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FIRST NORTHERN COMMUNITY BANCORP - Quarter Report: 2019 June (Form 10-Q)

 
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 June 30, 2019

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  (Do not check if a smaller reporting company) ☐
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 August 5, 2019  was 12,294,386.
1

FIRST NORTHERN COMMUNITY BANCORP
 
INDEX

 
Page
PART I   – Financial Information
3
ITEM I. – Financial Statements (Unaudited)
3
Condensed Consolidated Balance Sheets (Unaudited)
3
Condensed Consolidated Statements of Income (Unaudited)
4
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
5
Condensed Consolidated Statement of Stockholders’ Equity (Unaudited)
6
Condensed Consolidated Statements of Cash Flows (Unaudited)
7
Notes to Condensed Consolidated Financial Statements
8
ITEM 2. – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
32
ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
49
ITEM 4. – CONTROLS AND PROCEDURES
49
PART II – OTHER INFORMATION
49
ITEM 1. – LEGAL PROCEEDINGS
49
ITEM 1A. – RISK FACTORS
49
ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
51
ITEM 3. – DEFAULTS UPON SENIOR SECURITIES
51
ITEM 4. – MINE SAFETY DISCLOSURES
51
ITEM 5. – OTHER INFORMATION
51
ITEM 6. – EXHIBITS
51
SIGNATURES
52

2

PART I – FINANCIAL INFORMATION
 
FIRST NORTHERN COMMUNITY BANCORP
 
ITEM I.    – FINANCIAL STATEMENTS (UNAUDITED)
 
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
(in thousands, except share amounts)
 
June 30, 2019
   
December 31, 2018
 
 
           
Assets
           
 
           
Cash and cash equivalents
 
$
124,285
   
$
116,032
 
Certificates of deposit
   
14,210
     
7,595
 
Investment securities – available-for-sale
   
310,998
     
314,637
 
Loans, net of allowance for loan losses of $12,838 at June 30, 2019 and $12,822 at December 31, 2018
   
731,619
     
763,393
 
Loans held-for-sale
   
1,154
     
2,295
 
Stock in Federal Home Loan Bank and other equity securities, at cost
   
6,574
     
6,019
 
Premises and equipment, net
   
6,203
     
6,646
 
Other real estate owned
   
784
     
1,092
 
Interest receivable and other assets
   
36,391
     
32,136
 
 
               
Total Assets
 
$
1,232,218
   
$
1,249,845
 
 
               
Liabilities and Stockholders’ Equity
               
 
               
Liabilities:
               
 
               
Demand deposits
 
$
408,462
   
$
416,493
 
Interest-bearing transaction deposits
   
299,041
     
312,697
 
Savings and MMDA's
   
326,991
     
332,514
 
Time, $250,000 or less
   
40,975
     
46,905
 
Time, over $250,000
   
16,276
     
16,003
 
Total deposits
   
1,091,745
     
1,124,612
 
 
               
Interest payable and other liabilities
   
15,591
     
12,772
 
 
               
Total Liabilities
   
1,107,336
     
1,137,384
 
 
               
Stockholders' Equity:
               
Common stock, no par value; 16,000,000 shares authorized; 12,293,386 shares issued and outstanding at June 30, 2019 and 12,253,812 shares issued and outstanding at December 31, 2018
   
93,184
     
92,618
 
Additional paid-in capital
   
977
     
977
 
Retained earnings
   
30,955
     
23,902
 
Accumulated other comprehensive loss, net
   
(234
)
   
(5,036
)
Total Stockholders’ Equity
   
124,882
     
112,461
 
 
               
Total Liabilities and Stockholders’ Equity
 
$
1,232,218
   
$
1,249,845
 

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
June 30, 2019
   
Three months ended
June 30, 2018
   
Six months ended
June 30, 2019
   
Six months ended
June 30, 2018
 
Interest and dividend income:
                       
Loans
 
$
9,856
   
$
9,146
   
$
19,468
   
$
17,952
 
Due from banks interest bearing accounts
   
638
     
427
     
1,279
     
944
 
Investment securities
                               
Taxable
   
1,597
     
1,314
     
3,230
     
2,622
 
Non-taxable
   
70
     
34
     
120
     
73
 
Other earning assets
   
108
     
98
     
223
     
203
 
Total interest and dividend income
   
12,269
     
11,019
     
24,320
     
21,794
 
Interest expense:
                               
Deposits
   
452
     
281
     
823
     
544
 
Total interest expense
   
452
     
281
     
823
     
544
 
Net interest income
   
11,817
     
10,738
     
23,497
     
21,250
 
Provision for loan losses
   
     
525
     
     
1,050
 
Net interest income after provision for loan losses
   
11,817
     
10,213
     
23,497
     
20,200
 
Non-interest income:
                               
Service charges on deposit accounts
   
487
     
490
     
967
     
978
 
Gains on sales of loans held-for-sale
   
70
     
85
     
185
     
154
 
Investment and brokerage services income
   
149
     
159
     
298
     
320
 
Mortgage brokerage income
   
79
     
6
     
138
     
12
 
Loan servicing income
   
96
     
100
     
186
     
206
 
Debit card income
   
567
     
536
     
1,058
     
1,038
 
Losses on sales of available-for-sale securities
   
(6
)
   
     
(6
)
   
 
Other income
   
229
     
369
     
704
     
841
 
Total non-interest income
   
1,671
     
1,745
     
3,530
     
3,549
 
Non-interest expenses:
                               
Salaries and employee benefits
   
5,430
     
5,063
     
10,802
     
10,380
 
Occupancy and equipment
   
790
     
697
     
1,444
     
1,412
 
Data processing
   
640
     
489
     
1,243
     
1,019
 
Stationery and supplies
   
72
     
106
     
134
     
205
 
Advertising
   
108
     
97
     
176
     
185
 
Directors’ fees
   
85
     
75
     
130
     
140
 
Other real estate owned expense
   
315
     
     
371
     
 
Other expense
   
1,365
     
1,292
     
2,523
     
2,472
 
Total non-interest expenses
   
8,805
     
7,819
     
16,823
     
15,813
 
Income before provision for income taxes
   
4,683
     
4,139
     
10,204
     
7,936
 
Provision for income taxes
   
1,277
     
1,136
     
2,813
     
2,200
 
 
                               
Net income
 
$
3,406
   
$
3,003
   
$
7,391
   
$
5,736
 
 
                               
Basic earnings per common share
 
$
0.28
   
$
0.25
   
$
0.61
   
$
0.47
 
Diluted earnings per common share
 
$
0.28
   
$
0.24
   
$
0.60
   
$
0.47
 

See notes to unaudited condensed consolidated financial statements.


4

FIRST NORTHERN COMMUNITY BANCORP
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
 
(in thousands)
 
Three months ended
June 30, 2019
   
Three months ended
June 30, 2018
   
Six months ended
June 30, 2019
   
Six months ended
June 30, 2018
 
Net income
 
$
3,406
   
$
3,003
   
$
7,391
   
$
5,736
 
Other comprehensive income (loss), net of tax:
                               
Unrealized holding gains (losses) arising during the period, net of tax effect of $1,339 and $(246) for the three months ended June 30, 2019 and June 30, 2018, respectively, and $1,934 and $(977) for the six months ended June 30, 2019 and June 30, 2018, respectively
   
3,320
     
(610
)
   
4,798
     
(2,421
)
Less: reclassification adjustment due to losses realized on sales of securities, net of tax effect of $2 for the three and six months ended June 30, 2019, and $0 for the three and six months ended June 30, 2018.
   
4
     
     
4
     
 
Other comprehensive income (loss), net of tax
 
$
3,324
   
$
(610
)
 
$
4,802
   
$
(2,421
)
 
                               
Comprehensive income
 
$
6,730
   
$
2,393
   
$
12,193
   
$
3,315
 

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
                     
 
 
Shares
   
Amounts
   
Additional
Paid-in
Capital
   
Retained
Earnings
   
Accumulated
Other
Comprehensive
Loss
   
Total
 
 
                                   
Balance at December 31, 2017
   
11,630,129
   
$
85,583
   
$
977
   
$
17,881
   
$
(4,397
)
 
$
100,044
 
Net income
                           
2,733
             
2,733
 
Other comprehensive loss, net of taxes
                                   
(1,811
)
   
(1,811
)
Stock dividend adjustment
   
628
     
240
             
(240
)
           
 
Cash in lieu of fractional shares
   
(159
)
                   
(10
)
           
(10
)
Stock-based compensation
           
108
                             
108
 
Common shares issued related to restricted stock grants
   
25,281
     
                             
 
Stock options exercised
   
5,978
     
                             
 
 
Balance at March 31, 2018
   
11,661,857
   
$
85,931
   
$
977
   
$
20,364
   
$
(6,208
)
 
$
101,064
 
Net income
                           
3,003
             
3,003
 
Other comprehensive loss, net of taxes
                                   
(610
)
   
(610
)
Stock-based compensation
           
117
                             
117
 
 
Balance at June 30, 2018
   
11,661,857
   
$
86,048
   
$
977
   
$
23,367
   
$
(6,818
)
 
$
103,574
 
                                                 
                                                 
Balance at December 31, 2018
   
12,253,812
   
$
92,618
   
$
977
   
$
23,902
   
$
(5,036
)
 
$
112,461
 
Net income
                           
3,985
             
3,985
 
Other comprehensive income, net of taxes
                                   
1,478
     
1,478
 
Stock dividend adjustment
   
1,401
     
330
             
(330
)
           
 
Cash in lieu of fractional shares
   
(116
)
                   
(8
)
           
(8
)
Stock-based compensation
           
111
                             
111
 
Common shares issued related to restricted stock grants
   
40,258
     
                             
 
Balance at March 31, 2019
   
12,295,355
   
$
93,059
   
$
977
   
$
27,549
   
$
(3,558
)
 
$
118,027
 
Net income
                           
3,406
             
3,406
 
Other comprehensive income, net of taxes
                                   
3,324
     
3,324
 
Stock-based compensation
           
125
                             
125
 
Restricted stock reversal
   
(1,969
)
                                   
 
Balance at June 30, 2019
   
12,293,386
   
$
93,184
   
$
977
   
$
30,955
   
$
(234
)
 
$
124,882
 

See notes to unaudited condensed consolidated financial statements.

6

FIRST NORTHERN COMMUNITY BANCORP
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
 
 
(in thousands)
 
 
 
Six months ended
June 30, 2019
   
Six months ended
June 30, 2018
 
Cash Flows From Operating Activities
           
Net income
 
$
7,391
   
$
5,736
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
335
     
285
 
Accretion and amortization of investment securities premiums and discounts, net
   
847
     
1,393
 
(Decrease) increase in deferred loan origination fees and costs, net
   
(90
)
   
70
 
Provision for loan losses
   
     
1,050
 
Stock-based compensation
   
236
     
225
 
Gain on sale of fixed assets
   
(281
)
   
 
Losses on sales of available-for-sale securities
   
6
     
 
Other real estate owned writedowns
   
308
     
 
Operating lease payments
   
(434
)
   
(421
)
Gains on sales of loans held-for-sale
   
(185
)
   
(154
)
Proceeds from sales of loans held-for-sale
   
10,280
     
10,194
 
Originations of loans held-for-sale
   
(8,954
)
   
(10,436
)
Changes in assets and liabilities:
               
(Increase) decrease in interest receivable and other assets
   
(6,191
)
   
98
 
Increase (decrease) in interest payable and other liabilities
   
3,253
     
(1,131
)
Net cash provided by operating activities
   
6,521
     
6,909
 
                 
Cash Flows From Investing Activities
               
Proceeds from calls or maturities of available-for-sale securities
   
24,580
     
14,580
 
Proceeds from sales of available-for-sale securities
   
8,102
     
 
Principal repayments on available-for-sale securities
   
23,972
     
25,081
 
Purchase of available-for-sale securities
   
(47,130
)
   
(49,620
)
Net increase in certificates of deposit
   
(6,615
)
   
(2,181
)
Net decrease in loans
   
31,864
     
7,161
 
Net increase in stock in Federal Home Loan Bank and other equity securities, at cost
   
(555
)
   
(452
)
Sales (purchases) of premises and equipment, net
   
389
     
(28
)
Net cash provided by (used in) investing activities
   
34,607
     
(5,459
)
 
               
Cash Flows From Financing Activities
               
Net decrease in deposits
   
(32,867
)
   
(33,112
)
Cash dividends paid in lieu of fractional shares
   
(8
)
   
(10
)
Net cash used in financing activities
   
(32,875
)
   
(33,122
)
                 
Net increase (decrease) in Cash and Cash Equivalents
   
8,253
     
(31,672
)
Cash and Cash Equivalents, beginning of period
   
116,032
     
152,892
 
Cash and Cash Equivalents, end of period
 
$
124,285
   
$
121,220
 
 
               
Supplemental Disclosures of Cash Flow Information:
               
Cash paid during the period for:
               
Interest
 
$
801
   
$
536
 
Income taxes
 
$
3,560
   
$
1,655
 
Supplemental disclosures of non-cash investing and financing activities:
               
Stock dividend distributed
 
$
6,610
   
$
6,046
 
Change in unrealized holding gains (losses) on available for sale securities, net of taxes
 
$
4,802
   
$
(2,421
)
 See notes to unaudited condensed consolidated financial statements.
7

FIRST NORTHERN COMMUNITY BANCORP
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
June 30, 2019 and 2018 and December 31, 2018
 
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 (GAAP) for interim financial information and with the instructions to Form 10-Q and Articles 9 and 10 of Regulation S-X.  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, 2018 as filed with the Securities and Exchange Commission.  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, 2018. 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. Certain amounts in prior periods have been reclassified to conform to the current presentation.
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 Adopted Accounting Standards:

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842).  The Company adopted ASU 2016-02 on January 1, 2019.  The Company adopted the new guidance using the optional transition method provided in ASU 2018-11, Leases (Topic 842): Targeted Improvements.  This modified transition method allowed the Company to initially apply the new leases standard at the adoption date and allowed the Company to continue reporting comparative periods presented in the financial statements in accordance with legacy guidance in ASC 840.  See Note 11, Leases.

Recently Issued Accounting Pronouncements:

In March 2019, FASB issued ASU 2019-01, Leases (Topic 842): Codification Improvements.  These amendments align the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance (Issue 1).  This ASU also requires lessors within the scope of Topic 942, Financial Services - Depository and Lending, to present all "principal payments received under leases" within investing activities (Issue 2).  Finally, this ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard (Issue 3).  Issue 1 and Issue 2 are effective for public companies for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.  Issue 3 is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  The Company adopted Issue 3 of ASU 2019-01 on January 1, 2019, which did not have a significant impact on its consolidated financial statements.  See Note 11, Leases.

8

In November 2018, FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses.  The guidance clarifies that receivables arising from operating leases are not within the scope of the credit losses standard, but rather should be accounted for in accordance with the leases standard.  The effective date and transition requirements are the same as the effective dates and transition requirements in the credit losses standard, ASU 2016-13.  The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements.

In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The amendments in ASU 2016-13, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.  Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates.  Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses.  In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration.  The amendments are effective for public companies for annual periods beginning after December 15, 2019.  Early application will be permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  On July 17, 2019 the FASB proposed a delay until January 1, 2023 on the adoption of ASU 2016-13 for small reporting companies with less than $250M in public float via the SEC's definition of these companies.  The Company would qualify for FASB's proposed delay if the delay is finalized.  We are currently evaluating the potential impact of ASU 2016-13 on our financial statements. In that regard, we have formed a cross-functional working group, under the direction of our Chief Financial Officer and our Chief Credit Officer. The working group is comprised of individuals from various functional areas including credit risk, finance and information technology, among others. We are currently working through our implementation plan which includes assessment and documentation of processes, internal controls and data sources; model development and documentation; and system configuration, among other things. We are also in the process of implementing a third-party vendor solution to assist us in the application of ASU 2016-13. The adoption of ASU 2016-13 could result in an increase in the allowance for loan losses as a result of changing from an “incurred loss” model, which encompasses allowances for current known and inherent losses within the portfolio, to an “expected loss” model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. Furthermore, ASU 2016-13 will necessitate that we establish an allowance for expected credit losses for certain debt securities and other financial assets. While we are currently unable to reasonably estimate the impact of adopting ASU 2016-13, we expect that the impact of adoption will be significantly influenced by the composition, characteristics and quality of our loan and securities portfolios as well as the prevailing economic conditions and forecasts as of the adoption date.

In April 2019, FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.  These amendments clarifies and improves areas of guidance related to the recently issued standards on credit losses, hedging, and recognition and measurement.  The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements.

In May 2019, FASB issued ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief.  These amendments provide entities that have certain instruments within the scope of Subtopic 326-20, Financial Instruments—Credit Losses—Measured at Amortized Cost, with an option to irrevocably elect the fair value option in Subtopic 825-10, Financial Instruments—Overall, applied on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326. The fair value option election does not apply to held-to-maturity debt securities. An entity that elects the fair value option should subsequently apply the guidance in Subtopics 820-10, Fair Value Measurement—Overall, and 825-10.  The effective date and transition methodology are the same as in ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.  The Company does not expect the adoption of this update to have a significant impact on its 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 June 30, 2019 are summarized as follows:

(in thousands)
 
Amortized cost
   
Unrealized gains
   
Unrealized losses
   
Estimated fair value
 
 
                       
Investment securities available-for-sale:
                       
U.S. Treasury Securities
 
$
36,463
   
$
636
   
$
(29
)
 
$
37,070
 
Securities of U.S. government agencies and corporations
   
49,823
     
382
     
(57
)
   
50,148
 
Obligations of states and political subdivisions
   
22,728
     
645
     
(9
)
   
23,364
 
Collateralized mortgage obligations
   
67,618
     
358
     
(409
)
   
67,567
 
Mortgage-backed securities
   
133,053
     
777
     
(981
)
   
132,849
 
 
                               
Total debt securities
 
$
309,685
   
$
2,798
   
$
(1,485
)
 
$
310,998
 

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2018 are summarized as follows:
 
(in thousands)
 
Amortized
cost
   
Unrealized
gains
   
Unrealized
losses
   
Estimated fair
value
 
 
                       
Investment securities available-for-sale:
                       
U.S. Treasury Securities
 
$
50,825
   
$
14
   
$
(157
)
 
$
50,682
 
Securities of U.S. government agencies and corporations
   
42,215
     
89
     
(228
)
   
42,076
 
Obligations of states and political subdivisions
   
19,110
     
181
     
(123
)
   
19,168
 
Collateralized mortgage obligations
   
65,615
     
34
     
(1,850
)
   
63,799
 
Mortgage-backed securities
   
142,297
     
147
     
(3,532
)
   
138,912
 
 
                               
Total debt securities
 
$
320,062
   
$
465
   
$
(5,890
)
 
$
314,637
 

The Company had $15,683,000 and $32,683,000 in proceeds from sales, calls and maturities of available-for-sale securities for the three and six months ended June 30, 2019, respectively.  The Company had $3,465,000 and $14,580,000 in proceeds from sales, calls and maturities of available-for-sale securities for the three and six months ended June 30, 2018, respectively.  Gross realized gains on sales of available-for-sale securities were $47,000 for the three and six months ended June 30, 2019.  There were no gross realized gains from sales of available-for-sale securities for the three and six months ended June 30, 2018.  Gross realized losses from sales of available-for-sale securities were $(53,000) for the three and six months ended June 30, 2019.  There were no gross realized losses on sales of available-for-sale securities for the three and six months ended June 30, 2018.

The amortized cost and estimated market value of debt and other securities at June 30, 2019, by contractual and expected maturity, are shown in the following table:
 
(in thousands)
 
Amortized
cost
   
Estimated
fair value
 
 
           
Maturity in years:
           
Due in one year or less
 
$
43,519
   
$
43,519
 
Due after one year through five years
   
45,639
     
46,488
 
Due after five years through ten years
   
12,891
     
13,370
 
Due after ten years
   
6,965
     
7,205
 
Subtotal 
   
109,014
     
110,582
 
MBS & CMO
   
200,671
     
200,416
 
Total
 
$
309,685
   
$
310,998
 


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 June 30, 2019, 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
 
$
   
$
   
$
11,489
   
$
(29
)
 
$
11,489
   
$
(29
)
Securities of U.S. government agencies and corporations
   
1,984
     
(1
)
   
17,669
     
(56
)
   
19,653
     
(57
)
Obligations of states and political subdivisions
   
     
     
3,325
     
(9
)
   
3,325
     
(9
)
Collateralized Mortgage obligations
   
     
     
42,082
     
(409
)
   
42,082
     
(409
)
Mortgage-backed securities
   
1,234
     
(9
)
   
83,995
     
(972
)
   
85,229
     
(981
)
 
                                               
Total
 
$
3,218
   
$
(10
)
 
$
158,560
   
$
(1,475
)
 
$
161,778
   
$
(1,485
)

No decline in value was considered “other-than-temporary” during the first six months of 2019.  Eight securities, all considered investment grade, which had a fair value of $3,218,000 and a total unrealized loss of $10,000, have been in an unrealized loss position for less than twelve months as of June 30, 2019.  One hundred forty six securities, all considered investment grade, which had a fair value of $158,560,000 and a total unrealized loss of $1,475,000, have been in an unrealized loss position for more than twelve months as of June 30, 2019.  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 we 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 June 30, 2019.

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.

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of December 31, 2018, follows:

 
                                   
 
 
Less than 12 months
   
12 months or more
   
Total
 
 
 
Fair Value
   
Unrealized
losses
   
Fair Value
   
Unrealized
losses
   
Fair Value
   
Unrealized
losses
 
 
                                   
U.S. Treasury Securities
 
$
37,805
   
$
(67
)
 
$
5,951
   
$
(90
)
 
$
43,756
   
$
(157
)
Securities of U.S. government agencies and corporations
   
16,959
     
(39
)
   
13,540
     
(189
)
   
30,499
     
(228
)
Obligations of states and political subdivisions
   
847
     
(2
)
   
9,134
     
(121
)
   
9,981
     
(123
)
Collateralized Mortgage obligations
   
2,217
     
(6
)
   
53,217
     
(1,844
)
   
55,434
     
(1,850
)
Mortgage-backed securities
   
16,358
     
(123
)
   
105,361
     
(3,409
)
   
121,719
     
(3,532
)
 
                                               
Total
 
$
74,186
   
$
(237
)
 
$
187,203
   
$
(5,653
)
 
$
261,389
   
$
(5,890
)

Investment securities carried at $33,066,000 and $36,781,000 at June 30, 2019 and December 31, 2018, 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 June 30, 2019  and December 31, 2018 was as follows:
 
($ in thousands)
 
June 30, 2019
   
December 31, 2018
 
 
           
Commercial
 
$
111,042
   
$
125,177
 
Commercial Real Estate
   
422,063
     
420,106
 
Agriculture
   
109,440
     
123,626
 
Residential Mortgage
   
56,108
     
51,064
 
Residential Construction
   
15,529
     
20,124
 
Consumer
   
29,464
     
35,397
 
 
               
 
   
743,646
     
775,494
 
Allowance for loan losses
   
(12,838
)
   
(12,822
)
Net deferred origination fees and costs
   
811
     
721
 
 
               
Loans, net
 
$
731,619
   
$
763,393
 

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.

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.

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.

12

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, 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 and periodically thereafter (generally annually but may be more frequent depending on the collateral type), once repayment is questionable, and the loan has been deemed classified.

As of June 30, 2019, approximately 15% in principal amount of the Company's loans were for general commercial uses, including professional, retail and small businesses.  Approximately 57% 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 15% in principal amount of the Company's loans were for agriculture, approximately 7% in principal amount of the Company’s loans were residential mortgage loans, approximately 2% in principal amount of the Company’s loans were residential construction loans and approximately 4% 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 June 30, 2019 and December 31, 2018, all loans were pledged under a blanket collateral lien to secure actual and 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 June 30, 2019 and December 31, 2018, 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
   
Non-Accrual
   
Total Loans
 
June 30, 2019
                                   
Commercial
 
$
109,825
   
$
   
$
139
   
$
490
   
$
588
   
$
111,042
 
Commercial Real Estate
   
421,715
     
     
     
     
348
     
422,063
 
Agriculture
   
109,342
     
98
     
     
     
     
109,440
 
Residential Mortgage
   
55,844
     
     
176
     
     
88
     
56,108
 
Residential Construction
   
15,529
     
     
     
     
     
15,529
 
Consumer
   
29,243
     
     
107
     
     
114
     
29,464
 
Total
 
$
741,498
   
$
98
   
$
422
   
$
490
   
$
1,138
   
$
743,646
 
 
                                               
December 31, 2018
                                               
Commercial
 
$
123,765
   
$
662
   
$
   
$
   
$
750
   
$
125,177
 
Commercial Real Estate
   
419,725
     
     
     
     
381
     
420,106
 
Agriculture
   
118,639
     
157
     
     
     
4,830
     
123,626
 
Residential Mortgage
   
50,964
     
     
     
     
100
     
51,064
 
Residential Construction
   
20,124
     
     
     
     
     
20,124
 
Consumer
   
35,054
     
114
     
38
     
     
191
     
35,397
 
Total
 
$
768,271
   
$
933
   
$
38
   
$
   
$
6,252
   
$
775,494
 
 
Non-accrual loans amounted to $1,138,000 at June 30, 2019 and were comprised of three commercial loans totaling $588,000, two commercial real estate loans totaling $348,000, one residential mortgage loans totaling $88,000, and two consumer loans totaling $114,000.  Non-accrual loans amounted to $6,252,000 at December 31, 2018 and were comprised of two commercial loans totaling $750,000, two commercial real estate loans totaling $381,000, five agriculture loans totaling $4,830,000, two residential mortgage loans totaling $100,000, and one consumer loan totaling $191,000.  All non-accrual loans are measured for impairment based upon 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 collateral, if the loan is collateral dependent.  If the measurement of the 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. If the loan is considered to be collateral dependent, it is generally the Company's policy to charge-off the portion of any non-accrual loan that the Company does not expect to collect by writing the loan down to the estimated net realizable value of the underlying collateral.  There were no commitments to lend additional funds to borrowers whose loans were on non-accrual status at June 30, 2019.  There was a $261,000 commitment to lend additional funds to a borrower whose loan was on non-accrual status at December 31, 2018.
 
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.  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 June 30, 2019 and December 31, 2018 were as follows:
 
($ in thousands)
 
Unpaid Contractual Principal Balance
   
Recorded
Investment with
no Allowance
   
Recorded
Investment with
Allowance
   
Total Recorded
Investment
   
Related
Allowance
 
June 30, 2019
                             
Commercial
 
$
3,116
   
$
588
   
$
1,759
   
$
2,347
   
$
32
 
Commercial Real Estate
   
753
     
348
     
255
     
603
     
20
 
Agriculture
   
     
     
     
     
 
Residential Mortgage
   
1,102
     
88
     
927
     
1,015
     
179
 
Residential Construction
   
743
     
     
711
     
711
     
48
 
Consumer
   
203
     
114
     
88
     
202
     
2
 
Total
 
$
5,917
   
$
1,138
   
$
3,740
   
$
4,878
   
$
281
 
 
                                       
December 31, 2018
                                       
Commercial
 
$
3,591
   
$
300
   
$
2,602
   
$
2,902
   
$
496
 
Commercial Real Estate
   
780
     
381
     
261
     
642
     
21
 
Agriculture
   
4,830
     
4,830
     
     
4,830
     
 
Residential Mortgage
   
1,669
     
100
     
1,451
     
1,551
     
287
 
Residential Construction
   
560
     
     
560
     
560
     
49
 
Consumer
   
403
     
191
     
198
     
389
     
2
 
Total
 
$
11,833
   
$
5,802
   
$
5,072
   
$
10,874
   
$
855
 

The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the three months ended June 30, 2019 and June 30, 2018 was as follows:
 
($ in thousands)
 
Three Months Ended
June 30, 2019
   
Three Months Ended
June 30, 2018
 
 
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
Commercial
 
$
2,260
   
$
32
   
$
2,863
   
$
45
 
Commercial Real Estate
   
614
     
4
     
1,934
     
4
 
Agriculture
   
2,389
     
240
     
     
 
Residential Mortgage
   
1,183
     
22
     
1,888
     
15
 
Residential Construction
   
727
     
8
     
641
     
9
 
Consumer
   
293
     
18
     
484
     
3
 
Total
 
$
7,466
   
$
324
   
$
7,810
   
$
76
 

15

The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the six months ended June 30, 2019 and June 30, 2018 was as follows:
 
($ in thousands)
 
Six Months Ended
June 30, 2019
   
Six Months Ended
June 30, 2018
 
 
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
Commercial
 
$
2,474
   
$
74
   
$
3,129
   
$
91
 
Commercial Real Estate
   
623
     
8
     
1,955
     
7
 
Agriculture
   
3,203
     
240
     
     
 
Residential Mortgage
   
1,306
     
34
     
2,018
     
30
 
Residential Construction
   
671
     
16
     
644
     
19
 
Consumer
   
325
     
21
     
462
     
6
 
Total
 
$
8,602
   
$
393
   
$
8,208
   
$
153
 

Troubled Debt Restructurings

The Company's loan portfolio includes certain loans that have been modified in a Troubled Debt Restructuring ("TDR"), which are loans on which concessions in terms have been granted because of the borrowers' financial difficulties and, as a result, the Company receives less than the current market-based compensation for the loan.  These concessions may include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance, or other actions.  Certain TDRs are placed on non-accrual status at the time of restructure and may be returned to accruing status after considering the borrower's sustained repayment performance for a reasonable period, generally  six months.
 
When a loan is modified, it is measured based upon the present value of future cash flows discounted at the contractual interest rate of the original loan agreement, or the fair value of collateral less selling costs if the loan is collateral dependent.  If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through a specific allowance or a charge-off of the loan.

The Company had $3,851,000 and $4,813,000 in TDR loans as of June 30, 2019 and December 31, 2018, respectively.  Specific reserves for TDR loans totaled $281,000 and $405,000 as of June 30, 2019 and December 31, 2018, respectively.  TDR loans performing in compliance with modified terms totaled $3,740,000 and $4,622,000 as of June 30, 2019 and December 31, 2018, respectively.  There were no commitments to advance additional funds on existing TDR loans as of June 30, 2019 and December 31, 2018.

There were no loans modified as TDRs during the three-month periods ended June 30, 2019 and June 30, 2018.

Loans modified as TDRs during the six months ended June 30, 2019 were as follows:

($ in thousands)
 
Six Months Ended June 30, 2019
 
 
 
Number of
Contracts
   
Pre-modification
outstanding
recorded
investment
   
Post-
modification
outstanding
recorded
investment
 
Residential Construction
   
2
   
$
189
   
$
189
 
Total
   
2
   
$
189
   
$
189
 

There were no loans modified as TDRs during the six months ended June 30, 2018.

Loan modifications generally involve reductions in the interest rate, payment extensions, forgiveness of principal, or forbearance.  There were no loans modified as a TDR within the previous 12 months and for which there was a payment default during the three and six months ended June 30, 2019 and June 30, 2018.


16


Credit Quality Indicators
 
All loans are rated using the credit risk ratings and criteria adopted by the Company.  Risk ratings are adjusted as future circumstances warrant.  All credits risk rated 1, 2, 3 or 4 equate to a Pass as indicated by Federal and State bank regulatory agencies; a 5 equates to a Special Mention; a 6 equates to Substandard; a 7 equates to Doubtful; and an 8 equates to a Loss.  For the definitions of each risk rating, see Note 4 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018.

The following table presents the risk ratings by loan class as of June 30, 2019 and December 31, 2018:

($ in thousands)
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
June 30, 2019
                                   
Commercial
 
$
107,663
   
$
947
   
$
2,432
   
$
   
$
   
$
111,042
 
Commercial Real Estate
   
394,747
     
18,746
     
8,570
     
     
     
422,063
 
Agriculture
   
99,438
     
7,606
     
2,396
     
     
     
109,440
 
Residential Mortgage
   
55,563
     
     
545
     
     
     
56,108
 
Residential Construction
   
15,529
     
     
     
     
     
15,529
 
Consumer
   
28,597
     
500
     
367
     
     
     
29,464
 
Total
 
$
701,537
   
$
27,799
   
$
14,310
   
$
   
$
   
$
743,646
 
 
                                               
December 31, 2018
                                               
Commercial
 
$
121,848
   
$
66
   
$
2,813
   
$
450
   
$
   
$
125,177
 
Commercial Real Estate
   
395,436
     
14,272
     
10,398
     
     
     
420,106
 
Agriculture
   
104,809
     
11,750
     
7,067
     
     
     
123,626
 
Residential Mortgage
   
50,149
     
     
915
     
     
     
51,064
 
Residential Construction
   
19,372
     
752
     
     
     
     
20,124
 
Consumer
   
34,272
     
590
     
535
     
     
     
35,397
 
Total
 
$
725,886
   
$
27,430
   
$
21,728
   
$
450
   
$
   
$
775,494
 

17

Allowance for Loan Losses

The following tables detail activity in the allowance for loan losses by loan class for the three and six months ended June 30, 2019.

Three months ended June 30, 2019
 
($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Balance as of March 31, 2019
 
$
2,499
   
$
6,386
   
$
1,834
   
$
502
   
$
217
   
$
277
   
$
1,031
   
$
12,746
 
Provision for loan losses
   
(191
)
   
43
     
79
     
(82
)
   
(41
)
   
(6
)
   
198
     
 
 
                                                               
Charge-offs
   
     
     
     
     
     
(8
)
   
     
(8
)
Recoveries
   
64
     
     
     
16
     
20
     
     
     
100
 
Net (charge-offs) recoveries
   
64
     
     
     
16
     
20
     
(8
)
   
     
92
 
Balance as of June 30, 2019
 
$
2,372
   
$
6,429
   
$
1,913
   
$
436
   
$
196
   
$
263
   
$
1,229
   
$
12,838
 

Six months ended June 30, 2019
 
($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Balance as of December 31, 2018
 
$
3,198
   
$
5,890
   
$
1,632
   
$
643
   
$
318
   
$
279
   
$
862
   
$
12,822
 
Provision for loan losses
   
(759
)
   
539
     
281
     
(279
)
   
(143
)
   
(6
)
   
367
     
 
 
                                                               
Charge-offs
   
(150
)
   
     
     
     
     
(15
)
   
     
(165
)
Recoveries
   
83
     
     
     
72
     
21
     
5
     
     
181
 
Net (charge-offs) recoveries
   
(67
)
   
     
     
72
     
21
     
(10
)
   
     
16
 
Balance as of June 30, 2019
 
$
2,372
   
$
6,429
   
$
1,913
   
$
436
   
$
196
   
$
263
   
$
1,229
   
$
12,838
 

The following table details the allowance for loan losses allocated to loans individually and collectively evaluated for impairment by loan class as of June 30, 2019.

($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Period-end amount allocated to:
                                               
Loans individually evaluated for impairment
 
$
32
   
$
20
   
$
   
$
179
   
$
48
   
$
2
   
$
   
$
281
 
Loans collectively evaluated for impairment
   
2,340
     
6,409
     
1,913
     
257
     
148
     
261
     
1,229
     
12,557
 
Ending Balance
 
$
2,372
   
$
6,429
   
$
1,913
   
$
436
   
$
196
   
$
263
   
$
1,229
   
$
12,838
 

18

The following table details activity in the allowance for loan losses by loan class for the three and six months ended June 30, 2018.

Three months ended June 30, 2018
 
($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Balance as of March 31, 2018
 
$
2,549
   
$
5,414
   
$
1,423
   
$
643
   
$
348
   
$
305
   
$
1,033
   
$
11,715
 
Provision for loan losses
   
654
     
(30
)
   
112
     
(28
)
   
12
     
     
(195
)
   
525
 
 
                                                               
Charge-offs
   
(475
)
   
     
     
     
     
(5
)
   
     
(480
)
Recoveries
   
36
     
     
     
4
     
1
     
6
     
     
47
 
Net (charge-offs) recoveries
   
(439
)
   
     
     
4
     
1
     
1
     
     
(433
)
Balance as of June 30, 2018
 
$
2,764
   
$
5,384
   
$
1,535
   
$
619
   
$
361
   
$
306
   
$
838
   
$
11,807
 
 
Six months ended June 30, 2018
 
($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Balance as of December 31, 2017
 
$
2,625
   
$
5,460
   
$
1,547
   
$
628
   
$
360
   
$
342
   
$
171
   
$
11,133
 
Provision for loan losses
   
569
     
(76
)
   
(12
)
   
(29
)
   
(1
)
   
(68
)
   
667
     
1,050
 
 
                                                               
Charge-offs
   
(475
)
   
     
     
     
     
(11
)
   
     
(486
)
Recoveries
   
45
     
     
     
20
     
2
     
43
     
     
110
 
Net (charge-offs) recoveries
   
(430
)
   
     
     
20
     
2
     
32
     
     
(376
)
Balance as of June 30, 2018
 
$
2,764
   
$
5,384
   
$
1,535
   
$
619
   
$
361
   
$
306
   
$
838
   
$
11,807
 

The following table details the allowance for loan losses allocated to loans individually and collectively evaluated for impairment by loan class as of June 30, 2018.

($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Period-end amount allocated to:
                                               
Loans individually evaluated for impairment
 
$
45
   
$
35
   
$
   
$
304
   
$
58
   
$
4
   
$
   
$
446
 
Loans collectively evaluated for impairment
   
2,719
     
5,349
     
1,535
     
315
     
303
     
302
     
838
     
11,361
 
Ending Balance
 
$
2,764
   
$
5,384
   
$
1,535
   
$
619
   
$
361
   
$
306
   
$
838
   
$
11,807
 

19

The following table details activity in the allowance for loan losses and the amount allocated to loans individually and collectively evaluated for impairment as of and for the year ended December 31, 2018.

Year ended December 31, 2018
($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Balance as of December 31, 2017
 
$
2,625
   
$
5,460
   
$
1,547
   
$
628
   
$
360
   
$
342
   
$
171
   
$
11,133
 
Provision for loan losses
   
1,036
     
572
     
85
     
(19
)
   
(173
)
   
(92
)
   
691
     
2,100
 
 
                                                               
Charge-offs
   
(509
)
   
(142
)
   
     
     
     
(34
)
   
     
(685
)
Recoveries
   
46
     
     
     
34
     
131
     
63
     
     
274
 
Net (charge-offs) recoveries
   
(463
)
   
(142
)
   
     
34
     
131
     
29
     
     
(411
)
Ending Balance
 
$
3,198
   
$
5,890
   
$
1,632
   
$
643
   
$
318
   
$
279
   
$
862
   
$
12,822
 
Period-end amount allocated to:
                                                               
Loans individually evaluated for impairment
 
$
496
   
$
21
   
$
   
$
287
   
$
49
   
$
2
   
$
   
$
855
 
Loans collectively evaluated for impairment
   
2,702
     
5,869
     
1,632
     
356
     
269
     
277
     
862
     
11,967
 
Balance as of December 31, 2018
 
$
3,198
   
$
5,890
   
$
1,632
   
$
643
   
$
318
   
$
279
   
$
862
   
$
12,822
 

The Company’s investment in loans as of June 30, 2019, June 30, 2018, and December 31, 2018 related to each balance in the allowance for loan losses by loan class and disaggregated on the basis of the Company’s impairment methodology was as follows:

($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Total
 
June 30, 2019
 
Loans individually evaluated for impairment
 
$
2,347
   
$
603
   
$
   
$
1,015
   
$
711
   
$
202
   
$
4,878
 
Loans collectively evaluated for impairment
   
108,695
     
421,460
     
109,440
     
55,093
     
14,818
     
29,262
     
738,768
 
Ending Balance
 
$
111,042
   
$
422,063
   
$
109,440
   
$
56,108
   
$
15,529
   
$
29,464
   
$
743,646
 
 
                                                       
June 30, 2018
 
Loans individually evaluated for impairment
 
$
2,535
   
$
1,922
   
$
   
$
1,585
   
$
637
   
$
446
   
$
7,125
 
Loans collectively evaluated for impairment
   
128,936
     
390,151
     
112,457
     
44,182
     
22,057
     
36,751
     
734,534
 
Ending Balance
 
$
131,471
   
$
392,073
   
$
112,457
   
$
45,767
   
$
22,694
   
$
37,197
   
$
741,659
 
 
                                                       
December 31, 2018
 
Loans individually evaluated for impairment
 
$
2,902
   
$
642
   
$
4,830
   
$
1,551
   
$
560
   
$
389
   
$
10,874
 
Loans collectively evaluated for impairment
   
122,275
     
419,464
     
118,796
     
49,513
     
19,564
     
35,008
     
764,620
 
Ending Balance
 
$
125,177
   
$
420,106
   
$
123,626
   
$
51,064
   
$
20,124
   
$
35,397
   
$
775,494
 

20

5.  MORTGAGE OPERATIONS

Transfers and servicing of financial assets and extinguishments of liabilities are accounted for and reported based on consistent application of a financial-components approach that focuses on control.  Transfers of financial assets that are sales are distinguished from transfers that are secured borrowings.  Retained interests (mortgage servicing rights) in loans sold are measured by allocating the previous carrying amount of the transferred assets between the loans sold and retained interests, if any, based on their relative fair value at the date of transfer.  Fair values are estimated using discounted cash flows based on a current market interest rate.

The Company recognizes a gain and a related asset for the fair value of the rights to service loans for others when loans are sold.  The Company sold substantially its entire portfolio of conforming long-term residential mortgage loans originated during the six months ended June 30, 2019 for cash proceeds equal to the fair value of the loans.  The Company serviced real estate mortgage loans for others totaling $205,264,000 and $211,845,000 at June 30, 2019 and December 31, 2018, respectively.

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

Key assumptions used in measuring the fair value of mortgage servicing rights as of June 30, 2019 and December 31, 2018 were as follows:

 
June 30, 2019
 
December 31, 2018
 
 
       
Constant prepayment rate
   
9.97
%
   
8.58
%
Discount rate
   
10.01
%
   
10.01
%
Weighted average life (years)
   
6.20
     
6.79
 

The following table summarizes the Company’s mortgage servicing rights assets as of June 30, 2019 and December 31, 2018.  Mortgage servicing rights are included in Interest Receivable and Other Assets on the condensed consolidated balance sheets:

 
 
(in thousands)
 
 
 
December 31, 2018
   
Additions
   
Reductions
   
June 30, 2019
 
 
                       
Mortgage servicing rights
 
$
1,579
   
$
59
   
$
(138
)
 
$
1,500
 
Valuation allowance
   
     
     
     
 
Mortgage servicing rights, net of valuation allowance
 
$
1,579
   
$
59
   
$
(138
)
 
$
1,500
 

At June 30, 2019 and December 31, 2018, the estimated fair market value of the Company’s mortgage servicing rights asset was $1,775,000 and $2,091,000, respectively.

The Company received contractually specified servicing fees of $131,000 and $138,000 for the three months ended June 30, 2019 and June 30, 2018, respectively.  The Company received contractually specified servicing fees of $265,000 and $277,000 for the six months ended June 30, 2019 and June 30, 2018, respectively.  Contractually specified servicing fees are included in non-interest income on the condensed consolidated statements of income, net of the amortization of the mortgage servicing rights asset.

21


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

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of June 30, 2019:
 
(in thousands) 
     
June 30, 2019
 
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
U.S. Treasury securities
 
$
37,070
   
$
37,070
   
$
   
$
 
Securities of U.S. government agencies and corporations
   
50,148
     
     
50,148
     
 
Obligations of states and political subdivisions
   
23,364
     
     
23,364
     
 
Collateralized mortgage obligations
   
67,567
     
     
67,567
     
 
Mortgage-backed securities
   
132,849
     
     
132,849
     
 
Total investments at fair value
 
$
310,998
   
$
37,070
   
$
273,928
   
$
 


There were no transfers of assets measured at fair value on a recurring basis between level 1 and level 2 of the fair value hierarchy.

The table below presents the recorded amount of assets and liabilities measured at fair value on a recurring basis as of December 31, 2018:
 
(in thousands) 
     
December 31, 2018
 
Fair Value
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Other Observable Inputs
(Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
U.S. Treasury securities
 
$
50,682
   
$
50,682
   
$
   
$
 
Securities of U.S. government agencies and corporations
   
42,076
     
     
42,076
     
 
Obligations of states and political subdivisions
   
19,168
     
     
19,168
     
 
Collateralized mortgage obligations
   
63,799
     
     
63,799
     
 
Mortgage-backed securities
   
138,912
     
     
138,912
     
 
Total investments at fair value
 
$
314,637
   
$
50,682
   
$
263,955
   
$
 


22

Assets Recorded at Fair Value on a Non-Recurring Basis

Assets measured at fair value on a non-recurring basis are included in the table below by level within the fair value hierarchy as of June 30, 2019 and December 31, 2018:

(in thousands) 
     
June 30, 2019
 
Carrying Value
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans
 
$
110
   
$
   
$
   
$
110
 
Other real estate owned
   
784
     
     
     
784
 
Total assets at fair value
 
$
894
   
$
   
$
   
$
894
 


(in thousands) 
     
December 31, 2018
 
Carrying Value
   
Level 1
   
Level 2
   
Level 3
 
Impaired loans
 
$
300
   
$
   
$
   
$
300
 
Other real estate owned
   
1,092
     
     
     
1,092
 
Total assets at fair value
 
$
1,392
   
$
   
$
   
$
1,392
 
 
There were no liabilities measured at fair value on a recurring or non-recurring basis at June 30, 2019 and December 31, 2018.

Key methods and assumptions used in measuring the fair value of impaired loans and other real estate owned as of June 30, 2019 and December 31, 2018 were as follows:

 
Method
 
Assumption Inputs
 
 
 
 
Impaired loans
Collateral, market, income,  enterprise, liquidation and discounted Cash Flows
 
External appraised values, management assumptions regarding market trends or other relevant factors, selling costs generally ranging from 6% to 10%, or the amount and timing of cash flows based on the loan's effective interest rate.
Other real estate owned
Collateral
 
External appraised values, management assumptions regarding market trends or other relevant factors, selling costs generally ranging from 6% to 10%.
 
The following section describes the valuation methodologies used for assets and liabilities recorded at fair value.

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

Impaired Loans

The Company does not record loans at fair value on a recurring basis.  However, from time to time, a loan is considered impaired.  Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Once a loan is identified as individually impaired, the Company measures impairment.  The fair value of impaired loans is estimated using one of several methods, including the present value of expected 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.  Those impaired loans not requiring charge-off or specific allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

23

At June 30, 2019 and December 31, 2018, certain impaired loans were considered collateral dependent and were evaluated based on the fair value of the underlying collateral securing the loan.  Impaired loans where a charge-off is recorded based on the fair value of collateral require classification in the fair value hierarchy.  When a loan is evaluated based on the fair value of the underlying collateral securing the loan, the Company records the impaired loan as non-recurring Level 3 given the valuation includes significant unobservable assumptions.

Other Real Estate Owned

Other real estate assets (“OREO”) acquired through, or in lieu of, foreclosure are held-for-sale and are initially recorded at the lower of cost or fair value, less selling costs.  Any write-downs to fair value at the time of transfer to OREO are charged to the allowance for loan losses.  Appraisals or evaluations are then done periodically thereafter charging any additional write-downs or valuation allowances to the appropriate expense accounts.  Values are derived from appraisals of underlying collateral and discounted cash flow analysis.  OREO is classified within Level 3 of the hierarchy given the valuation includes significant unobservable assumptions.

Disclosures about Fair Value of Financial Instruments
  
The estimated fair values of the Company’s financial instruments for the periods ended June 30, 2019 and December 31, 2018 were approximately as follows:
 
(in thousands) 
       
June 30, 2019
   
December 31, 2018
 
 
 
Level
   
Carrying amount
   
Fair value
   
Carrying amount
   
Fair value
 
 
                             
Financial assets:
                             
Cash and cash equivalents
   
1
   
$
124,285
   
$
124,285
   
$
116,032
   
$
116,032
 
Certificates of deposit
   
2
     
14,210
     
14,375
     
7,595
     
7,573
 
Stock in Federal Home Loan Bank and other equity securities
   
3
     
6,574
     
6,574
     
6,019
     
6,019
 
Loans receivable:
                                       
Net loans
   
3
     
731,619
     
688,332
     
763,393
     
726,179
 
Loans held-for-sale
   
2
     
1,154
     
1,177
     
2,295
     
2,345
 
Interest receivable
   
2
     
4,349
     
4,349
     
4,158
     
4,158
 
Mortgage servicing rights
   
3
     
1,500
     
1,775
     
1,579
     
2,091
 
Financial liabilities:
                                       
Deposits
   
3
     
1,091,745
     
973,718
     
1,124,612
     
966,464
 
Interest payable
   
2
     
96
     
96
     
74
     
74
 
 
Limitations
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument and expected exit prices.  These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision.  Changes in assumptions could significantly affect the estimates.
 
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities and premises and equipment.  In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.
24

7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers.  These financial instruments include commitments to extend credit in the form of loans or through standby letters of credit.  These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet.  The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
 
The Bank’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments.  The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
 
Financial instruments, whose contract amounts represent credit risk at the indicated periods, were as follows:

(in thousands)
 
June 30, 2019
   
December 31, 2018
 
 
           
Undisbursed loan commitments
 
$
196,098
   
$
201,983
 
Standby letters of credit
   
2,445
     
2,974
 
Commitments to sell loans
   
2,496
     
570
 
 
               
 
 
$
201,039
   
$
205,527
 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.  The Bank evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation.  Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  The Bank issues both financial and performance standby letters of credit.  The financial standby letters of credit are primarily to guarantee payment to third parties.  At June 30, 2019 and December 31, 2018, there were no financial standby letters of credit outstanding.  The performance standby letters of credit are typically issued to municipalities as specific performance bonds.  Performance standby letters of credit totaled $2,445,000 and $2,974,000 at June 30, 2019 and December 31, 2018, respectively.  The Bank has experienced no draws on these letters of credit, resulting in no related liability included on its balance sheet; however, should a triggering event occur, the Bank either has collateral in excess of the letter of credit or imbedded agreements of recourse from the customer.  The Bank has set aside a reserve for unfunded commitments in the amount of $840,000 and $800,000  at June 30, 2019 and December 31, 2018, respectively, which is recorded in "interest payable and other liabilities" on the Condensed Consolidated Balance Sheets.

Commitments to extend credit and standby letters of credit bear similar credit risk characteristics as outstanding loans.  As of June 30, 2019 and December 31, 2018, the Company had no off-balance sheet derivatives requiring additional disclosure.

Mortgage loans sold to investors may be sold with servicing rights retained, for which the Company makes only standard legal representations and warranties as to meeting certain underwriting and collateral documentation standards.  In the past two years, the Company has not had to repurchase any loans due to deficiencies in underwriting or loan documentation.  Management believes that any liabilities that may result from such recourse provisions are not significant.

25

8.  STOCK PLANS

On January 24, 2019, the Board of Directors of the Company declared a 5% stock dividend payable as of March 29, 2019.  All stock options and restricted stock outstanding have been adjusted to give retroactive effect to stock dividends.

The following table presents the activity related to stock options for the three months ended June 30, 2019.

 
 
Number of
Shares
   
Weighted
Average
Exercise Price
   
Aggregate
Intrinsic Value
   
Weighted
Average
Remaining
Contractual
Term (in years)
 
Options outstanding at Beginning of  Period
   
405,137
   
$
8.72
             
Granted
   
     
             
Expired
   
     
             
Cancelled / Forfeited
   
     
             
Exercised
   
     
             
Options outstanding at End of Period
   
405,137
   
$
8.72
   
$
1,192,539
     
6.91
 
Exercisable (vested) at End of Period
   
224,595
   
$
6.95
   
$
1,038,576
     
5.46
 

The following table presents the activity related to stock options for the six months ended June 30, 2019.

 
 
Number of
Shares
   
Weighted
Average
Exercise Price
   
Aggregate
Intrinsic Value
   
Weighted
Average
Remaining
Contractual
Term (in years)
 
Options outstanding at Beginning of  Period
   
329,160
   
$
8.23
             
Granted
   
77,666
   
$
10.86
             
Expired
   
   
$
             
Cancelled / Forfeited
   
(1,689
)
   
12.41
             
Exercised
   
     
             
Options outstanding at End of Period
   
405,137
   
$
8.72
   
$
1,192,539
     
6.91
 
Exercisable (vested) at End of Period
   
224,595
   
$
6.95
   
$
1,038,576
     
5.46
 

The weighted average grant date fair value per share of options granted during the six months ended June 30, 2019 was $1.82 per share.

There were no options exercised during the six months ended June 30, 2019.  The intrinsic value of options exercised was $81,000 during the six months ended June 30, 2018.  The fair value of awards vested was $141,000 and $114,000 during the six months ended June 30, 2019 and June 30, 2018, respectively.

26

As of June 30, 2019, there was $327,000 of total unrecognized compensation cost related to non-vested stock options.  This cost is expected to be recognized over a weighted average period of approximately 2.56 years.

There was $38,000 and $73,000 of recognized compensation cost related to stock options granted for the three and six months ended June 30, 2019, respectively.

A summary of the weighted average assumptions used in valuing stock options during the three and six months ended June 30, 2019 is presented below:

 
 
Three Months Ended
June 30, 2019*
   
Six Months Ended
June 30, 2019
 
Risk Free Interest Rate
   
     
2.47
%
 
               
Expected Dividend Yield
   
     
0.00
%
 
               
Expected Life in Years
   
     
5
 
 
               
Expected Price Volatility
   
     
11.86
%

* There were no stock options granted during the three months ended June 30, 2019.

The following table presents the activity related to non-vested restricted stock for the three months ended June 30, 2019.

 
 
Number of
Shares
   
Weighted
Average
Grant Date Fair Value
   
Aggregate
Intrinsic Value
   
Weighted
Average
Remaining
Contractual
Term (in years)
 
Non-vested Restricted stock outstanding at Beginning of  Period
   
126,731
   
$
10.19
             
Granted
   
   

             
Cancelled / Forfeited
   
(1,969
)
 

11.10
             
Exercised/Released/Vested
   

   
             
Non-vested restricted stock outstanding at End of Period
   
124,762
   
$
10.18
   
$
1,434,763
     
2.94
 


The following table presents the activity related to non-vested restricted stock for the six months ended June 30, 2019.

 
 
Number of
Shares
   
Weighted
Average
Grant Date Fair Value
   
Aggregate
Intrinsic Value
   
Weighted
Average
Remaining
Contractual
Term (in years)
 
Non-vested Restricted stock outstanding at Beginning of  Period
   
118,391
   
$
8.94
             
Granted
   
42,262
   

10.86
             
Cancelled / Forfeited
   
(1,969
)
 

11.10
             
Exercised/Released/Vested
   
(33,922
)
   
6.64
             
Non-vested restricted stock outstanding at End of Period
   
124,762
   
$
10.18
   
$
1,434,763
     
2.94
 


The weighted average fair value of restricted stock granted during the six months ended June 30, 2019 was $10.86 per share.

As of June 30, 2019, there was $778,000 of total unrecognized compensation cost related to non-vested restricted stock.  This cost is expected to be recognized over a weighted average period of approximately 2.94 years. 

There was $81,000 and $150,000 of recognized compensation cost related to restricted stock awards for the three and six months ended June 30, 2019, respectively.
27

The Company has an Employee Stock Purchase Plan (“ESPP”).  There are 295,277 shares authorized for issuance under the ESPP.  The total number of shares authorized has been adjusted to give retroactive effect to stock dividends and stock splits, including the 5% stock dividend declared on January 24, 2019, payable March 29, 2019 to shareholders of record as of February 28, 2019.  The ESPP will expire on March 16, 2026.

The ESPP is implemented by participation periods of not more than twenty-seven months each.  The Board of Directors determines the commencement date and duration of each participation period.  The Board of Directors approved the current participation period of November 24, 2018 to November 23, 2019.  An eligible employee is one who has been continually employed for at least 90 days prior to commencement of a participation period. Under the terms of the ESPP, employees can choose to have up to 10 percent of their compensation withheld to purchase the Company’s common stock each participation period.  The purchase price of the stock is 85 percent of the lower of the fair value on the last trading day before the date of participation or the fair value on the last trading day during the participation period.

As of June 30, 2019, there was $13,000 of unrecognized compensation cost related to ESPP issuances.  This cost is expected to be recognized over a weighted average period of approximately 0.50 years.

There was $6,000 and $13,000 of recognized compensation cost related to ESPP issuances for the three and six months ended June 30, 2019, respectively.

The weighted average fair value at issuance date during the six months ended June 30, 2019 was $2.57 per share.

A summary of the weighted average assumptions used in valuing ESPP issuances during the three and six months ended June 30, 2019 is presented below.

 
 
Three Months Ended
June 30, 2019
   
Six Months Ended
June 30, 2019
 
Risk Free Interest Rate
   
2.67
%
   
2.67
%
 
               
Expected Dividend Yield
   
0.00
%
   
0.00
%
 
               
Expected Life in Years
   
1.00
     
1.00
 
 
               
Expected Price Volatility
   
8.47
%
   
8.47
%


28


9. ACCUMULATED OTHER COMPREHENSIVE LOSS

The following table details activity in accumulated other comprehensive income (loss) for the three months ended June 30, 2019.

(in thousands)
 
Unrealized
Gains (losses) on
Securities
   
Officers’
Retirement
Plan
   
Directors’
Retirement
Plan
   
Accumulated
Other
Comprehensive
Income/(loss)
 
Balance as of March 31, 2019
 
$
(2,389
)
 
$
(1,198
)
 
$
29
   
$
(3,558
)
Current period other comprehensive income
   
3,324
     
     
     
3,324
 
Balance as of June 30, 2019
 
$
935
   
$
(1,198
)
 
$
29
   
$
(234
)

The following table details activity in accumulated other comprehensive income (loss) for the six months ended June 30, 2019.

(in thousands)
 
Unrealized
Gains (losses) on
Securities
   
Officers’
Retirement
Plan
   
Directors’
Retirement
Plan
   
Accumulated
Other
Comprehensive
Income/(loss)
 
Balance as of December 31, 2018
 
$
(3,867
)
 
$
(1,198
)
 
$
29
   
$
(5,036
)
Current period other comprehensive income
   
4,802
     
     
     
4,802
 
Balance as of June 30, 2019
 
$
935
   
$
(1,198
)
 
$
29
   
$
(234
)

The following table details activity in accumulated other comprehensive income (loss) for the three months ended June 30, 2018.

(in thousands)
 
Unrealized
Gains on
Securities
   
Officers’
Retirement
Plan
   
Directors’
Retirement
Plan
   
Accumulated
Other
Comprehensive
Income/(loss)
 
Balance as of March 31, 2018
 
$
(4,808
)
 
$
(1,403
)
 
$
3
   
$
(6,208
)
Current period other comprehensive loss
   
(610
)
   
     
     
(610
)
Balance as of June 30, 2018
 
$
(5,418
)
 
$
(1,403
)
 
$
3
   
$
(6,818
)

The following table details activity in accumulated other comprehensive income (loss) for the six months ended June 30, 2018.

(in thousands)
 
Unrealized
Gains on
Securities
   
Officers’
Retirement
Plan
   
Directors’
Retirement
Plan
   
Accumulated
Other
Comprehensive
Income/(loss)
 
Balance as of December 31, 2017
 
$
(2,997
)
 
$
(1,403
)
 
$
3
   
$
(4,397
)
Current period other comprehensive loss
   
(2,421
)
   
     
     
(2,421
)
Balance as of June 30, 2018
 
$
(5,418
)
 
$
(1,403
)
 
$
3
   
$
(6,818
)

29


10.  OUTSTANDING SHARES AND EARNINGS PER SHARE

On January 24, 2019, the Board of Directors of the Company declared a 5% stock dividend payable March 29, 2019 to shareholders of record as of February 28, 2019.  All income per share amounts have been adjusted to give retroactive effect to stock dividends.

Earnings Per Share (EPS)

Basic EPS includes no dilution and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the respective period.  Diluted EPS is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding plus dilutive shares for the quarter.  Diluted shares include all common stock equivalents (“in-the-money” stock options, unvested restricted stock, stock units, warrants and rights, convertible bonds and preferred stock), which reflects the potential dilution of securities that could share in the earnings of the Company.

The following table presents a reconciliation of basic and diluted EPS for the three and six months ended June 30, 2019 and 2018 (dollars in thousands except per share amounts):

 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2019
   
2018
   
2019
   
2018
 
Basic earnings per share:
                       
Net income
 
$
3,406
   
$
3,003
   
$
7,391
   
$
5,736
 
 
                               
Weighted average common shares outstanding
   
12,169,937
     
12,127,378
     
12,156,829
     
12,119,688
 
Basic EPS
 
$
0.28
   
$
0.25
   
$
0.61
   
$
0.47
 
 
                               
Diluted earnings per share:
                               
Net income
 
$
3,406
   
$
3,003
   
$
7,391
   
$
5,736
 
 
                               
Weighted average common shares outstanding
   
12,169,937
     
12,127,378
     
12,156,829
     
12,119,688
 
 
                               
Effect of dilutive shares
   
146,994
     
168,730
     
145,161
     
169,752
 
 
                               
Adjusted weighted average common shares outstanding
   
12,316,931
     
12,296,108
     
12,301,990
     
12,289,440
 
Diluted EPS
 
$
0.28
   
$
0.24
   
$
0.60
   
$
0.47
 

Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounting to 215,415 shares and 73,361 shares for the three months ended June 30, 2019 and 2018, respectively.  Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounting to 215,415 shares and 106,221 shares for the six months ended June 30, 2019 and 2018, respectively.
30


11.  LEASES

The Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019.  As a result, the Company recognized a right-of-use asset of $4,417,000 included in Interest receivable and other assets and lease liabilities of $4,812,000 included in Interest payable and other liabilities on the Condensed Consolidated Balance Sheets.  The recognition of a cumulative-effect adjustment to the opening balance of retained earnings was not necessary as prior to the adoption of this ASU, the Company recognized lease expense on a straight-line basis over the life of the lease term.  As such, the difference between the right-of-use asset and lease liabilities was offset by accrued rent and tenant improvement receivables as of January 1, 2019.

The Bank leases nine branch and administrative locations.  Leases with an initial term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term.  For lease agreements entered into or reassessed after the adoption of Topic 842, the Bank combines lease and nonlease components.  As of June 30, 2019, all of the Bank’s leases are operating leases.

Most leases include options to renew, with renewal terms that can extend the lease term from 3 to 10 years.  The exercise of lease renewal options is at the Bank’s sole discretion.  Most leases are currently in the extension period.  For the remaining leases with options to renew, the Bank has not included the extended lease terms in the calculation of lease liabilities as the options are not reasonably certain of being exercised.  Certain lease agreements include rental payments that are adjusted periodically for inflation.  The Bank's lease agreements do not contain any residual value guarantees or restrictive covenants.

The Bank uses its FHLB advance fixed rates, which are the Bank’s incremental borrowing rates for secured borrowings, as the discount rates to calculate lease liabilities.

As of June 30, 2019, the Company had right-of use assets and lease liabilities totaling $4,044,000 and $4,435,000, respectively.  For the six months ended June 30, 2019, the Company recognized lease expense totaling $447,000, which includes expenses related to short-term leases totaling $57,000 and a reduction of $41,000 for the recognition of deferred gain on sale-leaseback.  Lease expense is included in Occupancy and equipment expense on the Condensed Consolidated Statements of Income.

The table below summarizes the maturity of remaining lease liabilities:

(in thousands)
 
June 30, 2019
 
2019
 
$
438
 
2020
   
858
 
2021
   
802
 
2022
   
738
 
2023
   
669
 
After 2023
   
1,387
 
Total lease payments
   
4,892
 
Less: interest
   
(457
)
Present value of lease liabilities
 
$
4,435
 

The tables below summarizes other information related to our operating leases:

(in thousands)
 
Three Months Ended
June 30, 2019
   
Six Months Ended
June 30, 2019
 
Cash paid for amounts included in the measurement of lease liabilities
           
     Operating cash flows from operating leases
 
$
217
     
434
 
Right-of-use assets obtained in exchange for new operating lease liabilities
 
$
     
4,417
 


   
June 30, 2019
 
Weighted-average remaining lease term - operating leases, in years
   
6.21
 
Weighted-average discount rate - operating leases
   
3.03
%

31

FIRST NORTHERN COMMUNITY BANCORP
 
ITEM 2.   – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 and expectations. See Part I, Item 1A. “Risk Factors,” and the other risks described in our 2018 Annual Report on Form 10-K and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and the other risks described in our Quarterly Reports on Form 10-Q for factors to be considered when reading any forward-looking statements in this filing.
 
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.
 



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 (including our plans to open new branch offices) 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

Pending and recent legal and regulatory actions, and future legislative and regulatory developments, including the effects of the Dodd-Frank Wall Street Reform and Protection Act (the “Dodd-Frank Act”) and other legislation and governmental measures introduced in response to the financial crisis which began in 2008 affecting the banking system, financial markets and the U.S. economy

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 after the financial crisis by the U.S. federal banking agencies

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, and expectations regarding collections

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 loan losses, underwriting standards, and risk grading


32

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

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 increases 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, our strategy regarding troubled debt restructurings (“TDRs”), delinquency rates and our underwriting standards

Our deposit base including renewal of time deposits

The impact on our net interest income and net interest margin from the current interest rate environment

Possible changes in the initiatives and policies of the federal bank regulatory agencies

Tax rates and the impact of changes in the U.S. tax laws, including the Tax Cuts and Jobs Act

Our pension and retirement plan costs

Our liquidity position

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 conditions, including drought, fire or flooding, seismic events, and related governmental responses, 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

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 2018 Annual Report on Form 10-K, and in our other reports to the SEC.
 
33

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 Annual Report on Form 10-K for the year ended December 31, 2018.

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 during the second quarter and year-to-date 2019 included:

Net income of $7.4 million for the six months ended June 30, 2019, up 28.9% from $5.7 million earned for the same period last year.  Net income of $3.4 million for the three months ended June 30, 2019, up 13.4% from $3.0 million for the same period last year.
 
Diluted income per share of $0.60 for the six months ended June 30, 2019, up 27.7% from diluted income per share of $0.47 in the same period last year.  Diluted income per share of $0.28 for the three months ended June 30, 2019, up 16.7% from diluted income per share of $0.24 for the same period last year.

Net interest income of $23.5 million for the six months ended June 30, 2019, up 10.6% from $21.3 million for the same period last year.  Net interest income of $11.8 million for the three months ended June 30, 2019, up 10.1% from $10.7 for the same period last year.

Net interest margin of 4.10% for the six months ended June 30, 2019, up 8.5% from 3.78% for the same period last year.  Net interest margin of 4.11% for the three months ended June 30, 2019, up 7.3% from 3.83% for the same period last year.

No provision for loan losses for the six months ended June 30, 2019, compared to $1.1 million provision for the same period last year.  No provision for loan losses for the three months ended June 30, 2019, compared to $0.5 million provision for the same period last year.

Total assets of $1.23 billion as of June 30, 2019, down 1.4% from $1.25 billion as of December 31, 2018.
 
Total net loans (including loans held-for-sale) of $732.8 million as of June 30, 2019, down 4.3% from $765.7 million as of December 31, 2018.

Total investment securities of $311.0 million as of June 30, 2019, down 1.2% from $314.6 million as of December 31, 2018.

Total deposits of $1.09 billion as of June 30, 2019, down 2.9% from $1.12 billion as of December 31, 2018.

 
34

SUMMARY FINANCIAL DATA

The Company recorded net income of $7,391,000 for the six months ended June 30, 2019, representing an increase of $1,655,000 or 28.9% from net income of $5,736,000 for the same period in 2018.  The Company recorded net income of $3,406,000 for the three months ended June 30, 2019, representing an increase of $403,000 or 13.4% from net income of $3,003,000 for the same period in 2018.
 
The following tables present a summary of the results for the three and six months ended June 30, 2019 and 2018, and a summary of financial condition at June 30, 2019 and December 31, 2018.

 
 
Three Months Ended June 30, 2019
   
Three Months Ended June 30, 2018
   
Six Months Ended June 30, 2019
   
Six Months Ended June 30, 2018
 
(in thousands except for per share amounts)
                       
For the Period:
                       
Net Income
 
$
3,406
   
$
3,003
   
$
7,391
   
$
5,736
 
Basic Earnings Per Common Share
 
$
0.28
   
$
0.25
   
$
0.61
   
$
0.47
 
Diluted Earnings Per Common Share
 
$
0.28
   
$
0.24
   
$
0.60
   
$
0.47
 
Net Income to Average Assets (annualized)
   
1.11
%
   
1.01
%
   
1.21
%
   
0.96
%
Net Income to Average Equity (annualized)
   
11.31
%
   
11.74
%
   
12.54
%
   
11.29
%
Average Equity to Average Assets
   
9.86
%
   
8.62
%
   
9.63
%
   
8.51
%


 
 
 
June 30, 2019
   
December 31, 2018
 
 
           
(in thousands except for ratios)
       
At Period End:
           
Total Assets
 
$
1,232,218
   
$
1,249,845
 
Total Investment Securities
   
310,998
     
314,637
 
Total Loans, Net (including loans held-for-sale)
 
$
732,773
   
$
765,688
 
Total Deposits
 
$
1,091,745
   
$
1,124,612
 
Loan-To-Deposit Ratio
   
67.1
%
   
68.1
%

35

FIRST NORTHERN COMMUNITY BANCORP
 
Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)

 
 
Three months ended
June 30, 2019
   
Three months ended
June 30, 2018
 
 
 
Average
Balance
   
Interest
   
Yield/
Rate (4)
   
Average
Balance
   
Interest
   
Yield/
Rate (4)
 
Assets
                                   
Interest-earning assets:
                                   
Loans (1)
 
$
730,215
   
$
9,856
     
5.41
%
 
$
728,625
   
$
9,146
     
5.03
%
Certificate of deposits
   
11,757
     
85
     
2.90
%
   
3,064
     
14
     
1.83
%
Interest bearing due from banks
   
99,589
     
553
     
2.23
%
   
98,032
     
413
     
1.69
%
Investment securities, taxable
   
292,656
     
1,597
     
2.19
%
   
279,931
     
1,314
     
1.88
%
Investment securities, non-taxable  (2)
   
11,656
     
70
     
2.41
%
   
9,428
     
34
     
1.45
%
Other interest earning assets
   
6,446
     
108
     
6.72
%
   
5,924
     
98
     
6.64
%
Total average interest-earning assets
   
1,152,319
     
12,269
     
4.27
%
   
1,125,004
     
11,019
     
3.93
%
Non-interest-earning assets:
                                               
Cash and due from banks
   
27,271
                     
25,397
                 
Premises and equipment, net
   
6,262
                     
6,052
                 
Other real estate owned
   
1,081
                     
                 
Interest receivable and other assets
   
35,396
                     
30,129
                 
Total average assets
 
$
1,222,329
                   
$
1,186,582
                 
 
                                               
Liabilities and Stockholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing transaction deposits
   
304,217
     
111
     
0.15
%
   
299,471
     
87
     
0.12
%
Savings and MMDA’s
   
327,631
     
246
     
0.30
%
   
329,465
     
130
     
0.16
%
Time, $250,000 or less
   
42,163
     
56
     
0.53
%
   
51,262
     
45
     
0.35
%
Time, over $250,000
   
16,748
     
39
     
0.93
%
   
17,526
     
19
     
0.43
%
Total average interest-bearing liabilities
   
690,759
     
452
     
0.26
%
   
697,724
     
281
     
0.16
%
Non-interest-bearing liabilities:
                                               
Non-interest-bearing demand deposits
   
396,000
                     
375,772
                 
Interest payable and other liabilities
   
15,108
                     
10,781
                 
Total liabilities
   
1,101,867
                     
1,084,277
                 
Total average stockholders’ equity
   
120,462
                     
102,305
                 
Total average liabilities and stockholders’ equity
 
$
1,222,329
                   
$
1,186,582
                 
Net interest income and net interest margin (3)
         
$
11,817
     
4.11
%
         
$
10,738
     
3.83
%
  

(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 thereon is excluded. Loan interest income includes loan fees of approximately $67 and $17 for the three months ended June 30, 2019 and 2018, 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.
 
36

FIRST NORTHERN COMMUNITY BANCORP
 
Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)

 
 
Six months ended
June 30, 2019
   
Six months ended
June 30, 2018
 
 
 
Average
Balance
   
Interest
   
Yield/
Rate (4)
   
Average
Balance
   
Interest
   
Yield/
Rate (4)
 
Assets
                                   
Interest-earning assets:
                                   
Loans (1)
 
$
737,092
   
$
19,468
     
5.33
%
 
$
723,180
   
$
17,952
     
5.01
%
Certificate of deposits
   
10,383
     
151
     
2.93
%
   
2,527
     
20
     
1.60
%
Interest bearing due from banks
   
93,581
     
1,128
     
2.43
%
   
110,563
     
924
     
1.69
%
Investment securities, taxable
   
296,241
     
3,230
     
2.20
%
   
280,240
     
2,622
     
1.89
%
Investment securities, non-taxable  (2)
   
11,141
     
120
     
2.17
%
   
10,836
     
73
     
1.36
%
Other interest earning assets
   
6,234
     
223
     
7.21
%
   
5,747
     
203
     
7.12
%
Total average interest-earning assets
   
1,154,672
     
24,320
     
4.25
%
   
1,133,093
     
21,794
     
3.88
%
Non-interest-earning assets:
                                               
Cash and due from banks
   
27,058
                     
24,836
                 
Premises and equipment, net
   
6,409
                     
6,102
                 
Other real estate owned
   
1,087
                     
                 
Interest receivable and other assets
   
33,999
                     
29,907
                 
Total average assets
 
$
1,223,225
                   
$
1,193,938
                 
 
                                               
Liabilities and Stockholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing transaction deposits
   
307,022
     
237
     
0.16
%
   
301,601
     
154
     
0.10
%
Savings and MMDA’s
   
328,592
     
409
     
0.25
%
   
333,659
     
259
     
0.16
%
Time, $250,000 or less
   
43,033
     
112
     
0.52
%
   
52,091
     
92
     
0.36
%
Time, over $250,000
   
17,093
     
65
     
0.77
%
   
17,810
     
39
     
0.44
%
Total average interest-bearing liabilities
   
695,740
     
823
     
0.24
%
   
705,161
     
544
     
0.16
%
Non-interest-bearing liabilities:
                                               
Non-interest-bearing demand deposits
   
395,628
                     
376,057
                 
Interest payable and other liabilities
   
14,006
                     
11,132
                 
Total liabilities
   
1,105,374
                     
1,092,350
                 
Total average stockholders’ equity
   
117,851
                     
101,588
                 
Total average liabilities and stockholders’ equity
 
$
1,223,225
                   
$
1,193,938
                 
Net interest income and net interest margin (3)
         
$
23,497
     
4.10
%
         
$
21,250
     
3.78
%
 

(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 thereon is excluded. Loan interest income includes loan fees of approximately $57 and $45 for the six months ended June 30, 2019 and 2018, 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.
 
37


FIRST NORTHERN COMMUNITY BANCORP
 
Distribution of Average Statements of Condition and Analysis of Net Interest Income
(in thousands, except percentage amounts)

 
 
Three months ended
June 30, 2019
   
Three months ended March 31, 2019
 
 
 
Average
Balance
   
Interest
   
Yield/
Rate
   
Average
Balance
   
Interest
   
Yield/
Rate
 
Assets
                                   
Interest-earning assets:
                                   
Loans (1)
 
$
730,215
   
$
9,856
     
5.41
%
 
$
744,045
   
$
9,612
     
5.24
%
Certificates of deposit
   
11,757
     
85
     
2.90
%
   
8,994
     
66
     
2.98
%
Interest bearing due from banks
   
99,589
     
553
     
2.23
%
   
87,772
     
575
     
2.66
%
Investment securities, taxable
   
292,656
     
1,597
     
2.19
%
   
299,866
     
1,633
     
2.21
%
Investment securities, non-taxable (2)
   
11,656
     
70
     
2.41
%
   
10,621
     
50
     
1.91
%
Other interest earning assets
   
6,446
     
108
     
6.72
%
   
6,019
     
115
     
7.75
%
Total average interest-earning assets
   
1,152,319
     
12,269
     
4.27
%
   
1,157,317
     
12,051
     
4.22
%
Non-interest-earning assets:
                                               
Cash and due from banks
   
27,271
                     
26,606
                 
Premises and equipment, net
   
6,262
                     
6,557
                 
Other real estate owned
   
1,081
                     
1,092
                 
Interest receivable and other assets
   
35,396
                     
32,587
                 
Total average assets
 
$
1,222,329
                   
$
1,224,159
                 
 
                                               
Liabilities and Stockholders’ Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing transaction deposits
   
304,217
     
111
     
0.15
%
   
309,859
     
127
     
0.17
%
Savings and MMDA’s
   
327,631
     
246
     
0.30
%
   
329,563
     
162
     
0.20
%
Time, $250,000 and under
   
42,163
     
56
     
0.53
%
   
44,759
     
56
     
0.51
%
Time, over $250,000
   
16,748
     
39
     
0.93
%
   
16,594
     
26
     
0.64
%
Total average interest-bearing liabilities
   
690,759
     
452
     
0.26
%
   
700,775
     
371
     
0.21
%
Non-interest-bearing liabilities:
                                               
Non-interest-bearing demand deposits
   
396,000
                     
395,329
                 
Interest payable and other liabilities
   
15,108
                     
12,920
                 
Total liabilities
   
1,101,867
                     
1,109,024
                 
Total average stockholders’ equity
   
120,462
                     
115,135
                 
Total average liabilities and stockholders’ equity
 
$
1,222,329
                   
$
1,224,159
                 
Net interest income and net interest margin (3)
         
$
11,817
     
4.11
%
         
$
11,680
     
4.09
%
 
(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 of approximately $67 and $(9) for the three months ended June 30, 2019 and March 31, 2019, 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.
38


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 June 30, 2019 over the three months ended June 30, 2018, the six months ended June 30, 2019 over the six months ended June 30, 2018, and the three months ended June 30, 2019 over the three months ended March 31, 2019.  Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume.



   
Three Months Ended June 30, 2019
   
Six Months Ended June 30, 2019
   
Three Months Ended June 30, 2019
 
   
Over
   
Over
   
Over
 
   
Three Months Ended June 30, 2018
   
Six Months Ended June 30, 2018
   
Three Months Ended March 31, 2019
 
   
Volume
   
Interest
Rate
   
Change
   
Volume
   
Interest
Rate
   
Change
   
Volume
   
Interest
Rate
   
Change
 
                                             
Increase (Decrease) in Interest Income:
                                           
                                             
Loans
 
$
22
   
$
688
   
$
710
   
$
350
   
$
1,166
   
$
1,516
   
$
(114
)
 
$
358
   
$
244
 
Certificates of Deposit
   
59
     
12
     
71
     
103
     
28
     
131
     
21
     
(2
)
   
19
 
Due From Banks
   
7
     
133
     
140
     
(159
)
   
363
     
204
     
75
     
(97
)
   
(22
)
Investment Securities - Taxable
   
63
     
220
     
283
     
156
     
452
     
608
     
(36
)
   
     
(36
)
Investment Securities - Non-taxable
   
9
     
27
     
36
     
2
     
45
     
47
     
5
     
15
     
20
 
Other Assets
   
9
     
1
     
10
     
17
     
3
     
20
     
9
     
(16
)
   
(7
)
   
$
169
   
$
1,081
   
$
1,250
   
$
469
   
$
2,057
   
$
2,526
   
$
(40
)
 
$
258
   
$
218
 
                                                                         
Increase (Decrease) in Interest Expense:
                                                         
                                                                         
Deposits:
                                                                       
Interest-Bearing Transaction Deposits
 
$
2
   
$
22
   
$
24
   
$
3
   
$
80
   
$
83
   
$
(3
)
 
$
(13
)
 
$
(16
)
Savings & MMDAs
   
     
116
     
116
     
(4
)
   
154
     
150
     
(1
)
   
85
     
84
 
Time Certificates
   
(29
)
   
60
     
31
     
(56
)
   
102
     
46
     
(11
)
   
24
     
13
 
                                                                         
   
$
(27
)
 
$
198
   
$
171
   
$
(57
)
 
$
336
   
$
279
   
$
(15
)
 
$
96
   
$
81
 
                                                                         
Increase in Net Interest Income:
 
$
196
   
$
883
   
$
1,079
   
$
526
   
$
1,721
   
$
2,247
   
$
(25
)
 
$
162
   
$
137
 

39

CHANGES IN FINANCIAL CONDITION

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect an $8,253,000 or 7.1% increase in cash and cash equivalents, a $6,615,000 or 87.1% increase in certificates of deposit, a $3,639,000 or 1.2% decrease in investment securities available-for-sale, a $31,774,000 or 4.2% decrease in net loans held-for-investment, a $1,141,000 or 49.7% decrease in loans held-for-sale, a $555,000 or 9.2% increase in stock in Federal Home Loan Bank and other equity securities, a $443,000 or 6.7% decrease in premises and equipment, a $308,000 or 28.2% decrease in other real estate owned, and a $4,255,000 or 13.2% increase in interest receivable and other assets from December 31, 2018 to June 30, 2019.  The increase in cash and cash equivalents was primarily due to an increase in retained earnings, net of a decrease in net loans, partially offset by a decrease in deposit balances.  The increase in certificates of deposit was due to a decrease in investment securities available-for-sale which was allocated towards additional certificates of deposit purchases.  The decrease in investment securities available-for-sale was primarily the result of maturities of agency, mortgage-backed, U.S. Treasury and municipal securities, which was partially offset by purchases of agency, municipal, collateralized mortgage obligations, and mortgage-backed securities.  The decrease in net loans held-for-investment was primarily due to principal paydowns and maturities of loans, coupled with soft growth primarily attributed to a very wet and cool spring that delayed crop planting, residential construction and commercial construction activity.  As a result, operating line advances on agricultural and commercial lines have been significantly lower than normal.  Additionally, residential developments have started later than expected, resulting in much lower loan balances than anticipated.  The decrease in loans held-for-sale was due to timing of sales of loans held-for-sale.  The increase in stock in Federal Home Loan Bank and other equity securities was due to the purchase of Federal Home Loan Bank stock.  The decrease in premises & equipment was primarily due the sale of land during the six months ended June 30, 2019.  The decrease in other real estate owned was due to a writedown on an existing commercial real estate property.  The increase in interest receivable and other assets was primarily due to the recognition of a right-of-use asset related to leases upon adoption of ASU 2016-02, Leases (Topic 842).

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a decrease in total deposits of $32,867,000 or 2.9% from December 31, 2018 to June 30, 2019.  The decrease in deposits was largely due to increased competition for low cost funding as short term rates rose during the period, coupled with seasonal fluctuations.
 
CHANGES IN RESULTS OF OPERATIONS

Interest Income

The Federal Open Market Committee made no changes to the Federal Funds rate during the six months ended June 30, 2019.

Interest income on loans for the six months ended June 30, 2019 was up 8.4% from the same period in 2018, increasing from $17,952,000 to $19,468,000, and was up 7.8% for the three months ended June 30, 2019 over the same period in 2018, increasing from $9,146,000 to $9,856,000.  The increase in interest income on loans for the six months ended June 30, 2019 as compared to the same period a year ago was primarily due to a 32 basis point increase in loan yields and an increase in average loans.  The increase in interest income on loans for the three months ended June 30, 2019 as compared to the same period a year ago was primarily due to a 38 basis point increase in loan yields and an increase in average loans.  The increase in loan yields was primarily due to the origination of new loans and the repricing of existing loans at higher rates.

Interest income on investment securities available-for-sale for the six months ended June 30, 2019 was up 24.3% from the same period in 2018, increasing from $2,695,000 to $3,350,000, and was up 23.7% for the three months ended June 30, 2019 over the same period in 2018, increasing from $1,348,000 to $1,667,000.  The increase in interest income on investment securities for the three and six months ended June 30, 2019 as compared to the same period a year ago was due to a 33 basis point increase in investment yields and an increase in average investment securities.

Interest income on certificates of deposit for the six months ended June 30, 2019 was up 655.0% from the same period in 2018, increasing from $20,000 to $151,000, and was up 507.1% for the three months ended June 30, 2019 over the same period in 2018, increasing from $14,000 to $85,000.  The increase in interest income on certificates of deposit for the six months ended June 30, 2019 as compared to the same period a year ago was due to an increase in average balances of certificates of deposit and a 133 basis point increase in yield on certificates of deposit.  The increase in interest income on certificates of deposit for the three months ended June 30, 2019 as compared to the same period a year ago was due to a 107 basis point increase in yield on certificates of deposit and an increase in average balances of certificates of deposit.

Interest income on interest-bearing due from banks for the six months ended June 30, 2019 was up 22.1% from the same period in 2018, increasing from $924,000 to $1,128,000, and was up 33.9% for the three months ended June 30, 2019 over the same period in 2018, increasing from $413,000 to $553,000.  The increase in interest income on interest-bearing due from banks for the six months ended June 30, 2019 as compared to the same period a year ago was due to a 74 basis point increase in yield on interest-bearing due from banks due to an increase in the Federal Funds rate, which was partially offset by a decrease in average balances of interest-bearing due from banks.  The increase in interest income on interest-bearing due from banks for the three months ended June 30, 2019 as compared to the same period a year ago was due to a 54 basis point increase in yield on interest-bearing due from banks due to an increase in the Federal Funds rate and an increase in average balances of interest-bearing due from banks.

40

Interest income on other earning assets for the six months ended June 30, 2019 was up 9.9% from the same period in 2018, increasing from $203,000 to $223,000, and was up 10.2% for the three months ended June 30, 2019 over the same period in 2018, increasing from $98,000 to $108,000.  The increase in interest income on other assets for the six months ended June 30, 2019 as compared to the same period a year ago was due to an increase in average balances of other earning assets and a 9 basis point increase in yield on other earning assets.  The increase in interest income on other earning assets for the three months ended June 30, 2019 as compared to the same period a year ago was due to an 8 basis point increase in yield on other earning assets and an increase in average balances of other earning assets.

The Company had no Federal Funds sold balances during the three and six months ended June 30, 2019 and June 30, 2018.
 
Interest Expense

Interest expense on deposits and other borrowings for the six months ended June 30, 2019 was up 51.3% from the same period in 2018, increasing from $544,000 to $823,000, and was up 60.9% for the three months ended June 30, 2019 over the same period in 2018, increasing from $281,000 to $452,000.  The increase in interest expense during the six months ended June 30, 2019 was primarily due to an 8 basis point increase in the Company’s average cost of funds, which was partially offset by a decrease in the average balance of interest-bearing liabilities.  The increase in interest expense during the three months ended June 30, 2019 was primarily due to a 10 basis point increase in the Company’s average cost of funds, which was partially offset by a decrease in the average balance of interest-bearing liabilities.  The decrease in average balance of interest-bearing liabilities was primarily due to increased competition for low cost funding.

The Company had no FHLB advances and related interest expense during the three and six months ended June 30, 2019 and June 30, 2018.

Provision for Loan Losses

There was no provision for loan losses for the six months ended June 30, 2019 compared to a provision for loan losses of $1,050,000 for the same period in 2018.  There was no provision for loan losses for the three months ended June 30, 2019 compared to a provision for loan losses of $525,000 for the same period in 2018.  The allowance for loan losses was approximately $12,838,000 or 1.72% of total loans, at June 30, 2019, compared to $12,822,000, or 1.65% of total loans, at December 31, 2018.  The allowance for loan losses is maintained at a level considered adequate by management to provide for probable loan losses inherent in the loan portfolio.

The decrease in the provision for loan losses during the three and six months ended June 30, 2019 was primarily due to a lack of significant loan growth coupled with decreased charge-offs and increased recoveries and a decrease in specific reserves on impaired loans.

Provision for Unfunded Lending Commitment Losses

There was a provision for unfunded lending commitment losses of $40,000 and $0 for the six months ended June 30, 2019 and June 30, 2018, respectively.  There was a reversal of provision of $40,000 and $0 for the three months ended June 30, 2019 and June 30, 2018, respectively.

The provision for unfunded lending commitment losses is included in non-interest expense in the Condensed Consolidated Statements of Income.
 
Non-Interest Income
 
Non-Interest income was down 0.5% for the six months ended June 30, 2019 from the same period in 2018, decreasing from $3,549,000 to $3,530,000.

The decrease was primarily due to decreases in service charges on deposit accounts, investment and brokerage income, loan servicing income and other income, which was partially offset by increases in gains on sales of loans held-for-sale, mortgage brokerage income and debit card income.  The decrease in service charges on deposit accounts was primarily due to decreases in fees charged.  The decrease in investment and brokerage income was primarily due to a decrease in demand for those services.  The decrease in loan servicing income was primarily due to a decrease in mortgage servicing assets recorded and fee income earned.  The decrease in other income was partially due to a decrease in trust income due to the sale of the Company’s Trust Department during the fourth quarter of 2018.  This was partially offset by a gain on sale of land recorded in the first quarter of 2019.  The increase in gains on sales of loans held-for-sale was primarily due to improved pricing on sales of loans held-for-sale.  The increase in mortgage brokerage income was primarily due to an increase in the demand for those services.  The increase in debit card income was primarily due to an increase in volume of transactions.

41

Non-Interest income was down 4.2% for the three months ended June 30, 2019 from the same period in 2018, decreasing from $1,745,000 to $1,671,000.

The decrease was primarily due to decreases in gains on sales of loans held-for-sale, investment and brokerage income and other income, which was partially offset by increases in mortgage brokerage income and debit card income.  The decrease in gains on sales of loans held-for-sale was primarily due to a decrease in volume of loans held-for-sale.  The decrease in investment and brokerage income was primarily due to a decrease in the demand for those services.  The decrease in other income was partially due to a decrease in trust income due to the sale of the Company’s Trust Department during the fourth quarter of 2018.  The increase in mortgage brokerage income was primarily due to an increase in the demand for those services.  The increase in debit card income was primarily due to an increase in volume of transactions.

Non-Interest Expenses

Total non-interest expenses were up 6.4% for the six months ended June 30, 2019 from the same period in 2018, increasing from $15,813,000 to $16,823,000.

The increase was primarily due to increases in salaries and employee benefits, data processing and other real estate owned expense, which was partially offset by decreases in stationery and supplies.  The increase in salaries and employee benefits was primarily due to an increase in staffing associated with a new branch which is targeted to open in the third quarter of 2019 and an increase in profit sharing, which was partially offset by a decrease in incentive compensation expense.  The increase in data processing expense was primarily due to costs associated with enhanced IT infrastructure.  The increase in other real estate owned expense was primarily due to a writedown on an existing commercial real estate property.

Total non-interest expenses were up 12.6% for the three months ended June 30, 2019 from the same period in 2018, increasing from $7,819,000 to $8,805,000.

The increase was primarily due to increases in salaries and employee benefits, occupancy and equipment expense, data processing and other real estate owned expense, which was partially offset by decreases in stationery and supplies.  The increase in salaries and employee benefits was primarily due to an increase in staffing associated with a new branch which is targeted to open in the third quarter of 2019.  The increase in occupancy and equipment expense was primarily due to an increase in service contracts.  The increase in data processing expense was primarily due to enhanced IT infrastructure costs.  The increase in other real estate owned expense was primarily due to a writedown on an existing commercial real estate property.

42


The following table sets forth other non-interest expenses by category for the three and six months ended June 30, 2019 and 2018.
 
 
 
(in thousands)
 
 
 
Three months ended
June 30, 2019
   
Three months ended
June 30, 2018
   
Six months ended
June 30, 2019
   
Six months ended
June 30, 2018
 
Other non-interest expenses
                       
(Reversal) Provision for unfunded loan commitments
 
$
(40
)
 
$
   
$
40
   
$
 
FDIC assessments
   
80
     
100
     
170
     
210
 
Contributions
   
61
     
31
     
127
     
80
 
Legal fees
   
159
     
98
     
231
     
152
 
Accounting and audit fees
   
114
     
107
     
224
     
211
 
Consulting fees
   
186
     
116
     
264
     
212
 
Postage expense
   
47
     
68
     
74
     
94
 
Telephone expense
   
31
     
28
     
64
     
57
 
Public relations
   
82
     
58
     
130
     
119
 
Training expense
   
47
     
38
     
81
     
65
 
Loan origination expense
   
32
     
22
     
82
     
73
 
Computer software depreciation
   
22
     
33
     
54
     
69
 
Sundry losses
   
63
     
53
     
117
     
93
 
Loan collection expense
   
7
     
30
     
(45
)
   
43
 
Other non-interest expense
   
474
     
510
     
910
     
994
 
 
                               
Total other non-interest expenses
 
$
1,365
   
$
1,292
   
$
2,523
   
$
2,472
 
 

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 increased 27.9% for the six months ended June 30, 2019 from the same period in 2018, increasing from $2,200,000 to $2,813,000 due to an increase in pre-tax income.  Provision for income taxes increased 12.4% for the three months ended June 30, 2019 from the same period in 2018, increasing from $1,136,000 to $1,277,000 due to an increase in pre-tax income.

Off-Balance Sheet Commitments

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

 
 
(in thousands)
 
 
           
 
 
June 30, 2019
   
December 31, 2018
 
 
           
Undisbursed loan commitments
 
$
196,098
   
$
201,983
 
Standby letters of credit
   
2,445
     
2,974
 
Commitments to sell loans
   
2,496
     
570
 
 
 
$
201,039
   
$
205,527
 
 
The reserve for unfunded lending commitments amounted to $840,000 and $800,000 as of June 30, 2019 and December 31, 2018, respectively.  The reserve for unfunded lending commitments is included in other liabilities on the Condensed Consolidated Balance Sheets.  See Note 7 of the Notes to Condensed Consolidated Financial Statements of this Form 10-Q, "Financial Instruments with Off-Balance Sheet Risk," for additional information.

43


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 by loan category at June 30, 2019 and December 31, 2018:

 
 
At June 30, 2019
   
At December 31, 2018
 
 
 
Gross
   
Guaranteed
   
Net
   
Gross
   
Guaranteed
   
Net
 
(in thousands)
                                   
 
                                   
Commercial
 
$
588
   
$
   
$
588
   
$
750
   
$
300
   
$
450
 
Commercial real estate
   
348
     
51
     
297
     
381
     
56
     
325
 
Agriculture
   
     
     
     
4,830
     
776
     
4,054
 
Residential mortgage
   
88
     
     
88
     
100
     
     
100
 
Residential construction
   
     
     
     
     
     
 
Consumer
   
114
     
     
114
     
191
     
     
191
 
Total non-accrual loans
 
$
1,138
   
$
51
   
$
1,087
   
$
6,252
   
$
1,132
   
$
5,120
 

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 $1,138,000 at June 30, 2019 and were comprised of three commercial loans totaling $588,000, two commercial real estate loans totaling $348,000, one residential mortgage loan totaling $88,000, and two consumer loans totaling $114,000.  Non-accrual loans amounted to $6,252,000 at December 31, 2018 and were comprised of two commercial loans totaling $750,000, two commercial real estate loans totaling $381,000, five agriculture loans totaling $4,830,000, two residential mortgage loans totaling $100,000, and one consumer loan totaling $191,000.  If the loan is considered collateral dependent, it is generally the Company’s policy to charge-off the portion of any non-accrual loan that the Company does not expect to collect by writing the loan down to the estimated net realizable value of the underlying collateral.

Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired.  Non-performing impaired loans totaling $1,138,000 and $6,252,000 as of June 30, 2019 and December 31, 2018, respectively.  The decrease in non-performing impaired loans from December 31, 2018 to June 30, 2019 was primarily due to the payoff of four agriculture loans in one lending relationship.  A restructuring of a loan can constitute a TDR if the Company for economic or legal reasons related to the borrower’s financial difficulties grants a concession to the borrower that it would not otherwise consider.  A loan that is restructured as a TDR is considered an impaired loan.  Performing impaired loans, which consisted of loans modified as TDRs, totaled $3,740,000 and $4,622,000 at June 30, 2019 and December 31, 2018, respectively.  The Company expects to collect all principal and interest due from performing impaired loans.  These loans are not on non-accrual status.  The majority of the non-performing impaired loans, in management's opinion, were adequately collateralized based on recently obtained appraised property values or were guaranteed by a governmental entity.  See “Allowance for Loan Losses” below for additional information.  No assurance can be given that the existing or any additional collateral will be sufficient to secure full recovery of the obligations owed under these loans.

44

As the following table illustrates, total non-performing assets, net of guarantees of the State of California and U.S. Government, including its agencies and its government-sponsored agencies, decreased $3,851,000 or 62.0% to $2,361,000 during the first six months of 2019.  Non-performing assets, net of guarantees, represented 0.2% of total assets at June 30, 2019.

 
 
At June 30, 2019
   
At December 31, 2018
 
 
 
Gross
   
Guaranteed
   
Net
   
Gross
   
Guaranteed
   
Net
 
(dollars in thousands)
                                   
 
                                   
Non-accrual loans
 
$
1,138
   
$
51
   
$
1,087
   
$
6,252
   
$
1,132
   
$
5,120
 
Loans 90 days past due and still accruing
   
490
     
     
490
     
     
     
 
 
                                               
Total non-performing loans
   
1,628
     
51
     
1,577
     
6,252
     
1,132
     
5,120
 
Other real estate owned
   
784
     
     
784
     
1,092
     
     
1,092
 
Total non-performing assets
 
$
2,412
   
$
51
   
$
2,361
   
$
7,344
   
$
1,132
   
$
6,212
 
 
                                               
Non-performing loans (net of guarantees) to total loans
                   
0.2
%
                   
0.7
%
Non-performing assets (net of guarantees) to total assets
                   
0.2
%
                   
0.5
%
Allowance for loan and lease losses to non-performing loans (net of guarantees)
                   
814.1
%
                   
250.4
%

The Company had one loan totaling $490,000 that was 90 days or more past due and still accruing at June 30, 2019.  The Company had no loans 90 days or more past due and still accruing at December 31, 2018.

Excluding the non-performing loans cited previously, loans totaling $12,682,000 and $15,926,000 were classified as substandard or doubtful loans, representing potential problem loans at June 30, 2019 and December 31, 2018, respectively.  In management’s opinion, the potential loss related to these problem loans was sufficiently covered by the Bank’s existing loan loss reserve (Allowance for Loan Losses) at June 30, 2019 and December 31, 2018.  The ratio of the Allowance for Loan Losses to total loans at June 30, 2019 and December 31, 2018 was 1.72% and 1.65%, 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.  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 one commercial real estate property classified as OREO totaling $784,000 and $1,092,000 as of June 30, 2019 and December 31, 2018, respectively.

45


Allowance for Loan Losses

The Company's Allowance for Loan Losses is maintained at a level believed by management to be adequate to provide for loan and other credit losses that can be reasonably anticipated.  The allowance 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 as well as considers current economic conditions, loan loss experience, and other factors in determining the adequacy of the reserve balance.  The allowance for loan losses is based on estimates, and actual losses may vary from current estimates.

The following table summarizes the Allowance for Loan Losses of the Company during the six months ended June 30, 2019 and 2018, and for the year ended December 31, 2018:
 
Analysis of the Allowance for Loan Losses
(Amounts in thousands, except percentage amounts)

 
 
Six months ended
June 30,
   
Year ended
December 31,
 
 
 
2019
   
2018
   
2018
 
 
                 
Balance at beginning of period
 
$
12,822
   
$
11,133
   
$
11,133
 
Provision for loan losses
   
     
1,050
     
2,100
 
Loans charged-off:
                       
Commercial
   
(150
)
   
(475
)
   
(509
)
Commercial Real Estate
   
     
     
(142
)
Agriculture
   
     
     
 
Residential Mortgage
   
     
     
 
Residential Construction
   
     
     
 
Consumer
   
(15
)
   
(11
)
   
(34
)
 
                       
Total charged-off
   
(165
)
   
(486
)
   
(685
)
 
                       
Recoveries:
                       
Commercial
   
83
     
45
     
46
 
Commercial Real Estate
   
     
     
 
Agriculture
   
     
     
 
Residential Mortgage
   
72
     
20
     
34
 
Residential Construction
   
21
     
2
     
131
 
Consumer
   
5
     
43
     
63
 
 
                       
Total recoveries
   
181
     
110
     
274
 
 
                       
Net recoveries (charge-offs)
   
16
     
(376
)
   
(411
)
 
                       
Balance at end of period
 
$
12,838
   
$
11,807
   
$
12,822
 
 
                       
Ratio of net recoveries (charge-offs) to average loans outstanding during the period (annualized)
   
0.00
%
   
(0.10
%)
   
(0.05
%)
Allowance for loan losses
                       
To total loans at the end of the period
   
1.72
%
   
1.59
%
   
1.65
%
To non-performing loans, net of guarantees at the end of the period
   
814.1
%
   
599.0
%
   
250.4
%

The allowance for loan losses to non-performing loans, net of guarantees was 814.1% and 599.0% as of June 30, 2019 and June 30, 2018, respectively, and 250.4% as of December 31, 2018.  The increase in the ratio of allowance for loan losses to non-performing loans, net of guarantees from December 31, 2018 to June 30, 2019 was primarily due to a decrease in non-performing loans due to the payoff of four agriculture loans in one lending relationship.
46

Deposits

Deposits are one of the Company’s primary sources of funds.  At June 30, 2019, the Company had the following deposit mix: 29.9% in savings and MMDA deposits, 5.3% in time deposits, 27.4% in interest-bearing transaction deposits and 37.4% in non-interest-bearing transaction deposits.  At December 31, 2018, the Company had the following deposit mix: 29.6% in savings and MMDA deposits, 5.6% in time deposits, 27.8% in interest-bearing transaction deposits and 37.0% in non-interest-bearing transaction deposits.  Non-interest-bearing transaction deposits increase the Company’s net interest income by lowering its cost of funds.

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

Maturities of time certificates of deposits of over $250,000 outstanding at June 30, 2019 and December 31, 2018 are summarized as follows:

 
 
(in thousands)
 
 
 
June 30, 2019
   
December 31, 2018
 
Three months or less
 
$
2,426
   
$
3,848
 
Over three to twelve months
   
8,348
     
6,414
 
Over twelve months
   
5,502
     
5,741
 
Total
 
$
16,276
   
$
16,003
 


Liquidity and Capital Resources

In order to serve our market area, the Company must maintain adequate liquidity and adequate capital.  Liquidity is measured by various ratios; in management’s opinion, the most common is the ratio of net loans to deposits (including loans held-for-sale).  This ratio was 67.1% on June 30, 2019.  In addition, on June 30, 2019, the Company had the following short-term investments (based on remaining maturity and/or next repricing date):  $37,071,000 in securities due within one year or less; and $57,526,000 in securities due in one to five years.

To meet unanticipated funding requirements, the Company maintains short-term unsecured lines of credit with other banks which totaled $67,000,000 at June 30, 2019.  Additionally, the Company has a line of credit with the FHLB, with a borrowing capacity at June 30, 2019 of $326,908,000; credit availability 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 Board and the other U.S. federal banking agencies adopted final rules making significant changes to the U.S. regulatory capital framework for U.S. banking organizations and to conform this framework to the guidelines published by the Basel Committee on Banking Supervision (Basel Committee) known as the Basel III Global Regulatory Framework for Capital and Liquidity.  These rules adopted by the FRB and the other federal banking agencies (the U.S. Basel III Capital Rules) replaced the federal banking agencies' general risk-based capital rules, advanced approaches rule, market-risk rule, and leverage rules, in accordance with certain transition provisions. The Bank became subject to the new rules on January 1, 2015. The new rules implement higher minimum capital requirements, include a new common equity Tier 1 capital requirement, and establish criteria that instruments must meet in order to be considered common equity Tier 1 capital, additional Tier 1 capital, or Tier 2 capital. When fully phased in by January 1, 2019, the final rules will 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% (which is an increase from 4.0%); (c) a total capital ratio of 8%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4%. Under the new 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 when fully phased in). The phase-in of the capital conservation buffer began on January 1, 2016, and must be completed by January 1, 2019. The U.S. Basel III Capital Rules also provide for various adjustments and deductions to the definitions of regulatory capital that phased in from January 1, 2014 through December 31, 2017.

47


As of June 30, 2019, 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 June 30, 2019.

 
 
(amounts in thousands except percentage amounts)
 
 
 
Actual
   
Well Capitalized
 
 
 
Capital
   
Ratio
   
Ratio
Requirement
 
Leverage
 
$
121,839
     
9.98
%
   
5.0
%
Common Equity Tier 1
 
$
121,839
     
14.34
%
   
6.5
%
Tier 1 Risk-Based
 
$
121,839
     
14.34
%
   
8.0
%
Total Risk-Based
 
$
132,496
     
15.60
%
   
10.0
%


48

ITEM 3.   – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company believes that there have been no material changes in the quantitative and qualitative disclosures about market risk as of June 30, 2019, from those presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which are incorporated by reference herein.
 
ITEM 4.   – CONTROLS AND PROCEDURES
 
(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 June 30, 2019.  This conclusion is based on an evaluation conducted under the supervision and with the participation of management.

(b)  During the quarter ended June 30, 2019, 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.
 
PART II   – OTHER INFORMATION
 
ITEM 1. – LEGAL PROCEEDINGS
 
Neither the Company nor the Bank is a party to any material pending legal proceeding, nor is any of their property the subject of any material pending legal proceeding, except ordinary routine litigation arising in the ordinary course of the Bank’s business and incidental to its business, none of which is expected to have a material adverse impact upon the Company’s or the Bank’s business, financial position or results of operations.
 
ITEM 1A. – RISK FACTORS
 
For a discussion of risk factors relating to our business, please refer to Part I, Item 1A of our 2018 Form 10-K, which is incorporated by reference herein, and to the following:

The Bank’s Dependence on Real Estate Lending Increases Our Risk of Losses

At June 30, 2019, approximately 80% of the Bank’s loans in principal amount (excluding loans held-for-sale) were secured by real estate.  The value of the Bank’s real estate collateral has been, and could in the future continue to be, adversely affected by the economic recession and resulting adverse impact on the real estate market in Northern California.

The Bank’s primary lending focus has historically been commercial (including agricultural), construction, and real estate mortgage.  At June 30, 2019, real estate mortgage (excluding loans held-for-sale) and construction loans (residential and other) comprised approximately 77% and 3%, respectively, of the total loans in the Bank’s portfolio.  At June 30, 2019, all of the Bank’s real estate mortgage and construction loans and approximately 1% of its commercial loans were secured fully or in part by deeds of trust on underlying real estate.  The Company’s dependence on real estate increases the risk of loss in both the Bank’s loan portfolio and its holdings of other real estate owned if economic conditions in Northern California deteriorate in the future.  Deterioration of the real estate market in Northern California would have a material adverse effect on the Company’s business, financial condition, and results of operations.

The CFPB has adopted various regulations which have impacted, and will continue to impact, our residential mortgage lending business.  For additional information, see “Business – Certain CFPB Rules” in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2018.

49

Adverse California Economic Conditions Could Adversely Affect the Bank’s Business

The Bank’s operations and a substantial majority of the Bank’s assets and deposits are generated and concentrated primarily in Northern California, particularly the counties of Placer, Sacramento, Solano and Yolo, and are likely to remain so for the foreseeable future. At June 30, 2019, the majority of the Bank’s loan portfolio in principal amount (excluding loans held-for-sale) consisted of real estate-related loans, all of which were secured by collateral located in Northern California. As a result, a downturn in the economic conditions in Northern California may cause the Bank to incur losses associated with high default rates and decreased collateral values in its loan portfolio. Economic conditions in California are subject to various uncertainties including deterioration in the California real estate market and housing industry.
 
At times, economic conditions in California, and especially the regional markets we serve, have been subject to various challenges, including significant deterioration in the residential real estate sector and the California state government’s budgetary and fiscal difficulties.  While California home prices and the California economy in general have experienced a recovery in recent years, there can be no assurance that the recovery will continue.  Recent growth in home prices in some California markets may be unsustainable relative to market fundamentals, and home price declines may occur.
In addition, until 2013, the State government of California experienced budget shortfalls or deficits that led to protracted negotiations between the Governor and the State Legislature over how to address the budget gap.  The California electorate approved, in the 2012 general elections, certain increases in the rate of income taxation in California.  However, there can be no assurance that the state’s fiscal and budgetary challenges will not recur. In addition, the impact of increased rates of income taxation on the level of economic activity in California cannot be predicted at this time.
Also, municipalities and other governmental units within California have been experiencing budgetary difficulties, and several California municipalities have filed for protection under the Bankruptcy Code. As a result, concerns also have arisen regarding the outlook for the State of California’s governmental obligations, as well as those of California municipalities and other governmental units.

Poor economic conditions in California, and especially the regional markets we serve, will cause us to incur losses associated with higher default rates and decreased collateral values in our loan portfolio. If the budgetary and fiscal difficulties of the California State government and California municipalities and other governmental units were to recur or economic conditions in California decline, we expect that our level of problem assets will increase and our prospects for growth will be impaired.



 
50

ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
ITEM 3. – DEFAULTS UPON SENIOR SECURITIES

None.
 
ITEM 4. – MINE SAFETY DISCLOSURES

Not applicable.
 
ITEM 5. – OTHER INFORMATION

None.
 
ITEM 6.   – EXHIBITS
 
Exhibit
Number
 
Description of Document
 
 
 
 
Rule 13a — 14(a) Certification of Chief Executive Officer
 
 
 
 
Rule 13a — 14(a) Certification of Chief Financial Officer
 
 
 
 
Statement of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
 
 
 
 
Statement of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
 
 
 
101
 
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, is formatted in XBRL interactive data files: (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income; (iii) Condensed Consolidated Statements of Comprehensive (Loss) Income; (iv) Condensed Consolidated Statement of Stockholders’ Equity; (v) Condensed Consolidated Statements of Cash Flows; and (vi) Notes to Condensed Consolidated Financial Statements.
 

*   In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act.
 
51

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
 
FIRST NORTHERN COMMUNITY BANCORP
 
 
 
 
Date:
August 7, 2019
By:
/s/  Kevin Spink
 
 
 
 
 
 
 
Kevin Spink, Executive Vice President / Chief Financial Officer
 
 
 
(Principal Financial Officer and Duly Authorized Officer)

52