UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q
(Mark one)
S
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2017

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)

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted 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 and post 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 1, 2017  was 11,170,816.
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
34
ITEM 3. – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
51
ITEM 4. – CONTROLS AND PROCEDURES
51
PART II – OTHER INFORMATION
51
ITEM 1. – LEGAL PROCEEDINGS
51
ITEM 1A. – RISK FACTORS
51
ITEM 2. – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
53
ITEM 3. – DEFAULTS UPON SENIOR SECURITIES
53
ITEM 4. – MINE SAFETY DISCLOSURES
53
ITEM 5. – OTHER INFORMATION
53
ITEM 6. – EXHIBITS
53
SIGNATURES
54

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, 2017
   
December 31, 2016
 
 
           
Assets
           
 
           
Cash and cash equivalents
 
$
131,510
   
$
159,643
 
Certificates of deposit
   
3,968
     
16,213
 
Investment securities – available-for-sale
   
304,387
     
277,079
 
Loans, net of allowance for loan losses of $11,720 at June 30, 2017 and $10,899 at December 31, 2016
   
675,017
     
669,770
 
Loans held-for-sale
   
808
     
3,326
 
Stock in Federal Home Loan Bank and other equity securities, at cost
   
5,567
     
4,409
 
Premises and equipment, net
   
6,258
     
7,304
 
Interest receivable and other assets
   
29,668
     
29,019
 
 
               
Total Assets
 
$
1,157,183
   
$
1,166,763
 
 
               
Liabilities and Stockholders' Equity
               
 
               
Liabilities:
               
 
               
Demand deposits
 
$
359,613
   
$
362,688
 
Interest-bearing transaction deposits
   
294,779
     
293,343
 
Savings and MMDA's
   
316,591
     
331,730
 
Time, $250,000 or less
   
57,711
     
60,677
 
Time, over $250,000
   
20,579
     
15,258
 
Total deposits
   
1,049,273
     
1,063,696
 
 
               
Interest payable and other liabilities
   
10,329
     
10,769
 
 
               
Total Liabilities
   
1,059,602
     
1,074,465
 
 
               
Stockholders' Equity:
               
Common stock, no par value; 16,000,000 shares authorized; 11,170,816 shares issued and outstanding at June 30, 2017 and 11,148,446 shares issued and outstanding at December 31, 2016
   
79,486
     
79,114
 
Additional paid-in capital
   
977
     
977
 
Retained earnings
   
19,401
     
14,557
 
Accumulated other comprehensive loss, net
   
(2,283
)
   
(2,350
)
Total Stockholders' Equity
   
97,581
     
92,298
 
 
               
Total Liabilities and Stockholders' Equity
 
$
1,157,183
   
$
1,166,763
 

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, 2017
   
Three months ended
June 30, 2016
   
Six months ended
June 30, 2017
   
Six months ended
June 30, 2016
 
Interest and dividend income:
                       
Loans
 
$
8,211
   
$
7,649
   
$
16,172
   
$
15,031
 
Due from banks interest bearing accounts
   
291
     
192
     
623
     
461
 
Investment securities
                               
Taxable
   
1,191
     
882
     
2,293
     
1,664
 
Non-taxable
   
73
     
66
     
148
     
136
 
Other earning assets
   
83
     
93
     
191
     
177
 
Total interest and dividend income
   
9,849
     
8,882
     
19,427
     
17,469
 
Interest expense:
                               
Deposits
   
255
     
273
     
520
     
559
 
Total interest expense
   
255
     
273
     
520
     
559
 
Net interest income
   
9,594
     
8,609
     
18,907
     
16,910
 
Provision for loan losses
   
     
450
     
600
     
900
 
Net interest income after provision for loan losses
   
9,594
     
8,159
     
18,307
     
16,010
 
Non-interest income:
                               
Service charges on deposit accounts
   
495
     
506
     
913
     
1,026
 
Gains on sales of other real estate owned
   
     
     
     
4
 
Gains on sales of loans held-for-sale
   
148
     
252
     
295
     
362
 
Investment and brokerage services income
   
145
     
137
     
288
     
262
 
Mortgage brokerage income
   
30
     
22
     
43
     
22
 
Loan servicing income
   
116
     
104
     
266
     
220
 
Fiduciary activities income
   
118
     
105
     
243
     
218
 
Debit card income
   
501
     
503
     
968
     
968
 
(Losses) gains on sales/calls of available-for-sale securities
   
     
     
(16
)
   
14
 
Gain on sale-leaseback of real estate
   
     
     
1,187
     
 
Other income
   
202
     
226
     
413
     
444
 
Total non-interest income
   
1,755
     
1,855
     
4,600
     
3,540
 
Non-interest expenses:
                               
Salaries and employee benefits
   
4,453
     
4,099
     
9,204
     
8,284
 
Occupancy and equipment
   
693
     
766
     
1,389
     
1,489
 
Data processing
   
437
     
373
     
839
     
759
 
Stationery and supplies
   
108
     
91
     
178
     
184
 
Advertising
   
80
     
58
     
146
     
143
 
Directors' fees
   
76
     
76
     
135
     
135
 
Other real estate owned expense
   
     
     
(1
)
   
1
 
Other expense
   
1,373
     
1,345
     
2,833
     
2,632
 
Total non-interest expenses
   
7,220
     
6,808
     
14,723
     
13,627
 
Income before provision for income taxes
   
4,129
     
3,206
     
8,184
     
5,923
 
Provision for income taxes
   
1,581
     
1,171
     
3,123
     
2,157
 
 
                               
Net income
 
$
2,548
   
$
2,035
   
$
5,061
   
$
3,766
 
 
                               
Basic earnings per common share
 
$
0.23
   
$
0.18
   
$
0.46
   
$
0.34
 
Diluted earnings per common share
 
$
0.23
   
$
0.18
   
$
0.45
   
$
0.34
 

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, 2017
   
Three months ended
June 30, 2016
   
Six months ended
June 30, 2017
   
Six months ended
June 30, 2016
 
Net income
 
$
2,548
   
$
2,035
   
$
5,061
   
$
3,766
 
Other comprehensive income, net of tax:
                               
Unrealized holding gains arising during the period, net of tax effect of $64 and $172 for the three months ended June 30, 2017 and June 30, 2016, respectively, and $70 and $613 for the six months ended June 30, 2017 and June 30, 2016, respectively
   
93
     
259
     
103
     
919
 
Less: reclassification adjustment due to losses (gains) realized on sales of securities, net of tax effect of $0 for the three months ended June 30, 2017 and June 30, 2016, respectively, and $6 and $(6) for the six months ended June 30, 2017 and June 30, 2016, respectively
   
     
     
10
     
(8
)
Directors' and officers' retirement plan equity adjustments, net of tax effect of $0 for the three months ended June 30, 2017 and June 30, 2016, and $(31) and $0 for the six months ended June 30, 2017 and June 30, 2016, respectively
   
     
     
(46
)
   
 
Other comprehensive income
 
$
93
   
$
259
   
$
67
   
$
911
 
 
                               
Comprehensive income
 
$
2,641
   
$
2,294
   
$
5,128
   
$
4,677
 

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, 2015
   
10,676,557
   
$
73,764
   
$
977
   
$
11,603
   
$
(495
)
 
$
85,849
 
Net income
                           
8,051
             
8,051
 
Other comprehensive loss
                                   
(1,855
)
   
(1,855
)
Stock dividend adjustment
   
505
     
4
             
(4
)
           
 
4% stock dividend declared in 2017
   
428,786
     
5,088
             
(5,088
)
           
 
Cash in lieu of fractional shares
   
(101
)
                   
(5
)
           
(5
)
Stock-based compensation
           
286
                             
286
 
Tax deficiency related to expired, vested non-qualified stock options
           
(114
)
                           
(114
)
Common shares issued related to restricted stock grants
   
34,976
     
61
                             
61
 
Stock options exercised
   
7,723
     
25
                             
25
 
 
Balance at December 31, 2016
   
11,148,446
   
$
79,114
   
$
977
   
$
14,557
   
$
(2,350
)
 
$
92,298
 
Net income
                           
5,061
             
5,061
 
Other comprehensive income
                                   
67
     
67
 
Stock dividend adjustment
   
289
     
207
             
(207
)
           
 
Cash in lieu of fractional shares
   
(129
)
                   
(10
)
           
(10
)
Stock-based compensation
           
165
                             
165
 
Common shares issued related to restricted stock grants, net of restricted stock reversals
   
22,210
     
                             
 
Balance at June 30, 2017
   
11,170,816
   
$
79,486
   
$
977
   
$
19,401
   
$
(2,283
)
 
$
97,581
 

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, 2017
   
Six months ended June 30, 2016
 
Cash Flows From Operating Activities
           
Net income
 
$
5,061
   
$
3,766
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
   
295
     
303
 
Accretion and amortization of investment securities premiums and discounts, net
   
1,853
     
1,326
 
Valuation adjustment on mortgage servicing rights
   
(21
)
   
13
 
Increase (decrease) in deferred loan origination fees and costs, net
   
133
     
(90
)
Provision for loan losses
   
600
     
900
 
Stock-based compensation
   
165
     
135
 
Losses (gain) on sales/calls of available-for-sale securities
   
16
     
(14
)
Gain on sale-leaseback of real estate
   
(1,187
)
   
 
Gains on sales of other real estate owned
   
     
(4
)
Gains on sales of loans held-for-sale
   
(295
)
   
(362
)
Proceeds from sales of loans held-for-sale
   
15,699
     
16,470
 
Originations of loans held-for-sale
   
(12,886
)
   
(17,643
)
Changes in assets and liabilities:
               
Increase in interest receivable and other assets
   
(673
)
   
(1,012
)
Decrease increase in interest payable and other liabilities
   
(517
)
   
(1,114
)
Net cash provided by operating activities
   
8,243
     
2,674
 
                 
Cash Flows From Investing Activities
               
Proceeds from calls or maturities of available-for-sale securities
   
2,275
     
20,704
 
Proceeds from sales of available-for-sale securities
   
462
     
 
Principal repayments on available-for-sale securities
   
23,694
     
15,260
 
Purchase of available-for-sale securities
   
(55,419
)
   
(87,640
)
Net decrease (increase) in certificates of deposit
   
12,245
     
(60
)
Net increase in loans
   
(5,980
)
   
(28,932
)
Net increase in stock in Federal Home Loan Bank and other equity securities, at cost
   
(1,158
)
   
(475
)
Proceeds from sale of other real estate owned
   
     
221
 
Proceeds from sale of bank premises and equipment
   
2,868
     
 
Purchases of bank premises and equipment, net
   
(930
)
   
(773
)
Net cash used in investing activities
   
(21,943
)
   
(81,695
)
 
               
Cash Flows From Financing Activities
               
Net (decrease) increase in deposits
   
(14,423
)
   
21,748
 
Cash dividends paid in lieu of fractional shares
   
(10
)
   
(5
)
Net cash (used in) provided by financing activities
   
(14,433
)
   
21,743
 
                 
Net decrease in Cash and Cash Equivalents
   
(28,133
)
   
(57,278
)
Cash and Cash Equivalents, beginning of period
   
159,643
     
200,797
 
Cash and Cash Equivalents, end of period
 
$
131,510
   
$
143,519
 
 
               
Supplemental Disclosures of Cash Flow Information:
               
Cash paid during the period for:
               
Interest
 
$
518
   
$
543
 
Income taxes
 
$
3,265
   
$
2,380
 
Supplemental disclosures of non-cash investing and financing activities:
               
Stock dividend distributed
 
$
5,295
   
$
3,351
 
Transfer of loans held-for-investment to other real estate owned
 
$
   
$
217
 
Decrease in directors' & officers' retirement plan equity adjustment, net of tax
 
$
(46
)
 
$
 
Change in unrealized holding gains (losses) on available for sale securities, net of taxes
 
$
113
   
$
911
 
 See notes to unaudited condensed consolidated financial statements.
7

FIRST NORTHERN COMMUNITY BANCORP
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
June 30, 2017 and 2016 and December 31, 2016
 
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, 2016 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, 2016. 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 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 Loss" 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 Issued Accounting Pronouncements:

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606).  ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09 was initially effective for the Company's reporting period beginning on January 1, 2017. However, in August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date which defers the effective date by one year.  For financial reporting purposes, the standard allows for either a full retrospective or modified retrospective adoption. The FASB has also issued additional updates to provide further clarification to specific implementation issues associated with ASU 2014-09. These updates include ASU 2016-08, Principal versus Agent Considerations, ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20 Technical Corrections and Improvements to Topic 606. Our revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. We expect that ASU 2014-09 will require us to change how we recognize certain recurring revenue streams; however, we do not expect these changes to have a material impact on our financial statements. We continue to evaluate the impact of ASU 2014-09 on other components of non-interest income. We expect to adopt the standard beginning January 1, 2018 under the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be significant.

8

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The amendments in ASU 2016-02, among other things, require lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date:

A lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and
A right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term.

The amendments in this ASU are effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company currently leases ten properties.  The effect to the Company's financial statements will be a recordation of a lease liability and a right-of-use asset.  Management has not yet quantified the lease liability and right-of-use asset and is currently evaluating the impact of this ASU on the Company's 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.  Management is currently gathering data required to measure expected credit losses in accordance with this ASU, and will then evaluate the impact of this ASU on the Company's consolidated financial statements.  While the Company has not quantified the impact of this ASU, it does expect changing from the current loss model to an expected loss model to result in an earlier recognition of losses.

In January 2017, FASB issued ASU 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business.  The amendments in ASU 2017-01 clarify the definition and provide a more robust framework to use in determining when a set of assets and activities constitutes a business.  ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.  The amendments are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods.  The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements.

In January 2017, FASB issued ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings.  These amendments apply to ASU 2014-9 (Revenue from Contracts with Customers), ASU 2016-02 (Leases), and ASU 2016-13 (Financial Instruments - Credit Losses).

In March 2017, FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  The amendments also allow only the service cost component to be eligible for capitalization when applicable.  The amendments are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods.  The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements.

In March 2017, FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. The amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity.  The amendments are effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those periods.  The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements.

9

In May 2017, FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.  The amendments provide guidance on determing which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718.  The amendments are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods.  The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements.

In July 2017, FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.  These amendments simplify the accounting for certain financial instruments with down round features.  The amendments are effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those periods.  The Company does not expect the adoption of this update to have a significant impact on its consolidated financial statements.
10


3.  INVESTMENT SECURITIES

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at June 30, 2017 are summarized as follows:

(in thousands)
 
Amortized cost
   
Unrealized gains
   
Unrealized losses
   
Estimated fair value
 
 
                       
Investment securities available-for-sale:
                       
U.S. Treasury Securities
 
$
28,660
   
$
   
$
(94
)
 
$
28,566
 
Securities of U.S. government agencies and corporations
   
22,370
     
7
     
(154
)
   
22,223
 
Obligations of states and political subdivisions
   
30,345
     
263
     
(114
)
   
30,494
 
Collateralized mortgage obligations
   
67,465
     
10
     
(940
)
   
66,535
 
Mortgage-backed securities
   
158,154
     
218
     
(1,803
)
   
156,569
 
 
                               
Total debt securities
 
$
306,994
   
$
498
   
$
(3,105
)
 
$
304,387
 

The amortized cost, unrealized gains and losses and estimated fair values of investments in debt and other securities at December 31, 2016 are summarized as follows:
 
(in thousands)
 
Amortized
cost
   
Unrealized
gains
   
Unrealized
losses
   
Estimated fair
value
 
 
                       
Investment securities available-for-sale:
                       
U.S. Treasury Securities
 
$
28,738
   
$
2
   
$
(88
)
 
$
28,652
 
Securities of U.S. government agencies and corporations
   
24,382
     
2
     
(187
)
   
24,197
 
Obligations of states and political subdivisions
   
30,870
     
271
     
(253
)
   
30,888
 
Collateralized mortgage obligations
   
51,002
     
1
     
(1,065
)
   
49,938
 
Mortgage-backed securities
   
144,883
     
280
     
(1,759
)
   
143,404
 
 
                               
Total debt securities
 
$
279,875
   
$
556
   
$
(3,352
)
 
$
277,079
 

The Company had $0 and $2,737,000 in proceeds from sales/calls of available-for-sale securities for the three and six months ended June 30, 2017, respectively.  The Company had $16,726,000 and $20,704,000 in proceeds from calls of available-for-sale securities for the three and six months ended June 30, 2016.  There were no gross realized gains on sales of available-for-sale securities for the three and six months ended June 30, 2017.  Gross realized gains from sales of available-for-sale securities were $0 and $14,000 for the three and six months ended June 30, 2016.  Gross realized losses from sales/calls of available-for-sale securities were $0 and $(16,000) for the three and six months ended June 30, 2017.  There were no gross realized losses on sales of available-for-sale securities for the three and six months ended June 30, 2016.

The amortized cost and estimated market value of debt and other securities at June 30, 2017, 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
 
$
32,376
   
$
32,341
 
Due after one year through five years
   
42,042
     
41,811
 
Due after five years through ten years
   
6,957
     
7,130
 
Due after ten years
   
     
 
Subtotal 
   
81,375
     
81,282
 
MBS & CMO
   
225,619
     
223,105
 
Total
 
$
306,994
   
$
304,387
 


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.

11

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of June 30, 2017, 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
 
$
28,566
   
$
(94
)
 
$
   
$
   
$
28,566
   
$
(94
)
Securities of U.S. government agencies and corporations
   
20,215
     
(154
)
   
     
     
20,215
     
(154
)
Obligations of states and political subdivisions
   
16,860
     
(110
)
   
993
     
(4
)
   
17,853
     
(114
)
Collateralized Mortgage obligations
   
55,931
     
(940
)
   
     
     
55,931
     
(940
)
Mortgage-backed securities
   
116,730
     
(1,459
)
   
18,211
     
(344
)
   
134,941
     
(1,803
)
 
                                               
Total
 
$
238,302
   
$
(2,757
)
 
$
19,204
   
$
(348
)
 
$
257,506
   
$
(3,105
)

No decline in value was considered "other-than-temporary" during the first six months of 2017.  One hundred seventy securities, all considered investment grade, which had a fair value of $238,302,000 and a total unrealized loss of $2,757,000, have been in an unrealized loss position for less than twelve months as of June 30, 2017.  Nineteen securities, all considered investment grade, which had a fair value of $19,204,000 and a total unrealized loss of $348,000, have been in an unrealized loss position for more than twelve months as of June 30, 2017.  The declines in fair value were attributable to changes in interest rates.  We have evaluated the credit ratings of our investment securities and their issuer and/or insurers, and based on this evaluation have determined that no investment security in our investment portfolio was other-than-temporarily impaired as of June 30, 2017. As the Company does not intend to sell these securities and it is not more likely than not that the Company will be required to sell these securities prior to their anticipated recovery, these investments are not considered other-than-temporarily impaired.

An analysis of gross unrealized losses of the available-for-sale investment securities portfolio as of December 31, 2016, 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
 
$
23,564
   
$
(88
)
 
$
   
$
   
$
23,564
   
$
(88
)
Securities of U.S. government agencies and corporations
   
22,195
     
(187
)
   
     
     
22,195
     
(187
)
Obligations of states and political subdivisions
   
16,168
     
(245
)
   
996
     
(8
)
   
17,164
     
(253
)
Collateralized Mortgage obligations
   
49,805
     
(1,065
)
   
     
     
49,805
     
(1,065
)
Mortgage-backed securities
   
109,092
     
(1,678
)
   
4,829
     
(81
)
   
113,921
     
(1,759
)
 
                                               
Total
 
$
220,824
   
$
(3,263
)
 
$
5,825
   
$
(89
)
 
$
226,649
   
$
(3,352
)

Investment securities carried at $34,406,000 and $38,152,000 at June 30, 2017 and December 31, 2016, respectively, were pledged to secure public deposits or for other purposes as required or permitted by law.
12

4.  LOANS

The composition of the Company's loan portfolio, by loan class, as of June 30, 2017 and December 31, 2015 was as follows:
 
($ in thousands)
 
June 30, 2017
   
December 31, 2016
 
 
           
Commercial
 
$
122,803
   
$
126,311
 
Commercial Real Estate
   
355,060
     
344,210
 
Agriculture
   
101,340
     
101,905
 
Residential Mortgage
   
41,347
     
40,237
 
Residential Construction
   
24,802
     
23,650
 
Consumer
   
40,412
     
43,250
 
 
               
 
   
685,764
     
679,563
 
Allowance for loan losses
   
(11,720
)
   
(10,899
)
Net deferred origination fees and costs
   
973
     
1,106
 
 
               
Loans, net
 
$
675,017
   
$
669,770
 

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.  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.

13

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, 2017, approximately 51% 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 6% in principal amount of the Company's loans were residential mortgage loans.  Approximately 4% in principal amount of the Company's loans were residential construction loans.  Approximately 15% in principal amount of the Company's loans were for agriculture and 18% in principal amount of the Company's loans were for general commercial uses including professional, retail and small businesses.  Approximately 6% in principal amount of the Company's loans were consumer loans.

Once a loan becomes delinquent and 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 obtain an updated 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, 2017 and December 31, 2016, all loans were pledged under a blanket collateral lien to secure actual and potential borrowings from the Federal Home Loan Bank ("FHLB") and the Federal Reserve Bank.
 
14

Non-accrual and Past Due Loans

The Company's loans by delinquency and non-accrual status, as of June 30, 2017 and December 31, 2016, were as follows:
   
($ in thousands)
 
Current & Accruing
   
30-59 Days Past Due & Accruing
   
60-89 Days Past Due & Accruing
   
90 Days or
more Past Due & Accruing
   
Nonaccrual
   
Total Loans
 
June 30, 2017
                                   
Commercial
 
$
119,766
   
$
535
   
$
102
   
$
   
$
2,400
   
$
122,803
 
Commercial Real Estate
   
353,805
     
     
755
     
     
500
     
355,060
 
Agriculture
   
101,340
     
     
     
     
     
101,340
 
Residential Mortgage
   
41,220
     
     
     
     
127
     
41,347
 
Residential Construction
   
24,387
     
415
     
     
     
     
24,802
 
Consumer
   
39,512
     
899
     
1
     
     
     
40,412
 
Total
 
$
680,030
   
$
1,849
   
$
858
   
$
   
$
3,027
   
$
685,764
 
 
                                               
December 31, 2016
                                               
Commercial
 
$
121,311
   
$
   
$
   
$
   
$
5,000
   
$
126,311
 
Commercial Real Estate
   
343,186
     
484
     
     
     
540
     
344,210
 
Agriculture
   
101,905
     
     
     
     
     
101,905
 
Residential Mortgage
   
39,463
     
     
120
     
     
654
     
40,237
 
Residential Construction
   
23,650
     
     
     
     
     
23,650
 
Consumer
   
43,106
     
     
41
     
     
103
     
43,250
 
Total
 
$
672,621
   
$
484
   
$
161
   
$
   
$
6,297
   
$
679,563
 
 
Non-accrual loans amounted to $3,027,000 at June 30, 2017 and were comprised of one commercial loan totaling $2,400,000, two commercial real estate loans totaling $500,000 and two residential mortgage loans totaling $127,000.  Non-accrual loans amounted to $6,297,000 at December 31, 2016 and were comprised of one commercial loan totaling $5,000,000, two commercial real estate loans totaling $540,000, three residential mortgage loans totaling $654,000, and one consumer loan totaling $103,000.  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, 2017.
 
15

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 6 (substandard) or worse.  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, and is promptly charged-off against the allowance for loan losses.

Impaired loans, segregated by loan class, as of June 30, 2017 and December 31, 2016 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, 2017
                             
Commercial
 
$
4,003
   
$
   
$
3,541
   
$
3,541
   
$
827
 
Commercial Real Estate
   
1,614
     
500
     
1,033
     
1,533
     
48
 
Agriculture
   
     
     
     
     
 
Residential Mortgage
   
2,676
     
127
     
2,323
     
2,450
     
571
 
Residential Construction
   
805
     
     
805
     
805
     
87
 
Consumer
   
591
     
     
591
     
591
     
25
 
Total
 
$
9,689
   
$
627
   
$
8,293
   
$
8,920
   
$
1,558
 
 
                                       
December 31, 2016
                                       
Commercial
 
$
5,578
   
$
   
$
5,578
   
$
5,578
   
$
898
 
Commercial Real Estate
   
885
     
540
     
283
     
823
     
39
 
Agriculture
   
     
     
     
     
 
Residential Mortgage
   
3,392
     
654
     
2,380
     
3,034
     
584
 
Residential Construction
   
820
     
     
820
     
820
     
98
 
Consumer
   
708
     
103
     
601
     
704
     
25
 
Total
 
$
11,383
   
$
1,297
   
$
9,662
   
$
10,959
   
$
1,644
 

The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the three months ended June 30, 2017 and June 30, 2016 was as follows:
 
($ in thousands)
 
Three Months Ended
June 30, 2017
   
Three Months Ended
June 30, 2016
 
 
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
Commercial
 
$
4,542
   
$
8
   
$
940
   
$
10
 
Commercial Real Estate
   
1,164
     
4
     
880
     
4
 
Agriculture
   
     
     
     
 
Residential Mortgage
   
2,736
     
23
     
3,265
     
23
 
Residential Construction
   
808
     
10
     
992
     
11
 
Consumer
   
592
     
9
     
739
     
9
 
Total
 
$
9,842
   
$
54
   
$
6,816
   
$
57
 

16

The average recorded investment in impaired loans and the amount of interest income recognized on impaired loans during the six months ended June 30, 2017 and June 30, 2016 was as follows:
 
($ in thousands)
 
Six Months Ended
June 30, 2017
   
Six Months Ended
June 30, 2016
 
 
 
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
Commercial
 
$
4,887
   
$
17
   
$
933
   
$
22
 
Commercial Real Estate
   
1,050
     
8
     
1,006
     
8
 
Agriculture
   
     
     
     
 
Residential Mortgage
   
2,835
     
54
     
3,369
     
47
 
Residential Construction
   
812
     
19
     
996
     
23
 
Consumer
   
630
     
17
     
933
     
53
 
Total
 
$
10,214
   
$
115
   
$
7,237
   
$
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 only 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 $6,900,529 and $9,663,000 in TDR loans as of June 30, 2017 and December 31, 2016, respectively.  Specific reserves for TDR loans totaled $1,543,141 and $1,644,000 as of June 30, 2017 and December 31, 2016, respectively.  TDR loans performing in compliance with modified terms totaled $4,500,529 and $4,662,000 as of June 30, 2017 and December 31, 2016, respectively.  There were no commitments to advance additional funds on existing TDR loans as of June 30, 2017.

There were no loans modified as TDRs during the three and six months ended June 30, 2017.

There were no loans modified as TDRs during the three months ended June 30, 2016.

Loans modified as TDRs during the six months ended June 30, 2016 were as follows:


($ in thousands)
Six Months Ended June 30, 2016
 
 
Number of
Contracts
 
Pre-modification
outstanding
recorded
investment
 
Post-
modification
outstanding
recorded
investment
 
Commercial
   
1
   
$
180
   
$
180
 
Total
   
1
   
$
180
   
$
180
 

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, 2017 and June 30, 2016.

17

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, 2016.

The following table presents the risk ratings by loan class as of June 30, 2017 and December 31, 2016:

($ in thousands)
 
Pass
   
Special Mention
   
Substandard
   
Doubtful
   
Loss
   
Total
 
June 30, 2017
                                   
Commercial
 
$
111,835
   
$
7,690
   
$
3,278
   
$
   
$
   
$
122,803
 
Commercial Real Estate
   
341,999
     
11,806
     
1,255
     
     
     
355,060
 
Agriculture
   
101,295
     
     
45
     
     
     
101,340
 
Residential Mortgage
   
40,111
     
1,107
     
129
     
     
     
41,347
 
Residential Construction
   
24,802
     
     
     
     
     
24,802
 
Consumer
   
39,393
     
500
     
519
     
     
     
40,412
 
Total
 
$
659,435
   
$
21,103
   
$
5,226
   
$
   
$
   
$
685,764
 
 
                                               
December 31, 2016
                                               
Commercial
 
$
112,656
   
$
7,294
   
$
6,361
   
$
   
$
   
$
126,311
 
Commercial Real Estate
   
331,653
     
11,058
     
1,499
     
     
     
344,210
 
Agriculture
   
101,820
     
     
85
     
     
     
101,905
 
Residential Mortgage
   
37,831
     
1,751
     
655
     
     
     
40,237
 
Residential Construction
   
23,070
     
436
     
144
     
     
     
23,650
 
Consumer
   
41,826
     
547
     
877
     
     
     
43,250
 
Total
 
$
648,856
   
$
21,086
   
$
9,621
   
$
   
$
   
$
679,563
 

18

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, 2017.

Three months ended June 30, 2017
 
($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Balance as of March 31, 2017
 
$
3,808
   
$
4,723
   
$
1,287
   
$
701
   
$
454
   
$
381
   
$
145
   
$
11,499
 
Provision for loan losses
   
(869
)
   
160
     
88
     
(114
)
   
22
     
(12
)
   
725
     
 
 
                                                               
Charge-offs
   
     
     
     
     
     
(5
)
   
     
(5
)
Recoveries
   
121
     
     
     
90
     
1
     
14
     
     
226
 
Net recoveries
   
121
     
     
     
90
     
1
     
9
     
     
221
 
Balance as of June 30, 2017
 
$
3,060
   
$
4,883
   
$
1,375
   
$
677
   
$
477
   
$
378
   
$
870
   
$
11,720
 

Six months ended June 30, 2017
 
($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Balance as of December 31, 2016
 
$
3,571
   
$
3,910
   
$
1,262
   
$
660
   
$
440
   
$
498
   
$
558
   
$
10,899
 
Provision for loan losses
   
(634
)
   
973
     
113
     
(73
)
   
35
     
(126
)
   
312
     
600
 
 
                                                               
Charge-offs
   
     
     
     
     
     
(16
)
   
     
(16
)
Recoveries
   
123
     
     
     
90
     
2
     
22
     
     
237
 
Net recoveries
   
123
     
     
     
90
     
2
     
6
     
     
221
 
Balance as of June 30, 2017
 
$
3,060
   
$
4,883
   
$
1,375
   
$
677
   
$
477
   
$
378
   
$
870
   
$
11,720
 

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, 2017.

($ in thousands)
Commercial
 
Commercial
Real Estate
 
Agriculture
 
Residential
Mortgage
 
Residential
Construction
 
Consumer
 
Unallocated
 
Total
 
Period-end amount allocated to:
                               
Loans individually evaluated for impairment
 
$
827
   
$
48
   
$
   
$
571
   
$
87
   
$
25
   
$
   
$
1,558
 
Loans collectively evaluated for impairment
   
2,233
     
4,835
     
1,375
     
106
     
390
     
353
     
870
     
10,162
 
Ending Balance
 
$
3,060
   
$
4,883
   
$
1,375
   
$
677
   
$
477
   
$
378
   
$
870
   
$
11,720
 

19

The following table details activity in the allowance for loan losses by loan class for the three and six months ended June 30, 2016.

Three months ended June 30, 2016
 
($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Balance as of March 31, 2016
 
$
2,980
   
$
3,636
   
$
965
   
$
702
   
$
401
   
$
589
   
$
334
   
$
9,607
 
Provision for loan losses
   
315
     
(52
)
   
104
     
(12
)
   
(12
)
   
(45
)
   
152
     
450
 
 
                                                               
Charge-offs
   
(130
)
   
     
     
     
     
(15
)
   
     
(145
)
Recoveries
   
10
     
     
81
     
     
1
     
26
     
     
118
 
Net charge-offs
   
(120
)
   
     
81
     
     
1
     
11
     
     
(27
)
Balance as of June 30, 2016
 
$
3,175
   
$
3,584
   
$
1,150
   
$
690
   
$
390
   
$
555
   
$
486
   
$
10,030
 
 
Six months ended June 30, 2016
 
($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Balance as of December 31, 2015
 
$
3,097
   
$
3,343
   
$
1,060
   
$
739
   
$
334
   
$
641
   
$
37
   
$
9,251
 
Provision for loan losses
   
280
     
256
     
9
     
(50
)
   
54
     
(98
)
   
449
     
900
 
 
                                                               
Charge-offs
   
(230
)
   
(15
)
   
     
     
     
(35
)
   
     
(280
)
Recoveries
   
28
     
     
81
     
1
     
2
     
47
     
     
159
 
Net charge-offs
   
(202
)
   
(15
)
   
81
     
1
     
2
     
12
     
     
(121
)
Balance as of June 30, 2016
 
$
3,175
   
$
3,584
   
$
1,150
   
$
690
   
$
390
   
$
555
   
$
486
   
$
10,030
 

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, 2016.

($ in thousands)
Commercial
 
Commercial
Real Estate
 
Agriculture
 
Residential
Mortgage
 
Residential
Construction
 
Consumer
 
Unallocated
 
Total
 
Period-end amount allocated to:
                               
Loans individually evaluated for impairment
 
$
36
   
$
40
   
$
   
$
598
   
$
109
   
$
36
   
$
   
$
819
 
Loans collectively evaluated for impairment
   
3,139
     
3,544
     
1,150
     
92
     
281
     
519
     
486
     
9,211
 
Ending Balance
 
$
3,175
   
$
3,584
   
$
1,150
   
$
690
   
$
390
   
$
555
   
$
486
   
$
10,030
 

20

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, 2016.

Year ended December 31, 2016
($ in thousands)
 
Commercial
   
Commercial
Real Estate
   
Agriculture
   
Residential
Mortgage
   
Residential
Construction
   
Consumer
   
Unallocated
   
Total
 
Balance as of December 31, 2015
 
$
3,097
   
$
3,343
   
$
1,060
   
$
739
   
$
334
   
$
641
   
$
37
   
$
9,251
 
Provision for loan losses
   
883
     
582
     
121
     
(67
)
   
101
     
(341
)
   
521
     
1,800
 
 
                                                               
Charge-offs
   
(446
)
   
(15
)
   
     
(13
)
   
     
(65
)
   
     
(539
)
Recoveries
   
37
     
     
81
     
1
     
5
     
263
     
     
387
 
Net charge-offs
   
(409
)
   
(15
)
   
81
     
(12
)
   
5
     
198
     
     
(152
)
Ending Balance
 
$
3,571
   
$
3,910
   
$
1,262
   
$
660
   
$
440
   
$
498
   
$
558
   
$
10,899
 
Period-end amount allocated to:
                                                               
Loans individually evaluated for impairment
 
$
898
   
$
39
   
$
   
$
584
   
$
98
   
$
25
   
$
   
$
1,644
 
Loans collectively evaluated for impairment
   
2,673
     
3,871
     
1,262
     
76
     
342
     
473
     
558
     
9,255
 
Balance as of December 31, 2016
 
$
3,571
   
$
3,910
   
$
1,262
   
$
660
   
$
440
   
$
498
   
$
558
   
$
10,899
 

The Company's investment in loans as of June 30, 2017, June 30, 2016, and December 31, 2016 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, 2017
 
Loans individually evaluated for impairment
 
$
3,541
   
$
1,533
   
$
   
$
2,450
   
$
805
   
$
591
   
$
8,920
 
Loans collectively evaluated for impairment
   
119,262
     
353,527
     
101,340
     
38,897
     
23,997
     
39,821
     
676,844
 
Ending Balance
 
$
122,803
   
$
355,060
   
$
101,340
   
$
41,347
   
$
24,802
   
$
40,412
   
$
685,764
 
 
                                                       
June 30, 2016
 
Loans individually evaluated for impairment
 
$
818
   
$
869
   
$
   
$
2,986
   
$
987
   
$
773
   
$
6,433
 
Loans collectively evaluated for impairment
   
131,529
     
312,664
     
92,766
     
40,684
     
16,567
     
42,046
     
636,256
 
Ending Balance
 
$
132,347
   
$
313,533
   
$
92,766
   
$
43,670
   
$
17,554
   
$
42,819
   
$
642,689
 
 
                                                       
December 31, 2016
 
Loans individually evaluated for impairment
 
$
5,578
   
$
823
   
$
   
$
3,034
   
$
820
   
$
704
   
$
10,959
 
Loans collectively evaluated for impairment
   
120,733
     
343,387
     
101,905
     
37,203
     
22,830
     
42,546
     
668,604
 
Ending Balance
 
$
126,311
   
$
344,210
   
$
101,905
   
$
40,237
   
$
23,650
   
$
43,250
   
$
679,563
 

21

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, 2017 for cash proceeds equal to the fair value of the loans.

The recorded value of mortgage servicing rights is included in other assets on the condensed consolidated balance sheets, and 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, 2017 and December 31, 2016 were as follows:

 
June 30, 2017
 
December 31, 2016
 
 
 
 
Constant prepayment rate
 
10.84%
 
 
12.67%
Discount rate
 
10.02%
 
 
10.02%
Weighted average life (years)
 
6.03
 
 
5.51

At June 30, 2017 and December 31, 2016, the Company's mortgage loans held-for-sale were $808,000 and $3,326,000, respectively.  At June 30, 2017, and December 31, 2016, the Company serviced real estate mortgage loans for others totaling $228,261,000 and $231,310,000, respectively.

The following table summarizes the Company's mortgage servicing rights assets as of June 30, 2017 and December 31, 2016.  Mortgage servicing rights are included in Interest Receivable and Other Assets on the condensed consolidated balance sheets:

 
(in thousands)
 
 
December 31, 2016
 
Additions
 
Reductions
 
June 30, 2017
 
 
               
Mortgage servicing rights
 
$
1,815
   
$
122
   
$
(168
)
 
$
1,769
 
Valuation allowance
   
(21
)
   
     
21
     
 
Mortgage servicing rights, net of valuation allowance
 
$
1,794
   
$
122
   
$
(147
)
 
$
1,769
 

At June 30, 2017 and December 31, 2016, the estimated fair market value of the Company's mortgage servicing rights asset was $1,897,000 and $1,794,000, respectively.

The Company received contractually specified servicing fees of $145,000 and $149,000 for the three months ended June 30, 2017 and June 30, 2016, respectively.  The Company received contractually specified servicing fees of $291,000 and $298,000 for the six months ended June 30, 2017 and June 30, 2016, 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.

22


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, 2017:
 
 
 
(in thousands)
 
June 30, 2017
 
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
 
$
28,566
   
$
28,566
   
$
   
$
 
Securities of U.S. government agencies and corporations
   
22,223
     
     
22,223
     
 
Obligations of states and political subdivisions
   
30,494
     
     
30,494
     
 
Collateralized mortgage obligations
   
66,535
     
     
66,535
     
 
Mortgage-backed securities
   
156,569
     
     
156,569
     
 
Total investments at fair value
 
$
304,387
   
$
28,566
   
$
275,821
   
$
 


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, 2016:
 
 
 
(in thousands)
 
December 31, 2016
 
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
 
$
28,652
   
$
28,652
   
$
   
$
 
Securities of U.S. government agencies and corporations
   
24,197
     
     
24,197
     
 
Obligations of states and political subdivisions
   
30,888
     
     
30,888
     
 
Collateralized mortgage obligations
   
49,938
     
     
49,938
     
 
Mortgage-backed securities
   
143,404
     
     
143,404
     
 
Total investments at fair value
 
$
277,079
   
$
28,652
   
$
248,427
   
$
 


23

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, 2017:

 
(in thousands)
 
June 30, 2017
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Impaired loans
 
$
1,600
   
$
   
$
   
$
1,600
 
Total assets at fair value
 
$
1,600
   
$
   
$
   
$
1,600
 

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 December 31, 2016:

 
(in thousands)
 
December 31, 2016
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
Impaired loans
 
$
4,128
   
$
   
$
   
$
4,128
 
Loan servicing rights
   
1,794
     
     
     
1,794
 
Total assets at fair value
 
$
5,922
   
$
   
$
   
$
5,922
 
 
There were no liabilities measured at fair value on a recurring or non-recurring basis at June 30, 2017 and December 31, 2016.

Key methods and assumptions used in measuring the fair value of impaired loans and other real estate owned as of June 30, 2017 and December 31, 2016 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 ranging 6% to 7%.
Loan servicing rights
Discounted cash flows
 
Present value of expected future cash flows was estimated using a discount rate factor of 10.02% as of December 31, 2016.  A constant prepayment rate of 12.67% as of December 31, 2016 was utilized.
 
 
 
 
 
The following section describes the valuation methodologies used for assets 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.

Loans Held-for-Sale

Loans held-for-sale are carried at the lower of cost or fair value.  The fair value of loans held-for-sale is based on what secondary markets are currently offering for portfolios with similar characteristics.  As such, the Company classifies loans subjected to non-recurring fair value adjustments as Level 2.  At June 30, 2017 and December 31, 2016, there were no loans held-for-sale that required a write-down.

24

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 and an allowance for loan losses is established.  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 collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows.  Inputs include external appraised values, management assumptions regarding market trends or other relevant factors, selling and commission costs generally ranging from 6% to 7%, and amount and timing of cash flows based upon current discount rates.  Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans.

At June 30, 2017, 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 an allowance is established 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.

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.  At June 30, 2017 and December 31, 2016, there were no OREO that required a write-down.

Loan Servicing Rights

Loan servicing rights are subject to impairment testing.  The Company utilizes a third party service provider to calculate the fair value of the Company's loan servicing rights.  Loan servicing rights are measured at fair value as of the date of sale.  The Company uses quoted market prices when available.  Subsequent fair value measurements are determined using a discounted cash flow model.  In order to determine the fair value of the loan servicing rights, the present value of expected future cash flows is estimated.  Assumptions used include market discount rates, anticipated prepayment speeds, delinquency and foreclosure rates, and ancillary fee income.

The model used to calculate the fair value of the Company's loan servicing rights is periodically validated by an independent external model validation group.  The model assumptions and the loan servicing rights fair value estimates are also compared to observable trades of similar portfolios as well as to loan servicing rights broker valuations and industry surveys, as available.  If the valuation model reflects a value less than the carrying value, loan servicing rights are adjusted to fair value through a valuation allowance as determined by the model.  As such, the Company classifies loan servicing rights subjected to non-recurring fair value adjustments as Level 3.
25

Disclosures about Fair Value of Financial Instruments
  
The estimated fair values of the Company's financial instruments for the periods ended June 30, 2017 and December 31, 2016 were approximately as follows:
 
 
       
June 30, 2017
   
December 31, 2016
 
 
 
Level
   
Carrying amount
   
Fair value
   
Carrying amount
   
Fair value
 
 
                             
Financial assets:
                             
Cash and cash equivalents
   
1
   
$
131,510
   
$
131,510
   
$
159,643
   
$
159,643
 
Certificates of deposit
   
2
     
3,968
     
3,972
     
16,213
     
16,230
 
Stock in Federal Home Loan Bank and other equity securities
   
3
     
5,567
     
5,567
     
4,409
     
4,409
 
Loans receivable:
                                       
Net loans
   
3
     
675,017
     
674,331
     
669,770
     
669,437
 
Loans held-for-sale
   
2
     
808
     
822
     
3,326
     
3,363
 
Interest receivable
   
2
     
3,760
     
3,760
     
3,996
     
3,996
 
Mortgage servicing rights
   
3
     
1,769
     
1,897
     
1,794
     
1,794
 
Financial liabilities:
                                       
Deposits
   
3
     
1,049,273
     
970,559
     
1,063,696
     
1,001,460
 
Interest payable
   
2
     
80
     
80
     
78
     
78
 
 
The following section describes the valuation methodologies used by the Company for estimating fair value of financial instruments not recorded at fair value on the Balance Sheet.

Cash and Cash Equivalents
 
The carrying amounts reported in the condensed consolidated balance sheets for cash and short-term instruments are a reasonable estimate of fair value.  The carrying amount is a reasonable estimate of fair value because of the relatively short term between the origination of the instrument and its expected realization.  Therefore, the Company believes the measurement of fair value of cash and cash equivalents is derived from Level 1 inputs.
 
Certificates of Deposit

The Company measures the fair value of Certificates of deposit using Level 2 inputs.  The fair values of Certificates of deposit were derived by discounting their future expected cash flows back to their present values based upon a constant maturity curve. The constant maturity curve is based on similar instruments, taking into account factors such as instrument type, coupon type, currency, issuer, sector, country of issuer, credit rating, and prevailing market conditions. The Company believes these inputs fall under Level 2 of the fair value hierarchy.

Other Equity Securities
 
The carrying amounts reported in the condensed consolidated balance sheets approximate fair value as the shares can only be redeemed by the issuing institution.  The Company believes the measurement of the fair value of other equity securities is derived from Level 3 inputs.
 
Loans Receivable
 
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  The fair values for other loans (e.g., commercial real estate and rental property mortgage loans, commercial and industrial loans, and agricultural loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  The allowance for loan losses is considered to be a reasonable estimate of loan discount due to credit risks.  Given the estimation of expected credit losses involves management estimates for assumptions that are not directly observable in a market, the Company believes the fair value of loans receivable is derived from Level 3 inputs.
 
Interest Receivable and Payable
 
The carrying amount of interest receivable and payable approximates its fair value.  The Company believes the measurement of the fair value of interest receivable and payable is derived from Level 2 inputs.
 
26

Deposit Liabilities
 
The Company measures fair value of deposits using both observable and unobservable inputs.  The fair value of deposits were derived by discounting their expected future cash flows back to their present values based on the FHLB yield curve, and their expected decay rates for non-maturing deposits.  The Company is able to obtain FHLB yield curve rates as of the measurement date, and believes these inputs fall under Level 2 of the fair value hierarchy.  Decay rates were developed through internal analysis, and are supported by recent years of the Bank's transaction history.  The inputs used by the Company to derive the decay rate assumptions are unobservable inputs, and therefore fall under Level 3 of the fair value hierarchy.
 
Limitations
 
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. 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.
27

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, 2017
   
December 31, 2016
 
 
           
Undisbursed loan commitments
 
$
213,065
   
$
207,207
 
Standby letters of credit
   
3,030
     
3,518
 
Commitments to sell loans
   
2,428
     
1,848
 
 
               
 
 
$
218,523
   
$
212,573
 

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, 2017 and December 31, 2016, 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 $3,030,000 and $3,518,000 at June 30, 2017 and December 31, 2016, respectively.  The Bank has experienced no draws on these letters of credit, resulting in no related liability included on their 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 $850,000 at June 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, 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 number of loans the Company has had to repurchase due to deficiencies in underwriting or loan documentation is not significant.  Management believes that any liabilities that may result from such recourse provisions are not significant.

28

8.  STOCK PLANS

On January 26, 2017, the Board of Directors of the Company declared a 4% stock dividend payable as of March 31, 2017.  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, 2017.

 
 
Number of
Shares
   
Weighted
Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted
Average
Remaining
Contractual
Term (in years)
 
Options outstanding at Beginning of  Period
   
250,594
   
$
7.72
         
Granted
   
     
         
Expired
   
     
         
Cancelled / Forfeited
   
     
         
Exercised
   
     
         
Options outstanding at End of Period
   
250,594
   
$
7.72
   
$
1,063,197
     
7.24
 
Exercisable (vested) at End of Period
   
118,731
   
$
6.03
   
$
705,811
     
5.46
 

The following table presents the activity related to stock options for the six months ended June 30, 2017.

 
 
Number of
Shares
   
Weighted
Average
Exercise Price
 
Aggregate
Intrinsic Value
 
Weighted
Average
Remaining
Contractual
Term (in years)
 
Options outstanding at Beginning of  Period
   
227,549
   
$
8.12
         
Granted
   
60,520
   
$
11.54
         
Expired
   
(37,475
)
 
$
16.31
         
Cancelled / Forfeited
   
     
         
Exercised
   
     
         
Options outstanding at End of Period
   
250,594
   
$
7.72
   
$
1,063,197
     
7.24
 
Exercisable (vested) at End of Period
   
118,731
   
$
6.03
   
$
705,811
     
5.46
 

The weighted average grant date fair value per share of options granted during the six months ended June 30, 2017 was $2.78 per share.

29

As of June 30, 2017, there was $285,000 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 2.94 years.

There was $53,000 of recognized compensation cost related to stock options granted for the six months ended June 30, 2017.

A summary of the weighted average assumptions used in valuing stock options during the three and six months ended June 30, 2017 is presented below:

 
Three Months Ended
 June 30, 2017*
 
Six Months Ended
 June 30, 2017
Risk Free Interest Rate
 
 
 
1.89%
 
 
 
 
 
 
Expected Dividend Yield
 
 
 
0.00%
 
 
 
 
 
 
Expected Life in Years
 
 
 
5
 
 
 
 
 
 
Expected Price Volatility
 
 
 
22.88%

* There were no stock options granted during the three months ended June 30, 2017.

The following table presents the activity related to non-vested restricted stock for the three months ended June 30, 2017.
 
 
 
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
   
108,461
   
$
8.01
 
 
   
Granted
   
     
 
 
   
Cancelled / Forfeited
   
(1,463
)
 
$
6.92
 
 
   
Exercised/Released/Vested
   
     
 
 
   
Non-vested restricted stock outstanding at End of Period
   
106,998
   
$
8.03
 
$1,278,626
2.87

The following table presents the activity related to non-vested restricted stock for the six months ended June 30, 2017.

 
 
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
   
99,184
   
$
6.70
 
 
   
Granted
   
24,617
   
$
11.46
 
 
   
Cancelled / Forfeited
   
(1,463
)
 
$
6.92
 
 
   
Exercised/Released/Vested
   
(15,340
)
 
$
5.08
 
 
   
Non-vested restricted stock outstanding at End of Period
   
106,998
   
$
8.03
 
$1,278,626
2.87

The weighted average fair value of restricted stock granted during the six months ended June 30, 2017 was $11.46 per share.

As of June 30, 2017, there was $501,000 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 2.87 years.  There was $103,000 of recognized compensation cost related to restricted stock awards for the six months ended June 30, 2017.

30

The Company has an Employee Stock Purchase Plan ("ESPP").  There are 270,400 shares authorized under the ESPP.  The total number of shares authorized has been adjusted to give retroactive effect to stock dividends and stock splits, including the 4% stock dividend declared on January 26, 2017, payable March 31, 2017 to shareholders of record as of February 28, 2017.  The ESPP will expire on March 16, 2026.

The ESPP is implemented by participation periods of not more than 27 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 December 10, 2016 to November 23, 2017.  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, 2017, there was $9,000 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 $9,000 of recognized compensation cost related to ESPP issuances for the six months ended June 30, 2017.

The weighted average fair value at issuance date during the six months ended June 30, 2017 was $1.74 per share.

A summary of the weighted average assumptions used in valuing ESPP issuances during the three and six months ended June 30, 2017 is presented below.

 
Three Months Ended
 June 30, 2017
 
Six Months Ended
 June 30, 2017
Risk Free Interest Rate
 
0.85%
 
 
0.85%
 
 
 
 
 
 
Expected Dividend Yield
 
0.00%
 
 
0.00%
 
 
 
 
 
 
Expected Life in Years
 
1.00
 
 
1.00
 
 
 
 
 
 
Expected Price Volatility
 
8.18%
 
 
8.18%


31


9. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table details activity in accumulated other comprehensive income (loss) for the three months ended June 30, 2017.

($ in thousands)
 
Unrealized
Gains (losses) on
Securities
   
Officers'
retirement
plan
   
Directors'
retirement
plan
   
Accumulated
Other
Comprehensive
Income/(loss)
 
Balance as of March 31, 2017
 
$
(1,658
)
 
$
(732
)
 
$
14
   
$
(2,376
)
Current period other comprehensive income
   
93
     
     
     
93
 
Balance as of June 30, 2017
 
$
(1,565
)
 
$
(732
)
 
$
14
   
$
(2,283
)

The following table details activity in accumulated other comprehensive income (loss) for the six months ended June 30, 2017.

($ in thousands)
 
Unrealized
Gains (losses) on
Securities
   
Officers'
retirement
plan
   
Directors'
retirement
plan
   
Accumulated
Other
Comprehensive
Income/(loss)
 
Balance as of December 31, 2016
 
$
(1,678
)
 
$
(686
)
 
$
14
   
$
(2,350
)
Current period other comprehensive income
   
113
     
(46
)
   
     
67
 
Balance as of June 30, 2017
 
$
(1,565
)
 
$
(732
)
 
$
14
   
$
(2,283
)

The following table details activity in accumulated other comprehensive income (loss) for the three months ended June 30, 2016.

($ in thousands)
 
Unrealized
Gains on
Securities
   
Officers'
retirement
plan
   
Directors'
retirement
plan
   
Accumulated
Other
Comprehensive
Income/(loss)
 
Balance as of March 31, 2016
 
$
802
   
$
(662
)
 
$
17
   
$
157
 
Current period other comprehensive income
   
259
     
     
     
259
 
Balance as of June 30, 2016
 
$
1,061
   
$
(662
)
 
$
17
   
$
416
 

The following table details activity in accumulated other comprehensive income (loss) for the six months ended June 30, 2016.

($ in thousands)
 
Unrealized
Gains on
Securities
   
Officers'
retirement plan
   
Directors'
retirement plan
   
Accumulated
Other
Comprehensive
Income/(loss)
 
Balance as of December 31, 2015
 
$
150
   
$
(662
)
 
$
17
   
$
(495
)
Current period other comprehensive income
   
911
     
     
     
911
 
Balance as of June 30, 2016
 
$
1,061
   
$
(662
)
 
$
17
   
$
416
 

32


10.  OUTSTANDING SHARES AND EARNINGS PER SHARE

On January 26, 2017, the Board of Directors of the Company declared a 4% stock dividend payable as of March 31, 2017 to shareholders of record as of February 28, 2017.  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, 2017 and 2016 (dollars in thousands except per share amounts):

 
 
Three months ended
June 30,
   
Six months ended
June 30,
 
 
 
2017
   
2016
   
2017
   
2016
 
Basic earnings per share:
                       
Net income
 
$
2,548
   
$
2,035
   
$
5,061
   
$
3,766
 
 
                               
Weighted average common shares outstanding
   
11,064,306
     
11,032,697
     
11,059,122
     
11,025,961
 
Basic EPS
 
$
0.23
   
$
0.18
   
$
0.46
   
$
0.34
 
 
                               
Diluted earnings per share:
                               
Net income
 
$
2,548
   
$
2,035
   
$
5,061
   
$
3,766
 
 
                               
Weighted average common shares outstanding
   
11,064,306
     
11,032,697
     
11,059,122
     
11,025,961
 
 
                               
Effect of dilutive shares
   
139,053
     
70,306
     
138,407
     
70,063
 
 
                               
Adjusted weighted average common shares outstanding
   
11,203,359
     
11,103,003
     
11,197,529
     
11,096,024
 
Diluted EPS
 
$
0.23
   
$
0.18
   
$
0.45
   
$
0.34
 

Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 68,398 shares and 169,530 shares for the three months ended June 30, 2017 and 2016, respectively.  Stock options which were not included in the computation of diluted earnings per share because they would have had an anti-dilutive effect amounted to 68,398 shares and 169,530 shares for the six months ended June 30, 2017 and 2016, respectively.


11.  GAIN ON SALE-LEASEBACK OF REAL ESTATE

On January 6, 2017, the Company executed a sale-leaseback transaction related to land and building which is partially occupied by our Auburn Branch. The lease carries an initial lease term of six years and is classified as an operating lease. The sale resulted in a total gain of $1,682, of which $495 has been deferred as a component of Other Liabilities and will be accounted for as a reduction of Occupancy and equipment expense over the initial lease term.  The Company recognized $21 and $35 as a reduction of Occupancy and equipment expense for the three and six month periods ended June 30, 2017, respectively.

33

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 2016 Annual Report on Form 10-K and 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 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 crises 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

Our regulatory capital requirements, including the capital rules adopted in the past several years 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, underwriting standards, and risk grading

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
 
34

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 low-interest rate environment

Expectations regarding an increase or decrease in unrecognized tax benefits

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 or flooding, 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 2016 Annual Report on Form 10-K, and in our other reports to the SEC.
 
35

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, 2016.

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 2017 included:

Net income of $5.1 million for the six months ended June 30, 2017, up 34.2% from $3.8 million earned for the same period last year.  Net income of $2.5 million for the three months ended June 30, 2017, up 25.0% from $2.0 million for the same period last year.
 
Diluted income per share of $0.45 for the six months ended June 30, 2017, up 32.4% from diluted income per share of $0.34 in the same period last year.  Diluted income per share of $0.23 for the three months ended June 30, 2017, up 27.8% from diluted income per share of $0.18 in the same period last year.

Net interest income of $18.9 million for the six months ended June 30, 2017, up 11.8% from $16.9 million in the same period last year.  The increase in net interest income was primarily due to an increase in interest income on loans and investment securities.  The increase in interest income on loans and investment securities was primarily a result of increased average balances of both loans and investment securities. 

Net interest margin of 3.46% for the six months ended June 30, 2017, up 0.08% from 3.38% for the same period ended June 30, 2016.

Provision for loan losses of $0.6 million for the six months ended June 30, 2017, down 33.3% from $0.9 million for the same period ended June 30, 2016.

Total assets of $1.16 billion as of June 30, 2017, down 0.8% from $1.17 billion as of December 31, 2016.
 
Total net loans of $675.8 million as of June 30, 2017 (including loans held-for-sale), up 0.4% from $673.1 million as of December 31, 2016.

Total investment securities of $304.4 million as of June 30, 2017, up 9.9% from $277.1 million as of December 31, 2016.

Total deposits of $1.05 billion as of June 30, 2017, down 1.4% from $1.06 billion as of December 31, 2016.

 
36

SUMMARY FINANCIAL DATA

The Company recorded net income of $5,061,000 for the six months ended June 30, 2017, representing an increase of $1,295,000 or 34.4% from net income of $3,766,000 for the same period in 2016.  The Company recorded net income of $2,548,000 for the three months ended June 30, 2017, representing an increase of $513,000 or 25.2% from net income of $2,035,000 for the same period in 2016.
 
The following tables present a summary of the results for the three and six months ended June 30, 2017 and 2016, and a summary of financial condition at June 30, 2017 and December 31, 2016.

 
Three Months Ended
June 30, 2017
 
Three Months Ended
June 30, 2016
 
Six Months Ended
June 30, 2017
 
Six Months Ended
June 30, 2016
 
(in thousands except for per share amounts)
               
For the Period:
               
Net Income
 
$
2,548
   
$
2,035
   
$
5,061
   
$
3,766
 
Basic Earnings Per Common Share
 
$
0.23
   
$
0.18
   
$
0.46
   
$
0.34
 
Diluted Earnings Per Common Share
 
$
0.23
   
$
0.18
   
$
0.45
   
$
0.34
 
Net Income to Average Total Assets (annualized)
   
0.88
%
   
0.76
%
   
0.87
%
   
0.71
%
Net Income to Average Common Shareholders' Equity (annualized)
   
10.51
%
   
9.07
%
   
10.57
%
   
8.50
%


 
 
June 30, 2017
 
December 31, 2016
 
 
       
(in thousands except for ratios)
     
At Period End:
       
Total Assets
 
$
1,157,183
   
$
1,166,763
 
Total Loans, Net (including loans held-for-sale)
 
$
675,825
   
$
673,096
 
Total Investment Securities
 
$
304,387
   
$
277,079
 
Total Deposits
 
$
1,049,273
   
$
1,063,696
 
Loan-To-Deposit Ratio
   
64.4
%
   
63.3
%

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, 2017
   
Three months ended
June 30, 2016
 
 
 
Average
Balance
   
Interest
   
Yield/
Rate (4)
   
Average
Balance
   
Interest
   
Yield/
Rate (4)
 
Assets
                                   
Interest-earning assets:
                                   
Loans (1)
 
$
672,786
   
$
8,211
     
4.90
%
 
$
628,001
   
$
7,649
     
4.89
%
Certificate of deposits
   
4,852
     
15
     
1.24
%
   
16,709
     
38
     
0.91
%
Interest bearing due from banks
   
114,494
     
276
     
0.97
%
   
129,480
     
154
     
0.48
%
Investment securities, taxable
   
281,357
     
1,191
     
1.70
%
   
219,501
     
882
     
1.61
%
Investment securities, non-taxable  (2)
   
19,080
     
73
     
1.53
%
   
11,406
     
66
     
2.32
%
Other interest earning assets
   
5,313
     
83
     
6.27
%
   
4,299
     
93
     
8.68
%
Total average interest-earning assets
   
1,097,882
     
9,849
     
3.60
%
   
1,009,396
     
8,882
     
3.53
%
Non-interest-earning assets:
                                               
Cash and due from banks
   
24,786
                     
24,323
                 
Premises and equipment, net
   
6,065
                     
7,372
                 
Other real estate owned
   
                     
-
                 
Interest receivable and other assets
   
28,361
                     
26,623
                 
Total average assets
 
$
1,157,094
                   
$
1,067,714
                 
 
                                               
Liabilities and Stockholders' Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing transaction deposits
   
291,423
     
61
     
0.08
%
   
266,387
     
74
     
0.11
%
Savings and MMDA's
   
324,552
     
117
     
0.14
%
   
297,891
     
114
     
0.15
%
Time, $250,000 or less
   
58,333
     
54
     
0.37
%
   
65,039
     
64
     
0.39
%
Time, over $250,000
   
20,800
     
23
     
0.44
%
   
20,069
     
21
     
0.42
%
Total average interest-bearing liabilities
   
695,108
     
255
     
0.15
%
   
649,386
     
273
     
0.17
%
Non-interest-bearing liabilities:
                                               
Non-interest-bearing demand deposits
   
354,590
                     
319,999
                 
Interest payable and other liabilities
   
10,387
                     
8,625
                 
Total liabilities
   
1,060,085
                     
978,010
                 
Total average stockholders' equity
   
97,009
                     
89,704
                 
Total average liabilities and stockholders' equity
 
$
1,157,094
                   
$
1,067,714
                 
Net interest income and net interest margin (3)
         
$
9,594
     
3.51
%
         
$
8,609
     
3.42
%
 

(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 $10 and $(16) for the three months ended June 30, 2017 and 2016, 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

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, 2017
   
Six months ended
June 30, 2016
 
 
 
Average
Balance
   
Interest
   
Yield/
Rate (4)
   
Average
Balance
   
Interest
   
Yield/
Rate (4)
 
Assets
                                   
Interest-earning assets:
                                   
Loans (1)
 
$
666,443
   
$
16,172
     
4.89
%
 
$
617,892
   
$
15,031
     
4.88
%
Certificate of deposits
   
10,475
     
50
     
0.96
%
   
16,679
     
71
     
0.85
%
Interest bearing due from banks
   
127,062
     
573
     
0.91
%
   
150,728
     
390
     
0.52
%
Investment securities, taxable
   
272,592
     
2,293
     
1.70
%
   
202,272
     
1,664
     
1.65
%
Investment securities, non-taxable  (2)
   
19,094
     
148
     
1.56
%
   
11,927
     
136
     
2.29
%
Other interest earning assets
   
4,863
     
191
     
7.92
%
   
4,117
     
177
     
8.62
%
Total average interest-earning assets
   
1,100,529
     
19,427
     
3.56
%
   
1,003,615
     
17,469
     
3.49
%
Non-interest-earning assets:
                                               
Cash and due from banks
   
24,619
                     
24,329
                 
Premises and equipment, net
   
6,079
                     
7,258
                 
Other real estate owned
   
0
                     
13
                 
Interest receivable and other assets
   
28,069
                     
26,277
                 
Total average assets
 
$
1,159,296
                   
$
1,061,492
                 
 
                                               
Liabilities and Stockholders' Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing transaction deposits
   
290,180
     
121
     
0.08
%
   
265,642
     
150
     
0.11
%
Savings and MMDA's
   
329,570
     
244
     
0.15
%
   
294,304
     
238
     
0.16
%
Time, $250,000 or less
   
58,131
     
113
     
0.39
%
   
66,019
     
129
     
0.39
%
Time, over $250,000
   
20,729
     
42
     
0.41
%
   
20,371
     
42
     
0.41
%
Total average interest-bearing liabilities
   
698,610
     
520
     
0.15
%
   
646,336
     
559
     
0.17
%
Non-interest-bearing liabilities:
                                               
Non-interest-bearing demand deposits
   
354,646
                     
317,666
                 
Interest payable and other liabilities
   
10,257
                     
8,828
                 
Total liabilities
   
1,063,513
                     
972,830
                 
Total average stockholders' equity
   
95,783
                     
88,662
                 
Total average liabilities and stockholders' equity
 
$
1,159,296
                   
$
1,061,492
                 
Net interest income and net interest margin (3)
         
$
18,907
     
3.46
%
         
$
16,910
     
3.38
%
 

(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 exculded. Loan interest income includes loan fees of approximately $26 and $(108) for the six months ended June 30, 2017 and 2016, 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.
 
39


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, 2017
   
Three months ended
March 31, 2017
 
 
 
Average
Balance
   
Interest
   
Yield/
Rate
   
Average
Balance
   
Interest
   
Yield/
Rate
 
Assets
                                   
Interest-earning assets:
                                   
Loans (1)
 
$
672,786
   
$
8,211
     
4.90
%
 
$
660,028
   
$
7,961
     
4.89
%
Certificates of deposit
   
4,852
     
15
     
1.24
%
   
16,161
     
36
     
0.90
%
Interest bearing due from banks
   
114,494
     
276
     
0.97
%
   
139,768
     
296
     
0.86
%
Investment securities, taxable
   
281,357
     
1,191
     
1.70
%
   
263,729
     
1,102
     
1.69
%
Investment securities, non-taxable (2)
   
19,080
     
73
     
1.53
%
   
19,108
     
75
     
1.59
%
Other interest earning assets
   
5,313
     
83
     
6.27
%
   
4,409
     
108
     
9.93
%
Total average interest-earning assets
   
1,097,882
     
9,849
     
3.60
%
   
1,103,203
     
9,578
     
3.52
%
Non-interest-earning assets:
                                               
Cash and due from banks
   
24,786
                     
24,451
                 
Premises and equipment, net
   
6,065
                     
6,095
                 
Interest receivable and other assets
   
28,361
                     
27,773
                 
Total average assets
 
$
1,157,094
                   
$
1,161,522
                 
 
                                               
Liabilities and Stockholders' Equity:
                                               
Interest-bearing liabilities:
                                               
Interest-bearing transaction deposits
   
291,423
     
61
     
0.08
%
   
288,923
     
60
     
0.08
%
Savings and MMDA's
   
324,552
     
117
     
0.14
%
   
334,643
     
127
     
0.15
%
Time, $250,000 and under
   
58,333
     
54
     
0.37
%
   
58,717
     
59
     
0.41
%
Time, over $250,000
   
20,800
     
23
     
0.44
%
   
19,866
     
19
     
0.39
%
Total average interest-bearing liabilities
   
695,108
     
255
     
0.15
%
   
702,149
     
265
     
0.15
%
Non-interest-bearing liabilities:
                                               
Non-interest-bearing demand deposits
   
354,590
                     
354,759
                 
Interest payable and other liabilities
   
10,387
                     
10,128
                 
Total liabilities
   
1,060,085
                     
1,067,036
                 
Total average stockholders' equity
   
97,009
                     
94,486
                 
Total average liabilities and stockholders' equity
 
$
1,157,094
                   
$
1,161,522
                 
Net interest income and net interest margin (3)
         
$
9,594
     
3.51
%
         
$
9,313
     
3.42
%
 
(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 $10 and $16 for the three months ended June 30, 2017 and March 31, 2017, 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.
40


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, 2017 over the three months ended June 30, 2016, the six months ended June 30, 2017 over the six months ended June 30, 2016, and the three months ended June 30, 2017 over the three months ended March 31, 2017.  Changes not solely due to interest rate or volume have been allocated proportionately to interest rate and volume.



   
Three Months Ended June 30, 2017
   
Six Months Ended June 30, 2017
   
Three Months Ended June 30, 2017
 
   
Over
   
Over
   
Over
 
   
Three Months Ended June 30, 2016
   
Six Months Ended June 30, 2016
   
Three Months Ended March 31, 2017
 
   
Volume
   
Interest
Rate
   
Change
   
Volume
   
Interest
Rate
   
Change
   
Volume
   
Interest
Rate
   
Change
 
                                             
Increase (Decrease) in Interest Income:
                                           
                                             
Loans
 
$
552
   
$
(16
)
 
$
536
   
$
1,075
   
$
(68
)
 
$
1,007
   
$
231
   
$
25
   
$
256
 
Loan Fees
   
26
     
     
26
     
134
     
     
134
     
(6
)
   
     
(6
)
Due From Banks
   
(20
)
   
142
     
122
     
(70
)
   
253
     
183
     
(57
)
   
37
     
(20
)
Certificates of Deposit
   
(34
)
   
11
     
(23
)
   
(29
)
   
8
     
(21
)
   
(32
)
   
11
     
(21
)
Investment Securities
   
292
     
24
     
316
     
652
     
(11
)
   
641
     
73
     
14
     
87
 
Other Assets
   
19
     
(29
)
   
(10
)
   
30
     
(16
)
   
14
     
20
     
(45
)
   
(25
)
   
$
835
   
$
132
   
$
967
   
$
1,792
   
$
166
   
$
1,958
   
$
229
   
$
42
   
$
271
 
                                                                         
Increase (Decrease) in Interest Expense:
                                                         
                                                                         
Deposits:
                                                                       
Interest-Bearing Transaction Deposits
 
$
7
   
$
(20
)
 
$
(13
)
 
$
13
   
$
(42
)
 
$
(29
)
 
$
1
   
$
   
$
1
 
Savings & MMDAs
   
11
     
(8
)
   
3
     
24
     
(18
)
   
6
     
(3
)
   
(7
)
   
(10
)
Time Certificates
   
(8
)
   
     
(8
)
   
(16
)
   
     
(16
)
   
     
(1
)
   
(1
)
                                                                         
   
$
10
   
$
(28
)
 
$
(18
)
 
$
21
   
$
(60
)
 
$
(39
)
 
$
(2
)
 
$
(8
)
 
$
(10
)
                                                                         
Increase in Net Interest Income:
 
$
825
   
$
160
   
$
985
   
$
1,771
   
$
226
   
$
1,997
   
$
231
   
$
50
   
$
281
 

41

CHANGES IN FINANCIAL CONDITION

The assets of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a $28,133,000 or 17.6% decrease in cash and cash equivalents, a $12,245,000 or 75.5% decrease in certificates of deposit, a $27,308,000 or 9.9% increase in investment securities available-for-sale, a $5,247,000 or 0.8% increase in net loans held-for-investment, a $2,518,000 or 75.7% decrease in loans held-for-sale, a $1,158,000 or 26.3% increase in stock in Federal Home Loan Bank and other equity securities, and a $1,046,000 or 14.3% decrease in premises and equipment from December 31, 2016 to June 30, 2017.  The decrease in cash and cash equivalents was primarily due to a decrease in interest bearing due from Federal Reserve Bank accounts, which was mainly due to the purchase of investment securities.  The increase in investment securities available-for-sale was primarily the result of the purchases of mortgage-backed securities and collateralized mortgage obligations, which was partially offset by sales and calls of U.S. government agencies and mortgage-backed securities and maturities of municipal securities.  The increase in net loans held-for-investment was primarily due to increased demand for commercial real estate, residential mortgage, and residential construction loans, which was partially offset by decreased demand for commercial, agriculture, and consumer loans.  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 and equipment was due to a sale-leaseback of land and building partially occupied by a Bank branch.

The liabilities of the Company set forth in the Unaudited Condensed Consolidated Balance Sheets reflect a decrease in total deposits of $14,423,000 or 1.4% from December 31, 2016 to June 30, 2017.  The decrease in deposits was due to decreases in demand accounts, money market accounts, and time deposits $250,000 or less, which were partially offset by increases in interest-bearing transaction deposits, savings accounts, and time deposits over $250,000.
 
CHANGES IN RESULTS OF OPERATIONS

Interest Income

The Federal Open Market Committee increased the Federal Funds rate 50 basis points from 0.75% to 1.25% during the six months ended June 30, 2017.

Interest income on loans for the six months ended June 30, 2017 was up 7.6% from the same period in 2016, increasing from $15,031,000 to $16,172,000, and was up 7.4% for the three months ended June 30, 2017 over the same period in 2016, increasing from $7,649,000 to $8,211,000.  The increase in interest income on loans for the three and six months ended June 30, 2017 as compared to the same periods a year ago was primarily due to 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, 2017 was up 35.6% from the same period in 2016, increasing from $1,800,000 to $2,441,000, and was up 33.3% for the three months ended June 30, 2017 over the same period in 2016, increasing from $948,000 to $1,264,000.  The increase in interest income on investment securities for the six months ended June 30, 2017 as compared to the same period a year ago was due to an increase in average investment securities.  The increase in interest income on investment securities for the three months ended June 30, 2017 as compared to the same period a year ago was primarily due to an increase in average investment securities.

Interest income on interest-bearing due from banks for the six months ended June 30, 2017 was up 35.1% from the same period in 2016, increasing from $461,000 to $623,000, and was up 51.6% for the three months ended June 30, 2017 over the same period in 2016, increasing from $192,000 to $291,000.  The increase in interest income on interest-bearing due from banks for the six months ended June 30, 2017 as compared to the same period a year ago was due to an increase in yield on certificates of deposit of 11 basis points, and an increase in yield on interest-bearing due from banks of 39 basis points, which was partially offset by decreases in average balances of certificates of deposit and interest-bearing due from banks.  The increase in interest income on interest-bearing due from banks for the three months ended June 30, 2017 as compared to the same period a year ago was due to an increase in yield on certificates of deposit of 33 basis points, and an increase in yield on interest-bearing due from banks of 49 basis points, which was partially offset by decreases in average balances of certificates of deposit and interest-bearing due from banks.

The Company had no Federal Funds sold balances during the three and six months ended June 30, 2017 and June 30, 2016.
 
42

Interest Expense

Interest expense on deposits and other borrowings for the six months ended June 30, 2017 was down 7.0% from the same period in 2016, decreasing from $559,000 to $520,000, and was down 6.6% for the three months ended June 30, 2017 over the same period in 2016, decreasing from $273,000 to $255,000.  The decrease in interest expense during the three and six months ended June 30, 2017 was primarily due to a 2 basis point decrease in the Company's average cost of funds, which was partially offset by an increase in the average balance of interest-bearing liabilities.

The Company had no FHLB advances and related interest expense during the three and six months ended June 30, 2017 and June 30, 2016.

Provision for Loan Losses

There was a provision for loan losses of $600,000 for the six months ended June 30, 2017 compared to $900,000 for the same period in 2016.  There was no provision for loan losses for the three months ended June 30, 2017 compared to $450,000 for the same period in 2016.  The allowance for loan losses was approximately $11,720,000 or 1.71% of total loans, at June 30, 2017, compared to $10,899,000, or 1.60% of total loans, at December 31, 2016.  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, 2017 was primarily due to a decrease in specific reserves on impaired loans coupled with decreased charge-offs and increased recoveries, which was partially offset by an increase in loan balances compared to the same periods in 2016.

Provision for Unfunded Lending Commitment Losses

There was a provision for unfunded lending commitment losses of $57,000 for the three and six months ended June 30, 2017 compared to $0 for the three and six months ended June 30, 2016.  The increase in provision for unfunded lending commitment losses was primarily due to an increase in qualitative risk factors compared to the same periods in 2016.

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 up 29.9% for the six months ended June 30, 2017 from the same period in 2016, increasing from $3,540,000 to $4,600,000.

The increase was primarily due to the recognition of a pre-tax gain of $1,187,000 on a sale-leaseback transaction related to land and building which is partially occupied by a Bank branch.  The lease carries an initial lease term of six years and is classified as an operating lease.  The sale resulted in a total gain of $1,682,000, of which $495,000 was deferred as a component of Other Liabilities and is being accounted for as a reduction of occupancy & equipment expense over the initial lease term.

In addition, there were increases in investment and brokerage services income, mortgage brokerage income, loan servicing income, and fiduciary activities income, which was partially offset by decreases in service charges on deposit accounts, gains on sales of loans held-for-sale, and gains on sales of available-for-sale securities.  The increase in investment and brokerage income, mortgage brokerage income, and fiduciary activities income was primarily due to an increase in demand for those services.  The increase in loan servicing income was primarily due to the reversal of impairment expense in the current period.  The decrease in service charges on deposit accounts was primarily due to decreases in fees charged.  The decrease in gains on sales of loans held-for-sale is primarily due to a decrease in the volume of loans-held-for-sale.  The decrease in gains on sales of available-for-sale securities was primarily due to decreased values of securities sold and current market pricing at the time of sale.

Non-Interest income was down 5.4% for the three months ended June 30, 2017 from the same period in 2016, decreasing from $1,855,000 to $1,755,000.

The decrease was primarily due to decreases in gains on sales of loans held-for-sale and service charges on deposit accounts, which was partially offset by increases in investment and brokerage services income, mortgage brokerage income, loan servicing income, and fiduciary activities income.  The decrease in gains on sales of loans held-for-sale is primarily due to a decrease in the volume of loans-held-for-sale.  The decrease in service charges on deposit accounts was primarily due to decreases in fees charged.  The increase in investment and brokerage income, mortgage brokerage income, and fiduciary activities income was primarily due to an increase in demand for those services.  The increase in loan servicing income was primarily due to the reversal of impairment expense in the current period.      

43

Non-Interest Expenses

Total non-interest expenses were up 8.0% for the six months ended June 30, 2017 from the same period in 2016, increasing from $13,627,000 to $14,723,000.

The increase was primarily due to increases in salaries and employee benefits, data processing, and other expenses, which was partially offset by a decrease in occupancy and equipment expense.  The increase in salaries and employee benefits was primarily due to an increase in staffing and associated salary expense and profit sharing.  The increase in data processing was primarily due to increases in general data processing costs.  The increase in other expenses was primarily due to increases in provision for unfunded loan commitments, contributions, consulting fees, and sundry losses, which was partially offset by decreases in FDIC assessments and legal fees.  The decrease in occupancy and equipment expense was primarily due to a decrease in rent expense due to the expiration of a lease and the amortization of the deferred portion of the gain on sale of lease-back transaction discussed in Non-Interest Income above.

Total non-interest expenses were up 6.1% for the three months ended June 30, 2017 from the same period in 2016, increasing from $6,808,000 to $7,220,000.

The increase was primarily due to increases in salaries and employee benefits and data processing, which was partially offset by a decrease in occupancy and equipment expense.  The increase in salaries and employee benefits was primarily due to an increase in staffing and associated salary expense and profit sharing.  The increase in data processing was primarily due to increases in general data processing costs.  The decrease in occupancy and equipment expense was primarily due to a decrease in rent expense due to the expiration of a lease and the amortization of the deferred portion of the gain on sale of lease-back transaction discussed in Non-Interest Income above.
 
The following table sets forth other non-interest expenses by category for the three and six months ended June 30, 2017 and 2016.
 
 
 
(in thousands)
 
 
 
Three months ended
June 30, 2017
   
Three months ended
June 30, 2016
   
Six months ended
June 30, 2017
   
Six months ended
June 30, 2016
 
Other non-interest expenses
                       
Provision for unfunded loan commitments
 
$
57
   
$
   
$
57
   
$
 
FDIC assessments
   
135
     
155
     
270
     
310
 
Contributions
   
50
     
29
     
95
     
54
 
Legal fees
   
58
     
55
     
104
     
138
 
Accounting and audit fees
   
97
     
97
     
190
     
185
 
Consulting fees
   
112
     
150
     
361
     
302
 
Postage expense
   
67
     
76
     
135
     
154
 
Telephone expense
   
32
     
36
     
65
     
72
 
Public relations
   
23
     
21
     
47
     
55
 
Training expense
   
28
     
34
     
76
     
71
 
Loan origination expense
   
55
     
52
     
90
     
90
 
Computer software depreciation
   
36
     
38
     
74
     
63
 
Sundry losses
   
50
     
49
     
148
     
81
 
Loan collection expense
   
33
     
22
     
59
     
42
 
Other non-interest expense
   
540
     
531
     
1,062
     
1,015
 
 
                               
Total other non-interest expenses
 
$
1,373
   
$
1,345
   
$
2,833
   
$
2,632
 
 
44

Income Taxes

The Company's tax rate, the Company's income before taxes and the amount of tax relief provided by non-taxable earnings primarily affect the Company's provision for income taxes.

In the six months ended June 30, 2017, the Company's expense for income taxes increased $966,000 or 44.8% from the same period last year, from $2,157,000 to $3,123,000.

In the three months ended June 30, 2017, the Company's expense for income taxes increased $410,000 or 35.0% from the same period last year, from $1,171,000 to $1,581,000.

The increase in provision for income taxes for the period presented is primarily attributable to the respective levels of taxable earnings combined with the interim effective tax rate and the incidence of allowable deductions, in particular non-taxable municipal bond income, tax credits generated from low-income housing investments, solar tax credits, and excludable interest 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, 2017
 
December 31, 2016
 
 
       
Undisbursed loan commitments
 
$
213,065
   
$
207,207
 
Standby letters of credit
   
3,030
     
3,518
 
Commitments to sell loans
   
2,428
     
1,848
 
 
 
$
218,523
   
$
212,573
 
 
The reserve for unfunded lending commitments amounted to $850,000 and $793,000 as of June 30, 2017 and December 31, 2016, 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.
45


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, 2017 and December 31, 2016:

 
At June 30, 2017
 
At December 31, 2016
 
 
Gross
 
Guaranteed
 
Net
 
Gross
 
Guaranteed
 
Net
 
(in thousands)
                       
 
                       
Commercial
 
$
2,400
   
$
   
$
2,400
   
$
5,000
   
$
2,000
   
$
3,000
 
Commercial real estate
   
500
     
75
     
425
     
540
     
81
     
459
 
Agriculture
   
     
     
     
     
     
 
Residential mortgage
   
127
     
     
127
     
654
     
     
654
 
Residential construction
   
     
     
     
     
     
 
Consumer
   
     
     
     
103
     
     
103
 
Total non-accrual loans
 
$
3,027
   
$
75
   
$
2,952
   
$
6,297
   
$
2,081
   
$
4,216
 

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

Non-accrual loans amounted to $3,027,000 at June 30, 2017 and were comprised of one commercial loan totaling $2,400,000, two commercial real estate loans totaling $500,000, and two residential mortgage loans totaling $127,000.  Non-accrual loans amounted to $6,297,000 at December 31, 2016 and were comprised of one commercial loan totaling $5,000,000, two commercial real estate loans totaling $540,000, three residential mortgage loans totaling $654,000, and one consumer loan totaling $103,000. If the loan is 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.

Non-accrual loans included one commercial loan totaling $2,400,000, or 79% of total non-accrual loans at June 30, 2017 and December 31, 2016.  This loan is supported by the loan's guarantor.  The collateral securing all non-accrual loans is generally appraised at least annually but may be appraised more frequently depending on the collateral type. 

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 are non-accrual loans and loans that are 90 days or more past due and still accruing.  Total non-performing impaired loans at June 30, 2017 and December 31, 2016 consisting of loans on non-accrual status totaled $3,027,000 and $6,297,000, respectively.  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 in a TDR is considered an impaired loan.  Performing impaired loans totaled $5,892,000 and $4,662,000 at June 30, 2017 and December 31, 2016, respectively.  Performing impaired loans consist of loans modified as TDRs totaling $4,500,000 and other impaired loans totaling $1,392,000.  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.

46

As the following table illustrates, total non-performing assets, net of guarantees of the State of California and U.S. Government, including its agencies and its government-sponsored agencies, decreased $1,264,000, or 30.0% to $2,952,000 during the first six months of 2017.  Non-performing assets, net of guarantees, represented 0.3% of total assets at June 30, 2017.

 
 
At June 30, 2017
   
At December 31, 2016
 
 
 
Gross
   
Guaranteed
   
Net
   
Gross
   
Guaranteed
   
Net
 
(dollars in thousands)
                                   
 
                                   
Non-accrual loans
 
$
3,027
   
$
75
   
$
2,952
   
$
6,297
   
$
2,081
   
$
4,216
 
Loans 90 days past due and still accruing
   
     
     
     
     
     
 
 
                                               
Total non-performing loans
   
3,027
     
75
     
2,952
     
6,297
     
2,081
     
4,216
 
Other real estate owned
   
     
     
     
     
     
 
Total non-performing assets
 
$
3,027
   
$
75
   
$
2,952
   
$
6,297
   
$
2,081
   
$
4,216
 
 
                                               
Non-performing loans (net of guarantees) to total loans
                   
0.4
%
                   
0.6
%
Non-performing assets (net of guarantees) to total assets
                   
0.3
%
                   
0.4
%
Allowance for loan and lease losses to non-performing loans (net of guarantees)
                   
397.0
%
                   
258.5
%

The Company had no loans 90 days or more past due and still accruing at June 30, 2017 and December 31, 2016.

Excluding the non-performing loans cited previously, loans totaling $2,199,000 and $3,324,000 were classified as substandard or doubtful loans, representing potential problem loans at June 30, 2017 and December 31, 2016, 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, 2017 and December 31, 2016.  The ratio of the Allowance for Loan Losses to total loans at June 30, 2017 and December 31, 2016 was 1.71% and 1.60%, 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 no OREO as of June 30, 2017 and December 31, 2016.

47


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, 2017 and 2016, and for the year ended December 31, 2016:
 
Analysis of the Allowance for Loan Losses
(Amounts in thousands, except percentage amounts)

 
 
Six months ended
June 30,
   
Year ended
December 31,
 
 
 
2017
   
2016
   
2016
 
 
                 
Balance at beginning of period
 
$
10,899
   
$
9,251
   
$
9,251
 
Provision for loan losses
   
600
     
900
     
1,800
 
Loans charged-off:
                       
Commercial
   
     
(230
)
   
(446
)
Commercial Real Estate
   
     
(15
)
   
(15
)
Agriculture
   
     
     
 
Residential Mortgage
   
     
     
(13
)
Residential Construction
   
     
     
 
Consumer
   
(16
)
   
(35
)
   
(65
)
 
                       
Total charged-off
   
(16
)
   
(280
)
   
(539
)
 
                       
Recoveries:
                       
Commercial
   
123
     
28
     
37
 
Commercial Real Estate
   
     
     
 
Agriculture
   
     
81
     
81
 
Residential Mortgage
   
90
     
1
     
1
 
Residential Construction
   
2
     
2
     
5
 
Consumer
   
22
     
47
     
263
 
 
                       
Total recoveries
   
237
     
159
     
387
 
 
                       
Net recoveries (charge-offs)
   
221
     
(121
)
   
(152
)
 
                       
Balance at end of period
 
$
11,720
   
$
10,030
   
$
10,899
 
 
                       
Ratio of net recoveries(charge-offs) to average loans outstanding during the period (annualized)
   
0.07
%
   
(0.04
%)
   
-0.02
%
Allowance for loan losses
                       
To total loans at the end of the period
   
1.71
%
   
1.56
%
   
1.60
%
To non-performing loans, net of guarantees at the end of the period
   
397.0
%
   
794.1
%
   
258.5
%

The allowance for loan losses to non-performing loans, net of guarantees was 397.0% and 794.1% as of June 30, 2017 and June 30, 2016, respectively.  The decrease in allowance for loan losses to non-performing loans, net of guarantees was primarily due to an increase in non-performing loans.  The increase in allowance for loan losses during the six months in 2017 was due to an increase in qualitative risk factors primarily for commercial and commercial real estate loans.
48

Deposits

Deposits are one of the Company's primary sources of funds.  At June 30, 2017, the Company had the following deposit mix: 30.2% in savings and MMDA deposits, 7.5% in time deposits, 28.1% in interest-bearing transaction deposits and 34.2% in non-interest-bearing transaction deposits.  At December 31, 2016, the Company had the following deposit mix: 31.2% in savings and MMDA deposits, 7.1% in time deposits, 27.6% in interest-bearing transaction deposits and 34.1% 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, 2017 and December 31, 2016 are summarized as follows:

 
 
(in thousands)
 
 
 
June 30, 2017
   
December 31, 2016
 
Three months or less
 
$
3,177
   
$
2,676
 
Over three to twelve months
   
10,404
     
10,058
 
Over twelve months
   
6,998
     
2,524
 
Total
 
$
20,579
   
$
15,258
 


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 being the ratio of net loans to deposits (including loans held-for-sale).  This ratio was 64.4% on June 30, 2017.  In addition, on June 30, 2017, the Company had the following short-term investments (based on remaining maturity and/or next repricing date):  $32,701,000 in securities due within one year or less; and $48,941,000 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 $77,000,000 at June 30, 2017.  Additionally, the Company has a line of credit with the FHLB, with a borrowing capacity at June 30, 2017 of $265,684,000; 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.

As of June 30, 2017, 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, 2017.

 
(amounts in thousands except percentage amounts)
 
 
Actual
 
Well Capitalized
 
 
Capital
 
Ratio
 
Ratio
Requirement
 
Leverage
 
$
97,296
     
8.41
%
   
5.0
%
Common Equity Tier 1
 
$
97,296
     
12.50
%
   
6.5
%
Tier 1 Risk-Based
 
$
97,296
     
12.50
%
   
8.0
%
Total Risk-Based
 
$
107,062
     
13.75
%
   
10.0
%

49

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 Basel Committee's current international regulatory capital accord (Basel III). These 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, 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). The phase-in of the capital conservation buffer began on January 1, 2016, and will be completed by January 1, 2019. The new rules also provide for various adjustments and deductions to the definitions of regulatory capital that will phase in through December 31, 2017.
 
50

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, 2017, from those presented in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2016, 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, 2017.  This conclusion is based on an evaluation conducted under the supervision and with the participation of management.

(b)  During the quarter ended June 30, 2017, 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 2016 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, 2017, approximately 75% 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, 2017, real estate mortgage (excluding loans held-for-sale) and construction loans (residential and other) comprised approximately 70% and 5%, respectively, of the total loans in the Bank's portfolio.  At June 30, 2017, all of the Bank's real estate mortgage and construction loans and approximately 12% 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.  California markets have experienced a strong recovery in home prices since the housing market crisis; however, home price growth has begun to moderate and some fundamentals of the housing market have remained soft through the recovery. A renewed downturn and 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, 2016.

51

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, 2017, approximately 75% 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.

Potential Volatility of Deposits May Increase Our Cost of Funds

At June 30, 2017 and December 31, 2016, 2% and 1% of the dollar value of the Company's total deposits was represented by time certificates of deposit in excess of $250,000, respectively.  Although we have adopted a pricing strategy designed to reduce the level of time deposits, these deposits are also considered volatile and could be subject to withdrawal.  Withdrawal of a material amount of such deposits could adversely impact the Company's liquidity, profitability, business prospects, results of operations and cash flows.



 
52

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
 
 
 
31.1
 
Rule 13a — 14(a) Certification of Chief Executive Officer
 
 
 
31.2
 
Rule 13a — 14(a) Certification of Chief Financial Officer
 
 
 
32.1*
 
Statement of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
 
 
 
32.2*
 
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, 2017, 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.
 
53

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 2, 2017
By:
/s/  Jeremiah Z. Smith
 
 
 
 
 
 
 
Jeremiah Z. Smith, Senior Executive Vice President / Chief Operating Officer and Chief Financial Officer
 
 
 
(Principal Financial Officer and Duly Authorized Officer)

54