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

plbc20190630_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, 2019

 

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See 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 ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class:

 Trading Symbol

Name of Each Exchange on which Registered:

Common Stock, no par value

PLBC

The NASDAQ Stock Market LLC

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of August 2, 2019. 5,159,560 shares.

 

 

 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

   

June 30,

2019

   

December 31,
201
8

 
                 

Assets

               

Cash and cash equivalents

  $ 33,747     $ 46,686  

Investment securities available for sale

    173,692       171,507  

Loans, less allowance for loan losses of $7,058 at June 30, 2019 and $6,958 at December 31, 2018

    588,600       562,498  

Real estate acquired through foreclosure

    1,094       1,170  

Premises and equipment, net

    14,355       14,287  

Bank owned life insurance

    13,020       12,856  

Accrued interest receivable and other assets

    14,750       15,394  

Total assets

  $ 839,258     $ 824,398  
                 

Liabilities and Shareholders’ Equity

               
                 

Deposits:

               

Non-interest bearing

  $ 318,336     $ 304,039  

Interest bearing

    418,875       422,526  

Total deposits

    737,211       726,565  

Repurchase agreements

    7,944       13,058  

Accrued interest payable and other liabilities

    6,755       7,533  

Junior subordinated deferrable interest debentures

    10,310       10,310  

Total liabilities

    762,220       757,466  

 

Commitments and contingencies (Note 5)

               
                 

Shareholders’ equity:

               

Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,159,560 shares at June 30, 2019 and 5,137,476 at December 31, 2018

    7,147       6,944  

Retained earnings

    68,447       62,005  

Accumulated other comprehensive income (loss), net

    1,444       (2,017

)

Total shareholders’ equity

    77,038       66,932  

Total liabilities and shareholders’ equity

  $ 839,258     $ 824,398  

 

See notes to unaudited condensed consolidated financial statements.

 

1

 

 

 

 PLUMAS BANCORP AND SUBSIDIARY

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,

 
   

2019

   

2018

   

2019

   

2018

 

Interest Income:

                               

Interest and fees on loans

  $ 8,385     $ 7,209     $ 16,894     $ 13,987  

Interest on investment securities

    1,140       980       2,278       1,836  

Other

    95       105       274       289  

Total interest income

    9,620       8,294       19,446       16,112  

Interest Expense:

                               

Interest on deposits

    322       153       619       304  

Interest on junior subordinated deferrable interest debentures

    136       127       276       239  

Other

    3       1       6       3  

Total interest expense

    461       281       901       546  

Net interest income before provision for loan losses

    9,159       8,013       18,545       15,566  

Provision for Loan Losses

    200       300       600       500  

Net interest income after provision for loan losses

    8,959       7,713       17,945       15,066  

Non-Interest Income:

                               

Service charges

    670       653       1,320       1,294  

Interchange revenue

    583       553       1,097       1,044  

Gain on sale of loans

    231       533       475       1,199  

Gain on equity securities with no readily determinable fair value

    -       -       -       209  

Gain (loss) on sale of investments

    20       -       20       (8

)

Other

    507       486       1,064       1,019  

Total non-interest income

    2,011       2,225       3,976       4,757  

Non-Interest Expenses:

                               

Salaries and employee benefits

    3,104       2,923       6,304       6,036  

Occupancy and equipment

    825       705       1,683       1,407  

Other

    1,814       1,601       3,440       3,236  

Total non-interest expenses

    5,743       5,229       11,427       10,679  

Income before provision for income taxes

    5,227       4,709       10,494       9,144  

Provision for Income Taxes

    1,417       1,264       2,866       2,419  

Net income

  $ 3,810     $ 3,445     $ 7,628     $ 6,725  
                                 

Basic earnings per share

  $ 0.74     $ 0.67     $ 1.48     $ 1.32  

Diluted earnings per share

  $ 0.73     $ 0.66     $ 1.46     $ 1.29  

 

See notes to unaudited condensed consolidated financial statements.

 

2

 

 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

   

   

For the Three Months

   

For the Six Months

 
   

Ended June 30,

   

Ended June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

Net income

  $ 3,810     $ 3,445     $ 7,628     $ 6,725  

Other comprehensive income:

                               

Change in net unrealized gain/loss

    2,334       (783

)

    4,933       (3,372

)

Reclassification adjustments for net (gains) losses included in net income

    (20

)

    -       (20

)

    8  

Net unrealized holding gain (loss)

    2,314       (783

)

    4,913       (3,364

)

Related tax effect:

                               

Change in net unrealized gain/loss

    (690

)

    232       (1,458

)

    997  

Reclassification of net gains (losses) included in net income

    6       -       6       (2

)

Income tax effect

    (684

)

    232       (1,452

)

    995  

Other comprehensive income (loss)

    1,630       (551

)

    3,461       (2,369

)

Total comprehensive income

  $ 5,440     $ 2,894     $ 11,089     $ 4,356  

    

See notes to unaudited condensed consolidated financial statements.

 

3

 

 

 

PLUMAS BANCORP AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 

(in thousands, except shares)

 

   

Common Stock

   

Retained

   

Accumulated

Other

Comprehensive

Income (Loss)

   

Total

Shareholders’

 
   

Shares

   

Amount

   

Earnings

   

(Net of Taxes)

   

Equity

 
                                         

Balance, December 31, 2017

    5,064,972     $ 6,415     $ 49,855     $ (570

)

  $ 55,700  
                                         

Net Income

                    6,725               6,725  

Other comprehensive loss

                            (2,369

)

    (2,369

)

Cash dividends on common stock

                    (920

)

            (920

)

Exercise of stock options and tax effect

    53,704       263                       263  

Stock-based compensation expense

            98                       98  

Balance, June 30, 2018

    5,118,676     $ 6,776     $ 55,660     $ (2,939

)

  $ 59,497  
                                         

Balance, December 31, 2018

    5,137,476     $ 6,944     $ 62,005     $ (2,017

)

  $ 66,932  
                                         

Net Income

                    7,628               7,628  

Other comprehensive income

                            3,461       3,461  

Cash dividends on common stock

                    (1,186

)

            (1,186

)

Exercise of stock options and tax effect

    22,084       103                       103  

Stock-based compensation expense

            100                       100  

Balance, June 30, 2019

    5,159,560     $ 7,147     $ 68,447     $ 1,444     $ 77,038  

 

See notes to unaudited condensed consolidated financial statements.   

 

4

 

 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

   

For the Six Months

 
   

Ended June 30,

 
   

2019

   

2018

 

Cash Flows from Operating Activities:

               

Net income

  $ 7,628     $ 6,725  

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

               

Provision for loan losses

    600       500  

Change in deferred loan origination costs/fees, net

    (480

)

    (948

)

Depreciation and amortization

    722       489  

Stock-based compensation expense

    100       98  

(Gain) loss on sale of investments

    (20

)

    8  

Amortization of investment security premiums

    371       343  

Gain on equity securities with no readily determinable fair value

    -       (209

)

Gain on sale of OREO and other vehicles

    (18

)

    (75

)

Gain on sale of loans held for sale

    (475

)

    (1,199

)

Loans originated for sale

    (9,854

)

    (22,584

)

Proceeds from loan sales

    10,837       22,202  

Provision from change in OREO valuation

    -       38  

Earnings on bank-owned life insurance

    (164

)

    (165

)

Increase in accrued interest receivable and other assets

    (319

)

    (350

)

(Decrease) increase in accrued interest payable and other liabilities

    (778

)

    434  

Net cash provided by operating activities

    8,150       5,307  
                 

Cash Flows from Investing Activities:

               

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

    9,829       6,970  

Purchases of available-for-sale securities

    (19,297

)

    (35,509

)

Proceeds from sale of available-for-sale securities

    11,379       4,157  

Net increase in loans

    (27,242

)

    (28,455

)

Proceeds from Bank owned life insurance

    -       338  

Proceeds from sale of OREO

    85       550  

Proceeds from sale of other vehicles

    316       275  

Purchase of premises and equipment

    (608

)

    (2,900

)

Net cash used in investing activities

    (25,538

)

    (54,574

)

 

Continued on next page.

 

5

 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

 

   

For the Six Months

 
   

Ended June 30,

 
   

2019

   

2018

 

Cash Flows from Financing Activities:

               

Net increase in demand, interest bearing and savings deposits

  $ 17,918     $ 21,287  

Net decrease in time deposits

    (7,272

)

    (4,878

)

Net decrease in securities sold under agreements to repurchase

    (5,114

)

    (1,349

)

Cash dividends paid on common stock

    (1,186

)

    (920

)

Proceeds from exercise of stock options

    103       263  

Net cash provided by financing activities

    4,449       14,403  

Decrease in cash and cash equivalents

    (12,939

)

    (34,864

)

Cash and Cash Equivalents at Beginning of Year

    46,686       87,537  

Cash and Cash Equivalents at End of Period

  $ 33,747     $ 52,673  
                 

Supplemental Disclosure of Cash Flow Information:

               

Cash paid during the period for:

               

Interest expense

  $ 895     $ 549  

Income taxes

  $ 3,376     $ 2,856  
                 

Non-Cash Investing Activities:

               

Real estate and vehicles acquired through foreclosure

  $ 330     $ 375  
                 

Non-Cash Financing Activities:

               

Common stock retired in connection with the exercise of stock options

  $ 42     $ 29  

 

See notes to unaudited condensed consolidated financial statements.  

 

6

 

 

PLUMAS BANCORP AND SUBSIDIARY

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 and in 2018 the Bank purchased a branch located in Carson City, Nevada. 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 and Red Bluff, 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 consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated.

 

Plumas Statutory Trust I and Trust II are not consolidated into the Company's consolidated financial statements and, accordingly, are accounted for under the equity method. The Company's investment in Trust I of $344,000 and Trust II of $176,000 are included in accrued interest receivable and other assets on the consolidated balance sheet. The junior subordinated deferrable interest debentures issued and guaranteed by the Company and held by Trust I and Trust II are reflected as debt on the consolidated balance sheet.

 

The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.  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, 2019 and the results of its operations and its cash flows for the three-month and six-month periods ended June 30, 2019 and 2018. Our condensed consolidated balance sheet at December 31, 2018 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 2018 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and six-month periods ended June 30, 2019 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 2019. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents.

 

7

 

 

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.

 

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 the Company’s revenue-generating transactions are not subject to ASC 606, including revenue generated from financial instruments, such as the Company’s 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.

 

Recently Adopted 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 results in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under prior 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 adopted ASU No. 2016-02 on January 1, 2019 and recorded $565,000 in right-of-use assets and lease liabilities on adoption.

 

In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements. ASU No. 2018-11 provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company adopted ASU No. 2018-11 on January 1, 2019. The provisions of ASU 2018-11 did not have a material impact on the Company’s Consolidated Financial Statements.

 

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 adopted ASU No. 2017-08 on January 1, 2019. The provisions of ASU No. 2017-08 did not have a material impact on the Company’s Consolidated Financial Statements.

 

8

 

 

Pending Accounting Pronouncements

 

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. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor to assist in the transition to the CECL model. We expect to produce an initial CECL allowance calculation prior to September 30, 2019. 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.  In July 2019, the FASB proposed changes to the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. The proposal would delay the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company and has not adopted provisions of the standard early, the proposed delay would be applicable to the Company, if it is approved by the FASB.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

 

9

 

 

 

3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

 

The amortized cost and estimated fair value of investment securities at June 30, 2019 and December 31, 2018 consisted of the following, in thousands:

 

Available-for-Sale

 

June 30, 2019

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Debt securities:

                               

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

  $ 142,298     $ 1,553     $ (444

)

  $ 143,407  

Obligations of states and political subdivisions

    29,345       963       (23

)

    30,285  
    $ 171,643     $ 2,516     $ (467

)

  $ 173,692  

 

Net unrealized gain on available-for-sale investment securities totaling $2,049,000 were recorded, net of $605,000 in tax benefits, as accumulated other comprehensive income within shareholders' equity at June 30, 2019. During the three and six months ended June 30, 2019 the Company sold forty available-for-sale investment securities for total proceeds of $11,379,000 recording a $20,000 gain on sale. The Company realized a gain on sale from twenty-three of these securities totaling $59,000 and a loss on sale on seventeen securities of $39,000.

 

Available-for-Sale

 

December 31, 2018

 
           

Gross

   

Gross

         
   

Amortized

   

Unrealized

   

Unrealized

   

Fair

 
   

Cost

   

Gains

   

Losses

   

Value

 

Debt securities:

                               

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

  $ 135,059     $ 240     $ (2,621

)

  $ 132,678  

Obligations of states and political subdivisions

    39,311       121       (603

)

    38,829  
    $ 174,370     $ 361     $ (3,224

)

  $ 171,507  

 

Unrealized loss on available-for-sale investment securities totaling $2,863,000 were recorded, net of $846,000 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 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.

 

There were no transfers of available-for-sale investment securities during the six months ended June 30, 2019 and twelve months ended December 31, 2018. There were no securities classified as held-to-maturity at June 30, 2019 or December 31, 2018.

 

10

 

 

Investment securities with unrealized losses at June 30, 2019 and December 31, 2018 are summarized and classified according to the duration of the loss period as follows, in thousands:

 

June 30, 2019

 

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

  $ 813     $ 1     $ 50,258     $ 443     $ 51,071     $ 444  

Obligations of states and political subdivisions

    -       -       992       23       992       23  
    $ 813     $ 1     $ 51,250     $ 466     $ 52,063     $ 467  

 

December 31, 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

  $ 26,478     $ 269     $ 77,476     $ 2,352     $ 103,954     $ 2,621  

Obligations of states and political subdivisions

    19,270       284       5,672       319       24,942       603  
    $ 45,748     $ 553     $ 83,148     $ 2,671     $ 128,896     $ 3,224  

 

At June 30, 2019, the Company held 186 securities of which 58 were in a loss position. Of the securities in a loss position, 1 was in a loss position for less than twelve months. Of the 186 securities, 104 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 82 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate conditions. All of 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, 2019, 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, 2019 are other than temporarily impaired.

 

The amortized cost and estimated fair value of investment securities at June 30, 2019 by contractual maturity are shown below, in thousands.

 

   

Amortized Cost

   

Estimated Fair

Value

 

Within one year

  $ -     $ -  

After one year through five years

    3,284       3,361  

After five years through ten years

    6,367       6,545  

After ten years

    19,694       20,379  

Investment securities not due at a single maturity date:

               

Government-sponsored mortgage-backed securities

    142,298       143,407  
    $ 171,643     $ 173,692  

 

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 $89,285,000 and $92,166,000 and estimated fair values totaling $89,587,000 and $90,122,000 at June 30, 2019 and December 31, 2018, respectively, were pledged to secure deposits and repurchase agreements. 

  

11

 

 

 

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

 

Outstanding loans are summarized below, in thousands:

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
                 

Commercial

  $ 47,782     $ 49,563  

Agricultural

    76,552       69,160  

Real estate – residential

    16,328       15,900  

Real estate – commercial

    285,996       271,710  

Real estate – construction and land development

    37,523       40,161  

Equity lines of credit

    38,533       38,490  

Auto

    85,174       77,135  

Other

    4,250       4,080  

Total loans

    592,138       566,199  

Deferred loan costs, net

    3,520       3,257  

Allowance for loan losses

    (7,058

)

    (6,958

)

Total net loans

  $ 588,600     $ 562,498  

 

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

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 
                 

Balance, beginning of period

  $ 6,958     $ 6,669  

Provision charged to operations

    600       1,000  

Losses charged to allowance

    (657

)

    (1,191

)

Recoveries

    157       480  

Balance, end of period

  $ 7,058     $ 6,958  

 

The recorded investment in impaired loans totaled $2,419,000 and $1,275,000 at June 30, 2019 and December 31, 2018, respectively. The Company had specific allowances for loan losses of $110,000 on impaired loans of $772,000 at June 30, 2019 as compared to specific allowances for loan losses of $181,000 on impaired loans of $424,000 at December 31, 2018. The balance of impaired loans in which no specific reserves were required totaled $1,647,000 and $851,000 at June 30, 2019 and December 31, 2018, respectively. The average recorded investment in impaired loans for the six months ended June 30, 2019 and June 30, 2018 was $1,542,000 and $1,871,000, respectively. The Company recognized $32,000 and $36,000 in interest income for impaired loans during the six months ended June 30, 2019 and 2018, respectively. No interest was recognized on nonaccrual loans accounted for on a cash basis during the six months ended June 30, 2019 and 2018.

 

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, 2019 and December 31, 2018 was $1,057,000 and $1,080,000, respectively. The Company has allocated $47,000 and $53,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2019 and December 31, 2018, respectively. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at June 30, 2019 and December 31, 2018.

  

There were no troubled debt restructurings that occurred during the six months ending June 30, 2019 or June 30, 2018.

 

12

 

 

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, 2019 and 2018, respectively.

 

At June 30, 2019 and December 31, 2018, nonaccrual loans totaled $2,349,000 and $1,117,000, respectively. Interest foregone on nonaccrual loans totaled $69,000 and $29,000 for the six months ended June 30, 2019 and 2018, respectively. Interest foregone on nonaccrual loans totaled $43,000 and $14,000 for the three months ended June 30, 2019 and 2018, respectively. There were no loans past due 90 days or more and on accrual status at June 30, 2019 and December 31, 2018.

 

Salaries and employee benefits totaling $1,205,000 and $1,234,000 have been deferred as loan origination costs during the six months ended June 30, 2019 and 2018, respectively. Salaries and employee benefits totaling $607,000 and $736,000 have been deferred as loan origination costs during the three months ended June 30, 2019 and 2018, 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 may 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.

 

13

 

 

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

 

June 30, 2019

 

Commercial Credit Exposure

 
   

Credit Risk Profile by Internally Assigned Grade

 

Grade:

 

Commercial

   

Agricultural

   

Real

Estate-Residential

   

Real

Estate-Commercial

   

Real

Estate-Construction

   

Equity LOC

   

Total

 

Pass

  $ 47,255     $ 73,873     $ 16,064     $ 280,025     $ 37,435     $ 37,688     $ 492,340  

Special Mention

    505       2,679       120       5,109       -       -       8,413  

Substandard

    22       -       144       862       88       845       1,961  

Doubtful

    -       -       -       -       -       -       -  

Total

  $ 47,782     $ 76,552     $ 16,328     $ 285,996     $ 37,523     $ 38,533     $ 502,714  

 


 


December 31, 2018

 

Commercial Credit Exposure

 
   

Credit Risk Profile by Internally Assigned Grade

 

Grade:

 

Commercial

   

Agricultural

   

Real

Estate-Residential

   

Real

Estate-Commercial

   

Real

Estate-Construction

   

Equity LOC

   

Total

 

Pass

  $ 48,905     $ 68,910     $ 15,621     $ 268,159     $ 40,069     $ 38,304     $ 479,968  

Special Mention

    481       250       124       3,420       -       -       4,275  

Substandard

    177       -       155       131       92       186       741  

Doubtful

    -       -       -       -       -       -       -  

Total

  $ 49,563     $ 69,160     $ 15,900     $ 271,710     $ 40,161     $ 38,490     $ 484,984  

 


 


   

Consumer Credit Exposure

   

Consumer Credit Exposure

 
   

Credit Risk Profile

Based on Payment Activity

   

Credit Risk Profile

Based on Payment Activity

 
   

June 30, 2019

   

December 31, 2018

 
   

Auto

   

Other

   

Total

   

Auto

   

Other

   

Total

 

Grade:

                                               

Performing

  $ 84,787     $ 4,227     $ 89,014     $ 76,734     $ 4,071     $ 80,805  

Non-performing

    387       23       410       401       9       410  

Total

  $ 85,174     $ 4,250     $ 89,424     $ 77,135     $ 4,080     $ 81,215  

 

14

 

 

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

 

                   

Real

   

Real

   

Real

                                 

Six months ended June 30, 2019:

 

Commercial

   

Agricultural

   

Estate-

Residential

   

Estate-

Commercial

   

Estate-

Construction

   

Equity LOC

   

Auto

   

Other

   

Total

 

Allowance for Loan Losses

                                                                       

Beginning balance

  $ 914     $ 538     $ 214     $ 2,686     $ 758     $ 464     $ 1,289     $ 95     $ 6,958  

Charge-offs

    (137

)

    -       -       -       -       (5

)

    (484

)

    (31

)

    (657

)

Recoveries

    16       -       2       -       -       2       135       2       157  

Provision

    (72

)

    89       (39

)

    311       (161

)

    7       432       33       600  

Ending balance

  $ 721     $ 627     $ 177     $ 2,997     $ 597     $ 468     $ 1,372     $ 99     $ 7,058  

Three months ended June 30, 2019:

                                                                       

Allowance for Loan Losses

                                                                       

Beginning balance

  $ 796     $ 542     $ 195     $ 2,969     $ 641     $ 450     $ 1,384     $ 90     $ 7,067  

Charge-offs

    (121

)

    -       -       -       -       (5

)

    (172

)

    (8

)

    (306

)

Recoveries

    7       -       1       -       -       1       88       -       97  

Provision

    39       85       (19

)

    28       (44

)

    22       72       17       200  

Ending balance

  $ 721     $ 627     $ 177     $ 2,997     $ 597     $ 468     $ 1,372     $ 99     $ 7,058  

Six months ended June 30, 2018:

                                                                       

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 June 30, 2018:

                                                                       

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  

June 30, 2019:

                                                                       

Allowance for Loan Losses

                                                                       

Ending balance: individually evaluated for impairment

  $ -     $ -     $ 25     $ 63     $ 22     $ -     $ -     $ -     $ 110  

Ending balance: collectively evaluated for impairment

    721       627       152       2,934       575       468       1,372       99       6,948  

Ending balance

  $ 721     $ 627     $ 177     $ 2,997     $ 597     $ 468     $ 1,372     $ 99     $ 7,058  

Loans

                                                                       

Ending balance: individually evaluated for impairment

    -       250       639       862       114       554       -       -       2,419  

Ending balance: collectively evaluated for impairment

  $ 47,782     $ 76,302     $ 15,689     $ 285,134     $ 37,409     $ 37,979     $ 85,174     $ 4,250     $ 589,719  

Ending balance

  $ 47,782     $ 76,552     $ 16,328     $ 285,996     $ 37,523     $ 38,533     $ 85,174     $ 4,250     $ 592,138  

   

15

 

 

                   

Real

   

Real

   

Real

                                 

December 31, 2018:

 

Commercial

   

Agricultural

   

Estate-

Residential

   

Estate-

Commercial

   

Estate-

Construction

   

Equity LOC

   

Auto

   

Other

   

Total

 

Allowance for Loan Losses

                                                                       

Ending balance: individually evaluated for impairment

  $ 128     $ -       41     $ -     $ 12     $ -     $ -     $ -     $ 181  

Ending balance: collectively evaluated for impairment

  $ 786     $ 538     $ 173     $ 2,686     $ 746     $ 464     $ 1,289     $ 95     $ 6,777  

Ending Balance

  $ 914     $ 538     $ 214     $ 2,686     $ 758     $ 464     $ 1,289     $ 95     $ 6,958  

Loans

                                                                       

Ending balance: individually evaluated for impairment

  $ 128     $ 250     $ 649     $ 131     $ 117     $ -     $ -     $ -     $ 1,275  

Ending balance: collectively evaluated for impairment

    49,435       68,910       15,251       271,579       40,044       38,490       77,135       4,080       564,924  

Ending balance

  $ 49,563     $ 69,160     $ 15,900     $ 271,710     $ 40,161     $ 38,490     $ 77,135     $ 4,080     $ 566,199  

 

16

 

 

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

 

                           

Total

                 

June 30, 2019

 

30-89 Days

   

90 Days

and Still

           

Past Due

and

                 
   

Past Due

   

Accruing

   

Nonaccrual

   

Nonaccrual

   

Current

   

Total

 
                                                 

Commercial

  $ 258     $ -     $ -     $ 258     $ 47,524     $ 47,782  

Agricultural

    97       -       -       97       76,455       76,552  

Real estate – residential

    179       -       144       323       16,005       16,328  

Real estate – commercial

    348       -       862       1,210       284,786       285,996  

Real estate - construction & land

    -       -       88       88       37,435       37,523  

Equity Lines of Credit

    714       -       845       1,559       36,974       38,533  

Auto

    1,412       -       387       1,799       83,375       85,174  

Other

    37       -       23       60       4,190       4,250  

Total

  $ 3,045     $ -     $ 2,349     $ 5,394     $ 586,744     $ 592,138  

 

                           

Total

                 

December 31, 2018

 

30-89 Days

   

90 Days

and Still

           

Past Due

and

                 
   

Past Due

   

Accruing

   

Nonaccrual

   

Nonaccrual

   

Current

   

Total

 
                                                 

Commercial

  $ 11     $ -     $ 144     $ 155     $ 49,408     $ 49,563  

Agricultural

    -       -       -       -       69,160       69,160  

Real estate – residential

    154       -       155       309       15,591       15,900  

Real estate - commercial

    -       -       131       131       271,579       271,710  

Real estate - construction & land

    -       -       92       92       40,069       40,161  

Equity Lines of Credit

    596       -       186       782       37,708       38,490  

Auto

    1,725       -       401       2,126       75,009       77,135  

Other

    85       -       8       93       3,987       4,080  

Total

  $ 2,571     $ -     $ 1,117     $ 3,688     $ 562,511     $ 566,199  

 

17

 

 

The following tables show information related to impaired loans at June 30, 2019, in thousands:

 

           

Unpaid

           

Average

   

Interest

 
   

Recorded

   

Principal

   

Related

   

Recorded

   

Income

 

As of June 30, 2019:

 

Investment

   

Balance

   

Allowance

   

Investment

   

Recognized

 
                                         

With no related allowance recorded:

                                       

Commercial

  $ -     $ -     $ -     $ -     $ -  

Agricultural

    250       250       -       250       8  

Real estate – residential

    461       461       -       465       17  

Real estate – commercial

    383       398       -       156       -  

Real estate – construction & land

    -       -       -       -       -  

Equity Lines of Credit

    554       565       -       93       -  

Auto

    -       -       -       -       -  

Other

    -       -       -       -       -  

With an allowance recorded:

                                       

Commercial

  $ -     $ -     $ -     $ -     $ -  

Agricultural

    -       -       -       -       -  

Real estate – residential

    178       178       25       179       4  

Real estate – commercial

    479       479       63       283