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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)

11/04/2020 | 01:20pm 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 2019 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



? 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"), 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 thereto

? 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 financial crisis by the U.S. federal banking agencies and our current

intention not to elect to use the recently enacted 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 of loans made under the Paycheck
   Protection Program ("PPP") and the timing thereof



                                       32

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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 full

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

   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 2019 Annual Report on Form 10-K, and in our other reports to
the SEC.

                                       33

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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, 2019.

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 third quarter and year-to-date 2020 included:

• Net income of $8.8 million for the nine months ended September 30, 2020, down

21.0% from $11.1 million earned for the same period last year. Net income of

$3.4 million for the three months ended September 30, 2020, down 8.8% from $3.8

million for the same period last year.

• Diluted income per share of $0.68 for the nine months ended September 30, 2020,

down 20.9% from diluted income per share of $0.86 in the same period last

year. Diluted income per share of $0.27 for the three months ended September

30, 2020, down 6.9% from diluted income per share of $0.29 for the same period

  last year.



• Net interest income of $35.0 million for the nine months ended September 30,

2020, down 0.7% from $35.2 million for the same period last year. The decrease

was due to a decrease in interest income on due from banks, which was partially

offset by an increase in interest income on loans and investment securities and

a decrease in interest expense on deposits. Net interest income of $12.4

million for the three months ended September 30, 2020, up 5.7% from $11.7

million for the same period last year. The increase was due to an increase in

interest income on loans and a decrease in interest expense on deposits, which

was partially offset by a decrease in interest income on due from banks and on

  investment securities.



• Net interest margin of 3.29% for the nine months ended September 30, 2020, down

18.8% from 4.05% for the same period last year. Net interest margin of 3.16%

for the three months ended September 30, 2020, down 19.6% from 3.93% for the

  same period last year.



• Provision for loan losses of $2.3 million for the nine months ended September

30, 2020, compared to no provision for the same period last year. Provision

for loan losses of $0.8 million for the three months ended September 30, 2020,

compared to no provision for the same period last year. The increase was

largely driven by increases in qualitative factors adversely affecting our loan

portfolio due to declines in the general economic environment as a result of

  the coronavirus pandemic.



• Total assets of $1.68 billion as of September 30, 2020, up 29.8% from $1.29

billion as of December 31, 2019.

• Total net loans (including loans held-for-sale) of $970.5 million as of

September 30, 2020, up 25.6% from $773.0 million as of December 31, 2019.

The

increase was largely driven by PPP loans totaling approximately $232 million as

  of September 30, 2020.



• Total investment securities of $363.4 million as of September 30, 2020, up 6.0%

from $342.9 million as of December 31, 2019.

• Total deposits of $1.50 billion as of September 30, 2020, up 31.7% from $1.14

billion as of December 31, 2019.

• FHLB advances of $10 million as of September 30, 2020, compared to no FHLB

advances as of December 31, 2019. Advances are from the FHLB's COVID-19 Relief

and Recovery Advances Program and are short-term borrowings with a 0% interest

  rate.



Since March 13, 2020, the United States has been operating under a state of
emergency declared by President Trump in response to the spread of the
coronavirus and the COVID-19 disease which it causes.  On March 4, 2020,
California Governor Gavin Newsom declared a similar state-wide emergency.  Also,
early in March, a number of county and other local health agencies in California
declared emergencies and issued "stay-at-home" ordinances for all persons other
than workers at "essential businesses".  Later in 2020, the California state
government adopted a four-phase reopening plan. The ability of a county to move
into a phase with fewer restrictions on economic and social activities is
dependent upon the county's compliance with parameters such as the county's case
rate, test positivity rate, and a health equity metric.  As of this time, the
California state government, as well as the county health departments in our
market area, continue to limit business re-openings in certain sectors and/or
with capacity and other restrictions.  During March 2020 and continuing
thereafter, the pandemic and governmental responses have resulted in
recessionary economic, labor and financial market conditions across the United
States and in our markets in California, including dramatic increases in
unemployment. In response, the FRB reduced its federal funds rate by 1.5
percentage points to the current target range of .00 to .25 percent.  In
addition, in late March 2020, the U.S. government enacted the CARES Act, a $2.2
trillion economic stimulus package, the largest in U.S. history, in an effort to
lessen the impact of the pandemic on consumers and businesses.

                                       34

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Index

These developments 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 includes 5.7% to retail
properties and business; 1.3% to restaurants; and 0.9% to the hospitality/hotel
sector at September 30, 2020.  Loans to these customers are generally secured by
real estate with relatively low loan-to-value ratios and strong guarantors.
There is concern that borrowers will draw on their credit lines to support
cashflow disruptions caused by the continuing 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 September 30, 2020.  We
have also granted customer relief in a variety of ways, including extended grace
periods on residential and commercial mortgages, commercial loans, and
automobile loan and lease payments, refraining from reporting payment deferrals
to credit bureaus and waiving or refunding certain fees.  The increase in our
provision for loan and lease losses to $800,000 and $2,250,000 for the third
quarter and year to date 2020, respectively, compared to no provision for the
same periods in 2019, was largely driven by increases in qualitative factors
adversely affecting our loan portfolio due to declines in the general economic
environment as a result of the coronavirus pandemic.  The Bank, in the first
part of April 2020, commenced participation in the Paycheck Protection Program
(PPP) of the Small Business Administration (SBA) which is aimed at providing
relief from the pandemic to small businesses through loans by banks guaranteed
by the SBA.  In the initial phase of the program, the Bank approved
approximately 650 applications for loans under the PPP covering approximately
$184 million in funding.  The program was suspended after the initial
Congressional appropriation of $349 billion was exhausted.  A second phase of
the program, involving a Congressional appropriation of some $310 billion, was
initiated on April 27, 2020.  As of September 30, 2020, the Bank had approved
approximately 670 applications for PPP loans in this second phase, covering
approximately $51 million in funding.  A total of approximately $235 million in
PPP loans were originated year to date.  These PPP loan originations resulted in
approximately $7.8 million in SBA processing fees which will be recognized as an
adjustment to the effective yield over the loans projected life.  A total of
approximately $2.1 and $4.1 million of PPP processing fees was recognized in
interest income on loans for the three and nine months ended September 30, 2020,
respectively.  The Company expects that a significant portion of the loans it
has made under the PPP will be forgiven during the remainder of 2020 under the
terms of the program, as borrowers satisfy the requirement of applying at least
60% of the loan proceeds to support their payroll expenses.  Thereafter, the
Company expects to be reimbursed by the SBA for the amounts forgiven pursuant to
the terms of the PPP.  Loans which do not qualify for the forgiveness will
remain on the Bank's books, subject to the SBA's guarantee.

The Bank has continued to actively assist its communities by providing temporary
loan relief under Section 4013 of the CARES Act to customers who have been
negatively impacted by COVID-19. This relief includes loan modifications which
provided temporary forbearance programs (both full payment deferrals and
interest only payments). The Bank has provided temporary forbearance relief for
loans totaling approximately $91.3 million at September 30, 2020, a decrease of
$2.9 million compared to June 30, 2020, which resulted in the net deferral of
interest income of approximately $0.4 million and $1.3 million for the three and
nine months ended September 30, 2020, respectively.

For loans that were provided full payment deferrals under Section 4013, the Bank
made a policy election to cease recognizing interest income during the term of
the payment suspension. 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. Of the $91.3 million in total forbearances as of September
30, 2020, approximately $74.2 million were provided full payment deferrals for
terms ranging from three to six months, which resulted in the net deferral of
interest income of approximately $0.4 million and $1.3 million for the three and
nine months ended September 30, 2020, respectively.

Although banks in California are defined as "essential businesses" under the
California governmental actions and thus are allowed to remain open, some of our
employees have elected to work remotely, a majority of whom would normally be
working in our branches or offices.  In our branches and offices we continue to
enforce the use of face coverings, social distancing and using proper hygiene
practices.

For additional information on the possible effects of the pandemic on our business, see Part II., Item 1.A., "Risk Factors", in this Report on Form 10-Q.

                                       35

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Index

SUMMARY FINANCIAL DATA


The Company recorded net income of $8,809,000 for the nine months ended
September 30, 2020, representing a decrease of $2,336,000 or 21.0% from net
income of $11,145,000 for the same period in 2019.  The Company recorded net
income of $3,425,000 for the three months ended September 30, 2020, representing
a decrease of $329,000 or 8.8% from net income of $3,754,000 for the same period
in 2019.

The following tables present a summary of the results for the three and nine
months ended September 30, 2020 and 2019, and a summary of financial condition
at September 30, 2020 and December 31, 2019.

                                                Three Months          Three Months           Nine Months           Nine Months
                                               Ended September       Ended September       Ended September       Ended September
                                                  30, 2020              30, 2019              30, 2020              30, 2019
(dollars in thousands except for per share
amounts)
For the Period:
Net Income                                    $           3,425     $           3,754     $           8,809     $          11,145
Basic Earnings Per Common Share               $            0.27     $            0.29     $            0.69     $            0.87
Diluted Earnings Per Common Share             $            0.27     $            0.29     $            0.68     $            0.86
Net Income to Average Assets (annualized)                  0.84 %                1.20 %                0.78 %                1.20 %
Net Income to Average Equity (annualized)                  9.25 %               11.76 %                8.24 %               12.26 %
Average Equity to Average Assets                           9.10 %               10.18 %                9.52 %                9.83 %



                                                                September 30, 2020       December 31, 2019

(in thousands except for ratios)
At Period End:
Total Assets                                                   $          1,677,266     $         1,292,591
Total Investment Securities, at fair value                     $            363,369     $           342,897
Total Loans, Net (including loans held-for-sale)               $            970,497     $           773,003
Total Deposits                                                 $          1,499,001     $         1,138,632
Loan-To-Deposit Ratio                                                          64.7 %                  67.9 %



                                       36

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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
                                   September 30, 2020                            September 30, 2019
                          Average                        Yield/         Average                        Yield/
                          Balance        Interest       Rate (4)        Balance        Interest       Rate (4)
Assets
Interest-earning
assets:
Loans (1)               $   979,406     $   10,815           4.38 %   $   737,722     $    9,642           5.19 %
Certificate of
deposits                     18,992            106           2.21 %        14,420            101           2.78 %
Interest bearing due
from banks                  205,410             54           0.10 %       101,375            599           2.34 %
Investment
securities, taxable         318,983          1,500           1.87 %       307,581          1,660           2.14 %
Investment
securities,
non-taxable  (2)             22,624            131           2.30 %        13,440             82           2.42 %
Other interest
earning assets                6,480             82           5.02 %         6,574            114           6.88 %
Total average
interest-earning
assets                    1,551,895         12,688           3.24 %     1,181,112         12,198           4.10 %
Non-interest-earning
assets:
Cash and due from
banks                        31,933                                        29,398
Premises and
equipment, net                6,828                                         6,272
Other real estate
owned                             -                                           784
Interest receivable
and other assets             36,056                                        36,547
Total average assets    $ 1,626,712                                   $ 1,254,113

Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits        369,363             64           0.07 %       305,573            124           0.16 %
Savings and MMDA's          406,133            167           0.16 %       334,228            264           0.31 %
Time, $250,000 or
less                         40,858             51           0.50 %        39,964             58           0.58 %
Time, over $250,000          13,679             32           0.93 %        17,113             41           0.95 %
Total average
interest-bearing
liabilities                 830,033            314           0.15 %       696,878            487           0.28 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank advances                10,000                                             -
Non-interest-bearing
demand deposits             619,520                                       412,547
Interest payable and
other liabilities            19,095                                        17,007
Total liabilities         1,478,648                                     1,126,432
Total average
stockholders' equity        148,064                                       127,681
Total average
liabilities and
stockholders' equity    $ 1,626,712                                   $ 1,254,113
Net interest income
and net interest
margin (3)                              $   12,374           3.16 %                   $   11,711           3.93 %


(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

$2,205 and $(70) for the three months ended September 30, 2020 and 2019,

respectively. Loan fees for the three months ended September 30, 2020

include $2,138 in PPP loan fees recognized. Excluding this amount, loan fees

for the three months ended September 30, 2020 totaled $67.

(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

                        FIRST NORTHERN COMMUNITY BANCORP

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

                                    Nine months ended                             Nine months ended
                                   September 30, 2020                            September 30, 2019
                          Average                        Yield/         Average                        Yield/
                          Balance        Interest       Rate (4)        Balance        Interest       Rate (4)
Assets
Interest-earning
assets:
Loans (1)               $   884,681     $   29,752           4.48 %   $   737,304     $   29,110           5.28 %
Certificate of
deposits                     19,876            342           2.29 %        11,744            252           2.87 %
Interest bearing due
from banks                  161,476            510           0.42 %        96,207          1,727           2.40 %
Investment
securities, taxable         324,087          4,924           2.02 %       300,063          4,890           2.18 %
Investment
securities,
non-taxable  (2)             19,624            355           2.41 %        11,916            202           2.27 %
Other interest
earning assets                6,519            289           5.91 %         6,348            337           7.10 %
Total average
interest-earning
assets                    1,416,263         36,172           3.40 %     1,163,582         36,518           4.20 %
Non-interest-earning
assets:
Cash and due from
banks                        33,698                                        27,847
Premises and
equipment, net                6,578                                         6,363
Other real estate
owned                             -                                           985
Interest receivable
and other assets             40,812                                        34,857
Total average assets    $ 1,497,351                                   $ 1,233,634

Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits        349,501            303           0.12 %       306,534            361           0.16 %
Savings and MMDA's          379,438            652           0.23 %       330,491            673           0.27 %
Time, $250,000 or
less                         39,563            165           0.56 %        41,379            170           0.55 %
Time, over $250,000          13,246             97           0.98 %        17,719            106           0.80 %
Total average
interest-bearing
liabilities                 781,748          1,217           0.21 %       696,123          1,310           0.25 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank Advances                 5,109                                             -
Non-interest-bearing
demand deposits             548,995                                       401,269
Interest payable and
other liabilities            18,898                                        15,016
Total liabilities         1,354,750                                     1,112,408
Total average
stockholders' equity        142,601                                       121,226
Total average
liabilities and
stockholders' equity    $ 1,497,351                                   $ 1,233,634
Net interest income
and net interest
margin (3)                              $   34,955           3.29 %                   $   35,208           4.05 %


(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

thereon is excluded. Loan interest income includes loan fees of approximately

$4,062 and $(13) for the nine months ended September 30, 2020 and 2019,

respectively. Loan fees for the nine months ended September 30, 2020 include

$4,119 in PPP loan fees recognized. Excluding this amount, loan fees for the

nine months ended September 30, 2020 totaled $(57).

(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

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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
                                   September 30, 2020                               June 30, 2020
                          Average                        Yield/         Average                        Yield/
                          Balance        Interest         Rate          Balance        Interest         Rate
Assets
Interest-earning
assets:
Loans (1)               $   979,406     $   10,815           4.38 %   $   919,301     $    9,702           4.23 %
Certificates of
deposit                      18,992            106           2.21 %        22,486            123           2.19 %
Interest bearing due
from banks                  205,410             54           0.10 %       163,031             36           0.09 %
Investment
securities, taxable         318,983          1,500           1.87 %       324,040          1,667           2.06 %
Investment
securities,
non-taxable (2)              22,624            131           2.30 %        19,929            124           2.50 %
Other interest
earning assets                6,480             82           5.02 %         6,502             83           5.12 %
Total average
interest-earning
assets                    1,551,895         12,688           3.24 %     1,455,289         11,735           3.23 %
Non-interest-earning
assets:
Cash and due from
banks                        31,933                                        35,907
Premises and
equipment, net                6,828                                         6,375
Other real estate
owned                             -                                             -
Interest receivable
and other assets             36,056                                        50,343
Total average assets    $ 1,626,712                                   $ 1,547,914

Liabilities and
Stockholders' Equity:
Interest-bearing
liabilities:
Interest-bearing
transaction deposits        369,363             64           0.07 %       347,261             81           0.09 %
Savings and MMDA's          406,133            167           0.16 %       386,804            218           0.23 %
Time, $250,000 and
under                        40,858             51           0.50 %        38,046             57           0.60 %
Time, over $250,000          13,679             32           0.93 %        13,309             29           0.87 %
Total average
interest-bearing
liabilities                 830,033            314           0.15 %       785,420            385           0.20 %
Non-interest-bearing
liabilities:
Federal Home Loan
Bank Advances                10,000                                         5,275
Non-interest-bearing
demand deposits             619,520                                       595,343
Interest payable and
other liabilities            19,095                                        18,358
Total liabilities         1,478,648                                     1,404,396
Total average
stockholders' equity        148,064                                       143,518
Total average
liabilities and
stockholders' equity    $ 1,626,712                                   $ 1,547,914
Net interest income
and net interest
margin (3)                              $   12,374           3.16 %                   $   11,350           3.13 %


(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 $2,205

and $1,859 for the three months ended September 30, 2020 and June 30, 2020,

respectively. Loan fees for the three months ended September 30, 2020 and

June 30, 2020 include $2,138 and $1,981 in PPP loan fees recognized,

respectively. Excluding these amounts, loan fees for the three months ended

September 30, 2020 and June 30, 2020 totaled $67 and $(122), 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

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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 September 30, 2020 over the three months
ended September 30, 2019, the nine months ended September 30, 2020 over the nine
months ended September 30, 2019, and the three months ended September 30, 2020
over the three months ended June 30, 2020.  Changes not solely due to interest
rate or volume have been allocated proportionately to interest rate and volume.

                           Three Months Ended                       Nine Months Ended                       Three Months Ended
                           September 30, 2020                      September 30, 2020                       September 30, 2020
                                  Over                                    Over                                     Over
                           Three Months Ended                       Nine Months Ended                       Three Months Ended
                           September 30, 2019                      September 30, 2019                          June 30, 2020
                                Interest                                Interest                                  Interest
                    Volume        Rate         Change       Volume        Rate         Change       Volume          Rate         Change

Increase (Decrease) in Interest Income:


Loans              $  3,756     $  (2,583 )   $  1,173     $  6,951     $  (6,309 )   $    642     $     848     $      265     $  1,113
Certificates of
Deposit                  28           (23 )          5          149           (59 )         90           (18 )            1          (17 )
Due From Banks          306          (851 )       (545 )        740        (1,957 )     (1,217 )          13              5           18
Investment
Securities -
Taxable                  58          (218 )       (160 )        394          (360 )         34           (24 )         (143 )       (167 )
Investment
Securities -
Non-taxable              53            (4 )         49          139            14          153            17            (10 )          7
Other Assets             (2 )         (30 )        (32 )          9           (57 )        (48 )           -             (1 )         (1 )
                   $  4,199     $  (3,709 )   $    490     $  8,382     $  (8,728 )   $   (346 )   $     836     $      117     $    953

Increase (Decrease) in Interest Expense:

Deposits:

Interest-Bearing

Transaction

Deposits           $     21     $     (81 )   $    (60 )   $     45     $   

(103 ) $ (58 ) $ 4 $ (21 ) $ (17 ) Savings & MMDAs 47 (144 ) (97 ) 89

 (110 )        (21 )          12            (63 )        (51 )
Time
Certificates             (7 )          (9 )        (16 )        (79 )          65          (14 )           5             (8 )         (3 )

                   $     61     $    (234 )   $   (173 )   $     55     $    (148 )   $    (93 )   $      21     $      (92 )   $    (71 )

Increase
(decrease) in
Net Interest
Income:            $  4,138     $  (3,475 )   $    663     $  8,327     $  (8,580 )   $   (253 )   $     815     $      209     $  1,024



                                       40

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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 $164,150,000 or 147.2% increase in cash and cash
equivalents, a $3,442,000 or 23.4% increase in certificates of deposit, a
$20,472,000 or 6.0% increase in investment securities available-for-sale, a
$196,974,000 or 25.6% increase in net loans held-for-investment, and a $520,000
or 12.6% increase in loans held-for-sale from December 31, 2019 to September 30,
2020.  The increase in cash and cash equivalents, certificates of deposit, and
investment securities was primarily due to an increase in deposit balances. 

The

increase in net loans held-for-investment was primarily due to PPP loans
originated year to date totaling approximately $235 million which are classified
as commercial loans.  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 $360,369,000 or 31.7%
from December 31, 2019 to September 30, 2020.  The overall increase in total
deposits was primarily attributable to PPP loans originated year to date, 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.  During the current year, the Company requested and
received advances totaling $10 million through the FHLB's COVID-19 Relief and
Recovery Advances Program.  The advances are short-term borrowings with a 0%
interest rate.

CHANGES IN RESULTS OF OPERATIONS

Interest Income


The Federal Open Market Committee, in response to the economic effects of the
pandemic, decreased the Federal Funds rate by 150 basis points to 0.00% to 0.25%
during the nine months ended September 30, 2020.

Interest income on loans for the nine months ended September 30, 2020 was up
2.2% from the same period in 2019, increasing from $29,110,000 to $29,752,000,
and was up 12.2% for the three months ended September 30, 2020 over the same
period in 2019, increasing from $9,642,000 to $10,815,000.  The increase in
interest income on loans for the three and nine months ended September 30, 2020
was primarily due to the recognition of processing fees from the SBA related to
the origination of the PPP loans. The Company received a total of approximately
$7.8 million in processing fees from the SBA during the nine months ended
September 30, 2020. These fees are required to be recognized as an adjustment to
the effective yield over the life of the loan. For the three and nine months
ended September 30, 2020, the Bank recognized $2,138,000 and $4,119,000,
respectively, of these processing fees which are included as a component of
interest income on loans. The remaining balance of approximately $3.7 million
will be recognized over the remaining life of the PPP loans.  The increase in
interest income on loans was offset by an 81 and 80 basis point decrease in loan
yields for the three and nine months ended September 30, 2020, respectively.
The decrease in loan yields compared to prior periods 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; our 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 (see Note 2 of the
Notes to Condensed Consolidated Financial Statements) and the origination of
$235 million of PPP loans at an interest rate of 1%. Loans provided temporary
forbearance relief under the CARES act totaled $91.3 million on September 30,
2020 which resulted in the net deferral of interest income of approximately $0.4
and $1.3 million for the three and nine months ended September 30, 2020.

Interest income on certificates of deposit for the nine months ended September
30, 2020 was up 35.7% from the same period in 2019, increasing from $252,000 to
$342,000, and was up 5.0% for the three months ended September 30, 2020 over the
same period in 2019, increasing from $101,000 to $106,000.  The increase in
interest income on certificates of deposit for the nine months ended September
30, 2020 as compared to the same period a year ago was primarily due to an
increase in average balances of certificates of deposit, which was partially
offsect by a 58 basis point decrease in yield on certificates of deposit.  The
increase in interest income on certificates of deposit for the three months
ended September 30, 2020 as compared to the same period a year ago was primarily
due to an increase in average certificates of deposit, which was partially
offset by a 57 basis point decrease in yield on certificates of deposit.

Interest income on interest-bearing due from banks for the nine months ended
September 30, 2020 was down 70.5% from the same period in 2019, decreasing from
$1,727,000 to $510,000, and was down 91.0% for the three months ended September
30, 2020 over the same period in 2019, decreasing from $599,000 to $54,000.
This income is primarily derived from interest on excess reserves held at the
Federal Reserve.  The decrease in interest income on interest-bearing due from
banks for the nine months ended September 30, 2020 as compared to the same
period a year ago was primarily due to reductions in the Federal Funds Rate
resulting in a 198 basis point decrease in yield on interest-bearing due from
banks, which was partially offset by an increase in average balances of
interest-bearing due from banks.  The increase in interest income on
interest-bearing due from banks for the three months ended September 30, 2020 as
compared to the same period a year ago was primarily due to reductions in the
Federal Funds Rate, resulting in a 224 basis point decrease in yield on
interest-bearing due from banks, which was partially offset by an increase in
average balances of interest-bearing due from banks.

                                       41

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Index

Interest income on investment securities available-for-sale for the nine months
ended September 30, 2020 was up 3.7% from the same period in 2019, increasing
from $5,092,000 to $5,279,000, and was down 6.4% for the three months ended
September 30, 2020 over the same period in 2019, decreasing from $1,742,000 to
$1,631,000.  The increase in interest income on investment securities for the
nine months ended September 30, 2020 as compared to the same period a year ago
was primarily due to an increase in average investment securities, which was
partially offset by a 13 basis point decrease in investment yields.  The
decrease in interest income on investment securities for the three months ended
September 30, 2020 as compared to the same period a year ago was primarily due
to  a 26 basis point decrease in investment yields, which was partially offset
by an increase in average investment securities.

Interest income on other earning assets for the nine months ended September 30,
2020 was down 14.2% from the same period in 2019, decreasing from $337,000 to
$289,000, and was down 28.1% for the three months ended September 30, 2020 over
the same period in 2019, decreasing from $114,000 to $82,000.  This income is
primarily derived from dividends received by the Federal Home Loan Bank.  The
decrease in interest income on other assets for the nine months ended September
30, 2020 as compared to the same period a year ago was primarily due to a 119
basis point decrease in yield on other earning assets as a result of decreased
FHLB dividend rates.  The decrease in interest income on other earning assets
for the three months ended September 30, 2020 as compared to the same period a
year ago was primarily due to a 186 basis point decrease in yield on other
earning assets as a result of decreased FHLB dividend rates.

The Company had no Federal Funds sold balances during the three and nine months ended September 30, 2020 and September 30, 2019.

Interest Expense


Interest expense on deposits for the nine months ended September 30, 2020 was
down 7.1% from the same period in 2019, decreasing from $1,310,000 to
$1,217,000, and was down 35.5% for the three months ended September 30, 2020
over the same period in 2019, decreasing from $487,000 to $314,000.  The
decrease in interest expense during the nine months ended September 30, 2020 was
primarily due to a 4 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 decrease in interest expense during the three
months ended September 30, 2020 was primarily due to a 13 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 received FHLB advances of $10 million during the nine months ended
September 30, 2020 through the FHLB's COVID-19 Relief and Recovery Advances
Program.  The advances are short-term borrowings with a 0% interest rate.  The
Company had no FHLB advances or other borrowing balances during the nine months
ended September 30, 2019.

Provision for Loan Losses

Provision for loan losses totaled $2,250,000 for the nine months ended September
30, 2020 compared to no provision for loan losses for the same period in 2019.
Provision for loan losses totaled $800,000 for the three months ended September
30, 2020 compared to no provision for loan losses for the same period in 2019.
The allowance for loan losses was approximately $14,456,000 or 1.47% of total
loans, at September 30, 2020, compared to $12,356,000, or 1.58% of total loans,
at December 31, 2019.  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, 2019 to September 30, 2020 was primarily due to PPP loans of
approximately $232 million outstanding as of September 30, 2020, which are fully
guaranteed by the SBA.

The increase in the provision for loan losses during the three and nine months
ended September 30, 2020 compared to the same period in 2019 was primarily due
to increases in qualitative factors adversely affecting our loan portfolio
resulting from the downturn in economic conditions associated with the COVID-19
pandemic.

Provision for Unfunded Lending Commitment Losses


Provision for unfunded lending commitment losses totaled $110,000 and $40,000
for the nine months ended September 30, 2020 and September 30, 2019,
respectively.  There was no provision for unfunded lending commitment losses for
each of the three months ended September 30, 2020 and September 30, 2019.  The
changes in the provision for unfunded lending commitments was primarily due to
increases in qualitative factors adversely affecting our loan portfolio
resulting from the downturn in economic conditions associated with the COVID-19
pandemic.

The provision for unfunded lending commitment losses is included in other non-interest expense in the Condensed Consolidated Statements of Income.

                                       42

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Index

Non-Interest Income


Non-interest income was up 6.9% for the nine months ended September 30, 2020
from the same period in 2019, increasing from $5,319,000 to $5,686,000.
Non-interest income was up 33.5% for the three months ended September 30, 2020
from the same period in 2019, increasing from $1,789,000 to $2,389,000.

The increase was primarily due to increases in gains on sales of loans
held-for-sale and gains on sales of available-for-sale securities, which was
partially offset by decreases in service charges on deposit accounts, investment
and brokerage services income, mortgage  brokerage income, loan servicing income
and other income.  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
recent decline in interest rates and uptick in refinancing activity.  The
increase in gains on sales of available-for-sale securities was primarily due to
the sale of municipal securities during the third quarter of 2020.  The decrease
in service charges on deposit accounts was primarily a result of the COVID-19
pandemic and the Bank's decision to waive overdraft/NSF fees for all business
and consumer customers for an initial period of 60 days which began in March and
was later extended into the third quarter.  The auto-waiver period expired on
August 1, 2020.  This assistance resulted in increased fee waiver activity,
reducing reported service charge income.  The decrease in investment and
brokerage services 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 loan servicing income was
primarily due to impairment expense recognized on mortgage servicing rights
asset.  The decrease in other income year to date was primarily due to a gain on
sale of land recognized during the nine months ended September 30, 2019 that was
not repeated during the same period in 2020.

Non-Interest Expenses


Total non-interest expenses were up 4.7% for the nine months ended September 30,
2020 from the same period in 2019, increasing from $25,138,000 to $26,327,000.
Total non-interest expenses were up 11.2% for the three months ended September
30, 2020 from the same period in 2019, increasing from $8,315,000 to $9,250,000.

The increase was primarily due to increases in salaries and employee benefits,
occupancy and equipment and other expenses, which was partially offset by a
decrease in other real estate owned expense.  The increase in salaries and
employee benefits was primarily due to an increase in the number of full-time
equivalent employees.  The increase in occupancy and equipment expense was
primarily due to rent expense and other expenses associated with the opening of
an administrative office space and branch during the second half of 2019.  The
increase in other expenses was primarily due to increases in FDIC assessments
and loan collection expense, which was partially offset by a decrease in public
relations expense.  The decrease in other real estate owned expense was due to a
writedown on an other real estate owned property during the nine months ended
September 30, 2019.

                                       43

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Index

The following table sets forth other non-interest expenses by category for the three and nine months ended September 30, 2020 and 2019.

                                                                                         (in thousands)
                                                                              Three months
                                                   Three months ended             ended             Nine months ended       Nine months ended
                                                   September 30, 2020     

September 30, 2019 September 30, 2020 September 30, 2019 Other non-interest expenses Provision for unfunded loan commitments

            $                 -     $                 -     $               110     $                40
FDIC assessments                                                   108                     (98 )                   238                      72
Contributions                                                       18                      27                      99                     154
Legal fees                                                          59                      51                     268                     282
Accounting and audit fees                                          114                     115                     342                     339
Consulting fees                                                    158                     133                     352                     398
Postage expense                                                     49                      30                     115                     104
Telephone expense                                                   32                      42                      92                     106
Public relations                                                    24                      95                     116                     225
Training expense                                                    12                      54                      54                     135
Loan origination expense                                            55                      59                     165                     141
Computer software depreciation                                      18                      18                      52                      72
Sundry losses                                                       47                      35                     126                     153
Loan collection expense                                            154                      26                     256                     (19 )
Interchange fees                                                   123                     101                     366                     360
Other non-interest expense                                         355                     351                     927                   1,000

Total other non-interest expenses                  $             1,326     $             1,039     $             3,678     $             3,562



Income Taxes

The Company's tax rate, the Company's income before taxes and the amount of tax
relief provided by non-taxable earnings affect the Company's provision for
income taxes.  Provision for income taxes decreased 23.3% for the nine months
ended September 30, 2020 from the same period in 2019, decreasing from
$4,244,000 to $3,255,000, and decreased 10.0% for the three months ended
September 30, 2020 from the same period in 2019, decreasing from $1,431,000 to
$1,288,000.  The decrease in provision for income taxes was primarily due to a
decrease in pre-tax income.

Off-Balance Sheet Commitments

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

                                              (in thousands)

                                September 30, 2020       December 31, 2019

Undisbursed loan commitments   $            192,765     $           198,534
Standby letters of credit                     2,898                   2,455
Commitments to sell loans                     2,330                   1,240
                               $            197,993     $           202,229



The reserve for unfunded lending commitments amounted to $950,000 and $840,000
as of September 30, 2020 and December 31, 2019, 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.

                                       44

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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 September 30,
2020 and December 31, 2019:

                                    At September 30, 2020                   

At December 31, 2019

                             Gross        Guaranteed         Net          Gross         Guaranteed         Net
(in thousands)

Commercial                 $     267     $          -     $     267     $      266     $        170     $      96
Commercial real estate         5,390               37         5,353            466               45           421
Agriculture                    9,130                -         9,130              -                -             -
Residential mortgage             155                -           155            172                -           172
Residential construction           -                -             -              -                -             -
Consumer                         695                -           695            253                -           253
Total non-accrual loans    $  15,637     $         37     $  15,600     $    1,157     $        215     $     942


See Note 2 of the Notes to Condensed Consolidated Financial Statements for discussion on the Bank's policy election as a result of the CARES Act.


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 $15,637,000 at September 30, 2020 and were
comprised of two commercial loans totaling $267,000, four commercial real estate
loans totaling $5,390,000, three agriculture loans totaling $9,130,000, one
residential mortgage loan totaling $155,000, and four consumer loans totaling
$695,000.  Non-accrual loans amounted to $1,157,000 at December 31, 2019 and
were comprised of three commercial loans totaling $266,000, two commercial real
estate loans totaling $466,000, one residential mortgage loan totaling $172,000
and four consumer loans totaling $253,000. If the loan is considered collateral
dependent, it is generally the Company's policy to charge-off the portion of any
non-accrual loan that the Company does not expect to collect by writing the loan
down to the estimated net realizable value of the underlying collateral.

Loans for which it is probable that payment of interest and principal will not
be made in accordance with the contractual terms of the loan agreement are
considered impaired.  Non-performing impaired loans totaled $15,637,000 and
$1,157,000 as of September 30, 2020 and December 31, 2019, respectively.  The
increase in non-performing impaired loans from December 31, 2019 to September
30, 2020 was primarily due to two commercial real estate loans comprising one
lending relationship and three agriculture loans comprising one lending
relationship.  A restructuring of a loan can constitute a TDR if the Company for
economic or legal reasons related to the borrower's financial difficulties
grants a concession to the borrower that it would not otherwise consider.  A
loan that is restructured as a TDR is considered an impaired loan.  Performing
impaired loans, which consisted of loans modified as TDRs, totaled $2,469,000
and $3,318,000 at September 30, 2020 and December 31, 2019, 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 as of September 30, 2020 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.

                                       45

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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 $14,658,000 or 1,556%
to $15,600,000 during the first nine months of 2020.  Non-performing assets, net
of guarantees, represented 0.9% of total assets at September 30, 2020.

                                 At September 30, 2020                      

At December 31, 2019

                          Gross        Guaranteed         Net          Gross        Guaranteed         Net
(dollars in
thousands)

Non-accrual loans       $  15,637     $         37     $  15,600     $   1,157     $        215     $     942
Loans 90 days past
due and still
accruing                        -                -             -             -                -             -

Total non-performing
loans                      15,637               37        15,600         1,157              215           942
Other real estate
owned                           -                -             -             -                -             -
Total non-performing
assets                  $  15,637     $         37     $  15,600     $  
1,157     $        215     $     942

Non-performing loans
(net of guarantees)
to total loans                                               1.6 %                                        0.1 %
Non-performing assets
(net of guarantees)
to total assets                                              0.9 %                                        0.1 %
Allowance for loan
and lease losses to
non-performing loans
(net of guarantees)                                         92.7 %                                    1,311.7 %



The Company had no loans 90 days or more past due and still accruing at September 30, 2020 and December 31, 2019.


Excluding the non-performing loans cited previously, loans totaling $10,045,000
and $8,749,000 were classified as substandard or doubtful loans, representing
potential problem loans at September 30, 2020 and December 31, 2019,
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 September 30, 2020 and December 31, 2019.  The
ratio of the Allowance for Loan Losses to total loans at September 30, 2020 and
December 31, 2019 was 1.47% and 1.58%, 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 September 30, 2020
and December 31, 2019.

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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 nine months ended September 30, 2020 and 2019, and for the year ended December 31, 2019:

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

                                                        Nine months ended            Year ended
                                                          September 30,             December 31,
                                                       2020           2019              2019

Balance at beginning of period                       $  12,356      $  12,822      $       12,822
Provision for loan losses                                2,250              -                   -
Loans charged-off:
Commercial                                                (184 )         (596 )              (638 )
Commercial Real Estate                                       -              -                   -
Agriculture                                                  -            (98 )               (98 )
Residential Mortgage                                         -              -                   -
Residential Construction                                     -              -                   -
Consumer                                                   (13 )          (29 )               (43 )

Total charged-off                                         (197 )         (723 )              (779 )

Recoveries:
Commercial                                                  13             85                 209
Commercial Real Estate                                       -              -                   -
Agriculture                                                  -              -                   -
Residential Mortgage                                         -             72                  74
Residential Construction                                     -             21                  21
Consumer                                                    34             10                   9

Total recoveries                                            47            188                 313

Net charge-offs                                           (150 )         (535 )              (466 )

Balance at end of period                             $  14,456      $  12,287      $       12,356

Ratio of net charge-offs to average loans
outstanding during the period (annualized)               (0.02 %)       (0.10 %)            (0.06 %)
Allowance for loan losses
To total loans at the end of the period                   1.47 %         1.60 %              1.58 %
To non-performing loans, net of guarantees at the
end of the period                                         92.7 %      1,033.4 %           1,311.7 %



The decrease in the ratio of allowance to total loans from December 31, 2019 to
September 30, 2020 was primarily due to PPP loans of approximately $232 million
outstanding as of September 30, 2020, which are fully guaranteed by the SBA.
The increase in the provision for loan losses during the three and nine months
ended September 30, 2020 compared to the same periods in 2019 was primarily due
to increases in qualitative factors resulting from the downturn in economic
conditions associated with the COVID-19 pandemic.

The decrease in the ratio of allowance for loan losses to non-performing loans,
net of guarantees from December 31, 2019 to September 30, 2020 was primarily due
to the increase in non-performing loans.  The increase in non-performing
impaired loans from December 31, 2019 to September 30, 2020 was primarily due to
two commercial real estate loans comprising one lending relationship and three
agriculture loans comprising one lending relationship.

                                       47

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Index

Deposits


Deposits are one of the Company's primary sources of funds.  At September 30,
2020, the Company had the following deposit mix: 27.1% in savings and MMDA
deposits, 3.9% in time deposits, 25.1% in interest-bearing transaction deposits
and 43.9% in non-interest-bearing transaction deposits.  At December 31, 2019,
the Company had the following deposit mix: 30.2% in savings and MMDA deposits,
4.7% in time deposits, 27.9% in interest-bearing transaction deposits and 37.2%
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 September 30, 2020 and December 31, 2019 are summarized as follows:

                                             (in thousands)
                               September 30, 2020       December 31, 2019
Three months or less          $              2,458     $             4,738
Over three to twelve months                  8,328                   5,104
Over twelve months                           3,614                   6,035
Total                         $             14,400     $            15,877


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 is the
ratio of net loans to deposits (including loans held-for-sale).  This ratio was
64.7% on September 30, 2020.  In addition, on September 30, 2020, the Company
had the following short-term investments (based on remaining maturity and/or
next repricing date):  $18,515,000 in securities due within one year or less;
and $74,320,000 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
September 30, 2020.  Additionally, the Company has a line of credit with the
FHLB, with a remaining borrowing capacity at September 30, 2020 of $309,051,000;
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 on Banking Supervision ("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 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.  The final rules provide for
increased minimum capital ratios as follows: (a) a common equity Tier 1 capital
ratio of 4.5%; (b) a Tier 1 capital ratio of 6%; (c) a total capital ratio of
8%; and (d) a Tier 1 leverage ratio to average consolidated assets of 4%.  Under
these rules, in order to avoid certain limitations on capital distributions,
including dividend payments and certain discretionary bonus payments to
executive officers, a banking organization must hold a capital conservation
buffer composed of common equity Tier 1 capital above its minimum risk-based
capital requirements (equal to 2.5% of total risk-weighted assets).  The capital
conservation buffer is designed to absorb losses during periods of economic
stress.

Pursuant to the Economic Growth Regulatory Relief and Consumer Protection Act
(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.

                                       48

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Index

In November 2019, the bank regulatory agencies jointly adopted a final rule,
that became effective January 1, 2020, that provided for a simple measure of
capital adequacy for certain community banking organizations, consistent with
the EGRRCPA.  Under the rule, depository institutions and depository institution
holding companies that have less than $10 billion in total consolidated assets,
such as the Company and the Bank, and that meet other qualifying criteria,
including a leverage ratio (equal to tier 1 capital divided by average total
consolidated assets) of greater than 9 percent, are eligible to opt into the
community bank leverage ratio framework.  In April 2020, the federal bank
regulatory agencies issued an interim final rule that made temporary changes to
the community bank leverage ratio framework, pursuant to the CARES Act.  As of
the second quarter 2020, a banking organization with a leverage ratio of 8
percent or greater (and that meets other qualifying criteria) may elect to use
the community bank leverage ratio framework. The temporary changes to the
community bank leverage ratio framework implemented by this interim final rule
will cease to be effective as of the earlier of the termination date of the
national emergency concerning the coronavirus disease declared by the President
on March 13, 2020, or December 31, 2020. Concurrently, the federal bank
regulatory agencies issued an interim final rule that provides for a transition
from the temporary 8 percent community bank leverage ratio requirement to the 9
percent community bank leverage ratio requirement under the final rule.  Under
the transition rule, the community bank leverage ratio will be 8 percent in the
second quarter through fourth quarter of calendar year 2020, 8.5 percent in
calendar year 2021, and 9 percent thereafter.  Qualifying community banking
organizations that elect to use the community bank leverage ratio framework and
that maintain a leverage ratio of greater than 8 percent (subject to transition
to 9 percent beginning after calendar year 2021) will be considered to have
satisfied the generally applicable risk-based and leverage capital requirements
in the agencies' capital rules and, if applicable, will be considered to have
met the well-capitalized ratio requirements for purposes of the FDIA. At the
present time, the Company does not intend to elect to use the community bank
leverage framework.

As of September 30, 2020, 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 September 30, 2020.

                                                                (amounts in 

thousands except percentage amounts)

                                                                       Actual                             Well Capitalized
                                                                                                               Ratio
                                                           Capital                    Ratio                 Requirement
Leverage                                             $           138,177                    8.54 %                      5.0 %
Common Equity Tier 1                                 $           138,177                   15.83 %                      6.5 %
Tier 1 Risk-Based                                    $           138,177                   15.83 %                      8.0 %
Total Risk-Based                                     $           149,142                   17.09 %                     10.0 %



                                       49

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Index

© Edgar Online, source Glimpses

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