977
     
977
 
Retained earnings
   
55,119
     
44,338
 
Accumulated other comprehensive loss, net
   
(53,293
)
   
(4,197
)
Total Stockholders’ Equity
   
113,360
     
150,911
 
 
               
Total Liabilities and Stockholders’ Equity
 
$
1,932,713
   
$
1,899,087
 
 
See notes to unaudited condensed consolidated financial statements.

3

FIRST NORTHERN COMMUNITY BANCORP
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
 
(in thousands, except per share amounts)
 
Three months
ended
September 30, 2022
   
Three months
ended
September 30, 2021
   
Nine months
ended
September 30, 2022
   
Nine months
ended
September 30, 2021
 
Interest and dividend income:
                       
Loans
 
$
10,857
   
$
9,905
   
$
30,979
   
$
29,616
 
Due from banks interest bearing accounts
   
1,118
     
211
     
1,793
     
503
 
Investment securities
                               
Taxable
   
2,122
     
1,635
     
5,783
     
4,612
 
Non-taxable
   
250
     
153
     
634
     
436
 
Other earning assets
   
137
     
104
     
361
     
289
 
Total interest and dividend income
   
14,484
     
12,008
     
39,550
     
35,456
 
Interest expense:
                               
Deposits
   
271
     
231
     
691
     
686
 
Total interest expense
   
271
     
231
     
691
     
686
 
Net interest income
   
14,213
     
11,777
     
38,859
     
34,770
 
Provision (reversal of provision) for loan losses
   
300
     
(1,800
)
   
900
     
(1,500
)
Net interest income after provision for loan losses
   
13,913
     
13,577
     
37,959
     
36,270
 
Non-interest income:
                               
Service charges on deposit accounts
   
414
     
437
     
1,308
     
1,203
 
Gains on sales of loans held-for-sale
   
27
     
305
     
145
     
1,351
 
Investment and brokerage services income
   
137
     
174
     
443
     
470
 
Mortgage brokerage income
   
10
     
53
     
21
     
67
 
Loan servicing income
   
78
     
78
     
569
     
538
 
Debit card income
   
635
     
658
     
1,915
     
1,929
 
Losses on sales/calls of available-for-sale securities
   
     
(20
)
   
(152
)
   
(221
)
Other income
   
769
     
223
     
1,231
     
645
 
Total non-interest income
   
2,070
     
1,908
     
5,480
     
5,982
 
Non-interest expenses:
                               
Salaries and employee benefits
   
6,164
     
5,995
     
17,578
     
17,223
 
Occupancy and equipment
   
896
     
841
     
2,645
     
2,547
 
Data processing
   
912
     
839
     
2,587
     
2,557
 
Stationery and supplies
   
75
     
60
     
203
     
193
 
Advertising
   
99
     
100
     
276
     
250
 
Directors’ fees
   
60
     
88
     
196
     
210
 
Other expense
   
1,703
     
1,311
     
4,854
     
4,111
 
Total non-interest expenses
   
9,909
     
9,234
     
28,339
     
27,091
 
Income before provision for income taxes
   
6,074
     
6,251
     
15,100
     
15,161
 
Provision for income taxes
   
1,506
     
1,742
     
3,945
     
4,168
 
 
                               
Net income
 
$
4,568
   
$
4,509
   
$
11,155
   
$
10,993
 
 
                               
Basic earnings per common share
 
$
0.33
   
$
0.32
   
$
0.81
   
$
0.78
 
Diluted earnings per common share
 
$
0.33
   
$
0.32
   
$
0.80
   
$
0.77
 

See notes to unaudited condensed consolidated financial statements.

4

FIRST NORTHERN COMMUNITY BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

(in thousands)
 
Three months
ended
September 30, 2022
   
Three months
ended
September 30, 2021
   
Nine months
ended
September 30, 2022
   
Nine months
ended
September 30, 2021
 
Net income
 
$
4,568
   
$
4,509
   
$
11,155
   
$
10,993
 
Other comprehensive loss, net of tax:
                               
Unrealized holding losses arising during the period, net of tax effect of $(7,461) and $(463) for the three months ended September 30, 2022 and September 30, 2021, respectively, and $(19,850) and $(2,145) for the nine months ended September 30, 2022 and September 30, 2021, respectively
   
(18,492
)
   
(1,147
)
   
(49,204
)
   
(5,316
)
Less: reclassification adjustment due to losses realized on sales of securities, net of tax effect of $ and $6 for the three months ended September 30, 2022 and September 30, 2021, respectively, and $44 and $64 for the nine months ended September 30, 2022 and September 30, 2021, respectively
   
     
14
     
108
     
157
 
Other comprehensive loss, net of tax
 
$
(18,492
)
 
$
(1,133
)
 
$
(49,096
)
 
$
(5,159
)
 
                               
Comprehensive income (loss)
 
$
(13,924
)
 
$
3,376
   
$
(37,941
)
 
$
5,834
 

See notes to unaudited condensed consolidated financial statements.

5

FIRST NORTHERN COMMUNITY BANCORP
 
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in thousands, except share data)

 
 
Common Stock
   
Additional
Paid-in
   
Retained
   
Accumulated
Other
Comprehensive
Income (Loss),
       
 
 
Shares
   
Amounts
   
Capital
   
Earnings
   
net of tax
   
Total
 
 
                                   
Balance at December 31, 2020
   
13,634,463
   
$
107,527
   
$
977
   
$
37,115
   
$
5,038
   
$
150,657
 
Net income
                           
3,178
             
3,178
 
Other comprehensive loss, net of taxes
                                   
(4,172
)
   
(4,172
)
Stock dividend adjustment
   
1,282
     
329
             
(329
)
           
 
Cash in lieu of fractional shares
   
(168
)
                   
(8
)
           
(8
)
Stock-based compensation
           
144
                             
144
 
Common shares issued related to restricted stock grants
   
38,400
     
                             
 
Stock options exercised, net
   
6,108
     
                             
 
Balance at March 31, 2021
   
13,680,085
   
$
108,000
   
$
977
   
$
39,956
   
$
866
   
$
149,799
 
Net income
                           
3,306
             
3,306
 
Other comprehensive income, net of taxes
                                   
146
     
146
 
Stock-based compensation
           
148
                             
148
 
Common shares issued related to restricted stock grants
    3,000                                        
Stock repurchase and retirement
    (82,549 )     (925 )                             (925 )
Balance at June 30, 2021
   
13,600,536
   
$
107,223
   
$
977
   
$
43,262
   
$
1,012
   
$
152,474
 
Net income
                            4,509               4,509  
Other comprehensive loss, net of taxes
                                    (1,133 )     (1,133 )
Stock-based compensation
            148                               148  
Restricted stock forfeited
    (468 )                                      
Stock repurchase and retirement
    (132,334 )     (1,454 )                             (1,454 )
Balance at September 30, 2021     13,467,734     $ 105,917     $ 977     $
47,771     $
(121 )   $
154,544  
                                                 
Balance at December 31, 2021
   
13,848,904
   
$
109,793
   
$
977
   
$
44,338
   
$
(4,197
)
 
$
150,911
 
Net income
                           
3,041
             
3,041
 
Other comprehensive loss, net of taxes
                                   
(19,963
)
   
(19,963
)
Stock dividend adjustment
   
3,276
     
366
             
(366
)
           
 
Cash in lieu of fractional shares
   
(161
)
                   
(8
)
           
(8
)
Stock-based compensation
           
164
                             
164
 
Common shares issued related to restricted stock grants
   
67,596
     
                             
 
Stock options exercised, net
   
11,615
     
                             
 
Stock repurchase and retirement
    (1,401 )     (15 )                             (15 )
Balance at March 31, 2022
   
13,929,829
   
$
110,308
   
$
977
   
$
47,005
   
$
(24,160
)
 
$
134,130
 
Net income
                           
3,546
             
3,546
 
Other comprehensive loss, net of taxes
                                   
(10,641
)
   
(10,641
)
Stock-based compensation
           
168
                             
168
 
Common shares issued related to restricted stock grants
   
1,500
     
                             
 
Stock repurchase and retirement
   
(7,280
)
   
(69
)
                           
(69
)
Balance at June 30, 2022
   
13,924,049
   
$
110,407
   
$
977
   
$
50,551
   
$
(34,801
)
 
$
127,134
 
Net income
                            4,568               4,568  
Other comprehensive loss, net of taxes
                                    (18,492 )     (18,492 )
Stock-based compensation
            168                               168  
Stock repurchase and retirement
    (2,000 )     (18 )                             (18 )
Balance at September 30, 2022     13,922,049     $
110,557     $
977     $
55,119     $
(53,293 )   $
113,360  

See notes to unaudited condensed consolidated financial statements.

6

FIRST NORTHERN COMMUNITY BANCORP
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
 
(in thousands)
 
 
 
Nine months ended
September 30, 2022
   
Nine months ended
September 30, 2021
 
Cash Flows From Operating Activities
           
Net income
 
$
11,155
   
$
10,993
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
571
     
562
 
Accretion and amortization of investment securities premiums and discounts, net
   
3,545
     
3,039
 
Valuation adjustment on mortgage servicing rights
   
(276
)
   
24
 
(Decrease) increase in deferred loan origination fees and costs, net
   
(2,259
)
   
49
 
Provision (reversal of provision) for loan losses
   
900
     
(1,500
)
Stock-based compensation
   
500
     
440
 
Losses on sales/calls of available-for-sale securities
   
152
     
221
 
Amortization of operating lease right-of-use asset
   
835
     
781
 
Gains on sales of loans held-for-sale
   
(145
)
   
(1,351
)
Proceeds from sales of loans held-for-sale
   
10,206
     
58,529
 
Originations of loans held-for-sale
   
(8,998
)
   
(51,914
)
Changes in assets and liabilities:
               
(Increase) decrease  in interest receivable and other assets
   
(2,167
)
   
1,019
 
Decrease in interest payable and other liabilities
   
(995
)
   
(1,587
)
Net cash provided by operating activities
   
13,024
     
19,305
 
 
               
Cash Flows From Investing Activities
               
Proceeds from calls or maturities of available-for-sale securities
   
11,090
     
15,190
 
Proceeds from sales of available-for-sale securities
   
6,349
     
21,917
 
Principal repayments on available-for-sale securities
   
77,635
     
68,753
 
Purchases of available-for-sale securities
   
(143,445
)
   
(298,390
)
Proceeds from maturities of certificates of deposit
   
4,416
     
5,145
 
Proceeds from sales of certificates of deposit
    493        
Purchases of certificates of deposit
   
(2,728
)
   
(1,733
)
Net (increase) decrease in loans
   
(117,173
)
   
55,576
 
Purchases of Federal Home Loan Bank stock and other equity securities, at cost
    (2,343 )     (617 )
Purchases of premises and equipment
   
(37
)
   
(803
)
Net cash used in investing activities
   
(165,743
)
   
(134,962
)
 
               
Cash Flows From Financing Activities
               
Net increase in deposits
   
71,303
     
271,495
 
Principal payments on Federal Home Loan Bank advances           (5,000 )
Cash dividends paid in lieu of fractional shares
   
(8
)
   
(8
)
Repurchases of common stock
   
(102
)
   
(2,379
)
Net cash provided by financing activities
   
71,193
     
264,108
 
 
               
Net (decrease) increase in Cash and Cash Equivalents
   
(81,526
)
   
148,451
 
Cash and Cash Equivalents, beginning of period
   
345,929
     
267,177
 
Cash and Cash Equivalents, end of period
 
$
264,403
   
$
415,628
 
 
               
Supplemental Disclosures of Cash Flow Information:
               
Cash paid during the period for:
               
Interest
 
$
644
   
$
679
 
Income taxes
  $ 3,810     $ 3,270  
Supplemental disclosures of non-cash investing and financing activities:
               
Stock dividend distributed
 
$
6,992
   
$
6,636
 
Unrealized holding losses on available for sale securities, net of taxes
 
$
(49,096
)
 
$
(5,159
)
Transfer of loans held-for-sale to loans held-for-investment
 
$
   
$
1,765
 
Market value of shares tendered in-lieu of cash to pay for exercise of options
  $ 65     $ 32  
Recognition of right-of-use assets obtained in exchange for operating lease liabilities
  $ 869     $ 285  

See notes to unaudited condensed consolidated financial statements.

7

FIRST NORTHERN COMMUNITY BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2022 and 2021 and December 31, 2021

1.
BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of First Northern Community Bancorp (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  The results of operations for any interim period are not necessarily indicative of results expected for the full year.  These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the Securities and Exchange Commission ("SEC"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as reported amounts of revenue and expense during the reporting period.  Actual results could differ from those estimates.  All material intercompany balances and transactions have been eliminated in consolidation.

2.
ACCOUNTING POLICIES


The most significant accounting policies followed by the Company are presented in Note 1 to the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. These policies, along with the disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, Management has identified the allowance for loan losses accounting to be the accounting area requiring the most subjective or complex judgments, and as such the accounting area that could be most subject to revision as new information becomes available. A discussion of the factors affecting accounting for the allowance for loan losses is included in the “Asset Quality” and “Allowance for Loan Losses” discussions below.

 

Application of these principles requires the Company to make certain estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain accounting policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Estimates, assumptions and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment writedown or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third-party sources, when available.

Recently Issued Accounting Pronouncements:


In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842).  This ASU adds an SEC paragraph pursuant to the issuance of SEC Staff Accounting Bulletin No. 119 on loan losses to the FASB Codification Topic 326. This ASU also updates the SEC section of the Codification for the change in the effective date of Topic 842.  This ASU was effective upon addition to the FASB Codification. ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), is effective on January 1, 2023 for smaller reporting companies with less than $250 million in public float as defined in the SEC's rules.  The Company presently is a smaller reporting company.  The Company will apply the amendment's provisions as a cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective.  The Company has formed a team that is working on an implementation plan to adopt the amendment.  The implementation plan will include developing policies, procedures and internal controls over the model.  The Company is also working with a software vendor to measure expected losses required by the amendment.  The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements and expects that the portfolio composition and economic conditions at the time of adoption will influence the accounting adjustment made at the time the amendment is adopted.


8

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848).  This ASU provides temporary optional guidance to ease the potential burden in accounting for reference rate reform.  This ASU provides optional expedients and exceptions for contracts, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform.  This ASU was effective for all entities as of March 12, 2020 through December 31, 2022.  As of January 1, 2022, the Company is no longer originating LIBOR-based loans and is originating new variable rate loans using the Secured Overnight Financing Rate (SOFR).  For existing LIBOR based loans, the Company is monitoring the development and reporting of fallback indices.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.



In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848).  This ASU applies to contracts, hedging relationships and other transactions that reference LIBOR or other rate references expected to be discontinued because of reference rate reform. The amendments in this ASU are elective and apply to all entities that have derivative instruments that use an interest rate that will be modified by reference rate reform. This ASU provides implementation guidance to clarify that certain optional expedients and exceptions in Topic 848 may be applied to derivative instruments. This ASU may be elected on a full retrospective basis for any interim period subsequent to March 12, 2020, or on a prospective basis to new modifications from any date subsequent to the date of issuance.  The Company is evaluating the optional election of this ASU for the transition from LIBOR to a new reference rate.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.



In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures.  These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.  For public business entities, these amendments require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20.  This ASU is effective on January 1, 2023, the same effective date as ASU 2016-13.  The Company is currently evaluating the effects that the adoption of these amendments will have on its consolidated financial statements.



In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions.  These amendments clarify that a contractual restriction on the sale of an equity security is not considered part of the unit of account of the equity security and, therefore, is not considered in measuring fair value.   This ASU is effective for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2023.  The Company does not expect this ASU to have a material impact on the Company’s consolidated financial statements.

9

3. 
INVESTMENT SECURITIES

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at September 30, 2022 are summarized as follows:

(in thousands)
 
Amortized
cost
   
Unrealized
gains
   
Unrealized
losses
   
Estimated
fair value
 
 
                       
Investment securities available-for-sale:
                       
U.S. Treasury securities
 
$
115,583
   
$
   
$
(6,385
)
 
$
109,198
 
Securities of U.S. government agencies and corporations
   
120,824
     
     
(10,457
)
   
110,367
 
Obligations of states and political subdivisions
   
59,263
     
3
     
(7,710
)
   
51,556
 
Collateralized mortgage obligations
   
117,695
     
     
(19,553
)
   
98,142
 
Mortgage-backed securities
   
267,401
     
     
(28,679
)
   
238,722
 
                                 
Total debt securities
 
$
680,766
   
$
3
   
$
(72,784
)
 
$
607,985
 

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2021 are summarized as follows:

(in thousands)
 
Amortized
cost
   
Unrealized
gains
   
Unrealized
losses
   
Estimated
fair value
 
 
                       
Investment securities available-for-sale:
                       
U.S. Treasury securities
 
$
86,534
   
$
388
   
$
(711
)
 
$
86,211
 
Securities of U.S. government agencies and corporations
   
104,106
     
330
     
(1,826
)
   
102,610
 
Obligations of states and political subdivisions
   
44,842
     
1,444
     
(301
)
   
45,985
 
Collateralized mortgage obligations
   
137,872
     
665
     
(2,885
)
   
135,652
 
Mortgage-backed securities
   
262,738
     
1,971
     
(2,954
)
   
261,755
 
                                 
Total debt securities
 
$
636,092
   
$
4,798
   
$
(8,677
)
 
$
632,213
 

The Company had $0 and $2,470,000 in proceeds from sales of available-for-sale securities for the three-month periods ended September 30, 2022 and 2021, respectively.  The Company had $6,349,000 and $21,917,000 in proceeds from sales of available-for-sale securities for the nine-month periods ended September 30, 2022 and 2021, respectively.  There were no gross realized gains on sales of available-for-sale securities for each of the three-month periods ended September 30, 2022 and 2021. Gross realized losses on sales of available-for-sale securities were $0 and $20,000 for the three-month periods ended September 30, 2022 and 2021, respectively.  Gross realized gains on sales of available-for-sale securities were $0 and $322,000 for the nine-month periods ended September 30, 2022 and 2021, respectively.  Gross realized losses on sales of available-for-sale securities were $152,000 and $543,000 for the nine-month periods ended September 30, 2022 and 2021, respectively.

The amortized cost and estimated fair value of debt and other securities at September 30, 2022, by contractual maturity, are shown in the following table:

(in thousands)
 
Amortized
cost
   
Estimated
fair value
 
 
           
Maturity in years:
           
Due in one year or less
 
$
33,806
   
$
33,355
 
Due after one year through five years
   
188,827
     
175,412
 
Due after five years through ten years
   
39,515
     
34,802
 
Due after ten years
   
33,522
     
27,552
 
Subtotal
   
295,670
     
271,121
 
Mortgage-backed securities & Collateralized mortgage obligations    
385,096
     
336,864
 
Total
 
$
680,766
   
$
607,985
 

Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.  In addition, factors such as prepayments and interest rates may affect the yield on the carrying value of mortgage-related securities.

10

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of September 30, 2022, follows:


 
Less than 12 months
   
12 months or more
   
Total
 
(in thousands)  
Fair Value
   
Unrealized
losses
   
Fair Value
   
Unrealized
losses
   
Fair Value
   
Unrealized
losses
 
 
                                   
U.S. Treasury securities
 
$
66,255
   
$
(2,844
)
 
$
42,943
   
$
(3,541
)
 
$
109,198
   
$
(6,385
)
Securities of U.S. government agencies and corporations
   
43,768
     
(1,913
)
   
62,099
     
(8,544
)
   
105,867
     
(10,457
)
Obligations of states and political subdivisions
   
42,252
     
(5,103
)
   
7,598
     
(2,607
)
   
49,850
     
(7,710
)
Collateralized mortgage obligations
   
44,515
     
(5,086
)
   
51,469
     
(14,467
)
   
95,984
     
(19,553
)
Mortgage-backed securities
   
127,156
     
(11,660
)
   
105,959
     
(17,019
)
   
233,115
     
(28,679
)
                                                 
Total
 
$
323,946
   
$
(26,606
)
 
$
270,068
   
$
(46,178
)
 
$
594,014
   
$
(72,784
)

No decline in value related to investment securities was considered “other-than-temporary” during the first nine months of 2022. Four hundred sixteen securities, all considered investment grade, which had an aggregate fair value of $323,946,000 and a total unrealized loss of $26,606,000, have been in an unrealized loss position for less than twelve months as of September 30, 2022.  One hundred forty-six securities, all considered investment grade, which had an aggregate fair value of $270,068,000 and a total unrealized loss of $46,178,000, have been in an unrealized loss position for more than twelve months as of September 30, 2022.  The unrealized losses on the Company's investment securities were caused by market conditions for these types of investments, particularly changes in risk-free interest rates.The Company does not intend to sell the securities and has concluded it is not more likely than not that the Company will be required to sell these securities prior to recovery of their anticipated cost basis. Therefore, the Company does not consider these investments to be other than temporarily impaired as of September 30, 2022.

The fair value of investment securities could decline in the future if the general economy deteriorates, inflation increases, credit ratings decline, the issuer's financial condition deteriorates, or the liquidity for securities declines. As a result, other than temporary impairments may occur in the future. The coronavirus pandemic and the impact of governmental health measures in response thereto may increase the likelihood of such other than temporary impairments.

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of December 31, 2021, follows:


 
Less than 12 months
   
12 months or more
   
Total
 
(in thousands)  
Fair Value
   
Unrealized
losses
   
Fair Value
   
Unrealized
losses
   
Fair Value
   
Unrealized
losses
 
 
                                   
U.S. Treasury Securities
 
$
63,254
   
$
(673
)
 
$
2,066
   
$
(38
)
 
$
65,320
   
$
(711
)
Securities of U.S. government agencies and corporations
   
48,288
     
(942
)
   
30,158
     
(884
)
   
78,446
     
(1,826
)
Obligations of states and political subdivisions
   
11,680
     
(233
)
   
934
     
(68
)
   
12,614
     
(301
)
Collateralized Mortgage obligations
   
90,299
     
(2,850
)
   
1,298
     
(35
)
   
91,597
     
(2,885
)
Mortgage-backed securities
   
175,943
     
(2,816
)
   
6,997
     
(138
)
   
182,940
     
(2,954
)
                                                 
Total
 
$
389,464
   
$
(7,514
)
 
$
41,453
   
$
(1,163
)
 
$
430,917
   
$
(8,677
)

Investment securities carried at $50,540,000 and $39,695,000 at September 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.

11

4. 
LOANS

The composition of the Company’s loan portfolio, by loan class, as of September 30, 2022  and December 31, 2021 was as follows:

($ in thousands)
 
September 30,
2022
   
December 31,
2021
 
 
           
Commercial
 
$
107,958
   
$
135,894
 
Commercial Real Estate
   
646,365
     
526,924
 
Agriculture
   
118,929
     
107,183
 
Residential Mortgage
   
88,765
     
76,160
 
Residential Construction
   
7,407
     
4,482
 
Consumer
   
15,569
     
17,258
 
      984,993       867,901  
 
               
Allowance for loan losses
   
(14,771
)
   
(13,952
)
Net deferred origination fees and costs
   
1,027
     
(1,232
)
                 
Loans, net
 
$
971,249
   
$
852,717
 

The Company manages asset quality and credit risk by maintaining diversification in its loan portfolio and through review processes that include analysis of credit requests and ongoing examination of outstanding loans and delinquencies, with particular attention to portfolio dynamics and loan mix. The Company strives to identify loans experiencing difficulty early enough to correct the problems, to record charge-offs promptly based on realistic assessments of collectability and current collateral values and to maintain an adequate allowance for loan losses at all times. Asset quality reviews of loans and other non-performing assets are administered using credit risk rating standards and criteria similar to those employed by state and federal banking regulatory agencies.

Commercial loans, whether secured or unsecured, generally are made to support the short-term operations and other needs of small businesses. These loans are generally secured by the receivables, equipment, and other real property of the business and are susceptible to the related risks described above. Problem commercial loans are generally identified by periodic review of financial information that may include financial statements, tax returns, and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors. Notwithstanding, when repayment becomes unlikely based on the borrower's income and cash flow, repossession or foreclosure of the underlying collateral may become necessary.  Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.  Paycheck Protection Program (“PPP”) loans outstanding included in Commercial loans totaled $0.5 million and $37.3 million as of September 30, 2022 and December 31, 2021, respectively.



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

12

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

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

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, including cost over-runs, mismanagement of the project, or lack of demand and market changes experienced at time of completion. Losses are primarily related to underlying collateral value and changes therein as described above. Problem construction loans are generally identified by periodic review of financial information that may include financial statements, tax returns and payment history of the borrower. Based on this information, the Company may decide to take any of several courses of action, including demand for repayment, requiring the borrower to provide a significant principal payment and/or additional collateral or requiring similar support from guarantors, or repossession or foreclosure of the underlying collateral. Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation.

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

Collateral values may be determined by appraisals obtained through Bank-approved, licensed appraisers, qualified independent third parties, purchase invoices, or other appropriate documentation. Collateral valuations are obtained at origination of the credit. Once repayment is questionable, and the loan has been deemed classified, collateral valuations are obtained periodically (generally annually but may be more frequent depending on the collateral type).

As of September 30, 2022, approximately 11% in principal amount of the Company's loans were for general commercial uses, including professional, retail and small businesses. Approximately 65% in principal amount of the Company’s loans were secured by commercial real estate, consisting primarily of loans secured by commercial properties and construction and land development loans. Approximately 12% in principal amount of the Company's loans were for agriculture, approximately 9% in principal amount of the Company’s loans were residential mortgage loans, approximately 1% in principal amount of the Company’s loans were residential construction loans and approximately 2% in principal amount of the Company’s loans were consumer loans.

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 impaired 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.

At September 30, 2022 and December 31, 2021, all loans were pledged under a blanket collateral lien to secure actual or potential borrowings from the Federal Home Loan Bank (“FHLB”).

13

Non-accrual and Past Due Loans

The Company’s loans by delinquency and non-accrual status, as of September 30, 2022 and December 31, 2021, were as follows:

($ in thousands)
 
Current & Accruing
   
30-59 Days Past Due & Accruing
   
60-89 Days Past Due & Accruing
   
90 Days or
More Past
Due &
Accruing
   
Nonaccrual
   
Total Loans
 
September 30, 2022
                                   
Commercial
 
$
106,987
   
$
164
   
$
404
   
$
403
   
$
   
$
107,958
 
Commercial Real Estate
   
646,365
     
     
     
     
     
646,365
 
Agriculture
   
111,304
     
     
     
     
7,625
     
118,929
 
Residential Mortgage
   
88,520
     
78
     
41
     
     
126
     
88,765
 
Residential Construction
   
7,260
     
147
     
     
     
     
7,407
 
Consumer
   
14,846
     
     
     
     
723
     
15,569
 
Total
 
$
975,282
   
$
389
   
$
445
   
$
403
   
$
8,474
   
$
984,993
 
 
                                               
December 31, 2021
                                               
Commercial
 
$
134,890
   
$
394
   
$
477
   
$
   
$
133
   
$
135,894
 
Commercial Real Estate
   
526,337
     
32
     
     
     
555
     
526,924
 
Agriculture
   
98,471
     
     
     
     
8,712
     
107,183
 
Residential Mortgage
   
75,861
     
161
     
     
     
138
     
76,160
 
Residential Construction
   
4,482
     
     
     
     
     
4,482
 
Consumer
   
16,523
     
     
76
     
     
659
     
17,258
 
Total
 
$
856,564
   
$
587
   
$
553
   
$
   
$
10,197
   
$
867,901
 

Non-accrual loans amounted to $8,474,000 at September 30, 2022 and were comprised of three agriculture loans totaling $7,625,000, one residential mortgage loan totaling $126,000, and five consumer loans totaling $723,000. Non-accrual loans amounted to $10,197,000 at December 31, 2021 and were comprised of two commercial loans totaling $133,000, one commercial real estate loan totaling $555,000, three agriculture loans totaling $8,712,000, one residential mortgage loan totaling $138,000, and four consumer loans totaling $659,000.

14

Impaired Loans
 
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement, including scheduled interest payments. Loans to be considered for impairment include non-accrual loans, troubled debt restructurings and loans with a risk rating of 5 (special mention) or worse and an aggregate exposure of $500,000 or more. Once identified, impaired loans are measured individually for impairment using one of three methods: present value of expected cash flows discounted at the loan's effective interest rate; the loan's observable market price; or fair value of collateral if the loan is collateral dependent. If the measurement of a non-accrual loan is less than the recorded investment in the loan, an impairment is recognized through the establishment of a specific reserve sufficient to cover expected losses and/or a charge-off against the allowance for loan losses. In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value of the collateral that can be identified as uncollectible, and is, therefore, deemed a confirmed loss, is promptly charged-off against the allowance for loan losses.

Impaired loans, segregated by loan class, as of September 30, 2022 and December 31, 2021 were as follows:

($ in thousands)
 
Unpaid Contractual
Principal Balance
   
Recorded
Investment
with
No Allowance
   
Recorded
Investment with
Allowance
   
Total
Recorded
Investment
   
Related Allowance
 
September 30, 2022
                             
Commercial
 
$
   
$
   
$
   
$
   
$
 
Commercial Real Estate
   
     
     
     
     
 
Agriculture
   
10,127
     
7,625
     
     
7,625
     
 
Residential Mortgage
   
680
     
126
     
503
     
629
     
76
 
Residential Construction
   
     
     
     
     
 
Consumer
   
902
     
723
     
64
     
787
     
4
 
Total
 
$
11,709
   
$
8,474
   
$
567
   
$
9,041
   
$
80
 
 
                                       
December 31, 2021
                                       
Commercial
 
$
142
   
$
133
   
$
   
$
133
   
$
 
Commercial Real Estate
   
555
     
555
     
     
555
     
 
Agriculture
   
10,680
     
8,712
     
     
8,712
     
 
Residential Mortgage
   
701
     
138
     
517
     
655
     
81
 
Residential Construction
   
241
     
     
241
     
241
     
10
 
Consumer
   
815
     
659
     
64
     
723
     
2
 
Total
 
$
13,134
   
$
10,197
   
$
822
   
$
11,019
   
$
93
 

The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the three months ended September 30, 2022 and September 30, 2021 was as follows:

($ in thousands)
 
Three Months Ended
September 30, 2022
   
Three Months Ended
September 30, 2021
 
 
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
Commercial
 
$
17
   
$
   
$
30
   
$
 
Commercial Real Estate
   
681
     
19
     
4,297