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Section 1: 10-Q (FORM 10-Q)

plbc20180630_10q.htm
 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
June 30, 2018

 

 

 

 

TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________

 

COMMISSION FILE NUMBER: 000-49883

 

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

 

California

75-2987096

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)

 

 

 

 

35 S. Lindan Avenue, Quincy, California

95971

(Address of Principal Executive Offices)

(Zip Code)

 

 

Registrant’s Telephone Number, Including Area Code (530) 283-7305

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒   No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule12b-2 of the Exchange Act:

 

  Large Accelerated Filer ☐ Accelerated Filer ☒ Non-Accelerated Filer ☐ Smaller Reporting Company ☐ Emerging Growth Company ☐

              

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 27, 2018. 5,118,676 shares.

 

 

 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

PLUMAS BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

   

June 30,

2018

   

December 31,
201
7

 
                 

Assets

               

Cash and cash equivalents

  $ 52,673     $ 87,537  

Investment securities available for sale

    157,792       137,466  

Loans, less allowance for loan losses of $6,698 at June 30, 2018 and $6,669 at December 31, 2017

    511,977       482,248  

Real estate acquired through foreclosure

    953       1,344  

Premises and equipment, net

    13,800       11,346  

Bank owned life insurance

    12,693       12,866  

Accrued interest receivable and other assets

    14,830       12,620  

Total assets

  $ 764,718     $ 745,427  
                 

Liabilities and Shareholders’ Equity

               
                 

Deposits:

               

Non-interest bearing

  $ 288,068     $ 282,239  

Interest bearing

    390,998       380,418  

Total deposits

    679,066       662,657  

Repurchase agreements

    8,724       10,074  

Accrued interest payable and other liabilities

    7,121       6,686  

Junior subordinated deferrable interest debentures

    10,310       10,310  

Total liabilities

    705,221       689,727  
                 

Commitments and contingencies (Note 5)

               
                 

Shareholders’ equity:

               

Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,118,676 shares at June 30, 2018 and 5,064,972 at December 31, 2017

    6,776       6,415  

Retained earnings

    55,660       49,855  

Accumulated other comprehensive loss, net

    (2,939

)

    (570

)

Total shareholders’ equity

    59,497       55,700  

Total liabilities and shareholders’ equity

  $ 764,718     $ 745,427  

 

See notes to unaudited condensed consolidated financial statements.

 

1

 

 

 

 PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

 

   

For the Three Months

   

For the Six Months

 
   

Ended June 30,

   

Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 

Interest Income:

                               

Interest and fees on loans

  $ 7,209     $ 6,433     $ 13,987     $ 12,541  

Interest on investment securities

    980       603       1,836       1,164  

Other

    105       83       289       179  

Total interest income

    8,294       7,119       16,112       13,884  

Interest Expense:

                               

Interest on deposits

    153       140       304       280  

Interest on note payable

    -       4       -       28  

Interest on junior subordinated deferrable interest debentures

    127       99       239       192  

Other

    1       1       3       2  

Total interest expense

    281       244       546       502  

Net interest income before provision for loan losses

    8,013       6,875       15,566       13,382  

Provision for Loan Losses

    300       200       500       400  

Net interest income after provision for loan losses

    7,713       6,675       15,066       12,982  

Non-Interest Income:

                               

Service charges

    653       628       1,294       1,227  

Interchange revenue

    553       490       1,044       946  

Gain on sale of loans

    533       786       1,199       1,314  

Gain on equity securities with no readily determinable fair value

    -       -       209       -  

Loss on sale of investments

    -       -       (8

)

    (17

)

Other

    486       478       1,019       960  

Total non-interest income

    2,225       2,382       4,757       4,430  

Non-Interest Expenses:

                               

Salaries and employee benefits

    2,923       2,864       6,036       5,791  

Occupancy and equipment

    705       654       1,407       1,423  

Other

    1,601       1,374       3,236       2,761  

Total non-interest expenses

    5,229       4,892       10,679       9,975  

Income before provision for income taxes

    4,709       4,165       9,144       7,437  

Provision for Income Taxes

    1,264       1,624       2,419       2,832  

Net income

  $ 3,445     $ 2,541     $ 6,725     $ 4,605  
                                 

Basic earnings per share

  $ 0.67     $ 0.51     $ 1.32     $ 0.93  

Diluted earnings per share

  $ 0.66     $ 0.49     $ 1.29     $ 0.89  

 

See notes to unaudited condensed consolidated financial statements.

 

2

 

 

 

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

     

   

For the Three Months

   

For the Six Months

 
   

Ended June 30,

   

Ended June 30,

 
   

2018

   

2017

   

2018

   

2017

 
                                 

Net income

  $ 3,445     $ 2,541     $ 6,725     $ 4,605  

Other comprehensive income:

                               

Change in net unrealized gain/loss

    (783

)

    780       (3,372

)

    1,283  

Reclassification adjustments for net losses included in net income

    -       -       8       17  

Net unrealized holding (loss) gain

    (783

)

    780       (3,364

)

    1,300  

Related tax effect:

                               

Change in net unrealized gain/loss

    232       (322

)

    997       (529

)

Reclassification of net losses included in net income

    -       -       (2

)

    (7

)

Income tax effect

    232       (322

)

    995       (536

)

Other comprehensive (loss) income

    (551

)

    458       (2,369

)

    764  

Total comprehensive income

  $ 2,894     $ 2,999     $ 4,356     $ 5,369  

   

See notes to unaudited condensed consolidated financial statements.

 

3

 

 

 

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   

For the Six Months

 
   

Ended June 30,

 
   

2018

   

2017

 

Cash Flows from Operating Activities:

               

Net income

  $ 6,725     $ 4,605  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Provision for loan losses

    500       400  

Change in deferred loan origination costs/fees, net

    (948

)

    (459

)

Depreciation and amortization

    489       520  

Stock-based compensation expense

    98       86  

Loss on sale of investments

    8       17  

Amortization of investment security premiums

    343       295  

Gain on equity securities with no readily determinable fair value

    (209

)

    -  

Gain on sale of OREO and other vehicles

    (75

)

    (7

)

Gain on sale of loans held for sale

    (1,199

)

    (1,314

)

Loans originated for sale

    (22,584

)

    (19,681

)

Proceeds from loan sales

    22,202       22,260  

Provision from change in OREO valuation

    38       9  

Earnings on bank-owned life insurance

    (165

)

    (167

)

Increase in accrued interest receivable and other assets

    (350

)

    (106

)

Increase (decrease) in accrued interest payable and other liabilities

    434       (1,230

)

Net cash provided by operating activities

    5,307       5,228  
                 

Cash Flows from Investing Activities:

               

Proceeds from principal repayments from available-for-sale government-sponsored mortgage-backed securities

    6,970       6,073  

Purchases of available-for-sale securities

    (35,509

)

    (20,287

)

Proceeds from sale of available-for-sale securities

    4,157       4,221  

Net increase in loans

    (28,455

)

    (16,722

)

Proceeds from Bank owned life insurance

    338       -  

Proceeds from sale of OREO

    550       75  

Proceeds from sale of other vehicles

    275       114  

Purchase of premises and equipment

    (2,900

)

    (179

)

Net cash used in investing activities

    (54,574

)

    (26,705

)

 

Continued on next page.

 

4

 

 

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

 

   

For the Six Months

 
   

Ended June 30,

 
   

2018

   

2017

 

Cash Flows from Financing Activities:

               

Net increase in demand, interest bearing and savings deposits

  $ 21,287     $ 36,978  

Net decrease in time deposits

    (4,878

)

    (3,172

)

Principal payment on note payable

    -       (2,375

)

Net decrease in securities sold under agreements to repurchase

    (1,349

)

    (3,222

)

Cash dividends paid on common stock

    (920

)

    (691

)

Proceeds from exercise of stock options

    263       164  

Net cash provided by financing activities

    14,403       27,682  

(Decrease) increase in cash and cash equivalents

    (34,864

)

    6,205  

Cash and Cash Equivalents at Beginning of Year

    87,537       62,646  

Cash and Cash Equivalents at End of Period

  $ 52,673     $ 68,851  
                 

Supplemental Disclosure of Cash Flow Information:

               

Cash paid during the period for:

               

Interest expense

  $ 549     $ 502  

Income taxes

  $ 2,856     $ 3,490  
                 

Non-Cash Investing Activities:

               

Real estate and vehicles acquired through foreclosure

  $ 375     $ 288  
                 
                 

Non-Cash Financing Activities:

               

Common stock retired in connection with the exercise of stock options

  $ 29     $ 10  

Common stock issued in connection with the cashless exercise of stock warrant

  $ -     $ 787  

 

See notes to unaudited condensed consolidated financial statements.  

 

5

 

 

PLUMAS BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

1. THE BUSINESS OF PLUMAS BANCORP

 

During 2002, Plumas Bancorp (the "Company") was incorporated as a bank holding company for the purpose of acquiring Plumas Bank (the "Bank") in a one bank holding company reorganization. This corporate structure gives the Company and the Bank greater flexibility in terms of operation, expansion and diversification. The Company formed Plumas Statutory Trust I ("Trust I") for the sole purpose of issuing trust preferred securities on September 26, 2002. The Company formed Plumas Statutory Trust II ("Trust II") for the sole purpose of issuing trust preferred securities on September 28, 2005.

 

The Bank operates eleven branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, and Truckee. In December 2015 the Bank opened a branch in Reno, Nevada; its first branch outside of California. The Bank’s administrative headquarters is in Quincy, California. In addition, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California, and commercial/agricultural lending offices in Chico, California and Klamath Falls, Oregon. The Bank's primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas. 

 

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Consolidation and Basis of Presentation

 

The condensed consolidated financial statements include the accounts of the Company and the accounts of its wholly-owned subsidiary, Plumas Bank. Plumas Statutory Trust I and Plumas Statutory Trust II are not consolidated into the Company’s consolidated financial statements and, accordingly, are accounted for under the equity method. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at June 30, 2018 and the results of its operations and its cash flows for the three-month and six-month periods ended June 30, 2018 and 2017. Our condensed consolidated balance sheet at December 31, 2017 is derived from audited financial statements.

 

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2017 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and six-month periods ended June 30, 2018 may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

 

Reclassifications

 

Certain reclassifications have been made to prior years’ balances to conform to the classifications used in 2018. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents.

 

Segment Information

 

Management has determined that since all of the banking products and services offered by the Company are available in each branch of the Bank, all branches are located within the same economic environment and management does not allocate resources based on the performance of different lending or transaction activities, it is appropriate to aggregate the Bank branches and report them as a single operating segment. No customer accounts for more than 10 percent of revenues for the Company or the Bank.

 

6

 

 

Revenue from Contracts with Customers

 

The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.

 

Most of our revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as our loans and investment securities. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Condensed Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

 

Income Taxes

 

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was enacted into law. The TCJ Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”), that impact corporate taxation requirements, such as the reduction of the top federal tax rate for corporations from 35% to 21% and changes or limitations to certain tax deductions. As a result of the TCJ Act, we re-measured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. However, we are still analyzing certain aspects of the TCJ Act and refining our calculations, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded in 2017 related to the re-measurement of our deferred tax asset was $1.4 million, and no further adjustments were made during the six months ended June 30, 2018.

 

Recently Adopted Accounting Pronouncements

 

In February 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“AOCI”). ASU  No.2018-02 allows entities to elect to reclassify stranded tax effects on items within AOCI, resulting from the new tax bill signed into law on December 22, 2017, to retained earnings. The Company elected to early adopt this new standard in 2017 and recorded a reclassification from AOCI to retained earnings in the amount of $94,000.

 

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers (“ASU  2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts and gains/losses on the sale of loans, did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts at the date of adoption however, periods prior to the date of adoption will not be retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption was not material.  

 

On January 5, 2016, the FASB issued ASU No. 2016-01, Financial Instruments–Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. Changes made to the current measurement model primarily affect the accounting for equity securities with readily determinable fair values, where changes in fair value will impact earnings instead of other comprehensive income. The accounting for other financial instruments, such as loans, investments in debt securities, and financial liabilities is largely unchanged. The Update also changes the presentation and disclosure requirements for financial instruments including a requirement that public business entities use exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. This Update is generally effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU No. 2016-01 on January 1, 2018 and recorded a $209,000 gain related to adjusting the carrying value of equity securities without a readily determinable fair market to $662,000 in accordance with this standard. Additionally, we refined the calculation used to determine the disclosed fair value of our loans held for investment as part of adopting this standard. The refined calculation did not have a significant impact on our fair value disclosures.

 

7

 

 

Pending Accounting Pronouncements

 

On February 25, 2016, the FASB issued ASU 2016-02, Leases. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally defined as a lease term of less than 12 months. This change will result in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under current lease accounting guidance. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. The Company has several lease agreements, including two branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated statements of condition. The Company expects the new guidance will require some of these lease agreements to now be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. The Company has performed a preliminary evaluation of the provisions of ASU No. 2016-02. Based on this evaluation, the Company has determined that ASU No. 2016-02 is not expected to have a material impact on the Company’s Consolidated Financial Statements. However, the Company continues to evaluate the extent of potential impact the new guidance will have on the Company’s Consolidated Balance Sheet.

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has begun its implementation efforts by establishing an implementation team chaired by the Company’s Chief Lending Officer and composed of members of the Company’s credit administration and accounting departments. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.

 

On March 30, 2017, the FASB issued ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities. This ASU amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has performed a preliminary evaluation of the provisions of ASU No. 2017-08. Based on this evaluation, the Company has determined that ASU No. 2017-08 is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

8

 

 

 

3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

 

The amortized cost and estimated fair value of investment securities at June 30, 2018 and December 31, 2017 consisted of the following, in thousands:

 

Available-for-Sale

 

June 30, 2018

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Debt securities:

                               

U.S. Government-sponsored agencies collateralized by mortgage obligations- residential

  $ 125,804     $ 21     $ (3,631

)

  $ 122,194  

Obligations of states and political subdivisions

    36,160       101       (663

)

    35,598  
    $ 161,964     $ 122     $ (4,294

)

  $ 157,792  

 

Net unrealized loss on available-for-sale investment securities totaling $4,172,000 were recorded, net of $1,233,000 in tax benefit, as accumulated other comprehensive loss within shareholders' equity at June 30, 2018. During the six months ended June 30, 2018 the Company sold eighteen available-for-sale investment securities for total proceeds of $4,157,000 recording a $8,000 loss on sale. The Company realized a gain on sale from eight of these securities totaling $4,000 and a loss on sale on ten securities of $12,000. No securities were sold during the three months ended June 30, 2018. 

 

Available-for-Sale

 

December 31, 2017

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Debt securities:

                               

U.S. Government-sponsored agencies collateralized by mortgage obligations- residential

  $ 104,935     $ 26     $ (1,173

)

  $ 103,788  

Obligations of states and political subdivisions

    33,340       482       (144

)

    33,678  
    $ 138,275     $ 508     $ (1,317

)

  $ 137,466  

 

Unrealized loss on available-for-sale investment securities totaling $809,000 were recorded, net of $239,000 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 2017. During the six months ended June 30, 2017 the Company sold seven available-for-sale investment securities for total proceeds of $4,221,000 recording a $17,000 loss on sale. The Company realized a gain on sale from four of these securities totaling $4,000 and a loss on sale on three securities of $21,000. No securities were sold during the three months ended June 30, 2017.

 

There were no transfers of available-for-sale investment securities during the six months ended June 30, 2018 and twelve months ended December 31, 2017. There were no securities classified as held-to-maturity at June 30, 2018 or December 31, 2017.

 

9

 

 

Investment securities with unrealized losses at June 30, 2018 and December 31, 2017 are summarized and classified according to the duration of the loss period as follows, in thousands:

 

June 30, 2018

 

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

Debt securities:

                                               

U.S. Government-sponsored agencies collateralized by mortgage obligations-residential

  $ 88,404     $ 2,209     $ 28,186     $ 1,422     $ 116,590     $ 3,631  

Obligations of states and political subdivisions

    20,901       420       3,269       243       24,170       663  
    $ 109,305     $ 2,629     $ 31,455     $ 1,665     $ 140,760     $ 4,294  

 

December 31, 2017

 

Less than 12 Months

   

12 Months or More

   

Total

 
   

Fair

   

Unrealized

   

Fair

   

Unrealized

   

Fair

   

Unrealized

 
   

Value

   

Losses

   

Value

   

Losses

   

Value

   

Losses

 

Debt securities:

                                               

U.S. Government-sponsored agencies collateralized by mortgage obligations-residential

  $ 60,070     $ 441     $ 31,213     $ 732     $ 91,283     $ 1,173  

Obligations of states and political subdivisions

    2,621       31       3,403       113       6,024       144  
    $ 62,691     $ 472     $ 34,616     $ 845     $ 97,307     $ 1,317  

 

At June 30, 2018, the Company held 199 securities of which 160 were in a loss position. Of the securities in a loss position, 124 were in a loss position for less than twelve months. Of the 199 securities 87 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 112 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate conditions. All the securities continue to pay as scheduled. When analyzing an issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Company’s intent and ability to hold the security to recovery. As of June 30, 2018, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis. Based on the Company’s evaluation of the above and other relevant factors, the Company does not believe the securities that are in an unrealized loss position as of June 30, 2018 are other than temporarily impaired.

 

The amortized cost and estimated fair value of investment securities at June 30, 2018 by contractual maturity are shown below, in thousands.

 

   

Amortized Cost

   

Estimated Fair

Value

 

Within one year

  $ -     $ -  

After one year through five years

    2,932       2,927  

After five years through ten years

    16,891       16,642  

After ten years

    16,337       16,029  

Investment securities not due at a single maturity date:

               

Government-sponsored mortgage-backed securities

    125,804       122,194  
    $ 161,964     $ 157,792  

 

Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

 

Investment securities with amortized costs totaling $91,031,000 and $82,059,000 and estimated fair values totaling $88,166,000 and $81,006,000 at June 30, 2018 and December 31, 2017, respectively, were pledged to secure deposits and repurchase agreements. 

  

 

10

 

 

 

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

 

Outstanding loans are summarized below, in thousands:

 

   

June 30,

   

December 31,

 
   

2018

   

2017

 
                 

Commercial

  $ 49,698     $ 39,620  

Agricultural

    63,701       58,908  

Real estate – residential

    14,789       16,624  

Real estate – commercial

    251,608       240,257  

Real estate – construction and land development

    25,325       25,181  

Equity lines of credit

    39,462       41,798  

Auto

    67,184       60,438  

Other

    3,981       3,808  

Total loans

    515,748       486,634  

Deferred loan costs, net

    2,927       2,283  

Allowance for loan losses

    (6,698

)

    (6,669

)

Total net loans

  $ 511,977     $ 482,248  

 

Changes in the allowance for loan losses, in thousands, were as follows:

 

   

June 30,

   

December 31,

 
   

2018

   

2017

 
                 

Balance, beginning of year

  $ 6,669     $ 6,549  

Provision charged to operations

    500       600  

Losses charged to allowance

    (763

)

    (879

)

Recoveries

    292       399  

Balance, end of period

  $ 6,698     $ 6,669  

 

The recorded investment in impaired loans totaled $1,929,000 and $2,270,000 at June 30, 2018 and December 31, 2017, respectively. The Company had specific allowances for loan losses of $81,000 on impaired loans of $469,000 at June 30, 2018 as compared to specific allowances for loan losses of $82,000 on impaired loans of $475,000 at December 31, 2017. The balance of impaired loans in which no specific reserves were required totaled $1,460,000 and $1,795,000 at June 30, 2018 and December 31, 2017, respectively. The average recorded investment in impaired loans for the six months ended June 30, 2018 and June 30, 2017 was $1,871,000 and $4,890,000, respectively. The Company recognized $36,000 and $79,000 in interest income for impaired loans during the six months ended June 30, 2018 and 2017, respectively. No interest was recognized on nonaccrual loans accounted for on a cash basis during the six months ended June 30, 2018 and 2017.

 

Included in impaired loans are troubled debt restructurings. A troubled debt restructuring is a formal restructure of a loan where the Company for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms to include one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

 

To determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

 

The carrying value of troubled debt restructurings at June 30, 2018 and December 31, 2017 was $1,105,000 and $1,111,000, respectively. The Company has allocated $59,000 and $63,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2018 and December 31, 2017. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at June 30, 2018 and December 31, 2017.

  

There were no troubled debt restructurings that occurred during the six months ending June 30, 2018 or June 30, 2017. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the six months ended June 30, 2018 and 2017, respectively. 

 

11

 

 

At June 30, 2018 and December 31, 2017, nonaccrual loans totaled $882,000 and $1,226,000, respectively. Interest foregone on nonaccrual loans totaled $29,000 and $89,000 for the six months ended June 30, 2018 and 2017, respectively. Interest foregone on nonaccrual loans totaled $14,000 and $38,000 for the three months ended June 30, 2018 and 2017, respectively. At December 31, 2017 there were three loans to one customer totaling $1.8 million that were 90 days past due and still accruing interest. These loans were well secured and in process of collection at December 31, 2017. As of June 30, 2018, the Company had received payment, in full, of principal and interest on these loans.

 

Salaries and employee benefits totaling $1,234,000 and $936,000 have been deferred as loan origination costs during the six months ended June 30, 2018 and 2017, respectively. Salaries and employee benefits totaling $736,000 and $541,000 have been deferred as loan origination costs during the three months ended June 30, 2018 and 2017, respectively.

 

The Company assigns a risk rating to all loans and periodically, but not less than annually, performs detailed reviews of all criticized and classified loans over $100,000 to identify credit risks and to assess the overall collectability of the portfolio. These risk ratings are also subject to examination by independent specialists engaged by the Company and the Company’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends in the industries in which borrowers operate and the fair values of collateral securing these loans. These credit quality indicators are used to assign a risk rating to each individual loan.

 

The risk ratings can be grouped into three major categories, defined as follows:

 

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses my result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

 

Substandard – A substandard loan is not adequately protected by the current sound worth and paying capacity of the borrower or the value of the collateral pledged, if any. Loans classified as substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. Well defined weaknesses include a project's lack of marketability, inadequate cash flow or collateral support, failure to complete construction on time or the project's failure to fulfill economic expectations. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

 

Doubtful – Loans classified doubtful have all the weaknesses inherent in those classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

 

12

 

 

 

The following table shows the loan portfolio allocated by management's internal risk ratings at the dates indicated, in thousands:

 

June 30, 2018

 

Commercial Credit Exposure

 
   

Credit Risk Profile by Internally Assigned Grade

 

 

 

Commercial

   

Agricultural

   

Real

Estate-Residential

   

Real

Estate-Commercial

   

Real

Estate-Construction

   

Equity LOC

   

Total

 
Grade:                                                        

Pass

  $ 48,738     $ 63,447     $ 14,508     $ 247,866     $ 25,228     $ 39,421     $ 439,208  

Special Mention

    705       254       122       3,462       -       -       4,543  

Substandard

    255       -       159       280       97       41       832  

Doubtful

    -       -       -       -       -       -       -  

Total

  $ 49,698     $ 63,701     $ 14,789     $ 251,608     $ 25,325     $ 39,462     $ 444,583  

 



 

December 31, 2017

 

Commercial Credit Exposure

 
   

Credit Risk Profile by Internally Assigned Grade

 

 

 

Commercial

   

Agricultural

   

Real

Estate-Residential

   

Real

Estate-Commercial

   

Real

Estate-Construction

   

Equity LOC

   

Total

 
Grade:                                                        

Pass

  $ 38,851     $ 56,859     $ 16,218     $ 239,944     $ 25,081     $ 41,636     $ 418,589  

Special Mention

    238       253       125       26       -       -       642  

Substandard

    531       1,796       281       287       100       162       3,157  

Doubtful

    -       -       -       -       -       -       -  

Total

  $ 39,620     $ 58,908     $ 16,624     $ 240,257     $ 25,181     $ 41,798     $ 422,388  

 



 

   

Consumer Credit Exposure

   

Consumer Credit Exposure

 
   

Credit Risk Profile

Based on Payment Activity

   

Credit Risk Profile

Based on Payment Activity

 
   

June 30, 2018

   

December 31, 2017

 
   

Auto

   

Other

   

Total

   

Auto

   

Other

   

Total

 

Grade:

                                               

Performing

  $ 66,888     $ 3,981     $ 70,869     $ 60,060     $ 3,788     $ 63,848  

Non-performing

    296       -       296       378       20       398  

Total

  $ 67,184     $ 3,981     $ 71,165     $ 60,438     $ 3,808     $ 64,246  

 

13

 

 

The following tables show the allocation of the allowance for loan losses at the dates indicated, in thousands:

 

 

 

Commercial

   

Agricultural

   

Real

Estate-

Residential

   

Real

Estate-

Commercial

   

Real

Estate-

Construction

   

Equity

LOC

   

Auto

   

Other

   

Total

 
Six months ended 6/30/18:                                                                        

Allowance for Loan Losses

                                                                       

Beginning balance

  $ 725     $ 623     $ 231     $ 2,729     $ 783     $ 533     $ 946     $ 99     $ 6,669  

Charge-offs

    (266

)

    -       -       -       -       -       (476

)

    (21

)

    (763

)

Recoveries

    15       -       91       18       2       3       155       8       292  

Provision

    379       (77

)

    (127

)

    (48

)

    (5

)

    (55

)

    419       14       500  

Ending balance

  $ 853     $ 546     $ 195     $ 2,699     $ 780     $ 481     $ 1,044     $ 100     $ 6,698  

Three months ended 6/30/18:

                                                                       

Allowance for Loan Losses

                                                                       

Beginning balance

  $ 772     $ 494     $ 212     $ 2,759     $ 791     $ 510     $ 977     $ 107     $ 6,622  

Charge-offs

    (1

)

    -       -       -       -       -       (311

)

    (2

)

    (314

)

Recoveries

    8       -       -       1       -       2       73       6       90  

Provision

    74       52       (17

)

    (61

)

    (11

)

    (31

)

    305       (11

)

    300  

Ending balance

  $ 853     $ 546     $ 195     $ 2,699     $ 780     $ 481     $ 1,044     $ 100     $ 6,698  

Six months ended 6/30/17:

                                                                       

Allowance for Loan Losses

                                                                       

Beginning balance

  $ 655     $ 466     $ 280     $ 2,740     $ 927     $ 575     $ 815     $ 91     $ 6,549  

Charge-offs

    (67

)

    -       -       -       -       -       (90

)

    (18

)

    (175

)

Recoveries

    19       -       2       3       -       2       50       5       81  

Provision

    98       48       (30

)

    69       144       (16

)

    70       17       400  

Ending balance

  $ 705     $ 514     $ 252     $ 2,812     $ 1,071     $ 561     $ 845     $ 95     $ 6,855  

Three months ended 6/30/17:

                                                                       

Allowance for Loan Losses

                                                                       

Beginning balance

  $ 788     $ 473     $ 268     $ 2,919     $ 838     $ 561     $ 806     $ 90     $ 6,743  

Charge-offs

    (67

)

    -       -       -       -       -       (40

)

    (13

)

    (120

)

Recoveries

    11       -       1       1       -       2       16       1       32  

Provision

    (27

)

    41       (17

)

    (108

)

    233       (2

)

    63       17       200  

Ending balance

  $ 705     $ 514     $ 252     $ 2,812     $ 1,071     $ 561     $ 845     $ 95     $ 6,855  

June 30, 2018:

                                                                       

Allowance for Loan Losses

                                                                       

Ending balance: individually evaluated for impairment

  $ 7     $ -     $ 45     $ -     $ 29     $ -     $ -     $ -     $ 81  

Ending balance: collectively evaluated for impairment

  $ 846     $ 546     $ 150     $ 2,699     $ 751     $ 481     $ 1,044     $ 100     $ 6,617  

Loans

                                                                       

Ending balance

  $ 49,698     $ 63,701     $ 14,789     $ 251,608     $ 25,325     $ 39,462     $ 67,184     $ 3,981     $ 515,748  

Ending balance: individually evaluated for impairment

  $ 19     $ 254     $ 810     $ 280     $ 217     $ 42     $ 304     $ 3     $ 1,929  

Ending balance: collectively evaluated for impairment

  $ 49,679     $ 63,447     $ 13,979     $ 251,328     $ 25,108     $ 39,420     $ 66,880     $ 3,978     $ 513,819  

December 31, 2017:

                                                                       

Allowance for Loan Losses

                                                                       

Ending balance: individually evaluated for impairment

  $ 2     $ -     $ 48     $ -     $ 32     $ -     $ -     $ -     $ 82  

Ending balance: collectively evaluated for impairment

  $ 723     $ 623     $ 183     $ 2,729     $ 751     $ 533     $ 946     $ 99     $ 6,587  

Loans

                                                                       

Ending balance

  $ 39,620     $ 58,908     $ 16,624     $ 240,257     $ 25,181     $ 41,798     $ 60,438     $ 3,808     $ 486,634  

Ending balance: individually evaluated for impairment

  $ 14     $ 253     $ 934     $ 287     $ 224     $ 162     $ 377     $ 19     $ 2,270  

Ending balance: collectively evaluated for impairment

  $ 39,606     $ 58,655     $ 15,690     $ 239,970     $ 24,957     $ 41,636     $ 60,061     $ 3,789     $ 484,364  

 

14

 

 

The following table shows an aging analysis of the loan portfolio by the time past due, in thousands:

 

                           

Total

                 

June 30, 2018

 

30-89 Days

   

90 Days

and Still

           

Past Due

and

                 
   

Past Due

   

Accruing

   

Nonaccrual

   

Nonaccrual

   

Current

   

Total

 
                                                 

Commercial

  $ 996     $ -     $ 5     $ 1,001     $ 48,697     $ 49,698  

Agricultural

    480       -       -       480       63,221       63,701  

Real estate – residential

    165       -       159       324       14,465       14,789  

Real estate – commercial

    153       -       280       433       251,175       251,608  

Real estate - construction & land

    -       -       96       96       25,229       25,325  

Equity Lines of Credit

    341       -       42       383       39,079       39,462  

Auto

    702       -       297       999       66,185       67,184  

Other

    29       -       3       32       3,949       3,981  

Total

  $ 2,866     $ -     $ 882     $ 3,748     $ 512,000     $ 515,748  

 

                           

Total

                 

December 31, 2017

 

30-89 Days

   

90 Days

and Still

           

Past Due

and

                 
   

Past Due

   

Accruing

   

Nonaccrual

   

Nonaccrual

   

Current

   

Total

 
                                                 

Commercial

  $ 1,869     $ -     $ -     $ 1,869     $ 37,751     $ 39,620  

Agricultural

    -       1,796       -       1,796       57,112       58,908  

Real estate – residential

    130       -       281       411       16,213       16,624  

Real estate - commercial

    -       -       287       287       239,970       240,257  

Real estate - construction & land

    38       -       100       138       25,043       25,181  

Equity Lines of Credit

    345       -       162       507       41,291       41,798  

Auto

    1,047       -       377       1,424       59,014       60,438  

Other

    20       -       19       39       3,769       3,808  

Total

  $ 3,449     $ 1,796     $ 1,226     $ 6,471     $ 480,163     $ 486,634  

 

15

 

 

The following tables show information related to impaired loans at the dates indicated, in thousands:

 

           

Unpaid

           

Average

   

Interest

 
   

Recorded

   

Principal

   

Related

   

Recorded

   

Income

 

As of June 30, 2018:

 

Investment

   

Balance

   

Allowance

   

Investment

   

Recognized

 
                                         

With no related allowance recorded:

                                       

Commercial

  $ -     $ -             $ -     $ -  

Agricultural

    254       254               254       9  

Real estate – residential

    577       588               580       18  

Real estate – commercial

    280       280               284       -  

Real estate – construction & land

    -       -               -       -  

Equity Lines of Credit

    42       42               51       -  

Auto

    304       304               232       -  

Other

    3       3               1       -  

With an allowance recorded:

                                       

Commercial

  $ 19     $ 19     $ 7     $ 14     $ 1  

Agricultural

    -       -       -       -       -  

Real estate – residential

    233       233       45       235       4  

Real estate – commercial

    -       -       -       -       -  

Real estate – construction & land

    217       217       29       220       4  

Equity Lines of Credit

    -       -       -       -       -  

Auto

    -       -       -       -       -  

Other

    -       -       -       -       -  

Total:

                                       

Commercial

  $ 19     $ 19     $ 7     $ 14     $ 1  

Agricultural

    254       254       -       254       9  

Real estate – residential

    810       821       45       815       22  

Real estate – commercial

    280       280       -       284       -  

Real estate – construction & land

    217       217       29       220       4  

Equity Lines of Credit

    42       42       -       51       -  

Auto

    304       304       -       232       -  

Other

    3       3       -       1       -  

Total

  $ 1,929     $ 1,940     $ 81     $ 1,871     $ 36  

 

16

 

 

           

Unpaid

           

Average

   

Interest

 
   

Recorded

   

Principal

   

Related

   

Recorded

   

Income

 

As of December 31, 2017:

 

Investment

   

Balance

   

Allowance

   

Investment

   

Recognized

 
                                         

With no related allowance recorded:

                                       

Commercial

  $ -     $ -             $ -     $ -  

Agricultural

    253       253               255       19  

Real estate – residential

    697       708               548       38  

Real estate – commercial

    287       287               184       -  

Real estate – construction & land

    -       -               -