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OFFON

FIRST NORTHERN COMMUNITY BANCORP

(FNRN)
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FIRST NORTHERN COMMUNITY BANCORP : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/07/2021 | 06:07am EDT

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 2020 Annual Report on Form 10-K and Part
II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and the other
risks described in our Quarterly Reports on Form 10-Q for factors to be
considered when reading any forward-looking statements in this filing.

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

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

? Our business objectives, strategies and initiatives, our organizational

structure, the growth of our business and our competitive position and

prospects, and the effect of competition on our business and strategies

? Our assessment of significant factors and developments that have affected or

   may affect our results



? Legal and regulatory actions, and future legislative and regulatory

developments, including the effects of the Dodd-Frank Wall Street Reform and

Protection Act (the "Dodd-Frank Act"), the Economic Growth, Regulatory Relief

and Consumer Protection Act (the "EGRRCPA"), and other legislation and

governmental measures introduced in response to the financial crisis which

began in 2008 and the ensuing recession affecting the banking system, financial

markets and the U.S. economy, as well as the effect of the federal Coronavirus

Aid, Relief, and Economic Security Act ("CARES Act"), enacted in March 2020, in

an effort to mitigate the consequences of the coronavirus pandemic and the

governmental actions in response to the pandemic

? Regulatory and compliance controls, processes and requirements and their impact

   on our business



? The costs and effects of legal or regulatory actions

? Expectations regarding draws on performance letters of credit and liabilities

that may result from recourse provisions in standby letters of credit

? Our intent to sell or hold, and the likelihood that we would be required to

sell, various investment securities

? Our regulatory capital requirements, including the capital rules established

after the 2008 financial crisis by the U.S. federal banking agencies and our

current intention not to elect to use the community bank leverage framework

? Expectations regarding our non-payment of a cash dividend on our common stock

in the foreseeable future

? Credit quality and provision for credit losses and management of asset quality

and credit risk, expectations regarding collections and expectations regarding

the forgiveness and SBA reimbursement and guarantee of loans made under the

   Paycheck Protection Program ("PPP") and the timing thereof



                                       31

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Index

? Our allowances for credit losses, including the conditions we consider in

determining the unallocated allowance and our portfolio credit quality, the

adequacy of the allowance for loan losses, underwriting standards, and risk

   grading



? 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 changes in residential mortgage

interest rates on new originations and refinancing of existing residential

   mortgage loans



? Loan portfolio composition and risk grade trends, expected charge-offs,

portfolio credit quality, our strategy regarding troubled debt restructurings

("TDRs"), delinquency rates and our underwriting standards and our expectations

regarding our recognition of interest income on loans that were provided

payment deferrals upon completion of the payment forbearance period

? Our deposit base including renewal of time deposits

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

low interest rate environment

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

   agencies



? Tax rates and the impact of changes in the U.S. tax laws, including the Tax

   Cuts and Jobs Act



? Our pension and retirement plan costs

? Our liquidity strategies and beliefs concerning the adequacy of our liquidity

   position



? Critical accounting policies and estimates, the impact or anticipated impact of

recent accounting pronouncements or changes in accounting principles

? Expected rates of return, maturities, loss exposure, growth rates, yields, and

   projected results



? The possible impact of weather-related conditions, including drought, fire or

flooding, seismic events, and related governmental responses, including related

electrical power outages, on economic conditions, especially in the

agricultural sector

? Maintenance of insurance coverages appropriate for our operations

? Threats to the banking sector and our business due to cybersecurity issues and

attacks and regulatory expectations related to cybersecurity

? Our expectations regarding the adoption of the expected loss model for

determining the allowance for loan losses

? The effects of the coronavirus pandemic on the U.S., California and global

economies and the actions of governments to reduce the spread of the virus and

to mitigate the resulting economic consequences

? 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 2020 Annual Report on Form 10-K, and in our other reports to
the SEC.

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Index

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, 2020.

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 first quarter 2021 included:

• Net income of $3.2 million for the three months ended March 31, 2021, up 18.6%

from $2.7 million earned for the same period last year.

• Diluted earnings per share of $0.23 for the three months ended March 31, 2021,

up 15.0% from diluted earnings per share of $0.20 in the same period last year.

• Net interest income of $10.9 million for the three months ended March 31, 2021,

down 3.2% from $11.2 million in the same period last year.

• Net interest margin of 2.67% for the three months ended March 31, 2021, down

26.4% from 3.63% for the same period last year.

• Provision for loan losses of $0.3 million for the three months ended March 31,

2021, down 53.9% from $0.7 million in the same period last year.

• Total assets of $1.78 billion as of March 31, 2021, up 7.5% from $1.66 billion

   as of December 31, 2020.



• Total net loans (including loans held-for-sale) of $950.8 million as of March

31, 2021, up 7.4% from $885.0 million as of December 31, 2020.

• Total investment securities of $466.0 million as of March 31, 2021, up 7.1%

from $435.1 million as of December 31, 2020.

• Total deposits of $1.61 billion as of March 31, 2021, up 8.7% from $1.48

billion as of December 31, 2020.

Recent Developments Related to COVID-19


The coronavirus pandemic and the governmental actions in response to the
pandemic, detailed in our Form 10-K for the year ended December 31, 2020,
continue to have had an impact on our business.  Our commercial real estate loan
portfolio exposure to industries most affected by the stay-at-home order and
subsequent limitations on business activities included 9.9% to retail properties
and business; 1.4% to restaurants; and 1.0% to the hospitality/hotel sector at
March 31, 2021.  Loans to these customers are generally secured by real estate
with moderate loan-to-value ratios and further supported by guarantors.  There
is concern that borrowers will draw on their credit lines to support cashflow
disruptions caused by the continuing governmental restrictions on business
activities. Most of the Bank's optional advance lines of credit are "controlled"
with advances supported by certain assets pledged to the Bank for repayment or
specific budgeted expense. The Bank monitors credit line advances daily and has
not noted any significant, unusual loan advances as of March 31, 2021.

In January 2021, the SBA reopened the PPP with an initial deadline of March 31,
2021.  On March 30, 2021, President Biden signed the PPP Extension Act of 2021
into law extending the PPP from March 31, 2021, to June 30, 2021.  However, the
SBA may not accept new lender applications for first draw or second draw PPP
loans submitted after May 31, 2021.  In this current phase of the PPP, the Bank
approved approximately 850 applications for loans covering approximately $104
million in funding as of March 31, 2021.  These PPP loan originations resulted
in approximately $4.8 million in processing fees from the SBA, which will be
recognized as an adjustment to the effective yield over the loan's life.  PPP
processing fees totaling approximately $760,000 and $0 were recognized in
interest income for the three-month periods ended March 31, 2021 and 2020,
respectively.  This includes the amortization of PPP processing fees received in
2020, which are also being recognized as an adjustment to the effective yield
over the loan's life.  The Bank had unearned PPP processing fees totaling $5.9
million and $1.9 million as of March 31, 2021 and December 31, 2020,
respectively.

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Index

During the three months ended March 31, 2021, the Bank received $57 million in
payoffs and reimbursements on PPP loans originated in 2020 from the SBA for the
amounts forgiven pursuant to the terms of the PPP.  The Bank had PPP loans
outstanding totaling $202 million and $155 million as of March 31, 2021 and
December 31, 2020, respectively.  Of the $202 million in PPP loans outstanding
as of March 31, 2021, $98 million were originated in the first and second phase
of the PPP in 2020.  The Company expects that a significant portion of these
loans will be forgiven during 2021 under the terms of the PPP, as borrowers
satisfy the requirement of applying at least 60% of the loan proceeds to support
their payroll expenses.  Loans which do not qualify for the forgiveness will
remain on the Bank's books, subject to the SBA's guarantee.

                                       34

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Index

SUMMARY


The Company recorded net income of $3,178,000 for the three months ended March
31, 2021, representing an increase of $499,000 from net income of $2,679,000 for
the same period in 2020.

The following tables present a summary of the results for the three months ended
March 31, 2021 and 2020, and a summary of our financial condition at March 31,
2021 and December 31, 2020:

                                                                  Three           Three
                                                                 months          months
                                                                  ended           ended
                                                                March 31,       March 31,
                                                                  2021            2020

(in thousands except for per share amounts and ratios) For the Period: Net Income

                                                     $     3,178     $     2,679
Basic Earnings Per Common Share                                $      0.24     $      0.20
Diluted Earnings Per Common Share                              $      0.23     $      0.20
Net Income to Average Assets (annualized)                             0.75 %          0.82 %
Net Income to Average Equity (annualized)                             8.47 %          7.91 %
Average Equity to Average Assets                                      8.80 %         10.32 %



                                                                                    December 31,
                                                                March 31, 2021          2020

(in thousands except for ratios)
At Period End:
Total Assets                                                   $      1,779,981     $  1,655,376
Total Investment Securities                                    $        466,046     $    435,080
Total Loans, Net (including loans held-for-sale)               $        950,810     $    885,020
Total Deposits                                                 $      1,607,037     $  1,478,162
Loan-To-Deposit Ratio                                                      59.2 %           59.9 %



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Index

                        FIRST NORTHERN COMMUNITY BANCORP

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

                                   Three months ended                            Three months ended
                                     March 31, 2021                                March 31, 2020
                          Average                        Yield/         Average                        Yield/
                          Balance        Interest       Rate (4)        Balance        Interest       Rate (4)
Assets
Interest-earning
assets:
Loans (1)               $   908,301     $    9,237           4.12 %   $   754,296     $    9,235           4.91 %
Certificates of
deposit                      16,065             85           2.15 %        18,159            114           2.52 %
Interest bearing due
from banks                  269,813             63           0.09 %       115,507            419           1.45 %
Investment
securities, taxable         424,086          1,486           1.42 %       329,293          1,757           2.14 %
Investment
securities,
non-taxable (2)              26,915            143           2.15 %        16,287            100           2.46 %
Other interest
earning assets                6,480             82           5.13 %         6,574            124           7.57 %
Total average
interest-earning
assets                    1,651,660         11,096           2.72 %     1,240,116         11,749           3.80 %
Non-interest-earning
assets:
Cash and due from
banks                        35,225                                        33,271
Premises and
equipment, net                6,471                                         6,529
Interest receivable
and other assets             35,258                                        36,089
Total average assets      1,728,614                                     1,316,005

Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits        400,485             55           0.06 %       331,663            158           0.19 %
Savings and MMDA's          409,068            105           0.10 %       345,082            268           0.31 %
Time, $250,000 and
under                        43,357             40           0.37 %        38,418             56           0.58 %
Time, over $250,000          14,838             24           0.66 %        14,097             36           1.02 %
Total average
interest-bearing
liabilities                 867,748            224           0.10 %       729,260            518           0.28 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank advances                 5,000                                             -
Non-interest-bearing
demand deposits             684,279                                       431,675
Interest payable and
other liabilities            19,390                                        19,236
Total liabilities         1,576,417                                     1,180,171
Total average
stockholders' equity        152,197                                       135,834
Total average
liabilities and
stockholders' equity    $ 1,728,614                                   $ 1,316,005
Net interest income
and net interest
margin (3)                              $   10,872           2.67 %                   $   11,231           3.63 %


(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 $864 and

$(2) for the three months ended March 31, 2021 and 2020, respectively. Loan

fees for the three months ended March 31, 2021 include $760 in PPP loan fees

recognized.

(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.



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Index

                        FIRST NORTHERN COMMUNITY BANCORP

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

                                   Three months ended                            Three months ended
                                     March 31, 2021                               December 31, 2020
                          Average                        Yield/         Average                        Yield/
                          Balance        Interest       Rate (4)        Balance        Interest       Rate (4)
Assets
Interest-earning
assets:
Loans (1)               $   908,301     $    9,237           4.12 %   $   924,244     $   10,817           4.64 %
Certificates of
deposit                      16,065             85           2.15 %        17,225             95           2.19 %
Interest bearing due
from banks                  269,813             63           0.09 %       267,079             73           0.11 %
Investment
securities, taxable         424,086          1,486           1.42 %       373,811          1,482           1.57 %
Investment
securities,
non-taxable (2)              26,915            143           2.15 %        26,766            143           2.12 %
Other interest
earning assets                6,480             82           5.13 %         6,480             82           5.02 %
Total average
interest-earning
assets                    1,651,660         11,096           2.72 %     1,615,605         12,692           3.12 %
Non-interest-earning
assets:
Cash and due from
banks                        35,225                                        31,396
Premises and
equipment, net                6,471                                         6,633
Interest receivable
and other assets             35,258                                        36,771
Total average assets      1,728,614                                     1,690,405

Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits        400,485             55           0.06 %       378,804             55           0.06 %
Savings and MMDA's          409,068            105           0.10 %       411,474            134           0.13 %
Time, $250,000 and
under                        43,357             40           0.37 %        43,089             50           0.46 %
Time, over $250,000          14,838             24           0.66 %        15,041             28           0.74 %
Total average
interest-bearing
liabilities                 867,748            224           0.10 %       848,408            267           0.12 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank advances                 5,000                                         7,285
Non-interest-bearing
demand deposits             684,279                                       663,103
Interest payable and
other liabilities            19,390                                        21,268
Total liabilities         1,576,417                                     1,540,064
Total average
stockholders' equity        152,197                                       150,341
Total average
liabilities and
stockholders' equity    $ 1,728,614                                   $ 1,690,405
Net interest income
and net interest
margin (3)                              $   10,872           2.67 %                   $   12,425           3.05 %


(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 $864 and

    $2,102 for the three months ended March 31, 2021 and December 31, 2020,
    respectively.  Loan fees for the three months ended March 31, 2021 and
    December 31, 2020 include $760 and $1,789 in PPP loan fees recognized,
    respectively.

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

taxable equivalent basis.

(3) Net interest margin is computed by dividing net interest income by total

average interest-earning assets.

(4) For disclosure purposes, yield/rates are annualized by dividing the number of

    days in the reported period by 365.



                                       37

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  Index

                              Analysis of Changes
                    in Interest Income and Interest Expense
                             (Dollars in thousands)

Following is an analysis of changes in interest income and expense (dollars in
thousands) for the three months ended March 31, 2021 over the three months ended
March 31, 2020 and the three months ended March 31, 2021 over the three months
ended December 31, 2020.  Changes not solely due to interest rate or volume have
been allocated proportionately to interest rate and volume.

                              Three Months Ended March 31, 2021                  Three Months Ended March 31, 2021
                                             Over                                               Over
                              Three Months Ended March 31, 2020                 Three Months Ended December 31, 2020
                                            Interest                                          Interest
                          Volume              Rate            Change         Volume             Rate             Change

Increase (Decrease)
in Interest Income:

Loans                   $     1,668       $     (1,666 )    $        2     $     (210 )     $      (1,370 )     $  (1,580 )
Certificates of
Deposit                         (13 )              (16 )           (29 )           (8 )                (2 )           (10 )
Due From Banks                  253               (609 )          (356 )            1                 (11 )           (10 )
Investment Securities
- Taxable                       422               (693 )          (271 )          166                (162 )             4
Investment Securities
- Non-taxable                    58                (15 )            43              -                   -               -
Other Assets                     (2 )              (40 )           (42 )            -                   -               -

                        $     2,386       $     (3,039 )    $     (653 )   $      (51 )     $      (1,545 )     $  (1,596 )

Increase (Decrease)
in Interest Expense:

Deposits:
Interest-Bearing
Transaction Deposits    $        26       $       (129 )    $     (103 )   $        -       $           -       $       -
Savings & MMDAs                  43               (206 )          (163 )            -                 (29 )           (29 )
Time Certificates                29                (57 )           (28 )            1                 (15 )           (14 )

                        $        98       $       (392 )    $     (294 )   $        1       $         (44 )     $     (43 )

Decrease in Net
Interest Income:        $     2,288       $     (2,647 )    $     (359 )   $      (52 )     $      (1,501 )     $  (1,553 )



                                       38

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Index

CHANGES IN FINANCIAL CONDITION


The assets of the Company set forth in the Unaudited Condensed Consolidated
Balance Sheets reflect a $27,252,000 or 10.2% increase in cash and cash
equivalents, a $2,205,000 or 13.0% decrease in certificates of deposit, a
$30,966,000 or 7.1% increase in investment securities available-for-sale, a
$66,574,000 or 7.6% increase in net loans held-for-investment, and a $784,000 or
8.5% decrease in loans held-for-sale from December 31, 2020 to March 31, 2021.
The increase in cash and cash equivalents was primarily due to an increase in
deposit balances.  The increase in investment securities was due to allocating
cash flows from deposits towards purchases of investment securities.  The
decrease in certificates of deposit was due to maturities of certificates of
deposit and allocating the cash flows from those maturities towards additional
purchases of available-for-sale securities.  The increase in net loans
held-for-investment was primarily due to PPP loans originated in the first
quarter of 2021 totaling approximately $98 million, which was partially offset
by SBA forgiveness payments on PPP loans received in the same period totaling
approximately $50 million.  Also contributing to the increase in net loans
held-for-investment during the period was commercial real estate loan purchases
totaling approximately $47.4 million in the first quarter of 2021.  Premiums on
commercial real estate loan purchases totaled $1.2 million.  The increase in
loans held-for-sale was due to the timing of funding and sale of the loans
held-for-sale pipeline.

The liabilities of the Company set forth in the Unaudited Condensed Consolidated
Balance Sheets reflect an increase in total deposits of $128,875,000 or 8.7%
from December 31, 2020 to March 31, 2021.  The overall increase in total
deposits was primarily attributable to PPP loans originated in the first quarter
of 2021, new customer relationships gained as a result of our PPP lending
activities, and increased savings rates driven by the economic uncertainties due
to the coronavirus pandemic.

CHANGES IN RESULTS OF OPERATIONS

Interest Income

The Federal Open Market Committee made no changes to the Federal Funds target of 0.00% to 0.25% during the three months ended March 31, 2021.


Interest income on loans for the three months ended March 31, 2021 was
comparable to the same period in 2020, totaling $9,237,000 and $9,235,000 for
the three-month periods ended March 31, 2021 and March 31, 2020, respectively.
Several factors contributed to loan interest income for the three months ended
March 31, 2021, including recognition of PPP processing fees, deferred interest
on forbearance loans, and declines in yields earned.  Interest income on loans
for the three months ended March 31, 2021 included approximately $760,000 in
recognition of processing fees from the SBA related to the origination of PPP
loans.  The Bank had unearned processing fees totaling $5.9 million as of March
31, 2021, which will be recognized over the life of the PPP loans.  In the
second quarter of 2020, the Bank made a policy election to cease interest
recognition for loans provided temporary full payment deferrals during the term
of the forbearance period (generally ranging from three to six months) under
Section 4013 of the CARES Act.  Upon completion of the payment forbearance
period, and resumption of performance under the original loan terms, the
foregone interest is capitalized as deferred interest and recognized as a yield
adjustment over the remaining loan term.  Loans on interest-only plans continued
to accrue interest income given continued payment performance over the course of
the forbearance period.  A majority of loans completed their forbearance period
during the fourth quarter of 2020.  Two loans totaling $900,000 were on a
principal and interest forbearance plan and one loan totaling $200,000 was on an
interest only forbearance plan at March 31, 2021.  The Bank recognized
approximately $177,000 in deferred interest for the three months ended March 31,
2021.

The decrease in loan yields is due to several factors:  adjustable rate loans
re-pricing at lower rates as a result of recent declines in interest rates and
related indices, which is mitigated to some extent by the inclusion of interest
rate floors on the majority of our variable rate loans; the accommodation of
certain fixed rate loan customers to re-price their existing loans at lower
rates to retain existing relationships in a competitive rate environment; an
increase in non-accrual loan balances; and the origination of PPP loans at an
interest rate of 1%.  PPP loans totaled $202 million as of March 31, 2021.

Interest income on certificates of deposit for the three months ended March 31,
2021 was down 25.4% from the same period in 2020, decreasing from $114,000 to
$85,000.  The decrease was primarily due to a 37 basis point decrease in
certificates of deposit yields and a decrease in average balances of
certificates of deposit.

Interest income on interest-bearing due from banks for the three months ended
March 31, 2021 was down 85.0% from the same period in 2020, decreasing from
$419,000 to $63,000.  The decrease was primarily due to a 136 basis point
decrease in interest-bearing due from yields, which was partially offset by an
increase in average interest-bearing due from banks balance.

Interest income on investment securities available-for-sale for the three months
ended March 31, 2021 was down 12.3% from the same period in 2020, decreasing
from $1,857,000 to $1,629,000. The decrease was primarily due to a 70 basis
point decrease in yields on investment securities, which was partially offset by
an increase in average balances of investment securities.

                                       39

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Index

The Company had no Federal Funds sold balances during the three months ended March 31, 2021 and March 31, 2020.

Interest Expense


Interest expense on deposits for the three months ended March 31, 2021 was down
56.8% from the same period in 2020, decreasing from $518,000 to $224,000.  The
decrease in interest expense was primarily due to an 18 basis point decrease in
average interest-bearing deposits yield, which was partially offset by an
increase in average deposits.

The Company had an FHLB advance totaling $5 million as of March 31, 2021.  The
advance, received through the FHLB's COVID-19 Relief and Recovery Advances
Program, is a short-term borrowing with a 0% interest rate.  The Company had no
FHLB advances or other borrowing balances during the three months ended March
31, 2020.

Provision for Loan Losses

Provision for loan losses totaled $300,000 for the three months ended March 31,
2021 compared to $650,000 for the same period in 2020.  The allowance for loan
losses was approximately $15,713,000, or 1.63% of total loans, at March 31,
2021, compared to $15,416,000, or 1.73% of total loans, at December 31, 2020.
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 ratio of allowance to total loans from December 31, 2020 to
March 31, 2021 was primarily due to PPP loans of approximately $202 million
outstanding as of March 31, 2021, which are fully guaranteed by the SBA.

The decrease in the provision for loan losses during the three months ended March 31, 2021 compared to the same period in 2020 was primarily due to decreases in qualitative factors resulting from an improvement in economic conditions, which was partially offset by an increase in specific reserves on impaired loans.

Provision for Unfunded Lending Commitment Losses


Reversal of unfunded lending commitment losses totaled $200,000 for the three
months ended March 31, 2021 compared to provision for unfunded lending
commitment losses of $100,000 for the same period in 2020.  The decrease was
primarily due to a decrease in qualitative factors resulting from an improvement
in economic conditions.

Provisions for unfunded lending commitment losses are included in non-interest expense in the Condensed Consolidated Statements of Income.

Non-Interest Income

Non-interest income was up 38.9% for the three months ended March 31, 2021 from the same period in 2020, increasing from $1,649,000 to $2,290,000.


The increase was primarily due to increases in gains on sales of loans
held-for-sale, loan servicing income, and debit card income, which were
partially offset by decreases in service charges on deposit accounts, investment
and brokerage income, mortgage brokerage income, and gains on sales/calls of
available-for-sale securities.  The increase in gains on sales of loans
held-for-sale was primarily due to an increase in loan origination volumes as a
result of the decline in interest rates and uptick in refinancing activity.
Although interest rates experienced a decline in the first quarter of 2021
compared to the same period in 2020, there was an uptick in interest rates
towards the end of the first quarter of 2021.  The increase in loan servicing
income was primarily due to the reversal of impairment expense recognized on
mortgage servicing rights asset primarily due to a decrease in constant
prepayment rates from December 31, 2020.  The increase in debit card income was
primarily due to an increase in transaction volumes.  The decrease in service
charges on deposit accounts was primarily due to a decrease in NSF fees, net of
waived fees.  The decrease in investment and brokerage income was primarily due
to a decrease in demand for those services.  The decrease in mortgage brokerage
income was primarily a result of decreased mortgage brokerage volume.  The
decrease in gains on sales/calls of available-for-sale securities was primarily
due to the sale of municipal securities at a net loss in the first quarter of
2021.

Non-Interest Expenses

Total non-interest expenses were down 0.8% for the three months ended March 31, 2021 from the same period in 2020, decreasing from $8,570,000 to $8,501,000.

                                       40

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Index

The decrease was primarily due to decreases in salaries and employee benefits,
occupancy and equipment, and reversal of provision for unfunded commitments,
which was partially offset by increases in data processing and other expenses.
The decrease in salaries and employee benefits was primarily due to an increase
in capitalization of loan origination costs, which was partially offset by an
increase in the number of full-time equivalent employees.  The decrease in
occupancy and equipment expense was primarily due to the lease termination of
the former trust office in the fourth quarter of 2020 and a decrease in
depreciation expense.  The reversal of  unfunded commitments expense was
primarily due to a decrease in qualitative factors resulting from an improvement
in economic conditions.  The increase in data processing expenses was primarily
due to costs associated with enhanced IT infrastructure coupled with the
implementation of a digital lending platform for PPP loans in the first quarter
of 2021.  The increase in other expenses was primarily due to increases in FDIC
assessments and loan collection expenses.

The following table sets forth other non-interest expenses by category for the three months ended March 31, 2021 and 2020.

                                                                             (in thousands)
                                                               Three months ended      Three months ended
                                                                 March 31, 2021          March 31, 2020
Other non-interest expenses
(Reversal of) provision for unfunded commitments expense       $              (200 )   $               100
FDIC assessments                                                               135                       -
Contributions                                                                   45                      49
Legal fees                                                                      49                      84
Accounting and audit fees                                                      115                     114
Consulting fees                                                                 50                      74
Postage expense                                                                 39                      22
Telephone expense                                                               30                      28
Public relations                                                                26                      62
Training expense                                                                12                      26
Loan origination expense                                                        26                      44
Computer software depreciation                                                  16                      17
Operational losses                                                              54                      64
Loan collection expense                                                        230                      34
Minibank interchange fees                                                      128                     135
Other non-interest expense                                                     328                     262
Total other non-interest expenses                              $             1,083     $             1,115



Income Taxes

The Company's tax rate, the Company's income before taxes and the amount of tax
relief provided by non-taxable earnings affect the Company's provision for
income taxes.  Provision for income taxes increased 20.6% for the three months
ended March 31, 2021 from the same period in 2020, increasing from $981,000 to
$1,183,000 primarily due to an increase in pre-tax income.  The effective tax
rate was 27.1% and 26.8% for the three months ended March 31, 2021 and March 31,
2020, respectively.

Off-Balance Sheet Commitments

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

                                            (in thousands)
                                March 31, 2021       December 31, 2020

Undisbursed loan commitments   $        207,589     $           189,097
Standby letters of credit                 2,878                   1,731
Commitments to sell loans                 3,430                   1,052
                               $        213,897     $           191,880



The reserve for unfunded lending commitments amounted to $750,000 and $950,000
as of March 31, 2021 and December 31, 2020, 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.

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Index

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 March 31,
2021 and December 31, 2020:

                                      At March 31, 2021                     

At December 31, 2020

                             Gross        Guaranteed         Net          Gross        Guaranteed         Net
(dollars in thousands)

Commercial                 $     284     $         63     $     221     $     363     $         63     $     300
Commercial real estate         6,803               32         6,771         4,875               34         4,841
Agriculture                    9,130                -         9,130         9,130                -         9,130
Residential mortgage             148                -           148           153                -           153
Residential construction           -                -             -             -                -             -
Consumer                         687                -           687           690                -           690
Total non-accrual loans    $  17,052     $         95     $  16,957     $  15,211     $         97     $  15,114



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

Non-accrual loans amounted to $17,052,000 at March 31, 2021 and were comprised
of three commercial loans totaling $284,000, four commercial real estate loans
totaling $6,803,000, three agriculture loans totaling 9,130,000, one residential
mortgage loan totaling $148,000 and four consumer loans totaling $687,000.
Non-accrual loans amounted to $15,211,000 at December 31, 2020 and were
comprised of four commercial loans totaling $363,000, three commercial real
estate loans totaling $4,875,000, three agriculture loans totaling $9,130,000,
one residential mortgage loan totaling $153,000 and five consumer loans totaling
$690,000. If the loan is considered collateral dependent, it is generally the
Company's policy to charge-off the portion of any non-accrual loan that the
Company does not expect to collect by writing the loan down to the estimated net
realizable value of the underlying collateral.

Loans for which it is probable that payment of interest and principal will not
be made in accordance with the contractual terms of the loan agreement are
considered impaired.  Nonaccrual loans are non-performing impaired loans
totaling $17,052,000 and $15,211,000 as of March 31, 2021 and December 31, 2020,
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 as a TDR is considered an impaired loan.  Performing
impaired loans, which consisted of loans modified as TDRs, totaled $1,195,000
and $2,260,000 at March 31, 2021 and December 31, 2020, respectively.  The
Company expects to collect all principal and interest due from performing
impaired loans.  These loans are not on non-accrual status.  The majority of the
non-performing impaired loans, in management's opinion, were adequately
collateralized based on recently obtained appraised property values or were
guaranteed by a governmental entity.  See "Allowance for Loan Losses" below for
additional information.  No assurance can be given that the existing or any
additional collateral will be sufficient to secure full recovery of the
obligations owed under these loans.

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Index

On March 22, 2020, the Federal bank regulatory agencies issued joint guidance
advising that the agencies have confirmed with the staff of the Financial
Accounting Standards Board that short-term modifications due to COVID-19, made
on a good faith basis to borrowers who were current prior to relief, are not
TDRs.  The CARES Act also provided relief from TDR classification for certain
COVID-19 loan modifications.  The Bank elected not to classify modifications
that meet the criteria under either the CARES Act or the criteria specified by
the regulatory agencies as TDRs.

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, increased $1,843,000 or 12.2% to
$16,957,000 during the first three months of 2021.  Non-performing assets, net
of guarantees, represented 1.0% of total assets at March 31, 2021.

                                   At March 31, 2021                        

At December 31, 2020

                          Gross        Guaranteed         Net          Gross        Guaranteed         Net
(dollars in
thousands)
Non-accrual loans       $  17,052     $         95     $  16,957     $  15,211     $         97     $  15,114
Loans 90 days past
due and still
accruing                        -                -             -             -                -             -

Total non-performing
loans                      17,052               95        16,957        15,211               97        15,114
Other real estate
owned                           -                -             -             -                -             -
Total non-performing
assets                     17,052               95        16,957        15,211               97        15,114

Non-performing loans
(net of guarantees)
to total loans                                               1.8 %                                        1.7 %
Non-performing assets
(net of guarantees)
to total assets                                              1.0 %                                        0.9 %
Allowance for loan
and lease losses to
non-performing loans
(net of guarantees)                                         92.7 %                                      102.0 %


The Company had no loans 90 days or more past due and still accruing at March 31, 2021 and December 31, 2020.


Excluding the non-performing loans cited previously, loans totaling $9,413,000
and $11,878,000 were classified as substandard loans, representing potential
problem loans at March 31, 2021 and December 31, 2020, 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 March 31, 2021 and December 31, 2020.  The ratio of the
Allowance for Loan Losses to total loans at March 31, 2021 and December 31, 2020
was 1.63% and 1.73%, 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 March 31, 2021 and
December 31, 2020.

                                       43

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Index

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 three months ended March 31, 2021 and 2020, and for the year ended December 31, 2020:

                    Analysis of the Allowance for Loan Losses
               (Amounts in thousands, except percentage amounts)

                                                        Three months ended           Year ended
                                                            March 31,               December 31,
                                                        2021          2020              2020

Balance at beginning of period                       $   15,416     $  12,356      $       12,356
Provision for loan losses                                   300           650               3,050
Loans charged-off:
Commercial                                                  (13 )        (145 )              (212 )
Commercial Real Estate                                        -             -                   -
Agriculture                                                   -             -                   -
Residential Mortgage                                          -             -                   -
Residential Construction                                      -             -                   -
Consumer                                                     (3 )          (9 )               (15 )
Total charged-off                                           (16 )        (154 )              (227 )

Recoveries:
Commercial                                                    8            11                 201
Commercial Real Estate                                        -             -                   -
Agriculture                                                   -             -                   -
Residential Mortgage                                          -             -                   -
Residential Construction                                      -             -                   -
Consumer                                                      5             6                  36
Total recoveries                                             13            17                 237

Net (charge-offs) recoveries                                 (3 )        (137 )                10

Balance at end of period                             $   15,713     $  12,869      $       15,416

Ratio of net charge-offs to average loans
outstanding during the period (annualized)                 0.00 %       (0.07 %)             0.00 %
Allowance for loan losses
To total loans at the end of the period                    1.63 %        1.67 %              1.73 %
To non-performing loans, net of guarantees at the
end of the period                                          92.7 %     1,152.1 %             102.0 %



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Index

Deposits


Deposits are one of the Company's primary sources of funds.  At March 31, 2021,
the Company had the following deposit mix: 26.9% in savings and MMDA deposits,
3.6% in time deposits, 25.5% in interest-bearing transaction deposits and 44.0%
in non-interest-bearing transaction deposits.  At December 31, 2020, the Company
had the following deposit mix: 26.1% in savings and MMDA deposits, 3.8% in time
deposits, 26.4% in interest-bearing transaction deposits and 43.7% 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.  These deposits are priced to remain
competitive.

Maturities of time certificates of deposits of over $250,000 or more outstanding at March 31, 2021 and December 31, 2020 are summarized as follows:

                                          (in thousands)
                              March 31, 2021       December 31, 2020
Three months or less          $         1,743     $             5,110
Over three to twelve months             6,540                   5,877
Over twelve months                      6,636                   3,656
Total                         $        14,919     $            14,643


Liquidity and Capital Resources


In order to serve our market area and comply with banking regulations, the
Company must maintain adequate liquidity and adequate capital.  Liquidity 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
59.2% on March 31, 2021.  In addition, on March 31, 2021, the Company had the
following short-term investments (based on remaining maturity and/or next
repricing date):  $17,748,000 in securities due within one year or less; and
$93,114,000 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 $122,000,000 at March
31, 2021.  Additionally, the Company has a line of credit with the FHLB, with a
remaining borrowing capacity at March 31, 2021 of $292,864,000; credit
availability is subject to certain collateral requirements.

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


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

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

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

                                       45

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Index

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

As of March 31, 2021, the Bank's capital ratios exceeded applicable regulatory
requirements.  The following table presents the capital ratios for the Bank,
compared to the regulatory standards for well-capitalized depository
institutions, as of March 31, 2021.

                                                            (amounts in 

thousands except percentage amounts)

                                                                   Actual                         Well Capitalized
                                                                                                       Ratio
                                                       Capital                Ratio                 Requirement
Leverage                                             $   144,788                    8.40 %                      5.0 %
Common Equity Tier 1                                 $   144,788                   15.94 %                      6.5 %
Tier 1 Risk-Based                                    $   144,788                   15.94 %                      8.0 %
Total Risk-Based                                     $   156,205                   17.20 %                     10.0 %



                                       46

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