First Northern Community Bancorp: Form 10-Q for the period ended Mar 31, 2025

FORWARD-LOOKING STATEMENTS

This report may include forward-looking statements, which may include forecasts of our financial results and condition, expectations for our operations and business, and our assumptions for those forecasts and expectations. Do not rely unduly on forward-looking statements. Actual results might differ significantly compared to our forecasts, if any, and expectations. See Part I, Item 1A. “Risk Factors,” and the other risks described in our 2024 Form 10-K and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and the other risks described in our Quarterly Reports on Form 10-Q for factors to be considered when reading any forward-looking statements in this filing.

This report and other reports or statements which we may release may include forward-looking statements, which are subject to the “safe harbor” created by section 27A of the Securities Act of 1933, as amended, and section 21E of the Securities Exchange Act of 1934, as amended. We may make forward-looking statements in our Securities and Exchange Commission (SEC) filings, press releases, news articles and when we are speaking on behalf of the Company. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Often, they include the words “believe,” “expect,” “target,” “anticipate,” “intend,” “plan,” “seek,” “strive,” “estimate,” “potential,” “project,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” or “may.” These forward-looking statements are intended to provide investors with additional information with which they may assess our future potential. All of these forward-looking statements are based on assumptions about an uncertain future and are based on information available to us at the date of these statements. We do not undertake to update forward-looking statements to reflect facts, circumstances, assumptions or events that occur after the date any forward-looking statements are made, except as may be required by law.

In this document and in other SEC filings or other public statements, for example, we make forward-looking statements relating to the following topics, among others:

• Our business objectives, strategies and initiatives, our organizational structure, the growth of our business and our competitive position and prospects, and the effect of competition on our business and strategies
• Our assessment of significant factors and developments that have affected or may affect our results
• Legal and regulatory actions, and future legislative and regulatory developments
• Regulatory and compliance controls, processes and requirements and their impact on our business
• The costs and effects of legal or regulatory actions
• Expectations regarding draws on performance letters of credit and liabilities that may result from recourse provisions in standby letters of credit
• Our intent to sell or hold, and the likelihood that we would be required to sell, various investment securities
• Our regulatory capital requirements, including the capital rules established after the 2008 financial crisis by the U.S. federal banking agencies and our current intention not to elect to use the community bank leverage ratio framework
• Expectations regarding our non-payment of a cash dividend on our common stock in the foreseeable future
• Credit quality and provision for credit losses and management of asset quality and credit risk, expectations regarding collections and the timing thereof
• Our allowances for credit losses, including the conditions we consider in determining the unallocated allowance and our portfolio credit quality, the adequacy of the allowance for credit losses, underwriting standards, and risk grading
• Our assessment of economic conditions and trends and credit cycles and their impact on our business including the imposition of tariffs on imported goods to the U.S.
• The seasonal nature of our business
• The impact of changes in interest rates and our strategy to manage our interest rate risk profile and the possible effect of changes in residential mortgage interest rates on new originations and refinancing of existing residential mortgage loans
• Loan portfolio composition and risk grade trends, expected charge-offs, portfolio credit quality, loan demand, our strategy regarding loan modifications, delinquency rates and our underwriting standards and our expectations regarding our recognition of interest income on loans that were provided payment deferrals upon completion of the payment forbearance period
• Our deposit base including renewal of time deposits and the outlook for deposit balances
• The impact on our net interest income and net interest margin of changes in interest rates
• The effect of possible changes in the initiatives and policies of the federal and state bank regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, the Securities and Exchange Commission and other standard setters
• Tax rates and the impact of changes in the U.S. tax laws
• Our pension and retirement plan costs
• Our liquidity strategies and beliefs concerning the adequacy of our liquidity, sources and amounts of funds and ability to satisfactorily manage our liquidity
• Critical accounting policies and estimates, the impact or anticipated impact of recent accounting pronouncements or changes in accounting principles
• Expected rates of return, maturities, loss exposure, growth rates, yields, and projected results
• The possible impact of weather-related or other natural conditions, including drought, fire or flooding, seismic events, and related governmental responses, including related electrical power outages, on economic conditions, especially in the agricultural sector
• Maintenance of insurance coverages appropriate for our operations
• Threats to the banking sector and our business due to cybersecurity issues and attacks and regulatory expectations related to cybersecurity
• The possible effects on community banks and our business from the failures of other banks
• The possible adverse impacts on the banking industry and our business from a period of significant, prolonged inflation
• Descriptions of assumptions underlying or relating to any of the foregoing

Readers of this document should not rely on any forward-looking statements, which reflect only our management’s belief as of the date of this report. There are numerous risks and uncertainties that could and will cause actual results to differ materially from those discussed in our forward-looking statements. Many of these factors are beyond our ability to control or predict and could have a material adverse effect on our financial condition and results of operations or prospects. Such risks and uncertainties include, but are not limited to those listed in Item 1A “Risk Factors” of Part II of this Form 10-Q, Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I of this Form 10-Q and "Risk Factors" and “Supervision and Regulation” in our 2024 Form 10-K, and in our other reports to the SEC.

INTRODUCTION

This overview of Management’s Discussion and Analysis highlights selected information in this report and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting 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 2024 Form 10-K for the year ended December 31, 2024.

Our subsidiary, First Northern Bank of Dixon (the “Bank”), is a California state-chartered bank that derives most of its revenues from lending and deposit taking in the Sacramento Valley region of Northern California. Interest rates, business conditions and customer confidence all affect our ability to generate revenues. In addition, the regulatory and compliance environment and competition can present challenges to our ability to generate those revenues.

Significant results and developments for the Company during the first quarter 2025 included:

• Net income of $3.7 million for the three months ended March 31, 2025, down 14.2% from $4.3 million earned for the same period last year.
• Diluted earnings per share of $0.23 for the three months ended March 31, 2025, down 11.5% from $0.26 for the three months ended March 31, 2024.
• Net interest income of $15.9 million for the three months ended March 31, 2025, up 3.8% from $15.4 million in the same period last year.
• Net interest margin of 3.64% for the three months ended March 31, 2025, up 4.30% from 3.49% for the three months ended March 31, 2024.
• Provision for credit losses of $0.9 million for the three months ended March 31, 2025, compared to reversal of provision of $0.3 million for the three months ended March 31, 2024.
• Total assets of $1.88 billion as of March 31, 2025, down 0.9% from $1.89 billion as of December 31, 2024.
• Total net loans (including loans held-for-sale) of $1.041 billion as of March 31, 2025, down 0.5% from $1.047 billion as of December 31, 2024.
• Total investment securities of $637.2 million as of March 31, 2025, up 0.5% from $633.9 million as of December 31, 2024.
• Total deposits of $1.67 billion as of March 31, 2025, down 1.5% from $1.70 billion as of December 31, 2024.

SUMMARY

The Company recorded net income of $3,671,000 for the three months ended March 31, 2025, representing a decrease of $605,000 from net income of $4,276,000 for the same period in 2024.

The following tables present a summary of the results for the three months ended March 31, 2025 and 2024, and a summary of our financial condition at March 31, 2025 and December 31, 2024:

(in thousands except for per share amounts and ratios)

(in thousands except for ratios)

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Distribution of Average Statements of Condition and Analysis of Net Interest Income

(in thousands, except percentage amounts)

(1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest is excluded. Loan interest income includes loan fees, net of deferred costs of approximately $(8) and $(351) for the three months ended March 31, 2025 and 2024, respectively.

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

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

(4) For disclosure purposes, yield/rates are annualized by dividing the number of days in the reported period by 365.

Distribution of Average Statements of Condition and Analysis of Net Interest Income

(in thousands, except percentage amounts)

(1) Average balances for loans include loans held-for-sale and non-accrual loans and are net of the allowance for loan losses, but non-accrued interest is excluded. Loan interest income includes loan fees, net of deferred costs of approximately $(8) and $49 for the three months ended March 31, 2025 and December 31, 2024, respectively.

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

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

(4) For disclosure purposes, yield/rates are annualized by dividing the number of days in the reported period by 365.

Analysis of Changes

in Interest Income and Interest Expense

(Dollars in thousands)

Following is an analysis of changes in interest income and expense (dollars in thousands) for the three months ended March 31, 2025 over the three months ended March 31, 2024 and the three months ended March 31, 2025 over the three months ended December 31, 2024. Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume.

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CHANGES IN FINANCIAL CONDITION

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $7,731,000, or 6.5%, decrease in cash and cash equivalents, a $3,315,000, or 0.5%, increase in investment securities available-for-sale, and a $6,057,000, or 0.6%, decrease in net loans held-for-investment from December 31, 2024 to March 31, 2025. The decrease in cash and cash equivalents was primarily due to a decrease in deposit balances and increase in investment securities due to purchases of available-for-sale securities, which was partially offset by a decrease in loans due to loan payoffs. The increase in investment securities was due to purchases of available-for-sale securities, which was partially offset by paydowns and maturities of available-for-sale securities. The decrease in net loans held-for-investment was primarily due to payoffs of commercial real estate and agriculture loans, which was partially offset by originations of commercial loans.

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a decrease in total deposits of $25,282,000, or 1.5%, from December 31, 2024 to March 31, 2025. The overall decrease in total deposits was primarily due to seasonal fluctuations due to changes in market conditions and monetary policy.

CHANGES IN RESULTS OF OPERATIONS

Interest Income

The Federal Open Market Committee kept the Federal Reserve's benchmark rate range at 4.25% to 4.50% during the three months ended March 31, 2025.

Interest income on loans for the three months ended March 31, 2025 was up 0.9% from the same period in 2024, increasing from $13,475,000 to $13,602,000. The increase in interest income on loans for the three months ended March 31, 2025 as compared to the same period a year ago was primarily due to a 13 basis point increase in yield on loans, which was partially offset by a decrease in average balance of loans.

Interest income on certificates of deposit for the three months ended March 31, 2025 was down 12.0% from the same period in 2024, decreasing from $183,000 to $161,000. The decrease was primarily due to a decrease in average balances of certificates of deposit, which was partially offset by an 18 basis point increase in certificates of deposit yields.

Interest income on interest-bearing due from banks for the three months ended March 31, 2025 was down 52.6% from the same period in 2024, decreasing from $1,532,000 to $727,000. The decrease was primarily due to a decrease in average interest-bearing due from banks balance coupled with an 81 basis point decrease in interest-bearing due from yields.

Interest income on investment securities available-for-sale for the three months ended March 31, 2025 was up 53.1% from the same period in 2024, increasing from $3,097,000 to $4,741,000. The increase was primarily due to an 80 basis point increase in yields on investment securities coupled with an increase in average balances of investment securities.

The Company had no Federal Funds sold balances during the three months ended March 31, 2025 and March 31, 2024.

Interest Expense

Interest expense on deposits for the three months ended March 31, 2025 was up 11.9% from the same period in 2024, increasing from $3,181,000 to $3,560,000. The increase in interest expense was primarily due to a 12 basis point increase in average interest-bearing deposits yield coupled with an increase in average interest-bearing deposits.

Provision for Credit Losses

There was a provision for credit losses of $850,000 for the three months ended March 31, 2025, compared to a reversal of provision for credit losses of $300,000 for the three months ended March 31, 2024. The allowance for credit losses was approximately $16,535,000, or 1.56% of total loans, at March 31, 2025, compared to $15,885,000, or 1.49% of total loans, at December 31, 2024. During the quarter ended March 31, 2025, the levels of forecasted national unemployment remained relatively stable. The GDP forecast called for a generally slowing trend, but still positive economic growth. Forecasted median single-family home prices called for lower home price growth, slowing close to zero. During the quarter ended March 31, 2025, there was an increase in nonaccrual loans requiring specific reserves. This was partially offset by a decrease in total reserve required due to a decrease in calculated loss rates as of March 31, 2025. As a result, the Company recorded provision for credit losses of $850,000 for the three months ended March 31, 2025.

Non-Interest Income

Non-interest income was down 3.6% for the three months ended March 31, 2025 from the same period in 2024, decreasing from $1,507,000 to $1,453,000. The decrease was primarily due to a decrease in other income, primarily bank owned life insurance income.

Non-Interest Expenses

Total non-interest expenses were up 3.2% for the three months ended March 31, 2025 from the same period in 2024, increasing from $11,227,000 to $11,590,000. The increase was primarily due to increases in consulting fees, which was partially offset by a decrease in salaries and employee benefits. The increase in consulting fees was primarily due to staffing searches. The decrease in salaries and employee benefits was primarily due to decreases in stock compensation, contingent compensation and profit sharing expense, which was partially offset by an increase in group insurance expense.

The following table sets forth other non-interest expenses by category for the three months ended March 31, 2025 and 2024.

(in thousands)

Income Taxes

The Company’s tax rate, the Company’s income before taxes and the amount of tax relief provided by non-taxable earnings affect the Company’s provision for income taxes. Provision for income taxes decreased 22.9% for the three months ended March 31, 2025 from the same period in 2024, decreasing from $1,666,000 to $1,285,000 primarily due to a decrease in pre-tax income. The effective tax rate was 25.9% and 28.0% for the three months ended March 31, 2025 and March 31, 2024, respectively.

Off-Balance Sheet Commitments

The following table shows the distribution of the Company’s undisbursed loan commitments at the dates indicated.

(in thousands)

The reserve for unfunded lending commitments amounted to $950,000 and $700,000 as of March 31, 2025 and December 31, 2024, 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, "Commitments and Contingencies,"

for additional information.

Asset Quality

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

• Substandard Assets – A substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified 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 or improbable.

Other Real Estate Owned and loans rated Substandard and Doubtful are deemed "classified assets". This category, which includes both performing and non-performing assets, receives an elevated level of attention regarding collection.

The following 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, 2025 and December 31, 2024:

(dollars in thousands)

It is generally the Company’s policy to discontinue interest accruals once a loan is past due for a period of 90 days as to interest or principal payments unless the loan is well secured and in process of collection. When a loan is placed on non-accrual, interest accruals cease and uncollected accrued interest is reversed and charged against current income. Payments received on non-accrual loans are applied against principal. A loan may only be restored to an accruing basis when it again becomes well secured and in the process of collection or all past due amounts have been collected or there is an extended period of positive performance and a high probability that the loan will continue to pay according to original terms.

Non-accrual loans amounted to $13,845,000 at March 31, 2025 and were comprised of one commercial loan totaling $139,000, one commercial real estate loan totaling $5,282,000, seven agriculture loans totaling $7,603,000, three residential mortgage loans totaling $196,000 and four consumer loans totaling $625,000. Non-accrual loans amounted to $11,212,000 at December 31, 2024 and were comprised of one commercial loan totaling $139,000, 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.

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.

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 $2,882,000, or 26.0%, to $13,955,000 during the first three months of 2025. Non-performing assets, net of guarantees, represented 0.7% of total assets at March 31, 2025.

(dollars in thousands)

The Company had $73,000 and $0 loans 90 days or more past due and still accruing interest at March 31, 2025 and December 31, 2024, respectively.

Excluding non-performing loans, loans totaling $15,958,000 and $11,643,000 were classified as substandard loans, representing potential problem loans at March 31, 2025 and December 31, 2024, respectively. Management believes that the allowance for credit losses at March 31, 2025 and December 31, 2024 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, 2025 and December 31, 2024 was 1.56% and 1.49%, respectively.

Other real estate owned (“OREO”) consists of property that the Company has acquired by deed in lieu of foreclosure or through foreclosure proceedings, and property that the Company does not hold title to but is in actual control of, known as in-substance foreclosure. OREO also consists of property held by the Company that is no longer intended for future development. 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 OREO totaling $1,241,000 and $0 as of March 31, 2025 and December 31, 2024, respectively. OREO as of March 31, 2025 represented land, transferred from premises and equipment, that the Company determined is no longer intended for future development.

Allowance for Credit Losses (ACL)

The Company's ACL is maintained at a level believed by management to appropriately reflect expected credit losses inherent in the loan portfolio. The ACL is increased by provisions charged to operating expense and reduced by net charge-offs. The Company contracts with vendors for credit reviews of the loan portfolio and utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. The ACL is based on estimates, and actual losses may vary from current estimates.

The following table summarizes transactions affecting the Company's ACL during the three months ended March 31, 2025 and 2024, and for the year ended December 31, 2024:

Analysis of the Allowance for Credit Losses

(Amounts in thousands, except percentage amounts)

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Deposits

Deposits are one of the Company’s primary sources of funds. At March 31, 2025 and December 31, 2024, the Company had the following deposit mix:

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.

Maturities of time certificates of deposits of over $250,000 or more outstanding at March 31, 2025 and December 31, 2024 are summarized as follows:

(in thousands)

Approximately 39% and 40% of our deposits were uninsured by the FDIC as of the periods ended March 31, 2025 and December 31, 2024, respectively.

Liquidity and Capital Resources

In order to serve our market area and comply with banking regulations, the Company must maintain adequate liquidity and adequate capital. Liquidity refers to the Company’s ability to provide funds at an acceptable cost to meet loan and other credit demand and deposit withdrawals, as well as contingency plans to meet unanticipated funding needs or loss of funding sources. These objectives can be addressed from either the asset or liability side of the balance sheet.

Asset liquidity sources consist of the repayments and maturities of loans, selling of loans, short-term money market investments, maturities of securities and sales of securities from the available-for-sale portfolio. These activities are generally summarized as investing activities in the Condensed Consolidated Statement of Cash Flows. For the three months ended March 31, 2025, net liquidity provided by investing activities totaled $15,413,000.

The Company’s available-for-sale investment securities plus cash and cash equivalents in excess of reserve requirements and certificates of deposit totaled $764,466,000 on March 31, 2025, which was 40.8% of assets at that date. This was a decrease of $4,909,000 from $769,375,000 and 40.7% as of December 31, 2024. 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, 2025, the effective duration of our investment securities was 3.17 with projected principal cashflow of $129,242,000 for the remainder of 2025 available for reinvestment or liquidity needs. The Company had no held-to-maturity securities as of March 31, 2025 and December 31, 2024.

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, 2025, the Company had $0 in borrowings outstanding. For the three months ended March 31, 2025, net liquidity used in financing activities totaled $26,564,000 primarily as a result of a decrease 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 liquidity sources, will depend on future economic and market conditions.

Liquidity is also provided or used through the results of operating activities, including from net income. For the three months ended March 31, 2025, operating activities provided cash of $3,420,000.

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 62.2% and 61.6% as of March 31, 2025 and December 31, 2024, respectively.

Loan demand during 2025 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 2025 is subject to policies of and actions by the Federal Reserve and heightened competition.

To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks which totaled $130,000,000 at March 31, 2025. Additionally, the Company has a line of credit with the FHLB, with a remaining borrowing capacity at March 31, 2025 of $395,974,000; credit availability from the FHLB is subject to certain collateral requirements.

The Company’s primary source of liquidity on a stand-alone basis is dividends from the Bank. Dividends from the Bank are subject to regulatory restrictions.

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

Banks, such as First Northern, became subject to the final rules on January 1, 2015. The final rules implemented higher minimum capital requirements, included a new common equity Tier 1 capital requirement, and established criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. The final rules provide for increased minimum capital ratios as follows: (a) a common equity Tier 1 capital ratio of 4.5%; (b) a Tier 1 capital ratio of 6%; (c) a total capital ratio of 8%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4%. Under these rules, in order to avoid certain limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements (equal to 2.5% of total risk-weighted assets). The capital conservation buffer is designed to absorb losses during periods of economic stress.

Pursuant to the Economic Growth, Regulatory Relief and Consumer Protection Act ("EGRRCPA"), the FRB adopted a final rule, effective August 31, 2018, amending the Small Bank Holding Company and Savings and Loan Holding Company Policy Statement (the “policy statement”) to increase the consolidated assets threshold to qualify to utilize the provisions of the policy statement from $1 billion to $3 billion. Bank holding companies, such as the Company, are subject to capital adequacy requirements of the FRB; however, bank holding companies which are subject to the policy statement are not subject to compliance with the regulatory capital requirements until they hold $3 billion or more in consolidated total assets. As a consequence, as of December 31, 2018, the Company was not required to comply with the FRB’s regulatory capital requirements until such time that its consolidated total assets equal $3 billion or more or if the FRB determines that the Company is no longer deemed to be a small bank holding company. However, if the Company had been subject to these regulatory capital requirements, it would have exceeded all regulatory requirements.

In August of 2020, the Federal banking agencies adopted the final version of the community bank leverage ratio framework rule (the “CBLR”), implementing two interim final rules adopted in April of 2020. The rule provides an optional, simplified measure of capital adequacy. Under the optional CBLR framework, the CBLR was 8.5% through calendar year 2021 and is 9% thereafter. The rule is applicable to all non-advanced approaches FDIC-supervised institutions with less than $10 billion in total consolidated assets. Banks not electing the CBLR framework will continue to be subject to the generally applicable risk-based capital rule. At the present time, the Company and the Bank do not intend to elect to use the CBLR framework.

As of March 31, 2025, 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, 2025.

(amounts in thousands except percentage amounts)

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(a) We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Our Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial officer) have concluded that the design and operation of our disclosure controls and procedures are effective as of March 31, 2025. This conclusion is based on an evaluation conducted under the supervision and with the participation of management.

(b) During the quarter ended March 31, 2025, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

We are subject to various risks and uncertainties, which could materially affect our business, results of operations, financial condition, future results, and the trading price of our common stock. You should read carefully the following information together with the information appearing in Part I, Item 1A, “Risk Factors” in our 2024 Form 10-K. The following information supplements and, to the extent inconsistent, supersedes some of the information appearing in the “Risk Factors” section of our 2024 Form 10‑K. These risk factors, as well as our condensed consolidated financial statements and notes thereto and the other information appearing in this Report, should be reviewed carefully for important information regarding risks that affect us.

Changes in U.S. and Foreign Government Policies, Including the Imposition of or Further Increases in Tariffs and Changes to Existing Trade Agreements, Could Have a Material Adverse Effect on the Bank’s Customers, Which, in Turn, Could Adversely Affect Our Business, Financial Condition and Results of Operations

In February 2025, the new Trump Administration announced that it would be imposing increases in tariffs on goods imported to the U.S. from Canada, Mexico, and China, and, in April 2025, the Administration announced the imposition of increased tariffs on goods imported to the U.S. from other countries. As a consequence, other countries, in retaliation to the U.S.’s tariff measures, announced the imposition of increased levels of tariffs on goods exported to such countries by companies in the U.S. The Administration subsequently announced a delay of 90 days in the implementation of those increased tariffs for most other countries, leaving in place, however, a 10% baseline tariff that went into effect on April 5 and that applies to nearly all imports from all countries. These tariffs could be of particular concern to U.S. companies operating in the agricultural sector who export agricultural goods to other countries. The Company’s customers include a number of agricultural businesses, which could be negatively affected.

As a result of these changes to U.S. and foreign government trade policies, there may be changes to existing trade agreements, greater restrictions on free trade generally, the imposition of or significant further increases in tariffs on goods imported into the U.S., and adverse responses by foreign governments to U.S. trade policies, among other possible changes. While the Administration has announced a delay in the implementation of those increased tariffs for most countries, the 10% baseline tariff that applies to nearly all imports from all countries remains in effect, and it remains unclear what the Administration or foreign governments will or will not do with respect to tariffs or trade agreements and policies. The extent and duration of any tariffs, and the resulting impact on economic conditions generally and on our customers’ businesses in particular are uncertain and depend on various factors, such as negotiations between the U.S. and other countries, the responses of such countries, and exemptions or exclusions that may be granted. A significant trade disruption or the establishment or further increase of any tariffs, trade protection measures or restrictions could result in lost sales, adversely impacting our banking customers and their businesses, including our agricultural business customers. In addition, international trade disputes, including those related to tariffs, could result in inflationary pressures and/or adversely impact global supply chains, which could increase the costs of doing business for our banking customers. Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the countries where our banking customers currently sell products, including agricultural products, and any resulting negative sentiments towards the U.S. and U.S. businesses as a result of such changes, could also have a material adverse effect on our banking customers’ business, financial condition, results of operations and cash flows. If these events negatively affect our banking clients, or general economic conditions nationally, in California, or in our local markets, our business, financial condition and results of operations could be adversely affected.

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

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

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

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

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

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

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

As noted previously, the Trump Administration recently imposed increased tariffs on goods imported to the U.S. from other countries. As a consequence, other countries, in retaliation to the U.S.’s tariff measures, announced the imposition of increased levels of tariffs on goods exported to such countries by companies in the U.S. The Administration subsequently announced a delay of 90 days in the implementation of those increased tariffs for most other countries, leaving in place, however, a 10% baseline tariff that went into effect on April 5 and that applies to nearly all imports from all countries. It remains unclear what the Administration or foreign governments will or will not do with respect to tariffs or trade agreements and policies. International trade disputes, including those related to tariffs, could result in inflationary pressures and/or adversely impact global supply chains, which could increase the costs of doing business for our banking customers. Political tensions as a result of trade policies could reduce trade volume, investment, technological exchange, and other economic activities between major international economies, resulting in a material adverse effect on global economic conditions and the stability of global financial markets, which could have resulting material adverse effects on general economic conditions nationally, in California, or in our local markets. Some economists have predicted that the Administration’s steep new tariffs could curtail growth and result in price increases for American consumers, ultimately increasing the likelihood of a U.S. recession. Any of these developments could adversely affect our business, financial condition and results of operations.

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

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

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

Adverse Economic Factors Affecting Certain Industries the Bank Serves Could Adversely Affect Our Business

The Bank is subject to certain industry-specific economic factors. For example, a portion of the Bank’s total loan portfolio is related to residential and commercial real estate, especially in California. Increases in residential mortgage loan interest rates could have an adverse effect on the Bank’s operations by depressing new mortgage loan originations, which in turn could negatively impact the Bank’s title and escrow deposit levels. Additionally, a downturn in the residential real estate and housing industries in California could have an adverse effect on the Bank’s operations and the quality of its real estate and construction loan portfolio. Although the Bank does not engage in subprime or negative amortization lending, we are not immune to volatility in the real estate market. Real estate valuations are influenced by demand, and demand is driven by economic factors such as employment rates and interest rates, which have been, and may continue to be, affected by the pandemic. These factors could adversely impact the quality of the Bank’s residential construction, residential mortgage and construction related commercial portfolios in various ways, including by decreasing the value of the collateral for our loans, and thereby negatively affecting the Bank’s overall loan portfolio.

The Bank provides financing to, and receives deposits from, businesses in a number of other industries that may be particularly vulnerable to industry-specific economic factors, including the home building, commercial real estate, retail, agricultural, industrial, and commercial industries. Following the financial crisis of 2008, the home building industry in California was especially adversely impacted by the deterioration in residential real estate markets, which lead the Bank to take additional provisions and charge-offs against credit losses in this portfolio. The recessionary economic and market conditions resulting from the COVID-19 pandemic also significantly affected the commercial and residential real estate markets in the U.S. generally, and in California in particular, decreasing property values, increasing the risk of defaults and reducing the value of real estate collateral. Continued volatility in fuel prices and energy costs and return of drought conditions in California could also adversely affect businesses in several of these industries.

As noted previously, the Trump Administration recently imposed increased tariffs on goods imported to the U.S. from other countries. As a consequence, other countries, in retaliation to the U.S.’s tariff measures, announced the imposition of increased levels of tariffs on goods exported to such countries by companies in the U.S. The Administration subsequently announced a delay of 90 days in the implementation of those increased tariffs for most other countries, leaving in place, however, a 10% baseline tariff that went into effect on April 5 and that applies to nearly all imports from all countries. Such tariffs could be of particular concern to U.S. companies operating in the agricultural sector who export agricultural goods to other countries. The Company’s customers include a number of agricultural businesses, which could be negatively affected. See “Changes in U.S. and Foreign Government Policies, Including the Imposition of or Further Increases in Tariffs and Changes to Existing Trade Agreements, Could Have a Material Adverse Effect on the Bank’s Customers, Which, in Turn, Could Adversely Affect Our Business, Financial Condition and Results of Operations,” above in these “Risk Factors” in this Quarterly Report on Form 10-Q.

Industry specific risks are beyond the Bank’s control and could adversely affect the Bank’s portfolio of loans, potentially resulting in an increase in non-performing loans or charge-offs and a slowing of growth or reduction in our loan portfolio.

In recent years, wildfires across California and in our market areas resulted in significant damage and destruction of property and equipment. The fire damage resulted in adverse economic impacts to those affected markets and beyond and on the Bank's customers. In addition, the major electric utility company in our region has adopted programs of electrical power shut-offs, often for multiple days, in wide areas of Northern California during periods of high winds and high fire danger. Shut-offs of power by this utility have adversely impacted the business of some of our customers and also have resulted in some of our branches being temporarily closed. It can be expected that these events will continue to occur from time to time in the areas served by the Bank, and that the consequences of these natural disasters, including programs of public utility public safety power outages when weather conditions and fire danger warrant, may adversely affect the Bank’s business and that of its customers. It is also possible that climate change may be increasing the severity or frequency of adverse weather conditions, thus increasing the impact of these types of natural disasters on our business and that of our customers. For additional information, see "Our Operations, Business and Customers Could be Materially Adversely Affected by the Physical Effects of Climate Change, as well as Governmental and Societal Responses to Climate Change," in "Risk Factors" in our 2024 Form 10-K.

The long-term impact of these developments on the markets we serve cannot be predicted at this time.

The Bank is Subject to Interest Rate Risk

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

Fluctuations in market rates and other market disruptions are neither predictable nor controllable and may adversely affect our financial condition and earnings. Since 2022, inflationary pressures have affected many aspects of the U.S. economy, including gasoline and fuel prices, and global and domestic supply-chain issues have also had a disruptive effect on many industries, including the agricultural industry. In January 2022, due to elevated levels of inflation and corresponding pressure to raise interest rates, the FRB announced after several periods of historically low federal funds rates and yields on Treasury notes that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time. The FOMC increased the target range 525 basis points from March 2022 through July 2023. The target range remained unchanged through much of 2024 until the FOMC decreased the rate 100 basis points during the last four months of the year. As of December 31, 2024, the target range for the federal funds rate had been decreased to 4.25% to 4.50%. It remains uncertain whether the FOMC will further decrease the target range for the federal funds rate to attain a monetary policy sufficiently restrictive to return inflation to more normalized levels, further reduce the federal funds rate or leave the rate at its current elevated level for a lengthy period of time. As noted previously, the Trump Administration recently imposed increased tariffs on goods imported to the U.S. from other countries. As a consequence, other countries, in retaliation to the U.S.’s tariff measures, announced the imposition of increased levels of tariffs on goods exported to such countries by companies in the U.S. The Administration subsequently announced a delay of 90 days in the implementation of those increased tariffs for most other countries, leaving in place, however, a 10% baseline tariff that went into effect on April 5 and that applies to nearly all imports from all countries. Such tariffs could result in increased inflationary pressures on the U.S. economy. These developments could adversely affect our banking customers’ businesses, which, in turn, could adversely affect our business, financial condition and results of operations. See “Economic Conditions in the U.S. May Soften or Become Recessionary with Resultant Adverse Consequences for the U.S. Financial Services Industry and for the Bank,” above in these “Risk Factors” in this Quarterly Report on Form 10-Q.

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

Beginning in 2021, the U.S. economy exhibited relatively rapid rates of increase in the consumer price index and other economic indices. If the U.S. economy encounters a significant, prolonged rate of inflation, this could pose higher relative risks to the banking industry and our business. Such inflationary periods have historically corresponded with relatively weaker earnings and higher credit losses for banks. In the past, inflationary environments have caused financing conditions to tighten and have increased borrowing costs for some marginal borrowers which, in turn, has impacted bank credit quality and loan growth. Additionally, a sustained period of inflation well above the FRB’s long-term target could prompt broad-based selling of longer-duration, fixed-rate debt, which could have negative implications for equity and real estate markets. Lower interest rates enable less credit-worthy borrowers to more readily meet their debt obligations. Small businesses and leveraged loan borrowers can be challenged in a materially higher-rate environment. Higher interest rates can also present challenges for commercial real estate projects, pressuring valuations and loan-to-value ratios. The FRB initiated a series of significant interest rate increases in response to the recent economic developments. For additional information, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Net Interest Income" in our 2024 Form 10-K and "-Interest Income" in this quarterly report on Form 10-Q.

In addition, the war between Russia and Ukraine and global reactions thereto have increased U.S. domestic and global energy prices. Oil supply disruptions related to the Russia-Ukraine conflict, and sanctions and other measures taken by the U.S. or its allies, could lead to higher costs for gas, food and goods in the U.S. and exacerbate the inflationary pressures on the economy. As noted previously, the Trump Administration recently imposed increased tariffs on goods imported to the U.S. from other countries. As a consequence, other countries, in retaliation to the U.S.’s tariff measures, announced the imposition of increased levels of tariffs on goods exported to such countries by companies in the U.S. The Administration subsequently announced a delay of 90 days in the implementation of those increased tariffs for most other countries, leaving in place, however, a 10% baseline tariff that went into effect on April 5 and that applies to nearly all imports from all countries. Such tariffs could result in increased inflationary pressures on the U.S. economy. These developments could adversely affect our banking customers’ businesses, which, in turn, could adversely affect our business, financial condition and results of operations. See “Economic Conditions in the U.S. May Soften or Become Recessionary with Resultant Adverse Consequences for the U.S. Financial Services Industry and for the Bank,” above in these “Risk Factors” in this Quarterly Report on Form 10-Q.