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 SEPTEMBER June 30 2017, 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’sRegistrant’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, or a smaller reporting company or an emerging growth company. See the definitionsdefinition of “large“large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company” and “emerging growth company” in Rule 12b-2Rule12b-2 of the Exchange Act.Act:

 

Large Accelerated Filer

☐

Accelerated Filer

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

Non-Accelerated File (Do not check if a smaller reporting company)

☐

Smaller Reporting Company

☒

Emerging growth company

☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialfinancial 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’sissuer’s classes of common stock, as of November 3, 2017. 5,062,772 sharesAugust 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)

 

 

September 30,

2017

  

December 31,
2016

  

June 30,

2019

  

December 31,
2018

 
                

Assets

                

Cash and cash equivalents

 $101,531  $62,646  $33,747  $46,686 

Investment securities available for sale

  116,522   101,595   173,692   171,507 

Loans, less allowance for loan losses of $6,822 at September 30, 2017 and $6,549 at December 31, 2016

  474,717   456,580 

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

  828   735   1,094   1,170 

Premises and equipment, net

  11,270   11,768   14,355   14,287 

Bank owned life insurance

  12,781   12,528   13,020   12,856 

Accrued interest receivable and other assets

  13,399   12,123   14,750   15,394 

Total assets

 $731,048  $657,975  $839,258  $824,398 
                

Liabilities and Shareholders’ Equity

        

Liabilities and Shareholders’ Equity

        
                

Deposits:

                

Non-interest bearing

 $275,353  $236,779  $318,336  $304,039 

Interest bearing

  374,497   345,574   418,875   422,526 

Total deposits

  649,850   582,353   737,211   726,565 

Repurchase agreements

  8,719   7,547   7,944   13,058 

Note payable

  -   2,375 

Accrued interest payable and other liabilities

  6,613   7,396   6,755   7,533 

Junior subordinated deferrable interest debentures

  10,310   10,310   10,310   10,310 

Total liabilities

  675,492   609,981   762,220   757,466 

Commitments and contingencies (Note 5)

                
                

Shareholders’ equity:

        

Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,053,172 shares at September 30, 2017 and 4,896,875 at December 31, 2016

  6,350   5,918 

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

  49,332   43,048   68,447   62,005 

Accumulated other comprehensive loss, net

  (126

)

  (972

)

Total shareholders’ equity

  55,556   47,994 

Total liabilities and shareholders’ equity

 $731,048  $657,975 

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.

 


 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

 

 

For the Three Months

  

For the Nine Months

  

For the Three Months

  

For the Six Months

 
 

Ended September 30,

  

Ended September 30,

  

Ended June 30,

  

Ended June 30,

 
 

2017

  

2016

  

2017

  

2016

  

2019

  

2018

  

2019

  

2018

 

Interest Income:

                                

Interest and fees on loans

 $6,560  $5,850  $19,101  $16,859  $8,385  $7,209  $16,894  $13,987 

Interest on investment securities

  618   462   1,782   1,407   1,140   980   2,278   1,836 

Other

  223   68   402   191   95   105   274   289 

Total interest income

  7,401   6,380   21,285   18,457   9,620   8,294   19,446   16,112 

Interest Expense:

                

Interest Expense:

                

Interest on deposits

  149   135   429   397   322   153   619   304 

Interest on note payable

  -   31   28   108 

Interest on junior subordinated deferrable interest debentures

  103   87   295   255   136   127   276   239 

Other

  1   1   4   3   3   1   6   3 

Total interest expense

  253   254   756   763   461   281   901   546 

Net interest income before provision for loan losses

  7,148   6,126   20,529   17,694   9,159   8,013   18,545   15,566 

Provision for Loan Losses

  200   200   600   600   200   300   600   500 

Net interest income after provision for loan losses

  6,948   5,926   19,929   17,094   8,959   7,713   17,945   15,066 

Non-Interest Income:

                                

Service charges

  1,138   1,027   3,311   2,992   670   653   1,320   1,294 

Interchange revenue

  583   553   1,097   1,044 

Gain on sale of loans

  557   505   1,870   1,397   231   533   475   1,199 

Loss on sale of investments

  -   -   (17

)

  (32

)

Gain on equity securities with no readily determinable fair value

  -   -   -   209 

Gain (loss) on sale of investments

  20   -   20   (8

)

Other

  488   461   1,449   1,344   507   486   1,064   1,019 

Total non-interest income

  2,183   1,993   6,613   5,701   2,011   2,225   3,976   4,757 

Non-Interest Expenses:

                                

Salaries and employee benefits

  2,822   2,547   8,613   7,713   3,104   2,923   6,304   6,036 

Occupancy and equipment

  713   779   2,136   2,163   825   705   1,683   1,407 

Other

  1,597   1,383   4,357   4,147   1,814   1,601   3,440   3,236 

Total non-interest expenses

  5,132   4,709   15,106   14,023   5,743   5,229   11,427   10,679 

Income before provision for income taxes

  3,999   3,210   11,436   8,772   5,227   4,709   10,494   9,144 

Provision for Income Taxes

  1,551   1,253   4,383   3,405   1,417   1,264   2,866   2,419 

Net income

 $2,448  $1,957  $7,053  $5,367  $3,810  $3,445  $7,628  $6,725 
                                

Basic earnings per share

 $0.48  $0.40  $1.41  $1.11  $0.74  $0.67  $1.48  $1.32 

Diluted earnings per share

 $0.47  $0.39  $1.36  $1.06  $0.73  $0.66  $1.46  $1.29 

 

See notes to unaudited condensed consolidated financial statements.

 


 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

   

 

For the Three Months

  

For the Nine Months

  

For the Three Months

  

For the Six Months

 
 

Ended September 30,

  

Ended September 30,

  

Ended June 30,

  

Ended June 30,

 
 

2017

  

2016

  

2017

  

2016

  

2019

  

2018

  

2019

  

2018

 
                                

Net income

 $2,448  $1,957  $7,053  $5,367  $3,810  $3,445  $7,628  $6,725 

Other comprehensive income:

                                

Change in net unrealized gain/loss

  139   (229

)

  1,422   1,843 

Less: reclassification adjustments for net losses included in net income

  -   -   17   32 

Net unrealized holding gains/losses

  139   (229

)

  1,439   1,875 

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

  (57

)

  95   (586

)

  (761

)

Reclassification of net losses included in net income

  -   -   (7

)

  (13

)

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

  (57

)

  95   (593

)

  (774

)

  (684

)

  232   (1,452

)

  995 

Other comprehensive income (loss)

  82   (134

)

  846   1,101   1,630   (551

)

  3,461   (2,369

)

Total comprehensive income

 $2,530  $1,823  $7,899  $6,468  $5,440  $2,894  $11,089  $4,356 

    

See notes to unaudited condensed consolidated financial statements.

 


 

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. 


PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

For the Nine Months

  

For the Six Months

 
 

Ended September 30,

  

Ended June 30,

 
 

2017

  

2016

  

2019

  

2018

 

Cash Flows from Operating Activities:

                

Net income

 $7,053  $5,367  $7,628  $6,725 

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

                

Provision for loan losses

  600   600   600   500 

Change in deferred loan origination costs/fees, net

  (636

)

  (326

)

  (480

)

  (948

)

Depreciation and amortization

  775   808   722   489 

Stock-based compensation expense

  122   86   100   98 

Loss on sale of investments

  17   32 

(Gain) loss on sale of investments

  (20

)

  8 

Amortization of investment security premiums

  451   487   371   343 

Gain on equity securities with no readily determinable fair value

  -   (209

)

Gain on sale of OREO and other vehicles

  (15

)

  (21

)

  (18

)

  (75

)

Gain on sale of loans held for sale

  (1,870

)

  (1,397

)

  (475

)

  (1,199

)

Loans originated for sale

  (27,236

)

  (22,173

)

  (9,854

)

  (22,584

)

Proceeds from loan sales

  31,435   23,722   10,837   22,202 

Provision from change in OREO valuation

  106   9   -   38 

Earnings on bank-owned life insurance

  (253

)

  (256

)

  (164

)

  (165

)

(Increase) decrease in accrued interest receivable and other assets

  (1,081

)

  764 

Decrease in accrued interest payable and other liabilities

  (783

)

  (243

)

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

  8,685   7,459   8,150   5,307 
                

Cash Flows from Investing Activities:

                

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

  9,387   9,842   9,829   6,970 

Proceeds from matured and called available-for-sale investment securities

  -   2,000 

Purchases of available-for-sale securities

  (27,811

)

  (28,986

)

  (19,297

)

  (35,509

)

Proceeds from sale of available-for-sale securities

  4,221   14,589   11,379   4,157 

Net increase in loans

  (21,454

)

  (47,764

)

  (27,242

)

  (28,455

)

Proceeds from Bank owned life insurance

  -   338 

Proceeds from sale of OREO

  83   392   85   550 

Proceeds from sale of other vehicles

  171   249   316   275 

Purchase of premises and equipment

  (226

)

  (461

)

  (608

)

  (2,900

)

Net cash used in investing activities

  (35,629

)

  (50,139

)

  (25,538

)

  (54,574

)

 

Continued on next page.

 


 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

 

 

For the Nine Months

  

For the Six Months

 
 

Ended September 30,

  

Ended June 30,

 
 

2017

  

2016

  

2019

  

2018

 

Cash Flows from Financing Activities:

                

Net increase in demand, interest bearing and savings deposits

 $70,314  $56,818  $17,918  $21,287 

Net decrease in time deposits

  (2,817

)

  (2,673

)

  (7,272

)

  (4,878

)

Principal payment on note payable

  (2,375

)

  (2,375

)

Net increase in securities sold under agreements to repurchase

  1,172   495 

Repurchase of common stock warrant

  -   (862

)

Net decrease in securities sold under agreements to repurchase

  (5,114

)

  (1,349

)

Cash dividends paid on common stock

  (691

)

  -   (1,186

)

  (920

)

Proceeds from exercise of stock options

  226   130   103   263 

Net cash provided by financing activities

  65,829   51,533   4,449   14,403 

Increase in cash and cash equivalents

  38,885   8,853 
        

Decrease in cash and cash equivalents

  (12,939

)

  (34,864

)

Cash and Cash Equivalents at Beginning of Year

  62,646   68,195   46,686   87,537 

Cash and Cash Equivalents at End of Period

 $101,531  $77,048  $33,747  $52,673 
                

Supplemental Disclosure of Cash Flow Information:

                

Cash paid during the period for:

                

Interest expense

 $757  $764  $895  $549 

Income taxes

 $5,220  $3,638  $3,376  $2,856 
                

Non-Cash Investing Activities:

                

Real estate and vehicles acquired through foreclosure

 $475  $1,383  $330  $375 
                
        

Non-Cash Financing Activities:

                

Common stock retired in connection with the exercise of stock options

 $10  $15  $42  $29 

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

 $787  $- 

 

See notes to unaudited condensed consolidated financial statements.  

 


 

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. GENERALTHE 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.California and in 2018 the Bank purchased a branch located in Carson City, Nevada. The Bank’sBank’s administrative headquarters is in Quincy, California. In addition, the Bank operates a lending officesoffice specializing in government-guaranteed lending in Auburn, California, and Phoenix, Arizona 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. CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Consolidation and Basis of Presentation

The condensed 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 Plumas Statutory Trust II are not consolidated into the Company’sCompany'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 SeptemberJune 30, 20172019 and the results of its operations and its cash flows for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20172019 and 2016.2018. Our condensed consolidated balance sheet at December 31, 20162018 is derived from audited financial statements. Certain reclassifications have been made to prior period’s balances to conform to classifications used in 2017.

 

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 20162018 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and nine-monthsix-month periods ended SeptemberJune 30, 20172019 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.


Segment Information

 

Management has determined that becausesince all of the commercial 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 single customer accounts for more than 10%10 percent of the revenues offor the Company or the Bank.


3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

 

The amortized cost and estimated fair value of investment securities at September 30, 2017 and December 31, 2016 consisted of the following, in thousands:

Available-for-Sale

 

September 30, 2017

 
      

Gross

  

Gross

  

Estimated

 
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Debt securities:

                

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

 $84,810  $111  $(729

)

 $84,192 

Obligations of states and political subdivisions

  31,927   518   (115

)

  32,330 
  $116,737  $629  $(844

)

 $116,522 

Net unrealized loss on available-for-sale investment securities totaling $215,000 were recorded, net of $89,000 in tax benefit, as accumulated other comprehensive loss within shareholders' equity at September 30, 2017. During the nine months ended September 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 saleRevenue 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 September 30, 2017.

Available-for-Sale

 

December 31, 2016

 
      

Gross

  

Estimated

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Debt securities:

                

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

 $76,207  $11  $(1,307

)

 $74,911 

Obligations of states and political subdivisions

  27,042   89   (447

)

  26,684 
  $103,249  $100  $(1,754

)

 $101,595 

Net unrealized loss on available-for-sale investment securities totaling $1,654,000 were recorded, net of $682,000 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 2016.  During the nine months ended September 30, 2016 the Company sold fourteen available-for-sale investment securities for total proceeds of $14,589,000 recording a $32,000 loss on sale. The Company realized a gain on sale from eight of these securities totaling $48,000 and a loss on sale on six securities of $80,000. No securities were sold during the three months ended September 30, 2016.

There were no transfers of available-for-sale investment securities during the nine months ended September 30, 2017 and twelve months ended December 31, 2016. There were no securities classified as held-to-maturity at September 30, 2017 or December 31, 2016.


Investment securitiesContracts with unrealized losses at September 30, 2017 and December 31, 2016 are summarized and classified according to the duration of the loss period as follows, in thousands:

September 30, 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 agencies collateralized by mortgage obligations-residential

 $56,380  $582  $4,066  $147  $60,446  $729 

Obligations of states and political subdivisions

  6,046   103   254   12   6,300   115 
  $62,426  $685  $4,320  $159  $66,746  $844 

December 31, 2016

 

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 agencies collateralized by mortgage obligations-residential

 $68,338  $1,237  $2,043  $70  $70,381  $1,307 

Obligations of states and political subdivisions

  18,052   447   -   -   18,052   447 
  $86,390  $1,684  $2,043  $70  $88,433  $1,754 

At September 30, 2017, the Company held 184 securities of which 75 were in a loss position. Of the 184 securities 72 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 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 September 30, 2017, 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 September 30, 2017 are other than temporarily impaired.

The amortized cost and estimated fair value of investment securities at September 30, 2017 by contractual maturity are shown below, in thousands.

  

Amortized

Cost

  

Estimated

Fair Value

 

Within one year

 $-  $- 

After one year through five years

  3,859   3,923 

After five years through ten years

  16,406   16,684 

After ten years

  11,662   11,723 

Investment securities not due at a single maturity date:

        

Government-sponsored mortgage-backed securities

  84,810   84,192 
  $116,737  $116,522 

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 $71,985,000 and $73,331,000 and estimated fair values totaling $71,422,000 and $72,112,000 at September 30, 2017 and December 31, 2016, respectively, were pledged to secure deposits and repurchase agreements.


4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below, in thousands:

  

September 30,

  

December 31,

 
  

2017

  

2016

 
         

Commercial

 $40,211  $41,293 

Agricultural

  58,105   51,103 

Real estate – residential

  17,810   21,283 

Real estate – commercial

  236,913   226,136 

Real estate – construction and land development

  23,175   21,904 

Equity lines of credit

  41,926   42,338 

Auto

  57,446   53,553 

Other

  3,697   3,513 
   479,283   461,123 

Deferred loan costs, net

  2,256   2,006 

Allowance for loan losses

  (6,822

)

  (6,549

)

Loans, net

 $474,717  $456,580 

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

  

September 30,

  

December 31,

 
  

2017

  

2016

 
         

Balance, beginning of year

 $6,549  $6,078 

Provision charged to operations

  600   800 

Losses charged to allowance

  (514

)

  (979

)

Recoveries

  187   650 

Balance, end of period

 $6,822  $6,549 

The recorded investment in impaired loans totaled $5,677,000 and $5,442,000 at September 30, 2017 and December 31, 2016, respectively. The Company had specific allowances for loan losses of $463,000 on impaired loans of $1,769,000 at September 30, 2017 as compared to specific allowances for loan losses of $366,000 on impaired loans of $1,534,000 at December 31, 2016. The balance of impaired loans in which no specific reserves were required totaled $3,908,000 at September 30, 2017 and December 31, 2016. The average recorded investment in impaired loans for the nine months ended September 30, 2017 and September 30, 2016 was $4,982,000 and $5,398,000, respectively. The Company recognized $100,000 and $105,000 in interest income for impaired loans during the nine months ended September 30, 2017 and 2016, respectively. No interest was recognized on nonaccrual loans accounted for on a cash basis during the nine months ended September 30, 2017 and 2016.

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.

In order 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 September 30, 2017 and December 31, 2016 was $4,078,000 and $4,616,000, respectively. The Company has allocated $323,000 and $342,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2017 and December 31, 2016, respectively. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at September 30, 2017 and December 31, 2016. There were no troubled debt restructurings that occurred during the nine months ending September 30, 2017 or September 30, 2016. There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine months ended September 30, 2017 and 2016, respectively.


At September 30, 2017 and December 31, 2016, nonaccrual loans totaled $3,798,000 and $2,724,000, respectively. Interest foregone on nonaccrual loans totaled $141,000 and $157,000 for the nine months ended September 30, 2017 and 2016, respectively. Interest foregone on nonaccrual loans totaled $52,000 and $51,000 for the three months ended September 30, 2017 and 2016, respectively. There were no loans past due 90 days or more and on accrual status at September 30, 2017 and December 31, 2016.

Salaries and employee benefits totaling $1,393,000 and $1,437,000 have been deferred as loan origination costs during the nine months ended September 30, 2017 and 2016, respectively. Salaries and employee benefits totaling $457,000 and $495,000 have been deferred as loan origination costs during the three months ended September 30, 2017 and 2016, respectively.Customers

 

The Company assigns a risk rating to all loans,records revenue from contracts with the exception of automobile and other loans and periodically, but not less than annually, performs detailed reviews of all such 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 bycustomers 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’s regulators. During these internal reviews, management monitors and analyzes the financial condition of borrowers and guarantors, trends satisfies a performance obligation. Significant revenue has not been recognized in the industriescurrent reporting period that results from performance obligations satisfied 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.previous periods.

 

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

Pass – A pass loan is a strong credit with no existing or known potential weaknesses deserving of management's close attention.

Watch – A Watch loan has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the Company’s credit position at some future date. Watch loans are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

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.

Loss – Loans classified as loss are considered uncollectible and charged off immediately.


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

September 30, 2017

 

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

 $39,240  $54,718  $16,974  $235,101  $22,512  $41,366  $409,911 

Watch

  420   3,387   126   302   -   -   4,235 

Substandard

  551   -   710   1,510   663   560   3,994 

Doubtful

  -   -   -   -   -   -   - 

Total

 $40,211  $58,105  $17,810  $236,913  $23,175  $41,926  $418,140 

December 31, 2016

 

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

 $40,459  $50,790  $21,125  $223,854  $21,201  $41,983  $399,412 

Watch

  565   280   -   400   -   -   1,245 

Substandard

  269   33   158   1,882   703   355   3,400 

Doubtful

  -   -   -   -   -   -   - 

Total

 $41,293  $51,103  $21,283  $226,136  $21,904  $42,338  $404,057 

  

Consumer Credit Exposure

  

Consumer Credit Exposure

 
  

Credit Risk Profile

Based on Payment Activity

  

Credit Risk Profile

Based on Payment Activity

 
  

September 30, 2017

  

December 31, 2016

 
  

Auto

  

Other

  

Total

  

Auto

  

Other

  

Total

 

Grade:

                        

Performing

 $57,162  $3,681  $60,843  $53,474  $3,511  $56,985 

Non-performing

  284   16   300   79   2   81 

Total

 $57,446  $3,697  $61,143  $53,553  $3,513  $57,066 


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

Nine months ended 9/30/17:

 

Commercial

  

Agricultural

  

Real Estate-

Residential

  

Real

Estate-

Commercial

  

Real

Estate-

Construction

  

Equity LOC

  

Auto

  

Other

  

Total

 

Allowance for Loan Losses

                                    

Beginning balance

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

Charge-offs

  (179

)

  -   -   -   -   (5

)

  (295

)

  (35

)

  (514

)

Recoveries

  46   -   3   4   -   3   123   8   187 

Provision

  108   95   (47

)

  39   64   77   233   31   600 

Ending balance

 $630  $561  $236  $2,783  $991  $650  $876  $95  $6,822 

Three months ended 9/30/17:

                                    

Allowance for Loan Losses

                                    

Beginning balance

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

Charge-offs

  (112

)

  -   -   -   -   (5

)

  (205

)

  (17

)

  (339

)

Recoveries

  27   -   1   1   -   1   73   3   106 

Provision

  10   47   (17

)

  (30

)

  (80)  93   163   14   200 

Ending balance

 $630  $561  $236  $2,783  $991  $650  $876  $95  $6,822 

Nine months ended 9/30/16:

                                    

Allowance for Loan Losses

                                    

Beginning balance

 $639  $294  $341  $2,525  $874  $528  $784  $93  $6,078 

Charge-offs

  (200

)

  -   -   (252

)

  (5

)

  (23

)

  (222

)

  (55

)

  (757

)

Recoveries

  23   -   39   3   359   2   106   24   556 

Provision

  225   177   (82

)

  341   (333

)

  70   171   31   600 

Ending balance

 $687  $471  $298  $2,617  $895  $577  $839  $93  $6,477 

Three months ended 9/30/16:

                                    

Allowance for Loan Losses

                                    

Beginning balance

 $835  $416  $322  $2,465  $883  $573  $841   95  $6,430 

Charge-offs

  (127

)

  -   -   -   (5

)

  -   (64

)

  (31

)

  (227

)

Recoveries

  6   -   3   1   30   1   24   9   74 

Provision

  (27

)

  55   (27

)

  151   (13

)

  3   38   20   200 

Ending balance

 $687  $471  $298  $2,617  $895  $577  $839  $93  $6,477 

September 30, 2017:

                                    

Allowance for Loan Losses

                                    

Ending balance: individually evaluated for impairment

 $2  $-  $50  $74  $219  $118  $-  $-  $463 

Ending balance: collectively evaluated for impairment

 $628  $561  $186  $2,709  $772  $532  $876  $95  $6,359 

Loans

                                    

Ending balance

 $40,211  $58,105  $17,810  $236,913  $23,175  $41,926  $57,446  $3,697  $479,283 

Ending balance: individually evaluated for impairment

 $71  $255  $1,367  $2,336  $788  $560  $284  $16  $5,677 

Ending balance: collectively evaluated for impairment

 $40,140  $57,850  $16,443  $234,577  $22,387  $41,366  $57,162  $3,681  $473,606 

December 31, 2016:

                                    

Allowance for Loan Losses

                                    

Ending balance: individually evaluated for impairment

 $2  $-   53   81  $206  $24  $-  $-  $366 

Ending balance: collectively evaluated for impairment

 $653  $466  $227   2,659  $721  $551  $815  $91  $6,183 

Loans

                                    

Ending balance

 $41,293  $51,103  $21,283   226,136  $21,904  $42,338  $53,553  $3,513  $461,123 

Ending balance: individually evaluated for impairment

 $16  $258  $1,615   2,323  $833  $326  $69  $2  $5,442 

Ending balance: collectively evaluated for impairment

 $41,277  $50,845  $19,668   223,813  $21,071  $42,012  $53,484  $3,511  $455,681 


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

September 30, 2017

 

30-89 Days

  

90 Days and Still

      

Total Past

Due and

         
  

Past Due

  

Accruing

  

Nonaccrual

  

Nonaccrual

  

Current

  

Total

 
                         

Commercial

 $407  $-  $56  $463  $39,748  $40,211 

Agricultural

  932   -   -   932   57,173   58,105 

Real estate – residential

  -   -   710   710   17,100   17,810 

Real estate – commercial

  766   -   1,510   2,276   234,637   236,913 

Real estate – construction & land

  -   -   663   663   22,512   23,175 

Equity Lines of Credit

  176   -   559   735   41,191   41,926 

Auto

  750   -   284   1,034   56,412   57,446 

Other

  22   -   16   38   3,659   3,697 

Total

 $3,053  $-  $3,798  $6,851  $472,432  $479,283 

December 31, 2016

 

30-89 Days

  

90 Days and Still

      

Total Past

Due and

         
  

Past Due

  

Accruing

  

Nonaccrual

  

Nonaccrual

  

Current

  

Total

 
                         

Commercial

 $77  $-  $-  $77  $41,216  $41,293 

Agricultural

  -   -   -   -   51,103   51,103 

Real estate – residential

  179   -   145   324   20,959   21,283 

Real estate – commercial

  519   -   1,479   1,998   224,138   226,136 

Real estate – construction & land

  10   -   703   713   21,191   21,904 

Equity Lines of Credit

  276   -   326   602   41,736   42,338 

Auto

  919   -   69   988   52,565   53,553 

Other

  23   -   2   25   3,488   3,513 

Total

 $2,003  $-  $2,724  $4,727  $456,396  $461,123 


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 September 30, 2017:

 

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 

With no related allowance recorded:

                    

Commercial

 $56  $56      $6  $- 

Agricultural

  255   255       256   14 

Real estate – residential

  1,129   1,139       1,072   30 

Real estate – commercial

  1,811   2,250       1,667   44 

Real estate – construction & land

  148   148       164   - 

Equity Lines of Credit

  209   209       212   - 

Auto

  284   284       95   - 

Other

  16   16       1   - 

With an allowance recorded:

                    

Commercial

 $15  $15  $2  $15  $1 

Agricultural

  -   -   -   -   - 

Real estate – residential

  238   238   50   240   5 

Real estate – commercial

  525   733   74   529   - 

Real estate – construction & land

  640   640   219   658   6 

Equity Lines of Credit

  351   351   118   67   - 

Auto

  -   -   -   -   - 

Other

  -   -   -   -   - 

Total:

                    

Commercial

 $71  $71  $2  $21  $1 

Agricultural

  255   255   -   256   14 

Real estate – residential

  1,367   1,377   50   1,312   35 

Real estate – commercial

  2,336   2,983   74   2,196   44 

Real estate – construction & land

  788   788   219   822   6 

Equity Lines of Credit

  560   560   118   279   - 

Auto

  284   284   -   95   - 

Other

  16   16   -   1   - 

Total

 $5,677  $6,334  $463  $4,982  $100 

      

Unpaid

      

Average

  

Interest

 
  

Recorded

  

Principal

  

Related

  

Recorded

  

Income

 

As of December 31, 2016:

 

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 
                     

With no related allowance recorded:

                    

Commercial

 $-  $-      $-  $- 

Agricultural

  258   258       259   19 

Real estate – residential

  1,373   1,385       1,291   77 

Real estate – commercial

  1,789   2,227       1,589   33 

Real estate – construction & land

  198   198       210   - 

Equity Lines of Credit

  219   219       121   - 

Auto

  69   69       46   - 

Other

  2   2       -   - 

With an allowance recorded:

                    

Commercial

 $16  $16  $2  $16  $1 

Agricultural

  -   -   -   -   - 

Real estate – residential

  242   242   53   243   11 

Real estate – commercial

  534   742   81   534   - 

Real estate – construction & land

  635   635   206   658   8 

Equity Lines of Credit

  107   107   24   110   - 

Auto

  -   -   -   -   - 

Other

  -   -   -   -   - 

Total:

                    

Commercial

 $16  $16  $2  $16  $1 

Agricultural

  258   258   -   259   19 

Real estate – residential

  1,615   1,627   53   1,534   88 

Real estate – commercial

  2,323   2,969   81   2,123   33 

Real estate – construction & land

  833   833   206   868   8 

Equity Lines of Credit

  326   326   24   231   - 

Auto

  69   69   -   46   - 

Other

  2   2   -   -   - 

Total

 $5,442  $6,100  $366  $5,077  $149 


5. COMMITMENTS AND CONTINGENCIES

The Company is party to claims and legal proceedings arising in the ordinary course of business. In the opinionMost of the Company’s management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or result of operations of the Company taken as a whole.

In the normal course of business, there are various outstanding commitments to extend credit, whichrevenue-generating transactions are not reflectedsubject 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 financial statements, including loan commitmentsCondensed Consolidated Statements of $107.7 millionIncome was not necessary. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and $93.7 millionthe 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 stand-by lettersthe transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of credit of $465 thousand and $625 thousand at September 30, 2017 and December 31, 2016, respectively.

Of the loan commitments outstanding at September 30, 2017, $23,245,000 are real estate construction loan commitments that are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each loan commitment and the amount and typetiming of collateral obtained, if any, are evaluated on an individual basis. Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The deferred liability related to the Company’s stand-by letters of credit was not significant at September 30, 2017 or December 31, 2016.

6. EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or otherrevenue from contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted earnings per share.

  

For the Three Months

  

For the Nine Months

 
  

Ended September 30,

  

Ended September 30,

 

(In thousands, except per share data)

 

2017

  

2016

  

2017

  

2016

 

Net Income:

                

Net income

 $2,448  $1,957  $7,053  $5,367 

Earnings Per Share:

                

Basic earnings per share

 $0.48  $0.40  $1.41  $1.11 

Diluted earnings per share

 $0.47  $0.39  $1.36  $1.06 

Weighted Average Number of Shares Outstanding:

                

Basic shares

  5,048   4,868   4,987   4,856 

Diluted shares

  5,192   5,035   5,181   5,052 

Shares of common stock issuable under stock options and warrants for which the exercise prices were greater than the average market prices were not included in the computation of diluted earnings per share due to their antidilutive effect.  Stock options and warrants not included in the computation of diluted earnings per share, due to shares not being in-the-money and having an antidilutive effect, were approximately 0 and 108,000 for the three month periods ended September 30, 2017 and 2016, respectively. Stock options and warrants not included in the computation of diluted earnings per share, due to shares not being in-the-money and having an antidilutive effect, were approximately 0 and 108,000 for the nine month periods ended September 30, 2017 and 2016, respectively.


7. STOCK-BASED COMPENSATION

Stock Options

In 2001, the Company established a Stock Option Plan for which 58,093 shares of common stock remain reserved for issuance to employees and directors and no shares are available for future grants as of September 30, 2017.

As of September 30, 2017, all remaining shares in this plan have vested and no compensation cost remains unrecognized. No options vested during the nine months ended September 30, 2017 and 2016.

A summary of the activity within the 2001 Stock Option Plan follows:

  

Shares

  

Weighted

Average

Exercise

Price

  

 

Weighted

Average

Remaining

Contractual

Term in

Years

  

Intrinsic

Value

 
                 

Options outstanding at January 1, 2017

  81,893  $2.95         

Options exercised

  (23,800

)

  2.95         

Options outstanding at September 30, 2017

  58,093  $2.95   1.5  $1,043,000 

Options exercisable at September 30, 2017

  58,093  $2.95   1.5  $1,043,000 

In May 2013, the Company established the 2013 Stock Option Plan for which 466,200 shares of common stock are reserved and 298,400 shares are available for future grants as of September 30, 2017. The Plan requires that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash, with Company common stock previously acquired by the optionee and held by the optionee for a period of at least nine months, in options of the Optionee that are fully vested and exercisable or in any combination of the foregoing. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant.

A summary of the activity within the 2013 Stock Option Plan follows:

  

Shares

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Term

in Years

  

Intrinsic

Value

 

Options outstanding at January 1, 2017

  192,800  $7.60         

Options exercised

  (25,000

)

  6.65         

Options outstanding at September 30, 2017

  167,800  $7.74   5.6  $2,208,000 

Options exercisable at September 30, 2017

  68,000  $7.11   5.2  $938,000 

Expected to vest after September 30, 2017

  88,922  $8.18   6.0  $1,131,000 


No options were granted during the nine months ended September 30, 2017. During the nine months ended September 30, 2016 the Company granted options to purchase 108,000 shares of common stock. The fair value of each option was estimated on the date of grant using the following assumptions:

  

2016

 

Expected life of stock options (in years)

  5.1 

Risk free interest rate

  1.52%

Volatility

  53.6%

Dividend yields

  2.00%

Weighted-average fair value of options granted during the nine months ended September 30, 2016

 $3.55 

As of September 30, 2017, there was $252,000 of total unrecognized compensation cost related to non-vested, share-based compensation arrangements granted under the 2013 Plan. That cost is expected to be recognized over a weighted average period of 2.0 years. The total fair value of options vested was $161,000 and $76,000 for nine months ended September 30, 2017 and 2016.

Compensation cost related to stock options recognized in operating results under the stock option plans was $122,000 and $86,000 for the nine months ended September 30, 2017 and 2016, respectively. The associated income tax benefit recognized was $11,000 for the nine months ended September 30, 2017 and $10,000 for the nine months ended September 30, 2016. Compensation cost related to stock options recognized in operating results under the stock option plans was $35,000 and $31,000 for the three months ended September 30, 2017 and 2016, respectively. The associated income tax benefit recognized was $2,000 for the three months ended September 30, 2017 and $4,000 for the three months ended September 30, 2016.

Cash received from option exercises under the two stock option plans for the nine months ended September 30, 2017 and 2016 were $226,000 and $128,000, respectively. The total intrinsic value of options at time of exercise for the two plans was $674,000 and $229,000 for the nine months ended September 30, 2017 and 2016, respectively. The tax benefit realized for the tax deductions from option exercise for the two plans totaled $52,000 and $1,000 for the nine months ended September 30, 2017 and 2016, respectively.

The Company determines the fair value of options on the date of grant using a Black-Scholes-Merton option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant. The Company recognizes adjustments to compensation expense related to forfeitures as they occur.

8. INCOME TAXES

The Company files its income taxes on a consolidated basis with its subsidiary. Income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities.

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. A valuation allowance is recognized if, based on the weight of available evidence management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated income statement. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the nine months ended September 30, 2017.


9. FAIR VALUE MEASUREMENT

The Company measures fair value under the fair value hierarchy described below.

Level 1: Quoted prices for identical instruments traded in active exchange markets.

Level 2: Quoted prices (unadjusted) for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

 Level 3: Model based techniques that use one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.

Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at September 30, 2017 and December 31, 2016 are as follows, in thousands:

      

Fair Value Measurements at September 30, 2017 Using:

 

Financial assets:

 

             Carrying

              Value

  

        Level 1

  

   Level 2

  

Level 3

  

Total Fair Value

 

Cash and cash equivalents

 $101,531  $101,531          $101,531 

Investment securities

  116,522      $116,522       116,522 

Loans, net

  474,717          $480,998   480,998 

FHLB stock

  2,685               N/A 

Accrued interest receivable

  2,317   58   395   1,864   2,317 

Financial liabilities:

                    

Deposits

  649,850   603,065   46,797       649,862 

Repurchase agreements

  8,719       8,719       8,719 

Junior subordinated deferrable interest debentures

  10,310           7,744   7,744 

Accrued interest payable

  58   10   35   13   58 


      

Fair Value Measurements at December 31, 2016 Using:

 

Financial assets:

 

Carrying

Value

  

Level 1

  

Level 2

  

Level 3

  

Total Fair

Value

 

Cash and cash equivalents

 $62,646  $62,646          $62,646 

Investment securities

  101,595      $101,595       101,595 

Loans, net

  456,580          $459,618   459,618 

FHLB stock

  2,438               N/A 

Accrued interest receivable

  2,312   7   398   1,907   2,312 

Financial liabilities:

                    

Deposits

  582,353   532,750   49,586       582,336 

Repurchase agreements

  7,547       7,547       7,547 

Note payable

  2,375           2,375   2,375 

Junior subordinated deferrable interest debentures

  10,310           7,762   7,762 

Accrued interest payable

  59   9   36   14   59 

These estimates do not reflect any premium or discount that could result from offering the Company's entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.

The following methods and assumptions were used by management to estimate the fair value of its financial instruments:

Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values and are classified as Level 1.

Investment securities: Fair values for securities available for sale are generally determined by matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2).

Loans: Fair values of loans, excluding loans held for sale, are estimated as follows: For variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

FHLB stock: It was not practicable to determine the fair value of the FHLB stock due to restrictions placed on its transferability.

Deposits: The fair values disclosed for demand deposits, including interest and non-interest demand accounts, savings, and certain types of money market accounts are, by definition, equal to the carrying amount at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

Repurchase agreements: The fair value of securities sold under repurchase agreements is estimated based on bid quotations received from brokers using observable inputs and are included as Level 2.

Note payable: The fair value of the Company’s Note Payable is estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.

Junior subordinated deferrable interest debentures: The fair values of the Company’s Subordinated Debentures are estimated using discounted cash flow analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 3 classification.


Accrued interest receivable and payable: The carrying amounts of accrued interest approximate fair value and are considered to be linked in classification to the asset or liability for which they relate.

Commitments to extend credit and letters of credit: The fair value of commitments are estimated using the fees currently charged to enter into similar agreements and are not significant and, therefore, not presented. Commitments to extend credit are primarily for variable rate loans and letters of credit.

Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. Those estimates that are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision are included in Level 3. Changes in assumptions could significantly affect the fair values presented.

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of September 30, 2017 and December 31, 2016, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Assets and liabilities measured at fair value on a recurring basis at September 30, 2017 are summarized below, in thousands:

      

Fair Value Measurements at

September 30, 2017 Using

 
  

Total Fair

Value

  

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

                

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

 $84,192      $84,192     

Obligations of states and political subdivisions

  32,330       32,330     
  $116,522  $-  $116,522  $- 

Assets and liabilities measured at fair value on a recurring basis at December 31, 2016 are summarized below, in thousands:

      

Fair Value Measurements at

December 31, 2016 Using

 
  

Total Fair

Value

  

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

                

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

 $74,911      $74,911     

Obligations of states and political subdivisions

  26,684       26,684     
  $101,595  $-  $101,595  $- 

The fair value of securities available-for-sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities or matrix pricing. There were no changes in the valuation techniques used during 2017 or 2016. Transfers between hierarchy measurement levels are recognized by the Company as of the beginning of the reporting period. Changes in fair market value are recorded in other comprehensive income.


Assets and liabilities measured at fair value on a non-recurring basis at September 30, 2017 are summarized below, in thousands: 

      

Fair Value Measurements at September 30, 2017 Using

 
  

Total Fair

Value

  

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

  

Total Gains

(Losses)

Nine

Months

Ended

September

30, 2017

 

Assets:

                    

Impaired loans:

                    

Real estate – commercial

 $451  $-  $-  $451  $7 

Equity lines of credit

  313           313   (115

)

Total impaired loans

  764   -   -   764   (108

)

Other real estate:

                    

Real estate – residential

  -           -   (2

)

Real estate – commercial

  192           192   (9

)

Real estate – construction and land development

  546           546   (95

)

Equity lines of credit

  90           90   - 

Total other real estate

  828   -   -   828   (106

)

  $1,592  $-  $-  $1,592  $(214

)

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2016 are summarized below, in thousands:

      

Fair Value Measurements at December 31, 2016 Using

 
  

Total Fair

Value

  

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

  

Significant

Other Observable

Inputs (Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

  

Total

Gains

(Losses)

Nine

Months

Ended

September

30, 2016

 

Assets:

                    

Impaired loans:

                    

Real estate – commercial

 $453          $453  $(83

)

Real estate – construction and land development

  -           -   (1

)

Equity lines of credit

  83           83   4 

Total impaired loans

  536   -   -   536   (80

)

Other real estate:

                    

Real estate – residential

  10           10   - 

Real estate – commercial

  84           84   (9

)

Real estate – construction and land development

  641           641   - 

Total other real estate

  735   -   -   735   (9

)

  $1,271  $-  $-  $1,271  $(89

)

The Company has no liabilities which are reported at fair value.


 The following methods were used to estimate fair value.

Collateral-Dependent Impaired Loans: The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on fair value estimates of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level 3).   Net losses of $108,000 and $80,000 represent impairment charges recognized during the nine months ended September 30, 2017 and 2016, respectively, related to the above impaired loans.

Other Real Estate: Nonrecurring adjustments to certain real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect current conditions and selling costs (Level 3).

Appraisals for both collateral-dependent impaired loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Administration Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of similar collateral that has been liquidated to the most recent appraised value for unsold properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at September 30, 2017 and December 31, 2016 (dollars in thousands):

Description

 

Fair Value

9/30/2017

 

 

Fair Value

12/31/2016

 

Valuation

Technique

 

Significant Unobservable Input

 

Range

(Weighted Average)

9/30/2017

 

Range

(Weighted Average)

12/31/2016

Impaired Loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RE – Commercial

 

$

451

 

 

$

453

 

Third Party appraisals

 

Management Adjustments to Reflect Current Conditions and Selling Costs

 

  

12%

(12%)

 

  

12%

(12%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Lines of Credit

 

$

313

 

 

$

83

 

Third Party appraisals

 

Management Adjustments to Reflect Current Conditions and Selling Costs

 

8%

-

10%

(9%)

 

 

 

8%

(8%)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Real Estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RE – Residential

 

$

-

 

 

$

10

 

Third Party appraisals

 

Management Adjustments to Reflect Current Conditions and Selling Costs

 

 

  

N/A 

 

 

 

48%

(48%) 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RE – Commercial

 

$

192

 

 

$

84

 

Third Party appraisals

 

Management Adjustments to Reflect Current Conditions and Selling Costs

 

 

 

16%

(16%) 

 

 

 

40%

(40%)

                      

Land and Construction

 

$

546

 

 

$

641

 

Third Party appraisals

 

Management Adjustments to Reflect Current Conditions and Selling Costs

 

 

 

10%

(10%)

 

10%

-

36%

(33%)

Equity

 

$

90

 

 

$

-

 

Third Party appraisals

 

Management Adjustments to Reflect Current Conditions and Selling Costs

 

 

 

10%

(10%)

 

 

  

N/A


10. Adoption of New Accounting Standardscustomers.

 

Recently Adopted Accounting Pronouncements

On March 30, 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for interim and annual periods beginning after December 15, 2016. Early application is permitted. The Company adopted ASU No. 2016-09 on January 1, 2017 and elected to recognize forfeitures as they occur. The cumulative effect adjustment from the modified retrospective transition of the forfeitures and the classification of awards did not have a material effect on the Company’s financial statements or disclosures. The Company expects adoption of ASU No. 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits.

Pending Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09 Revenue from Contracts with Customers. This update to the ASC is the culmination of efforts by the FASB and the International Accounting Standards Board (IASB) to develop a common revenue standard for U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2014-09 supersedes Topic 605 – Revenue Recognition and most industry-specific guidance. The core principal of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in ASU 2014-09 describes a 5-step process entities can apply to achieve the core principle of revenue recognition and requires disclosures sufficient to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers and the significant judgments used in determining that information.

This update was originally effective for annual reporting periods beginning on or after December 15, 2016 and interim periods therein and requires expanded disclosures. In July 2015 the FASB issued a deferral of ASU 2014-09 of one year making it effective for annual reporting periods beginning on or after December 15, 2017 while also providing for early adoption but not before the original effective date. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income. The Company has performed a preliminary evaluation of the provisions of ASU No. 2014-09. Based on this evaluation, the Company has determined that ASU No. 2014-09 is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach.

On January 5, 2016, the FASB issued Accounting Standards Update 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 has performed a preliminary evaluation of the provisions of ASU No. 2016-01. Based on this evaluation, the Company has determined that ASU No. 2016-01 is not expected to have a material impact on the Company’s Consolidated Financial Statements; however, the Company will continue to closely monitor developments and additional guidance.

 

On February 25, 2016, the FASB issued ASU 2016-02, Leases. The most significant change for lessees is the requirement under the new guidanceguidance 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 resultresults in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under currentprior 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 expectsadopted 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 guidance will require some of theseleasing 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 agreements to now be recognizedand 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 the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. Therefore, the Company’s preliminary evaluation indicates theJanuary 1, 2019. The provisions of ASU No. 2016-02 are expected to2018-11 did not have a material impact the Company’s consolidated statements of condition. However, the Company continues to evaluate the extent of potential impact the new guidance will have 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.

 


Pending Accounting Pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on FinancialFinancial 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.

 

On March 30, 2017,In August 2018, the FASB issued ASU 2017-08, ReceivablesNo. 2018-13, Fair Value Measurement, Disclosure Framework – 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 periodChanges to the earliest call date.Disclosure Requirements for Fair Value Measurement. The amendments do not require an accounting changein this update modify the disclosure requirements for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for public business entities for fiscal years,interim and interimannual periods within thosein fiscal years beginning after December 15, 2018.2019, with early adoption permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustmentare also allowed to retained earnings aselect early adoption of the beginningeliminated or modified disclosure requirements and delay adoption of the first reporting period in which the guidance isnew disclosure requirements until their effective (i.e., modified retrospective approach). The Company has performed a preliminary evaluation of the provisions ofdate. As ASU No. 2017-08. Based on this evaluation, the Company has determined that ASU No. 2017-08 is2018-13 only revises disclosure requirements, it will not expected to have a material impact on the Company’s Consolidated Financial Statements.


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.

 


 

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. 


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.


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.


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 


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 


          

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 


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 


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   - 

Real estate – construction & land

  114   114   22   116   3 

Equity Lines of Credit

  -   -   -   -   - 

Auto

  -   -   -   -   - 

Other

  -   -   -   -   - 

Total:

                    

Commercial

 $-  $-  $-  $-  $- 

Agricultural

  250   250   -   250   8 

Real estate – residential

  639   639   25   644   21 

Real estate – commercial

  862   877   63   439   - 

Real estate – construction & land

  114   114   22   116   3 

Equity Lines of Credit

  554   565   -   93   - 

Auto

  -   -   -   -   - 

Other

  -   -   -   -   - 

Total

 $2,419  $2,445  $110  $1,542  $32 


The following tables show information related to impaired loans at December 31, 2018, in thousands:

      

Unpaid

      

Average

  

Interest

 
  

Recorded

  

Principal

  

Related

  

Recorded

  

Income

 

As of December 31, 2018:

 

Investment

  

Balance

  

Allowance

  

Investment

  

Recognized

 
                     

With no related allowance recorded:

                    

Commercial

 $-  $-  $-  $-  $- 

Agricultural

  250   250   -   252   19 

Real estate – residential

  470   481   -   470   38 

Real estate – commercial

  131   144   -   136   - 

Real estate – construction & land

  -   -   -   -   - 

Equity Lines of Credit

  -   -   -   -   - 

Auto

  -   -   -   -   - 

Other

  -   -   -   -   - 

With an allowance recorded:

                    

Commercial

 $128  $128  $128  $1  $- 

Agricultural

  -   -   -   -   - 

Real estate – residential

  179   179   41   181   7 

Real estate – commercial

  -   -   -   -   - 

Real estate – construction & land

  117   117   12   120   7 

Equity Lines of Credit

  -   -   -   -   - 

Auto

  -   -   -   -   - 

Other

  -   -   -   -   - 

Total:

                    

Commercial

 $128  $128  $128  $1  $- 

Agricultural

  250   250   -   252   19 

Real estate – residential

  649   660   41   651   45 

Real estate – commercial

  131   144   -   136   - 

Real estate – construction & land

  117   117   12   120   7 

Equity Lines of Credit

  -   -   -   -   - 

Auto

  -   -   -   -   - 

Other

  -   -   -   -   - 

Total

 $1,275  $1,299  $181  $1,160  $71 

5. COMMITMENTS AND CONTINGENCIES

The Company is party to claims and legal proceedings arising in the ordinary course of business. In the opinion of the Company’s management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or result of operations of the Company taken as a whole.

In the normal course of business, there are various outstanding commitments to extend credit, which are not reflected in the financial statements, including loan commitments of $110.4 million and $126.9 million and stand-by letters of credit of $431 thousand and $417 thousand at June 30, 2019 and December 31, 2018, respectively.

Of the loan commitments outstanding at June 30, 2019, $22.0 million are real estate construction loan commitments that are expected to fund within the next twelve months. The remaining commitments primarily relate to revolving lines of credit or other commercial loans, and many of these are expected to expire without being drawn upon. Therefore, the total commitments do not necessarily represent future cash requirements. Each loan commitment and the amount and type of collateral obtained, if any, are evaluated on an individual basis. Collateral held varies, but may include real property, bank deposits, debt or equity securities or business assets.

Stand-by letters of credit are conditional commitments written to guarantee the performance of a customer to a third party. These guarantees are primarily related to the purchases of inventory by commercial customers and are typically short-term in nature. Credit risk is similar to that involved in extending loan commitments to customers and accordingly, evaluation and collateral requirements similar to those for loan commitments are used. The deferred liability related to the Company’s stand-by letters of credit was not significant at June 30, 2019 or December 31, 2018.


6. LEASES

The Company leases four lending offices, three branch offices, one administrative office and two standalone ATM locations. Two of the branch office leases have options to renew. The exercise of lease renewal options is at our sole discretion; therefore, are not included in our Right of Use (ROU) assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term. We have elected the practical expedient to exclude short-term leases from our ROU assets and lease liabilities. The three branch leases and two of the lending office leases are classified as operating leases while the remaining leases are all short-term leases. The Company adopted ASU No. 2016-02 on January 1, 2019 and recorded $565,000 in ROU assets and lease liabilities on adoption.

As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. The Company’s weighted average incremental borrowing rate used in the calculation of the right-of-use assets and lease liabilities was estimated at 5%. At June 30, 2019 the ROU assets and lease liabilities included on the condensed consolidated balance sheet in other assets and other liabilities, respectively totaled $394,000 consisting of total undiscounted remaining cash flows of $418,000 less a present value discount of $24,000.

The following table presents a maturity analysis of the operating lease liability at June 30, 2019, in thousands:

  

Maturities of Lease Liabilities

 

Six months ended December 31, 2019

 $133 

Year ended December 31, 2020

  163 

Year ended December 31, 2021

  63 

Year ended December 31, 2022

  59 
   418 

Less: Present value discount

  (24

)

Lease Liability June 30, 2019

 $394 

The weighted-average remaining lease term is 2.3 years.

Total lease costs for the six and three months ended June 30, 2019 were as follows, in thousands:

  

Six months ended June 30,

  

Three months ended June 30,

 
  

2019

  

2019

 

Operating leases

 $176  $88 

Short-term leases

  26   16 

Variable lease expense

  22   11 

Total lease expense

 $224  $115 

Variable lease expense consists primarily of maintenance expense paid to maintain common areas. Rent expense for the six and three months ended June 30, 2018, prior to the adoption of ASU 2016-02, was $183,000 and $91,000, respectively, which includes $18,000 and $8,000, respectively, related to variable lease expense.

Cash paid on operating leases was $176,000 and $88,000, respectively for the six and three months ended June 30, 2019.

The following table presents future minimum rental payments under leases with terms in excess of one year as of December 31, 2018 presented in accordance with ASC Topic 840, “Leases”:

 

Year Ending December 31,

   
 

2019

 $248,000 
 

2020

  163,000 
 

2021

  63,000 
 

2022

  59,000 
 

2023

  - 
 Total minimum rental payments $533,000 


7. EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock, such as stock options, result in the issuance of common stock which shares in the earnings of the Company. The treasury stock method has been applied to determine the dilutive effect of stock options in computing diluted earnings per share.

  

For the Three Months

  

For the Six Months

 
  

Ended June 30,

  

Ended June 30,

 

(In thousands, except per share data)

 

2019

  

2018

  

2019

  

2018

 

Net Income:

                

Net income

 $3,810  $3,445  $7,628  $6,725 

Earnings Per Share:

                

Basic earnings per share

 $0.74  $0.67  $1.48  $1.32 

Diluted earnings per share

 $0.73  $0.66  $1.46  $1.29 

Weighted Average Number of Shares Outstanding:

                

Basic shares

  5,155   5,107   5,149   5,089 

Diluted shares

  5,228   5,222   5,227   5,216 

Shares of common stock issuable under stock options for which the exercise prices were greater than the average market prices were not included in the computation of diluted earnings per share due to their antidilutive effect.  Stock options not included in the computation of diluted earnings per share, due to shares not being in-the-money and having an antidilutive effect, were approximately 71,000 and 71,000 for the three-month periods ended June 30, 2019 and 2018, respectively. Stock options not included in the computation of diluted earnings per share, due to shares not being in-the-money and having an antidilutive effect, were approximately 71,000 and 71,000 for the six-month periods ended June 30, 2019 and 2018, respectively.

8. STOCK-BASED COMPENSATION

In 2001, the Company established a Stock Option Plan for which no shares of common stock remain reserved for issuance to employees and directors and no shares are available for future grants as of June 30, 2019.

As of June 30, 2019, all remaining shares in this plan have vested and no compensation cost remains unrecognized.

A summary of the activity within the 2001 Stock Option Plan follows:

  

Shares

  

Weighted Average

Exercise Price

 
         

Options outstanding at January 1, 2019

  6,193  $2.95 

Options exercised

  (6,193

)

  2.95 

Options outstanding at June 30, 2019

  -  $- 

In May 2013, the Company established the 2013 Stock Option Plan for which 415,085 shares of common stock are reserved and 238,500 shares are available for future grants as of June 30, 2019. The 2013 Plan requires that the option price may not be less than the fair market value of the stock at the date the option is granted, and that the stock must be paid in full at the time the option is exercised. Payment in full for the option price must be made in cash, with Company common stock previously acquired by the optionee and held by the optionee for a period of at least six months, in options of the Optionee that are fully vested and exercisable or in any combination of the foregoing. The options expire on dates determined by the Board of Directors, but not later than ten years from the date of grant.

No options were granted during the six months ended June 30, 2019. During the six months ended June 30, 2018 the Company granted options to purchase 76,000 shares of common stock.


The fair value of each option was estimated on the date of grant using the following assumptions. 

  

2018

 

Expected life of stock options (in years)

  5.1 

Risk free interest rate

  2.38

%

Volatility

  30.4

%

Dividend yields

  1.39

%

Weighted-average fair value of options granted during the three months ended March 31, 2018

 $6.54 

The Company determines the fair value of options on the date of grant using a Black-Scholes-Merton option pricing model that uses assumptions based on expected option life, expected stock volatility and the risk-free interest rate. The expected volatility assumptions used by the Company are based on the historical volatility of the Company’s common stock over the most recent period commensurate with the estimated expected life of the Company’s stock options. The Company bases its expected life assumption on its historical experience and on the terms and conditions of the stock options it grants to employees. The risk-free rate is based on the U.S. Treasury yield curve for the periods within the contractual life of the options in effect at the time of the grant.

A summary of the activity within the 2013 Plan follows: 

  

Shares

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Term

in Years

  

Intrinsic Value

 

Options outstanding at January 1, 2019

  196,500  $13.84         

Options cancelled

  (2,400

)

 $8.75         

Options exercised

  (17,515

)

  7.24         

Options outstanding at June 30, 2019

  176,585  $14.57   5.1  $1,726,000 

Options exercisable at June 30, 2019

  102,860  $10.62   4.4  $1,409,000 

Expected to vest after June 30, 2019

  65,328  $20.07   6.1  $317,000 

As of June 30, 2019, there was $354,000 of total unrecognized compensation cost related to non-vested, share-based compensation. That cost is expected to be recognized over a weighted average period of 2.2 years.

The total fair value of options vested during the six months ended June 30, 2019 and 2018 was $197,000 and $150,000, respectively. The total intrinsic value of options at time of exercise was $311,000 and $1,104,000 for the six months ended June 30, 2019 and 2018, respectively.

Compensation cost related to stock options recognized in operating results under the stock option plans was $100,000 and $98,000 for the six months ended June 30, 2019 and 2018, respectively. The associated income tax benefit recognized was $7,000 for the six months ended June 30, 2019 and June 30, 2018. Compensation cost related to stock options recognized in operating results under the stock option plans was $50,000 and $51,000 for the three months ended June 30, 2019 and 2018, respectively. The associated income tax benefit recognized was $4,000 for the three months ended June 30, 2019 and $3,000 for the three months ended June 30, 2018.

Cash received from option exercises under the plans for the six months ended June 30, 2019 and 2018 were $103,000 and $263,000, respectively. The tax benefit realized for the tax deductions from option exercise totaled $24,000 and $99,000 for the six months ended June 30, 2019 and 2018, respectively. 


9. INCOME TAXES

The Company files its income taxes on a consolidated basis with its subsidiary. Income tax expense is the total of current year income tax due or refundable and the change in deferred tax assets and liabilities.

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. A valuation allowance is recognized if, based on the weight of available evidence management believes it is more likely than not that some portion or all of the deferred tax assets will not be realized. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.  Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Interest expense and penalties associated with unrecognized tax benefits, if any, are classified as income tax expense in the consolidated statements of income. There have been no significant changes to unrecognized tax benefits or accrued interest and penalties for the six months ended June 30, 2019.

10. FAIR VALUE MEASUREMENT

The Company measures fair value under the fair value hierarchy described below.

Level 1: Quoted prices for identical instruments traded in active exchange markets.

Level 2: Quoted prices (unadjusted) for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Model based techniques that use one significant assumption not observable in the market. These unobservable assumptions reflect the Company’s estimates of assumptions that market participants would use on pricing the asset or liability. Valuation techniques include management judgment and estimation which may be significant.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

Management monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period.

Management evaluates the significance of transfers between levels based upon the nature of the financial instrument and size of the transfer relative to total assets, total liabilities or total earnings.


Fair Value of Financial Instruments

The carrying amounts and estimated fair values of financial instruments, at June 30, 2019 follows, in thousands:

      

Fair Value Measurements at June 30, 2019 Using:

 
  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Fair

Value

 

Financial assets:

                    

Cash and cash equivalents

 $33,747  $33,747  $-  $-  $33,747 

Investment securities

  173,692   -   173,692   -   173,692 

Loans, net

  588,600   -   -   621,764   621,764 

FHLB stock

  3,517   -   -   -   N/A 

Accrued interest receivable

  3,101   6   614   2,481   3,101 

Financial liabilities:

                    

Deposits

  737,211   687,517   49,722   -   737,239 

Repurchase agreements

  7,944   -   7,944   -   7,944 

Junior subordinated deferrable interest debentures

  10,310   -   -   7,701   7,701 

Accrued interest payable

  94   12   60   22   94 

The carrying amounts and estimated fair values of financial instruments, at December 31, 2018 follows, in thousands:

      

Fair Value Measurements at December 31, 2018 Using:

 
  

Carrying Value

  

Level 1

  

Level 2

  

Level 3

  

Total Fair

Value

 

Financial assets:

                    

Cash and cash equivalents

 $46,686  $46,686  $-  $-  $46,686 

Investment securities

  171,507   -   171,507   -   171,507 

Loans, net

  562,498   -   -   580,396   580,396 

FHLB stock

  3,027   -   -   -   N/A 

Accrued interest receivable

  3,345   22   685   2,638   3,345 

Financial liabilities:

                    

Deposits

  726,565   669,599   57,050   -   726,649 

Repurchase agreements

  13,058   -   13,058   -   13,058 

Junior subordinated deferrable interest debentures

  10,310   -   -   8,092   8,092 

Accrued interest payable

  88   11   52   25   88 

Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding current economic conditions, risk characteristics of various financial instruments and other factors. Those estimates that are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision are included in Level 3. Changes in assumptions could significantly affect the fair values presented.

These estimates do not reflect any premium or discount that could result from offering the Company's entire holdings of a particular financial instrument for sale at one time, nor do they attempt to estimate the value of anticipated future business related to the instruments. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of these estimates.


The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring and non-recurring basis as of June 30, 2019 and December 31, 2018, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value:

Assets and liabilities measured at fair value on a recurring basis at June 30, 2019 are summarized below, in thousands:

      

Fair Value Measurements at

June 30, 2019 Using

 
                 
  

Total Fair

Value

  

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 

Assets:

                

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

 $143,407  $-  $143,407  $- 

Obligations of states and political subdivisions

  30,285       30,285     
  $173,692  $-  $173,692  $- 

Assets and liabilities measured at fair value on a recurring basis at December 31, 2018 are summarized below, in thousands:

      

Fair Value Measurements at

December 31, 2018 Using

 
  

Total Fair

Value

  

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

 
                 

Assets:

                

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

 $132,678  $-  $132,678  $- 

Obligations of states and political subdivisions

  38,829       38,829     
  $171,507  $-  $171,507  $- 

The fair value of securities available-for-sale equals quoted market price, if available. If quoted market prices are not available, fair value is determined using quoted market prices for similar securities or matrix pricing. There were no changes in the valuation techniques used during 2019 or 2018. Transfers between hierarchy measurement levels are recognized by the Company as of the beginning of the reporting period. Changes in fair market value are recorded in other comprehensive income.


Assets and liabilities measured at fair value on a non-recurring basis at June 30, 2019 are summarized below, in thousands:

      

Fair Value Measurements at June 30, 2019 Using

 
  

Total Fair

Value

  

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

  

Total Losses

Six Months

Ended

June 30, 2019

 

Assets:

                    

Impaired loans:

                    

Construction and land

 $416  $-  $-  $416  $(63)

Other real estate:

      -   -         

Real estate – residential

  292   -   -   292   - 

Real estate – commercial

  347   -   -   347   - 

Construction and land

  455   -   -   455   - 

Total other real estate

  1,094   -   -   1,094   - 

Total

 $1,510  $-  $-  $1,510  $(63)

Assets and liabilities measured at fair value on a non-recurring basis at December 31, 2018 are summarized below, in thousands:

      

Fair Value Measurements at December 31, 2018 Using

 
  

Total Fair

Value

  

Quoted

Prices in

Active

Markets for

Identical

Assets

(Level 1)

  

Significant

Other

Observable

Inputs

(Level 2)

  

Significant

Unobservable

Inputs

(Level 3)

  

Total Gains

(Losses) Six

Months Ended

June 30, 2018

 

Assets:

                    

Impaired loans:

                    

Construction and land

 $-  $-  $-  $-  $3 

Other real estate:

                    

Real estate – residential

  368   -   -   368   (38

)

Real estate – commercial

  347   -   -   347   - 

Construction and land

  455   -   -   455   - 

Total other real estate

  1,170   -   -   1,170   (38

)

Total

 $1,170  $-  $-  $1,170  $(35

)

The Company has no liabilities which are reported at fair value.

The following methods were used to estimate fair value.

Collateral-Dependent Impaired Loans: The Bank does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect partial write-downs, through charge-offs or specific reserve allowances, that are based on fair value estimates of the underlying collateral. The fair value estimates for collateral-dependent impaired loans are generally based on recent real estate appraisals or broker opinions, obtained from independent third parties, which are frequently adjusted by management to reflect current conditions and estimated selling costs (Level 3).   Net (losses) gains of ($63,000) and $3,000 represent impairment charges recognized during the six months ended June 30, 2019 and 2018, respectively, related to the above impaired loans.

Other Real Estate: Nonrecurring adjustments to certain real estate properties classified as other real estate owned are measured at the lower of carrying amount or fair value, less costs to sell. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. Fair values are generally based on third party appraisals of the property which are commonly adjusted by management to reflect current conditions and selling costs (Level 3).


Appraisals for both collateral-dependent impaired loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, a member of the Loan Administration Department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. On a quarterly basis, the Company compares the actual selling price of similar collateral that has been liquidated to the most recent appraised value for unsold properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.

The following table presents quantitative information about Level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at June 30, 2019 and December 31, 2018 (dollars in thousands): 

Description  

Fair Value

6/30/2019

   

Fair Value

12/31/2018

 

Valuation

Technique

 Significant Unobservable Input 

Range

(Weighted Average)

6/30/2019

 

Range

(Weighted Average)

12/31/2018

Impaired Loans:

                     
                      

RE – Commercial

 $416  $- 

Third Party appraisals

 

Management Adjustments to Reflect Current Conditions and Selling Costs

   10%(10%)   N/A 
                      

Other Real Estate:

                     
                      

RE – Residential

 $292  $368 

Third Party appraisals

 

Management Adjustments to Reflect Current Conditions and Selling Costs

   10%(10%)  10%-34%(16%)
                      

RE – Commercial

 $347  $347 

Third Party appraisals

 

Management Adjustments to Reflect Current Conditions and Selling Costs

  16%-17%(16%)  16%-17%(16%)
                      

Construction and Land

 $455  $455 

Third Party appraisals

 

Management Adjustments to Reflect Current Conditions and Selling Costs

  10%-51%(24%)  10%-51%(24%)


PART I – FINANCIAL INFORMATION

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain matters discussed in this Quarterly Report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, (1) significant increases in competitive pressures in the financial services industry; (2) changes in the interest rate environment resulting in reduced margins; (3) general economic conditions, either nationally or regionally, maybe less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in regulatory environment; (5) loss of key personnel; (6) fluctuations in the real estate market; (7) changes in business conditions and inflation; (8) operational risks including data processing systems failures or fraud; and (9) changes in securities markets. Therefore, the information set forth herein should be carefully considered when evaluating the business prospects of Plumas Bancorp (the “Company”).

 

When the Company uses in this Quarterly Report the words “anticipate”“anticipate”, “estimate”, “expect”, “project”, “intend”, “commit”, “believe” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and stockholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

 

INTRODUCTION

 

The following discussion and analysis sets forth certain statistical information relatingrelating to the Company as of SeptemberJune 30, 20172019 and December 31, 20162018 and for the ninethree- and three monthsix-month periods ended SeptemberJune 30, 20172019 and 2016.2018. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-K for the year ended December 31, 2016.2018.

 

Plumas Bancorp trades on The NASDAQ Capital Market under the ticker symbol “PLBC”.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES 

 

There have been no changes to the Company’sCompany’s critical accounting policies from those disclosed in the Company’s 20162018 Annual Report to Shareholders on Form 10-K.

 

This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report.

  

OVERVIEW - NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20179

 

Net income increased by $1.7 million$903 thousand from $5.4$6.7 million during the ninesix months ended SeptemberJune 30, 20162018 to $7.1$7.6 million during the current nine monthsix-month period. Earnings benefited from increasesan increase of $2.8$3.0 million in net interest income and $912 thousandpartially offset by a decline in non-interest income. Partially offsetting theseincome of $781 thousand and increases in revenues were increases inthe provision for loan losses of $100 thousand, non-interest expense of $1.1 million$748 thousand and $447 thousand in income tax expense of $978 thousand.expense. Diluted earnings per share increased to $1.36$1.46 for the ninesix months ended SeptemberJune 30, 2017 up from $1.062019 compared to $1.29 during the ninesix months ended SeptemberJune 30, 2016.2018.

 

Total assets at SeptemberJune 30, 20172019 were $731$839 million, an increase of $73.1$15 million from December 31, 2016. Loan growth totaled $18.1 million with gross loans increasing by $18.2 million from $461$824 million at December 31, 2016 to $4792018. The increase in assets includes increases of $26.1 million at Septemberin net loans and $2.2 million in investment securities. These items were partially offset by a decline of $12.9 million in cash and cash equivalents. At June 30, 2017. Cash2019, cash and cash equivalents increased by $38.9totaled $33.7 million, from $62.6net loans were $588.6 million at December 31, 2016 to $101.5 million at September 30, 2017. Investmentand investment securities increased by $14.9 million to $116.5totaled $173.7 million.

 


 

Deposits totaled $649.9 million at September 30, 2017, an increase of $67.5Total deposits increased by $10.6 million from $582.4$727 million at December 31, 2016. Increases included $38.62018 to $737 million in non-interest bearing demand deposits, $24.4at June 30, 2019. Shareholders’ equity increased by $10.1 million in savings and money market accounts and $7.3from $66.9 million in NOW accounts. Time deposits declined by $2.8 million. The Company continuesat December 31, 2018 to manage the mix of its deposits consistent with its identity as a community bank serving the financial needs of its customers.$77.0 million at June 30, 2019.

 

The annualized returnreturn on average assets was 1.39%1.85% for the ninesix months ended SeptemberJune 30, 2017 up from 1.18% for the nine months ended September 30, 2016.2019 and 2018. The annualized return on average equity increaseddecreased from 15.7%23.6% during the first ninesix months of 20162018 to 18.1%21.4% during the current nine monthsix-month period.

The following is a detailed discussion of each component affecting change in net income and the composition of our balance sheet.

 

RESULTS OF OPERATIONS FOR THE NINESIX MONTHS ENDED SEPTEMBERJUNE 30, 20179

 

Net interest income beforebefore provision for loan losses. Net interest income on a nontax-equivalent basis, for the ninesix months ended SeptemberJune 30, 20172019 was $20.5$18.5 million, an increase of $2.8$3.0 million from the $17.7$15.5 million earned during the same period in 2016.2018. The increase in net interest income includes an increase of $2.8$3.3 million in interest income and a declinepartially offset by an increase of $7$355 thousand in interest expense. Mostly related toNet interest margin, which benefited from a 1328 basis points increase in the average yield on interest–earninginterest-earning assets, net interest margin increased 21 basis points to 4.37%4.84%, up from 4.22%4.63% for the same period in 2016.2018.

 

Interest income increased by 15%21% to $21.3$19.4 million for the ninesix months ended SeptemberJune 30, 2017,2019, up from $18.5$16.1 million during the same period in 2016.2018. Related mostly to an increaseincreases in average loan balances and loan yield, interest and fees on loans increased by $2.2$2.9 million to $19.1$16.9 million for the ninesix months ended SeptemberJune 30, 2017;2019; compared to $16.9$14.0 million during the first nine monthshalf of 2016.2018. The Company’s average loan balances were $469$576 million duringfor the ninesix months ended SeptemberJune 30, 2017,2019, up $49$81 million, or 12%16%, from $420$495 million duringfor the same period in 2016.2018. The average rate earned on the Company’s loan balances increased by 21 basis points to 5.91% during the first six months of 2019 compared to 5.70% during the first six months of 2018. We attribute this increase in yield primarily to an increase in the prime interest rate. Loan pricing continues to be extremely competitive in our service area.

 

The following table compares loan balances by type at SeptemberJune 30, 20172019 and 2016.2018.

 

(dollars in thousands)

 

Balance at End of

Period

  

Percent of Loans

in Each Category

Total Loans

  

Balance at End of

Period

  

Percent of Loans

in Each Category

Total Loans

 
  

09/30/17

  

09/30/17

  

09/30/16

  

09/30/16

 

Commercial

 $40,211   8.4

%

 $41,942   9.4

%

Agricultural

  58,105   12.1

%

  49,046   11.0

%

Real estate – residential

  17,810   3.7

%

  22,987   5.1

%

Real estate – commercial

  236,913   49.4

%

  215,166   48.2

%

Real estate – construction

  23,175   4.8

%

  18,952   4.2

%

Equity Lines of Credit

  41,926   8.8

%

  41,743   9.3

%

Auto

  57,446   12.0

%

  53,464   12.0

%

Other

  3,697   0.8

%

  3,613   0.8

%

Total Gross Loans

 $479,283   100

%

 $446,913   100

%

The average rate earned on the Company’s loan balances increased by 9 basis point to 5.45% during the first nine months of 2017 compared to 5.36% during the first nine months of 2016. We attribute this increase in yield to an increase in the prime interest rate and a decrease in net loan costs of $159 thousand. Loan pricing continues to be extremely competitive in our service area. 

(dollars in thousands)

 

Balance at End

of Period

  

Percent of

Loans in Each

Category to

Total Loans

  

Balance at End

of Period

  

Percent of

Loans in Each

Category to

Total Loans

 
  

06/30/19

  

06/30/19

  

06/30/18

  

06/30/18

 

Commercial

 $47,782   8.1

%

 $49,698   9.6

%

Agricultural

  76,552   12.9

%

  63,701   12.4

%

Real estate – residential

  16,328   2.8

%

  14,789   2.9

%

Real estate – commercial

  285,996   48.3

%

  251,608   48.8

%

Real estate – construction & land

  37,523   6.3

%

  25,325   4.9

%

Equity Lines of Credit

  38,533   6.5

%

  39,462   7.6

%

Auto

  85,174   14.4

%

  67,184   13.0

%

Other

  4,250   0.7

%

  3,981   0.8

%

Total Gross Loans

 $592,138   100

%

 $515,748   100

%

   

Interest on investment securities increased by $375$442 thousand as a result ofrelated to an increase in yield of 2613 basis points, from 1.89%2.53% during the first nine monthshalf of 20162018 to 2.15%2.66% during the ninesix months ended SeptemberJune 30, 20172019, and an increase in the average balance in investment securities from $99.3$146.2 million during the first nine monthshalf of 20162018 to $110.9$172.9 million during the ninesix months ended SeptemberJune 30, 2017. During2019. We attribute the increase in yield during the current period yield benefited fromprimarily to market conditions, an increase in municipal securities as a percentage of total securitiesconditions. See “Investment Portfolio and Federal Funds Sold” for additional information related to the maturity and payments on lower earning securities. At September 30, 2016 municipal securities totaled $25.3 million or 25% of theCompany’s investment portfolio compared to $32.3 million or 28% of the portfolio at September 30, 2017.portfolio. Interest earned on other interest earning assets increaseddecreased by $211$15 thousand to $402$274 thousand during the ninesix months ended SeptemberJune 30, 2017 related to2019 as an increase in yield of 4877 basis points from 0.63%1.62% during the ninesix months ended SeptemberJune 30, 20162018 to 1.11%2.39% during the current nine monthsix-month period and an increasewas offset by a decrease in average balancebalances from $40.7$36.0 million during the 2016 periodsix months ended June 30, 2018 to $48.2$23.2 million during the nine months ended September 30, 2017. Interest on othercurrent six month period. Other interest earning assets mostly represents interest onrelated to balances held at the Federal Reserve Bank of San FranciscoFrancisco.

Interest expense on deposits increased by $315 thousand from $304 thousand for the six months ended June 30, 2018, to $619 thousand during the current period. This increase mostly relates to an increase in interest expense on money market accounts and time deposits related to the purchase of our Carson City, Nevada branch on October 26, 2018. The average rate paid on the Carson City money market and time deposits exceeds that which Plumas Bank pays in other markets and we would expect some runoff on these accounts as they reprice over time. During the first half of 2019 money market accounts housed at our Carson City branch averaged $15.3 million and time deposits at this branch averaged $15.5 million. Interest expense on money market accounts increased by $147 thousand to $195 thousand related to an increase in average rate paid of 31 basis points and an increase in average balances of $18.8 million from $65.8 million during the six months ended June 30, 2018 to $84.6 million during the six-month period. Interest on time deposits increased by $162 thousand from $66 thousand during the six months ended June 30, 2018 to $228 thousand during the first half of 2019. During this same period average time deposits increased by $11.2 million and the increase in yield is attributable to the increase in the fed fundsaverage rate during the comparable periods.paid on time deposit increased by 54 basis points.

 


 

Interest expense on depositsother interest-bearing liabilities increased by $32$40 thousand or 8%, to $429 thousand for the nine months ended September 30, 2017, up from $397$242 thousand during the 2016 period. This increasesix months ended June 30, 2018 to $282 thousand during the current period mostly relatesrelated to an increase in the average balance of Savings accounts partially offset by decreases in the average balance on time deposits.

The largest increase in interest expense on deposits was a $34 thousand increase in interest on savings accounts related to growth in this deposit category. Average savings balances increased from $129.9 million during the nine months ended September 30, 2016 to $155.5 million during the current nine month period. Plumas Bank’s savings accounts provide an attractive interest rate, in the current rate environment, and we have seen continued growth in savings accounts for the last few years. The average rate paid on savings accounts was 16 basis points during the 2016 period and 17 basis points during the nine months ended September 30, 2017.

junior subordinated debentures. Interest on time deposits declined by $10 thousand. Average time deposits declined by $3.6 million from $51.2 million during the nine months ended September 30, 2016 to $47.6 million during the current period. We attribute much of the reduction in time deposit to the unusually low interest rate environment as we have seen a movement out of time into more liquid deposit types. The average rate paid on time deposits was 0.31% during both nine month periods.

Interest expense on other interest-bearing liabilities decreased by $39 thousand from $366debentures, which totaled $276 thousand during the nine months ended September 30, 2016 to $327half of 2019 and $239 thousand during the current nine month period. Interest expense on the Company’s note payable deceased by $80 thousand to $28 thousand during the ninesix months ended SeptemberJune 30, 2017. This decrease was related to a decrease in average borrowings on this note from $3.6 million during the 2016 period to $936 thousand during the nine months ended September 30, 2017. The note payable was paid off in April of 2017. Interest expense on junior subordinated debentures, which increased by $40 thousand to $295 thousand,2018, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate. 


 

The following table presents for the nine-monthsix-month periods indicated the distribution of consolidated average assets, liabilities and shareholders' equity. It also presents the amounts of interest income from interest-earning assets and the resultant annualized yields, as well as the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and annualized rate percentages. Average balances are based on daily averages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:

 

 

For the Nine Months Ended September 30, 2017

 

For the Nine Months Ended September 30, 2016

 

 

For the Six Months Ended

June 30, 2019

  

For the Six Months Ended

June 30, 2018

 

 

Average

Balance

(in thousands)

 

Interest

(in thousands)

 

Yield/
Rate

 

Average

Balance

(in thousands)

 

Interest

(in thousands)

 

Yield/
Rate

 

 

Average

Balance

(in thousands)

  

Interest

(in thousands)

  

Yield/
Rate

  

Average

Balance

(in thousands)

  

Interest

(in thousands)

  

Yield/
Rate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

Loans (1) (2) (3)

 

$

468,731

 

$

19,101

 

5.45

%

 

$

420,020

 

$

16,859

 

5.36

%

 $576,114  $16,894   5.91

%

 $495,151  $13,987   5.70

%

Investment securities (1)

 

110,944

 

1,782

 

2.15

%

 

99,324

 

1,407

 

1.89

%

  172,858   2,278   2.66

%

  146,203   1,836   2.53

%

Interest-bearing deposits

 

 

48,218

 

 

402

 

1.11

%

 

 

40,730

 

 

191

 

0.63

%

  23,167   274   2.39

%

  36,018   289   1.62

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-earning assets

 

627,893

 

 

21,285

 

4.53

%

 

560,074

 

 

18,457

 

4.40

%

  772,139   19,446   5.08

%

  677,372   16,112   4.80

%

Cash and due from banks

 

18,994

 

 

 

 

 

 

 

16,866

 

 

 

 

 

 

  21,541           21,309         

Other assets

 

 

32,723

 

 

 

 

 

 

 

 

32,634

 

 

 

 

 

 

  39,766           36,252         

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

679,610

 

 

 

 

 

 

 

$

609,574

 

 

 

 

 

 

 $833,446          $734,933         

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

NOW deposits

 

$

95,791

 

66

 

0.09

%

 

$

91,678

 

63

 

0.09

%

 $105,007   49   0.09

%

 $102,113   47   0.09

%

Money market deposits

 

57,303

 

62

 

0.14

%

 

53,280

 

57

 

0.14

%

  84,589   195   0.46

%

  65,797   48   0.15

%

Savings deposits

 

155,521

 

192

 

0.17

%

 

129,929

 

158

 

0.16

%

  178,762   147   0.17

%

  173,968   143   0.17

%

Time deposits

 

 

47,619

 

 

109

 

0.31

%

 

 

51,176

 

 

119

 

0.31

%

  54,100   228   0.85

%

  42,917   66   0.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

356,234

 

429

 

0.16

%

 

326,063

 

397

 

0.16

%

  422,458   619   0.30

%

  384,795   304   0.16

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Note payable

 

936

 

28

 

4.00

%

 

3,555

 

108

 

4.06

%

Junior subordinated debentures

 

10,310

 

295

 

3.83

%

 

10,310

 

255

 

3.30

%

  10,310   276   5.40

%

  10,310   239   4.67

%

Other interest-bearing liabilities

 

 

6,733

 

 

4

 

0.08

%

 

 

5,656

 

 

3

 

0.07

%

  10,537   6   0.11

%

  7,967   3   0.08

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

374,213

 

 

756

 

0.27

%

 

345,584

 

 

763

 

0.29

%

  443,305   901   0.41

%

  403,072   546   0.27

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

246,923

 

 

 

 

 

211,995

 

 

 

 

 

Non-interest-bearing deposits

  311,282           267,925         

Other liabilities

 

6,326

 

 

 

 

 

6,227

 

 

 

 

 

  6,955           6,515         

Shareholders' equity

 

 

52,148

 

 

 

 

 

 

45,768

 

 

 

 

 

  71,904           57,421         

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities & equity

 

$

679,610

 

 

 

 

 

$

609,574

 

 

 

 

 

 $833,446          $734,933         

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of funding interest-earning assets (4)

 

 

 

 

 

0.16

%

 

 

 

 

 

0.18

%

          0.24

%

          0.17

%

Net interest income and margin (5)

 

 

 

$

20,529

 

4.37

%

 

 

 

$

17,694

 

4.22

%

     $18,545   4.84

%

     $15,566   4.63

%

 

(1)

Not computed on a tax-equivalent basis.

(2)

Average nonaccrual loan balances of $3.1$1.4 million for 20172019 and $4.0$1.0 million for 20162018 are included in average loan balances for computational purposes.

(3)

Net loan costs included in loan interest income for the nine-monthsix-month periods ended SeptemberJune 30, 20172019 and 20162018 were $350,000$228,000 and $509,000,$131,000, respectively.

(4)

Total annualized interest expense divided by the average balance of total earning assets.

(5)

Annualized net interest income divided by the average balance of total earning assets.

 


 

The following table sets forth changes in interest income and interest expense for the nine-monththree-month periods indicated and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates:

 

 

2017 over 2016 change in net interest income

for the nine months ended September 30

  

2019 over 2018 change in net interest income

for the six months ended June 30,

 
 

(in thousands)

  

(in thousands)

 
 

Volume (1)

  

Rate (2)

  

Mix (3)

  

Total

  

Volume (1)

  

Rate (2)

  

Mix (3)

  

Total

 
                                

Interest-earning assets:

                                

Loans

 $1,953  $277  $12  $2,242  $2,287  $533  $87  $2,907 

Investment securities

  164   191   20   375   335   91   16   442 

Interest bearing deposits

  35   148   28   211   (103

)

  137   (49

)

  (15

)

                

Total interest income

  2,152   616   60   2,828   2,519   761   54   3,334 
                

Interest-bearing liabilities:

                                

NOW deposits

  2   1   -   3   1   1   -   2 

Money market deposits

  4   2   (1

)

  5   14   104   29   147 

Savings deposits

  31   5   (2

)

  34   4   -   -   4 

Time deposits

  (8

)

  (2

)

  -   (10

)

  17   115   30   162 

Note payable

  (79

)

  (1

)

  -   (80

)

Junior subordinated debentures

  -   40   -   40   -   37   -   37 

Other

  1   -   -   1   1   2   -   3 
                

Total interest expense

  (49

)

  45   (3

)

  (7

)

  37   259   59   355 
                

Net interest income

 $2,201  $571  $63  $2,835  $2,482  $502  $(5

)

 $2,979 

 

(1)

The volume change in net interest income represents the change in average balance multiplied by the previous year’squarter’s rate.

(2)

The rate change in net interest income represents the change in rate multiplied by the previous year’squarter’s average balance.

(3)

The mix change in net interest income represents the change in average balance multiplied by the change in rate.

 

Provision for loan losses. During the ninesix months ended SeptemberJune 30, 20172019 and 20162018 we recorded a provision for loan losses of $600 thousand.thousand and $500 thousand, respectively. See “Analysis of Asset Quality and Allowance for Loan Losses” for furthera discussion of loan quality trends and the provision for loan losses.

 

The allowance for loan losses is maintained at a level that management believes will be appropriate to absorb probable incurred losses on existing loans based on an evaluation of the collectability of the loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to repay their loan. The allowance for loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed not less than quarterly and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.

 

Based on information currently available, management believes that the allowance for loan losses is appropriate to absorb probable incurred losses in the loan portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.


 

Non-interest income. During the ninesix months ended SeptemberJune 30, 2017,2019, non-interest income totaled $6.6$4.0 million, an increasea decrease of $912$781 thousand from the ninesix months ended SeptemberJune 30, 2016.2018. The largest component of this increasedecrease was a $473decline of $724 thousand increase in gains on sale of SBA loans from $1.4$1.2 million during the ninesix months ended SeptemberJune 30, 20162018 to $1.9 million$475 thousand during the current period. Proceeds from SBA loan sales totaled $31.4$10.8 million during the current six-month period and $23.7$22.2 million during the ninesix months ended SeptemberJune 30, 2016.2018. Loans originated for sale totaled $27.2$9.9 million during the ninesix months ended SeptemberJune 30, 20172019 and $22.2$22.6 million during the ninesix months ended SeptemberJune 30, 2016. In addition,2018. We attribute the decline in originations to the government shutdown during the first quarter of 2019 as well as intense rate competition. During the shutdown we were unable to provide SBA guaranteed loans. Partially offsetting the decline in gain on sale of SBA loans were increases of $26 thousand in service charge income, increased by $319$53 thousand during the comparison period mostly related to an increase in interchange income, $28 thousand in gain on debit card transactions, an increase in overdraft incomesale of securities and an increase in service chargesother non-interest income of $55 thousand. Non-interest income benefited during the 2018 period from a $209 thousand gain recorded upon the prospective adoption of a newly effective accounting pronouncement impacting the measurement of equity securities, which in our case consists of stock in our correspondent banks, without a readily determinable fair market value. No gain or loss was recorded on deposit accounts. Loan servicing income, which increased by $62 thousand, represents servicing income received onthese securities during the guaranteed portion of SBA loans sold into the secondary market. At September 30, 2017 we were servicing $114 million in guaranteed portions of loans an increase of $19 million from $95 million at September 30, 2016.current period.


 

The following table describes the components of non-interest income for the nine-monthsix-month periods ended SeptemberJune 30, 20172019 and 2016,2018, dollars in thousands:

 

 

For the Nine Months

         
 

Ended September 30

          

For the Six Months Ended June 30,

 
 

2017

  

2016

  

Dollar

Change

  

Percentage

Change

  

2019

  

2018

  

Dollar

Change

  

Percentage

Change

 

Service charges on deposit accounts

 $3,311  $2,992  $319   10.7

%

  1,320   1,294   26   2.0

%

Interchange income

  1,097   1,044   53   5.1

%

Gain on sale of loans, net

  1,870   1,397   473   33.9

%

  475   1,199   (724

)

  -60.4

%

Loan servicing fees

  526   464   62   13.4

%

  377   386   (9

)

  -2.3

%

Earnings on life insurance policies

  253   256   (3

)

  (1.2

)%

  164   165   (1

)

  -0.6

%

Loss on sale of investments

  (17

)

  (32

)

  15   46.9

%

Gain (loss) on sale of investments

  20   (8

)

  28   350.0

%

Gain on equity securities with no readily determinable fair value

  -   209   (209

)

  -100.0

%

Other

  670   624   46   7.4

%

  523   468   55   11.8

%

Total non-interest income

 $6,613  $5,701  $912   16.0

%

 $3,976  $4,757  $(781

)

  -16.4

%

 

Non-interest expense. During the ninesix months ended SeptemberJune 30, 20172019 non-interest expense increased by $1.1$748 thousand, or 7% to $11.4 million, up from $10.7 million during the same period in 2018. Total non-interest expense related to $15.1our Carson City, Nevada branch was $488 thousand for the six months ended June 30, 2019. Excluding the effect of the Carson City branch, non-interest expense would have increased by 3% for the six months ended June 30, 2019.

The Company’s single largest expense is salary and benefit costs. During the six months ended June 30, 2019 salary and benefit expense increased by $268 thousand, or 4%, to $6.3 million. The largest component of this increase was a $900 thousand increase in salary and benefit expense. The three largest components of thecosts includes annual merit increases and an increase in salary and benefit expense were increases of $355 thousand in salary expense, $189 thousand in accrued bonus expense and $163 thousand in commissions. Salary expense increased to $6.5 million related to additions to staff and merit and promotion increases. Bonus expense is mostly a function of pretax income; the increase during the 2017 period is directlypersonnel largely related to the increase in pretax income. The increase in commission expense which is related to our SBA operations is consistent withaddition of the increase in SBA activity.

Carson City, Nevada branch. Other significant increases in non-interest expense were $97include $276 thousand in the provision from change in OREO valuation, $79occupancy and equipment expense, $134 thousand in outside service fees,amortization of core deposit intangible and $60$119 thousand in OREO Costs.director compensation and expense. The largest decreases in non-interest expense were a reduction in professional fees of $93 thousand and a decline in other non-interest expense of $98 thousand.

 

OREO represents realOf the $276 thousand increase in occupancy and equipment costs, $93 thousand relates to the Carson City, Nevada branch. Of the remaining increase the three largest items were increases of $38 thousand in equipment depreciation, $38 thousand in software costs and $28 thousand in property taken bytaxes. The increase in amortization of core deposit intangible is related to the Bank either through foreclosure or through a deed in lieu thereof from the borrower. When other real estate is acquired, any excessamortization of the Bank’score deposit intangible recorded investment inon the loan balance and accrued interest income over the estimated fair market valueacquisition of the property less costs to sell is charged against the allowance for loan losses. A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The allowance is established through a provision for subsequent losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or from impairment are recorded as incurred. The provision from change in OREO valuation increased from $9 thousandCarson City branch. Director compensation and expense was abnormally low during the nine months ended September 30, 20162018 period as it included the reversal of accrued retirement costs related to $106 thousandour former director John Flournoy who elected not to run for reelection in 2018 and instead allowed his board term to expire as of May 16, 2018. Mr. Flournoy did not meet the minimum years of service required under his agreement to receive benefits.

Professional fees during the current period. Theperiod benefited from a reduction in consulting costs of $72 thousand. Consulting costs were somewhat high during the 2018 period as they included an external review of our compliance management system and $21 thousand related to our acquisition of the Carson City, Nevada branch. Other non-interest expense during the 2018 period was also higher than normal as it included a $50 thousand increase in the provision from changes in OREO valuation was related to a $95 thousand write-down, based on a recent appraisal, on the Company’s largest OREO property.

Outside service fees increased by $79 thousand to $1.6 million during the nine months ended September 30, 2017. This increase included an increase in expenses related to the generation of interchange income consistentreserve for undisbursed loan commitments and costs associated with the increase interchange income and an increasepending termination of our lease at our Tahoe City, California branch. During 2018 we purchased a building in expense related toTahoe City which, after remodeling is complete, will become the outsourced operationsnew home of the Company’s computer network. OREO costs increased fromour Tahoe City branch. Our lease obligation at our current location includes a credit of $13 thousandtermination penalty that during the nine months ended September 30, 2016 to $47 thousand during the current nine month. OREO costs in 2016 were abnormally low, benefiting from a reimbursement of previously incurred costs and $54 thousand in rental income on a new OREO property.

The largest decrease in non-interest expense was $43 thousand in deposit insurance2018 has been accrued into other expense. Effective July 1, 2016 the FDIC lowered the rates and surcharges it charges financial institutions for deposit insurance.

 


 

The following table describes the components of non-interest expense for the nine-monthsix-month periods ended SeptemberJune 30, 20172019 and 2016,2018, dollars in thousands:

 

 

For the Nine Months

          

For the Six Months Ended June 30,

 
 

Ended September 30

          

2019

  

2018

  

Dollar

Change

  

Percentage

Change

 
 

2017

  

2016

  

Dollar

Change

  

Percentage

Change

 

Salaries and employee benefits

 $8,613  $7,713  $900   11.7

%

Occupancy and equipment

  2,136   2,163   (27

)

  (1.2

%)

Salaries and employee benefits

 $6,304  $6,036  $268   4.4

%

Occupancy and equipment

  1,683   1,407   276   19.6

%

Outside service fees

  1,643   1,564   79   5.1

%

  1,231   1,156   75   6.5

%

Professional fees

  469   488   (19

)

  (3.9

%)

Professional fees

  344   437   (93

)

  -21.3

%

Telephone and data communication

  379   337   42   12.5

%

  261   266   (5

)

  -1.9

%

Business development

  284   248   36   14.5

%

  243   196   47   24.0

%

Advertising and shareholder relations

  282   316   (34

)

  (10.8

%)

  206   210   (4

)

  -1.9

%

Director compensation and retirement

  240   252   (12

)

  (4.8

)%

Director compensation and expense

  204   85   119   140.0

%

Armored car and courier

  207   184   23   12.5

%

  185   159   26   16.4

%

Amortization of Core Deposit Intangible

  138   4   134   3,350.0

%

Deposit insurance

  184   227   (43

)

  (18.9

%)

  127   119   8   6.7

%

Loan and collection expenses

  143   130   13   10.0

%

Loan collection expenses

  120   135   (15

)

  -11.1

%

Stationery and supplies

  57   52   5   9.6

%

OREO expenses

  27   38   (11

)

  -28.9

%

Provision from change in OREO valuation

  106   9   97   1,077.8

%

  -   38   (38

)

  -100.0

%

Stationery and supplies

  88   90   (2

)

  (2.2

%)

Insurance expense

  60   60   -   -

%

OREO costs

  47   (13

)

  60   461.5

%

Postage

  34   29   5   17.2

%

Loss on sale of OREO

  -   4   (4

)

  (100.0

%)

Gain on Sale of OREO

  (9)  (63

)

  54   -85.7

%

Other

  191   222   (31

)

  (14.0

%)

  306   404   (98

)

  -24.3

%

Total non-interest expense

 $15,106  $14,023  $1,083   7.7

%

 $11,427  $10,679  $748   7.0

%

 

Provision for income taxes. The Company recorded an income tax provision of $4.4$2.9 million, or 38.3%27.3% of pre-tax income for the ninesix months ended SeptemberJune 30, 2017.2019. This compares to an income tax provision of $3.4$2.4 million or 38.8%26.5% of pre-tax income forduring the ninefirst six months ended September 30, 2016.of 2018. The percentages for 20172019 and 20162018 differ from the statutory raterates as tax exempt items of income such as earnings on Bank owned life insurance and municipal investment incomeloan and securities interest decrease the tax provision.taxable income. In addition, the 20172019 and 2018 provision includes a $52 thousandinclude income tax benefitbenefits related to the exercise of nonqualified stock options.options of $24 thousand and $99 thousand, respectively. 

 

Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed, and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Based upon the analysis of available evidence, management has determined that it is "more likely than not" that all deferred income tax assets as of SeptemberJune 30, 20172019 and December 31, 20162018 will be fully realized and therefore no valuation allowance was recorded. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.

 

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER JUNE 30, 20172019

 

Net Income. The Company recorded net income of $2.4$3.8 million for the three months ended SeptemberJune 30, 20172019 up $491$365 thousand from net income of $2.0$3.4 million for the three months ended SeptemberJune 30, 2016. Increases2018. An increase of $1$1.2 million in net interest income and $190a $100 thousand decline in non-interest incomethe provision for loan losses were partially offset by increases of $423$514 thousand in non-interest expense and $298$153 thousand in the provision for income taxes.tax expense and a decrease of $214 thousand in non-interest income.


 

The following is a detail discussion of each component of the change in net income.

 

Net interest income before provision for loan losses. Net interest income on a nontax-equivalent basis, was $7.1$9.2 million for the three months ended SeptemberJune 30, 20172019 an increase of $1$1.2 million, or 17%14%, from $6.1$8.0 million for the same period in 2016.2018. The increase in net interest income includes an increase of $1$1.3 million in interest income and a declineincome; the largest component of $1 thousandwhich was an increase in interest expense.and fees on loans of $1.2 million. Net interest margin for the three months ended SeptemberJune 30, 2017 was 4.31% an increase of 112019 decreased by 2 basis points from 4.20%4.75% during the three months ended September 30, 2016.second quarter of 2018 to 4.73% during the current quarter.


 

Interest income increased by 16%16%, to $7.4$9.6 million for the three months ended SeptemberJune 30, 2017,2019, up from $6.4$8.3 million during the same period in 2016.2018. Related mainly to an increase in average loan balances interest and fees on loans increased $710 thousand$1.2 million to $6.6$8.4 million for the three months ended SeptemberJune 30, 20172019 as compared to $5.9$7.2 million during the thirdsecond quarter of 2016.2018. The Company’s average loan balances were $474$585 million for the three months ended SeptemberJune 30, 2017,2019, up $36$84 million, or 8%17%, from $438$501 million for the same period in 2016.

2018. The average yield on loans was 5.49%5.75% during the thirdsecond quarter of 2017 up2019 down slightly from 5.32%5.77% for same quarter in 2016.2018. We attribute this increasedecrease in yield to an increase in the prime interest rate and a decrease in net loan costs from $23 thousand during the second quarter of $47 thousand. Loan pricing continues2018 to be extremely competitive in our service area.$361 thousand during the current quarter. Net loan costs during the second quarter of 2018 were lower than normal as we benefited from several prepayment penalties.

 

Interest on investment securities increased by $156$160 thousand as a result ofmostly related to an increase in yield of 29 basis pointsaverage balance from 1.85%$152.3 million in 2018 to $174.4 million in 2019. Yield on investment securities was 2.62% during the thirdcurrent quarter of 2016 to 2.14%and 2.58% during the three months ended SeptemberJune 30, 2017 and an increase in the average balance in investment securities from $99.5 million during three months ended September 30, 2016 to $114.5 million during the 2017 quarter. Similar to the nine month comparison we attribute this increase to an increase in municipal securities to total securities and market conditions.2018.

 

Interest expense on deposits increased by $14$169 thousand to $149$322 thousand for the three months ended SeptemberJune 30, 2017. The largest component of this2019, up from $153 thousand during the 2018 quarter. This increase was a $12 thousandmostly relates to an increase in interest expense on savingsmoney market accounts mostlyand time deposits related to growth in this deposit category.the purchase of our Carson City branch on October 26, 2018. Interest on money market accounts increased by $85 thousand. Average savings balancesmoney market accounts increased $17.5 million from $133.5$68.4 million during the three months ended SeptemberJune 30, 20162018 to $161.2$85.9 million during the current quarter. Plumas Bank’s savings accounts provide an attractive interest rate, in the current rate environment, and we have seen continued growth in savings accounts for the last few years. The average rate paid on savingsmoney market accounts was 16increased by 36 basis points to 0.51% during both quarters.the three-months ended June 30, 2019 up from 0.15% during the 2018 quarter. Interest on time deposits increased by $80 thousand from $33 thousand during the three months ended June 30, 2018 to $113 thousand during the current quarter. Average time deposits increased by $10.6 million from $41.9 million during the three months ended June 30, 2018 to $52.5 million during the current quarter. The average rate paid on time deposits was 0.32% during the three-months ended June 30, 2018 and 0.86% during the current quarter.

 

Interest expense on other interest-bearing liabilities decreasedliabilities increased by $15$11 thousand from $119$128 thousand during the three months ended SeptemberJune 30, 20162018 to $104$139 thousand during the current quarter. Interest expense on the Company’s note payable deceased by $31 thousand as the note payableThis increase was paid offmostly related to an increase in April of 2017. Interest expenserate paid on junior subordinated debentures,debentures; interest expense on this debt, which increased by $16 thousand to $103 thousand, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate.LIBOR rate, increased by $9 thousand to $136 thousand. 

 


 

The following table presents for the three-month periods indicated the distribution of consolidated average assets, liabilities and shareholders' equity. It also presents the amounts of interest income from interest earning assets and the resultant annualized yields expressed in both dollars and annualized yield percentages, as well as, the amounts of interest expense on interest bearing liabilities and the resultant cost expressed in both dollars and annualized rate percentages. Average balances are based on daily averages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest thereon is excluded from the computation of yields earned:

 

 

For the Three Months Ended

June 30, 2019

  

For the Three Months Ended

June 30, 2018

 

 

For the Three Months Ended

September 30, 2017

 

 

For the Three Months Ended

September 30, 2016

 

 

Average Balance

(in thousands)

  

Interest

(in thousands)

  

Yield/
Rate

  

Average Balance

(in thousands)

  

Interest

(in thousands)

  

Yield/
Rate

 

 

Average Balance

(in thousands)

 

Interest

(in thousands)

 

Yield/
Rate

 

 

Average Balance

(in thousands)

 

Interest

(in thousands)

 

Yield/
Rate

 

                        

Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

Loans (1) (2) (3)

 

$

473,799

 

$

6,560

 

5.49

%

 

$

437,818

 

$

5,850

 

5.32

%

 $585,319  $8,385   5.75

%

 $501,400  $7,209   5.77

%

Investment securities (1)

 

114,511

 

618

 

2.14

%

 

99,470

 

462

 

1.85

%

  174,430   1,140   2.62

%

  152,288   980   2.58

%

Other

 

 

69,810

 

 

223

 

1.27

%

 

 

43,282

 

 

68

 

0.63

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing deposits

  16,186   95   2.35

%

  23,534   105   1.79

%

Total interest-earning assets

 

658,120

 

 

7,401

 

4.46

%

 

580,570

 

 

6,380

 

4.37

%

  775,935   9,620   4.97

%

  677,222   8,294   4.91

%

Cash and due from banks

 

20,268

 

 

 

 

 

 

 

18,578

 

 

 

 

 

 

  21,648           22,680         

Other assets

 

 

33,419

 

 

 

 

 

 

 

 

33,562

 

 

 

 

 

 

  39,605           37,456         

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

711,807

 

 

 

 

 

 

 

$

632,710

 

 

 

 

 

 

 $837,188          $737,358         

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

NOW deposits

 

$

97,255

 

23

 

0.09

%

 

$

93,412

 

21

 

0.09

%

 $105,950   25   0.09

%

 $103,736   24   0.09

%

Money market deposits

 

61,265

 

22

 

0.14

%

 

55,464

 

20

 

0.14

%

  85,877   110   0.51

%

  68,350   25   0.15

%

Savings deposits

 

161,238

 

67

 

0.16

%

 

133,543

 

55

 

0.16

%

  178,205   74   0.17

%

  172,786   71   0.16

%

Time deposits

 

 

46,982

 

 

37

 

0.31

%

 

 

50,480

 

 

39

 

0.31

%

  52,547   113   0.86

%

  41,924   33   0.32

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total deposits

 

366,740

 

149

 

0.16

%

 

332,899

 

135

 

0.16

%

  422,579   322   0.31

%

  386,796   153   0.16

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Note payable

 

-

 

-

 

-

%

 

2,622

 

31

 

4.70

%

Junior subordinated debentures

 

10,310

 

103

 

3.96

%

 

10,310

 

87

 

3.36

%

  10,310   136   5.29

%

  10,310   127   4.94

%

Other interest-bearing liabilities

 

 

7,129

 

 

1

 

0.06

%

 

 

6,371

 

 

1

 

0.06

%

  8,459   3   0.14

%

  6,378   1   0.06

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total interest-bearing liabilities

 

384,179

 

 

253

 

0.26

%

 

352,202

 

 

254

 

0.29

%

  441,348   461   0.42

%

  403,484   281   0.28

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest bearing deposits

 

266,382

 

 

 

 

 

 

 

226,484

 

 

 

 

 

 

Non-interest-bearing deposits

  314,990           269,067         

Other liabilities

 

6,323

 

 

 

 

 

 

 

6,292

 

 

 

 

 

 

  6,685           6,451         

Shareholders' equity

 

 

54,923

 

 

 

 

 

 

 

 

47,732

 

 

 

 

 

 

  74,165           58,356         

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities & equity

 

$

711,807

 

 

 

 

 

 

 

$

632,710

 

 

 

 

 

 

 $837,188          $737,358         

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of funding interest-earning assets (4)

 

 

 

 

 

 

0.15

%

 

 

 

 

 

 

0.17

%

          0.24

%

          0.16

%

Net interest income and margin (5)

 

 

 

 

$

7,148

 

4.31

%

 

 

 

 

$

6,126

 

4.20

%

     $9,159   4.73

%

     $8,013   4.75

%

 

(1)

Not computed on a tax-equivalent basis.

(2)

Average nonaccrual loan balances of $3.5$1.8 million for 20172019 and $2.9$0.9 million for 20162018 are included in average loan balances for computational purposes.

(3)

Net loan costs included in loan interest income for the three-month periods ended SeptemberJune 30, 20172019 and 20162018 were $133,000$361,000 and $180,000,$23,000, respectively.

(4)

Total annualized interest expense divided by the average balance of total earning assets.

(5)

Annualized net interest income divided by the average balance of total earning assets.

 


 

The following table sets forth changes in interest income and interest expense for the three-monththree-month periods indicated and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates:

 

 

2017 over 2016 change in net interest income

for the three months ended September 30

  

2019 over 2018 change in net interest income

for the three months ended June 30

 
 

(in thousands)

  

(in thousands)

 
 

Volume (1)

  

Rate (2)

  

Mix (3)

  

Total

  

Volume (1)

  

Rate (2)

  

Mix (3)

  

Total

 
                                

Interest-earning assets:

                                

Loans

 $482  $191  $37  $710  $1,206  $(26

)

 $(4

)

 $1,176 

Investment securities

  70   73   13   156   143   15   2   160 

Interest bearing deposits

  42   70   43   155   (33

)

  33   (10

)

  (10

)

                                

Total interest income

  594   334   93   1,021   1,316   22   (12

)

  1,326 
                                

Interest-bearing liabilities:

                                

NOW deposits

  1   1   -   2   1   -   -   1 

Money market deposits

  2   -   -   2 

Savings deposits

  11   1   -   12 

Money market deposits

  6   63   16   85 

Savings deposits

  2   1   -   3 

Time deposits

  (2

)

  -   -   (2

)

  8   57   15   80 

Note payable

  (31

)

  -   -   (31

)

Junior subordinated debentures

  -   16   -   16 

Other

  -   -   -   - 

Junior subordinated debentures

  -   9   -   9 

Other

  -   1   1   2 
                                

Total interest expense

  (19

)

  18   -   (1

)

  17   131   32   180 
                                

Net interest income

 $613  $316  $93  $1,022  $1,299  $(109

)

 $(44

)

 $1,146 

 

(1)

The volume change in net interest income represents the change in average balance divided by the previous year’s rate.

(2)

The rate change in net interest income represents the change in rate divided by the previous year’s average balance.

(3)

The mix change in net interest income represents the change in average balance multiplied by the change in rate.

 

Provision for loan losses. During the three months ended SeptemberJune 30, 20172019 and 20162018 we recorded a provision for loan losses of $200 thousand.thousand and $300 thousand, respectively. See “Analysis of Asset Quality and Allowance for Loan Losses” for a discussion of loan quality trends and the provision for loan losses.

 

Non-interest income. During the three months ended SeptemberJune 30, 2017,2019, non-interest income totaled $2.2$2.0 million, an increasea decrease of $190$214 thousand from the three months ended SeptemberJune 30, 2016.2018. The largest component of this increasedecrease was a $111$302 thousand increasedecrease in service charge income primarily related to an increase in interchange income on debit card transactions, an increase in overdraft income and an increase in service charges on deposit accounts. In addition, gains on sale of SBA loans increased by $52 thousand from $505$533 thousand during the three months ended SeptemberJune 30, 20162018 to $557$231 thousand during the current quarter. Proceeds from SBA loan sales totaled $4.8 million during the current quarter and $10.3 million during the 2018 quarter. Loans originated for sale totaled $6.1 million during the three months ended June 30, 2019 and $10.0 million during the three months ended June 30, 2018. We attribute much of the decrease in loan originations to intense rate competition as we tend to price our loans at higher rates than many of our competitors. The decline in gain on sale is consistent with the decrease in loans sold during the comparison periods. Partially offsetting the decline in gain on sale of SBA loans were increases of $17 thousand in service charge income, $30 thousand in interchange income, a $20 thousand gain on sale of securities and an increase in other non-interest income of $35 thousand.


 

The following table describes the components of non-interest income for the three-month periods ended SeptemberJune 30, 20172019 and 2016,2018, dollars in thousands: 

 

 

For the Three Months

          

For the Three Months

         
 

Ended September 30

          

Ended June 30

         
 

2017

  

2016

  

Dollar

Change

  

Percentage

Change

  

2019

  

2018

  

Dollar

Change

  

Percentage

Change

 

Service charges on deposit accounts

 $1,138  $1,027  $111   10.8

%

 $670  $653  $17   2.6

%

Interchange income

  583   553   30   5.4

%

Gain on sale of loans, net

  557   505   52   10.3

%

  231   533   (302

)

  -56.7

%

Loan serving fees

  188   161   27   16.8

%

  183   197   (14

)

  -7.1

%

Earnings on life insurance policies

  85   85   -   -

%

  82   82   -   -

%

Gain on sale of investments

  20   -   20   100

%

Other

  215   215   -   -

%

  242   207   35   16.9

%

Total non-interest income

 $2,183  $1,993  $190   9.5

%

 $2,011  $2,225  $(214

)

  -9.6

%

 

Non-interest expense. During the three months ended SeptemberJune 30, 2017,2019, total non-interest expense increased by $423$514 thousand, or 9%10%, to $5.1$5.7 million, up from $4.7$5.2 million for the comparable period in 2016. This increase was primarily2018. Total non-interest expense related to anour Carson City, Nevada branch was $229 thousand for the three months ended June 30, 2019. Excluding the effect of the Carson City branch, non-interest expense would have increased by 7% for the three months ended June 30, 2019.

The Company’s single largest expense is salary and benefit costs. During the three months ended June 30, 2019 salary and benefits increased by $181 thousand, or 6%, to $3.1 million. The increase of $275 thousand in salary and benefit expense. Salary expense increased by $99 thousand to $2.2 millioncosts includes annual merit increases and an increase in personnel largely related to additions to staff and merit and promotion increases. Inthe addition commission expense, related to our SBA operations, increased by $56 thousand consistent withof the increase in SBA activity and accrued bonus expense increased by $50 thousand.

Carson City, Nevada branch. Other significant increases in non-interest expense included $97 thousand in the provision for change in OREO valuation, $51 thousand in outside service fees and $45 thousand in OREO costs. The increase in the provision from changes in OREO valuation was related to a $95 thousand write-down, based on a recent appraisal, on the Company’s largest OREO property. The increase in outside service costs includes increases in interchange expenses and costs related to the outsourced operations of the Company’s computer network. OREO costs were abnormally low during the third quarter of 2016.

The largest decrease in non-interest expense was $66include $120 thousand in occupancy and equipment expense. Occupancyexpense, $102 thousand in director compensation and equipmentexpense and $68 thousand in the amortization of core deposit intangibles. The largest single decline in non-interest expense was higher than normal duringa $77 thousand reduction in Other. Please see the third quarter of 2016 as it included costs associated with replacing a large number of the Company’s personal computers and an elevated level of building repair costs.six-month discussion for additional information related to these changes.

 

The following table describes the components of non-interest expense for the three-month periods ended SeptemberJune 30, 20172019 and 2016,2018, dollars in thousands: 

 

  

For the Three Months

         
  

Ended September 30,

         
  

2017

  

2016

  

Dollar

Change

  

Percentage

Change

 

Salaries and employee benefits

 $2,822  $2,547  $275   10.8

%

Occupancy and equipment

  713   779   (66

)

  (8.5

%)

Outside service fees

  559   508   51   10.0

%

Professional fees

  180   147   33   22.4

%

Telephone and data communication

  122   128   (6

)

  (4.7

%)

Advertising and shareholder relations

  100   131   (31

)

  (23.7

%)

Business development

  99   86   13   15.1

%

Provision from change in OREO valuation

  97   -   97   100.0

%

Director compensation and retirement

  83   82   1   1.2

%

Armored car and courier

  74   66   8   12.1

%

Deposit insurance

  72   53   19   35.8

%

Loan and collection expenses

  49   57   (8

)

  (14.0

%)

Stationery and supplies

  33   28   5   17.9

%

OREO costs

  25   (20

)

  45   225.0

%

Insurance expense

  17   15   2   13.3

%

Postage

  11   9   2   22.2

%

Other

  76   93   (17

)

  (18.3

%)

Total non-interest expense

 $5,132  $4,709  $423   9.0

%


  

For the Three Months

         
  

Ended June 30,

         
  

2019

  

2018

  

Dollar

Change

  

Percentage

Change

 

Salaries and employee benefits

 $3,104  $2,923  $181   6.2

%

Occupancy and equipment

  825   705   120   17.0

%

Outside service fees

  627   583   44   7.5

%

Professional fees

  223   218   5   2.3

%

Telephone and data communication

  141   130   11   8.5

%

Business development

  137   117   20   17.1

%

Advertising and shareholder relations

  124   132   (8

)

  -6.1

%

Director compensation and expense

  97   (5

)

  102   2,040

%

Armored car and courier

  96   82   14   17.1

%

Amortization of Core Deposit Intangible

  69   1   68   6,800

%

Loan collection expenses

  67   46   21   45.7

%

Deposit insurance

  62   45   17   37.8

%

Stationery and supplies

  31   24   7   29.2

%

OREO expenses

  4   (3

)

  7   233.3

%

Provision from change in OREO valuation

  -   38   (38

)

  -100.0

%

Gain on sale of OREO

  (9

)

  (29

)

  20   69.0

%

Other

  145   222   (77

)

  -34.7

%

Total non-interest expense

 $5,743  $5,229  $514   9.8

%

 

Provision for income taxes. The Company recorded an income tax expenseprovision of $1.6$1.4 million, or 38.8%27.1% of pre-tax income for the three months ended SeptemberJune 30, 2017.2019. This compares to an income tax expenseprovision of $1.3 million, or 39.0%26.8% of pre-tax income for the three months ended SeptemberJune 30, 2016.2018. The percentages for 20172019 and 20162018 differ from the statutory raterates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan and investment incomesecurities interest decrease taxable income. In addition, the 2019 and 2018 provision include income tax benefits related to the exercise of stock options of $24 thousand and $35 thousand, respectively.


 

FINANCIAL CONDITION

 

Loan Portfolio. LoansGross loans balances increased by $18$26 million, or 5%, from $461$566 million at December 31, 20162018 to $479$592 million at SeptemberJune 30, 2017.2019. The increase in loan balances includes increases of $10.8$14.3 million in commercial real estate loans, $7.0$8.0 million in automobile loans, $7.4 million in agricultural loans $3.9 million automobile loans and $1.3$0.4 million in construction loansresidential real estate loans. These increases were partially offset by declines of $3.5$2.6 million in residential real estateconstruction loans $1.1and $1.8 million in commercial loans and $0.4 million in equity lines of credit.loans.  The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of the area it serves. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment.

 

As shown in the following table the Company's largest lending categories are commercial real estate loans, auto loans, agricultural loans equity lines of credit and commercial loans.

 

(dollars in thousands)

 

Balance at

End of

Period

  

Percent of

Loans in

Each

Category to

Total Loans

  

Balance at

End of

Period

  

Percent of

Loans in

Each

Category to

Total Loans

 
  

9/30/17

  

9/30/17

  

12/31/16

  

12/31/16

 

Commercial

 $40,211   8.4

%

 $41,293   9.0

%

Agricultural

  58,105   12.1

%

  51,103   11.1

%

Real estate – residential

  17,810   3.7

%

  21,283   4.6

%

Real estate – commercial

  236,913   49.4

%

  226,136   49.0

%

Real estate – construction & land

  23,175   4.8

%

  21,904   4.7

%

Equity Lines of Credit

  41,926   8.8

%

  42,338   9.2

%

Auto

  57,446   12.0

%

  53,553   11.6

%

Other

  3,697   0.8

%

  3,513   0.8

%

Total Gross Loans

 $479,283   100

%

 $461,123   100

%

Construction and land development loans represented 4.8% and 4.7% of the loan portfolio as of September 30, 2017 and December 31, 2016, respectively. The construction and land development portfolio component has been identified by Management as a higher-risk loan category.  The quality of the construction and land development category is highly dependent on property values both in terms of the likelihood of repayment once the property is transacted by the current owner as well as the level of collateral the Company has securing the loan in the event of default.  Loans in this category are characterized by the speculative nature of commercial and residential development properties and can include property in various stages of development from raw land to finished lots. The decline in these loans as a percentage of the Company’s loan portfolio from over 21% at December 31, 2007 to less than 6% during the last two years reflects management’s efforts, which began in 2009, to reduce its exposure to construction and land development loans.

(dollars in thousands)

 

Balance at

End of

Period

  

Percent of

Loans in

Each

Category to

Total Loans

  

Balance at

End of

Period

  

Percent of

Loans in

Each

Category to

Total Loans

 
  

6/30/19

  

6/30/19

  

12/31/18

  

12/31/18

 

Commercial

 $47,782   8.1

%

 $49,563   8.8

%

Agricultural

  76,552   12.9

%

  69,160   12.2

%

Real estate - residential

  16,328   2.8

%

  15,900   2.8

%

Real estate – commercial

  285,996   48.3

%

  271,710   48.0

%

Real estate – construction & land

  37,523   6.3

%

  40,161   7.1

%

Equity Lines of Credit

  38,533   6.5

%

  38,490   6.8

%

Auto

  85,174   14.4

%

  77,135   13.6

%

Other

  4,250   0.7

%

  4,080   0.7

%

Total Gross Loans

 $592,138   100

%

 $566,199   100

%

 

The Company’sCompany’s real estate related loans, including real estate mortgage loans, real estate construction and land development loans, consumer equity lines of credit, and agricultural loans secured by real estate comprised 72%71% of the total loan portfolio at SeptemberJune 30, 2017.2019. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, and Sierra and in Washoe Countyand Carson City Counties in Northern Nevada. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of the Company's operations in these areas of Northeastern California and Northwestern Nevada exposes it to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions.


 

The rates of interest charged on variable rate loans are set at specific increments in relation to the Company's lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indexes. The frequency in which variable rate loans reprice can vary from one day to several years. At SeptemberJune 30, 20172019 and December 31, 2016,2018, approximately 75%74% and 74%75%, respectively of the Company's loan portfolio was comprised of variable rate loans. At SeptemberJune 30, 20172019 and December 31, 2016, 39%2018, 31% and 42%33%, respectively of the variable loans were at their respective floor rate. While real estate mortgage, commercial and consumer lending remain the foundation of the Company's historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types. The most significant change has been an increase in indirect auto lending with automobile loans increasing from 2.5% of gross loans at December 31, 2011 to 12.0%14.4% of gross loans at SeptemberJune 30, 2017.2019. The automobile portfolio provides diversification to the loan portfolio in terms of rate, term and balance as these loans tend to have a much shorter term and balance than commercial real-estate loans and are fixed rate. In addition, the Company remains committed to the agricultural industry in Northeastern California and will continue to pursue high quality agricultural loans. Agricultural loans include both commercial and commercial real estate loans. The Company’s agricultural loan balances totaled $58$77 million at SeptemberJune 30, 20172019 and $51$69 million at December 31, 2016.2018.


 

Analysis of Asset Quality and Allowance for Loan Losses. The Company attempts to minimize credit risk through its underwriting and credit review policies. The Company’s credit review process includes internally prepared credit reviews as well as contracting with an outside firm to conduct periodic credit reviews. The Company’s management and lending officers evaluate the loss exposure of classified and impaired loans on a quarterly basis, or more frequently as loan conditions change. The Management Asset Resolution Committee (MARC) reviews the asset quality of criticized and past due loans on a monthly basis and reports the findings to the full Board of Directors. In management's opinion, this loan review system helps facilitate the early identification of potential criticized loans.

The Company has implemented MARC to develop an action plan to significantly reduce nonperforming assets. It consists of the Bank’sBank’s Chief Executive Officer, Chief Financial Officer and Chief Credit Officer, and the activities are governed by a formal written charter. The MARC meets at least quarterlymonthly and reports to the Board of Directors.

 

More specifically, a formal plan to effect repayment and/or disposition of every significant nonperforming loan relationship is developed and documented for review and on-going oversight by the MARC. Some of the strategies used include but are not limited to: 1) obtaining additional collateral, 2) obtaining additional investor cash infusion, 3) sale of the promissory note to an outside party, 4) proceeding with foreclosure on the underlying collateral, and 5) legal action against borrower/guarantors to encourage settlement of debt and/or collect any deficiency balance owed. Each step includes a benchmark timeline to track progress.

 

MARC also provides guidance for the maintenance and timely disposition of OREO properties; including developing financing and marketing programs to incent individuals to purchase OREO.

 

The allowance for loan losses is established through charges to earnings in the form of the provision for loan losses. Loan losses are charged to and recoveries are credited to the allowance for loan losses. The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. The adequacy of the allowance for loan losses is based upon management's continuing assessment of various factors affecting the collectability of loans; including current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance for loan losses, independent credit reviews, current charges and recoveries to the allowance for loan losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants retained by the Company. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The collectability of a loan is subjective to some degree, but must relate to the borrower’sborrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy.

 

Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics. Loss factors are based on the Company’sCompany’s historical loss experience as adjusted for changes in the business cycle and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Historical loss data from the beginning of the latest business cycle are incorporated in the loss factors.


 

The discretionary allocation is based upon management’smanagement’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.


 

The following table provides certain informationinformation for the dates indicated with respect to the Company's allowance for loan losses as well as charge-off and recovery activity.

 

(dollars in thousands)

 

For the Nine Months Ended

September 30,

  

For the Year Ended
December 31

  

For the Six Months Ended

June 30,

  

 

For the Year Ended
December 31

 
 

2017

  

2016

  

2016

  

2015

  

2014

  

2019

  

2018

  

2018

  

2017

  

2016

 

Balance at beginning of period

 $6,549  $6,078  $6,078  $5,451  $5,517  $6,958  $6,669  $6,669  $6,549  $6,078 

Charge-offs:

                                        

Commercial and agricultural

  179   200   268   91   191   137   266   325   202   268 

Real estate mortgage

  -   252   292   132   1,015   -   -   25   48   292 

Real estate construction & land

  -   5   5   55   106   -   -   -   -   5 

Consumer (includes equity LOC & Auto)

  335   300   414   549   601   520   497   841   629   414 

Total charge-offs

  514   757   979   827   1,913   657   763   1,191   879   979 

Recoveries:

                                        

Commercial and agricultural

  46   23   53   173   89   16   15   83   89   53 

Real estate mortgage

  7   42   45   8   19   2   109   114   118   45 

Real estate construction & land

  -   359   389   -   491   -   2   3   -   389 

Consumer (includes equity LOC & Auto)

  134   132   163   173   148   139   166   280   192   163 

Total recoveries

  187   556   650   354   747   157   292   480   399   650 

Net charge-offs

  327   201   329   473   1,166   500   471   711   480   329 

Provision for loan losses

  600   600   800   1,100   1,100   600   500   1,000   600   800 

Balance at end of period

 $6,822  $6,477  $6,549  $6,078  $5,451  $7,058  $6,698  $6,958  $6,669  $6,549 

Net charge-offs during the period to average loans (annualized for the nine month periods)

  0.09

%

  0.06

%

  0.08

%

  0.12

%

  0.33

%

Net charge-offs during the period to average loans (annualized for the six-month periods)

  0.18

%

  0.19

%

  0.14

%

  0.10

%

  0.08

%

Allowance for loan losses to total loans

  1.42

%

  1.45

%

  1.42

%

  1.52

%

  1.47

%

  1.19

%

  1.30

%

  1.23

%

  1.37

%

  1.42

%

 

During the ninesix months ended SeptemberJune 30, 20172019 and 20162018 we recorded a provision for loan losses of $600 thousand.thousand and $500 thousand, respectively. Net charge-offs totaled $327$500 thousand during the ninesix months ended SeptemberJune 30, 2017,2019, an increase of $126$29 thousand from $201$471 thousand during the ninesix months ended SeptemberJune 30, 2016.2018.

 

The following table provides a breakdown of the allowance for loan losses at SeptemberJune 30, 20172019 and December 31, 2016:2018:

 

(dollars in thousands)

 

Balance at

End of Period

  

Percent of

Loans in Each

Category to

Total Loans

  

Balance at

End of Period

  

Percent of

Loans in Each

Category to

Total Loans

  

Balance at

End of Period

  

Percent of

Loans in Each

Category to

Total Loans

  

Balance at

End of Period

  

Percent of

Loans in Each

Category to

Total Loans

 
 

2017

  

2017

  

2016

  

2016

  

2019

  

2019

  

2018

  

2018

 

Commercial and agricultural

 $1,191   20.5

%

 $1,121   20.1

%

 $1,348   21.0

%

 $1,452   21.0

%

Real estate mortgage

  3,019   53.1

%

  3,020   53.6

%

  3,174   51.1

%

  2,900   50.8

%

Real estate construction & land

  991   4.8

%

  927   4.7

%

  597   6.3

%

  758   7.1

%

Consumer (includes equity LOC & Auto)

  1,621   21.6

%

  1,481   21.6

%

  1,939   21.6

%

  1,848   21.1

%

Total

 $6,822   100.0

%

 $6,549   100.0

%

 $7,058   100.0

%

 $6,958   100.0

%

 

The allowance for loan losses totaled $6.8$7.1 million at SeptemberJune 30, 20172019 and $6.5$7.0 million at December 31, 2016.2018. Specific reserves related to impaired loans increaseddecreased by $97$71 thousand to $463 thousand at September 30, 2017 from $366$181 thousand at December 31, 2016.2018 to $110 thousand at June 30, 2019. At least quarterly the Company evaluates each specific reserve and if it determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion. General reserves were $6.4$7.0 million at SeptemberJune 30, 20172019 and $6.2$6.8 million at December 31, 2016.2018. The allowance for loan losses as a percentage of total loans was 1.42%1.19% at SeptemberJune 30, 20172019 and 1.23% at December 31, 2016.2018. The percentage of general reserves to unimpaired loans totaled 1.34%1.18% at SeptemberJune 30, 20172019 and 1.36%1.20% at December 31, 2016.2018.


 

The Company places loans 90 days or more past due on nonaccrual status unless the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 90 days. When a loan is placed on nonaccrual status the Company's general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans is subsequently recognized only to the extent that cash is received, and future collection of principal is deemed by management to be probable. Where the collectability of the principal or interest on a loan is considered to be doubtful by management, it is placed on nonaccrual status prior to becoming 90 days delinquent.


 

Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary difference between impaired loans and nonperforming loans is that impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but also may include identified problem loans other than delinquent loans where it is considered probable that we will not collect all amounts due to us (including both principal and interest) in accordance with the contractual terms of the loan agreement.

 

A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.

 

Loans restructured (TDRs) and not included in nonperforming loans in the following table totaled $1.9$1.0 million, $1.0 million, $1.1 million, $2.6 million and $2.0 million at SeptemberJune 30, 20172019 and $2.6 million, $2.0 million, $2.0 million, $4.5 million and $5.4 million at December 31, 2018, 2017, 2016, and 2015, 2014, 2013 and 2012, respectively. For additional information related to restructured loans see Note 4 to the condensed consolidated financial statements contained within this Form 10-Q.

 

The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated.

 

 

At September 30,

  

At December 31,

      At June 30,  At December 31, 
 

2017

  

2016

  

2015

  

2014

  

2013

  

2019

  

2018

  

2017

  

2016

  

2015

 
 

(dollars in thousands)

      

(dollars in thousands)

 
                                        

Nonaccrual loans

 $3,798  $2,724  $4,546  $6,625  $5,519  $2,349  $1,117  $1,226  $2,724  $4,546 

Loans past due 90 days or more and still accruing

  -   -   -   -   17   -   -   1,796   -   - 

Total nonperforming loans

  3,798   2,724   4,546   6,625   5,536   2,349   1,117   3,022   2,724   4,546 

Other real estate owned

  828   735   1,756   3,590   6,399   1,094   1,170   1,344   735   1,756 

Other vehicles owned

  49   12   30   13   60   76   53   35   12   30 

Total nonperforming assets

 $4,675  $3,471  $6,332  $10,228  $11,995  $3,519  $2,340  $4,401  $3,471  $6,332 

Interest income forgone on nonaccrual loans

 $141  $164  $303  $345  $280  $69  $46  $50  $164  $303 

Interest income recorded on a cash basis on nonaccrual loans

 $-  $29  $-  $31  $22  $-  $-  $-  $29  $- 

Nonperforming loans to total loans

  0.79

%

  0.59

%

  1.13

%

  1.79

%

  1.64

%

  0.40

%

  0.20

%

  0.62

%

  0.59

%

  1.13

%

Nonperforming assets to total assets

  0.64

%

  0.53

%

  1.06

%

  1.90

%

  2.33

%

  0.42

%

  0.28

%

  0.59

%

  0.53

%

  1.06

%

 

Nonperforming loans at SeptemberJune 30, 20172019 were $3.8$2.3 million, an increase of $1.1million$1.2 million from the $2.7$1.1 million balance at December 31, 2016.2018. Specific reserves on nonaccrual loans totaled $403$63 thousand at SeptemberJune 30, 20172019 and $298$128 thousand at December 31, 2016,2018, respectively. Performing loans past due thirty to eighty-nine days were $3.1$3.0 million at SeptemberJune 30, 2017 and $2.02019 up from $2.6 million at December 31, 2016.2018.


 

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. Total substandard loans increased by $594$1.2 million from $741 thousand at December 31, 2018 to $2.0 million at June 30, 2019. Loans classified as special mention increased by $4.1 million from $3.4$4.3 million at December 31, 20162018 to $4.0$8.4 million at SeptemberJune 30, 2017. Loans classified as watch increased by $3.0 million from $1.2 million at December 31, 2016 to $4.2 million at September2019. At June 30, 2017. At September 30, 2017, $4962019, $22 thousand of performing loans were classified as substandard. Further deterioration in the credit quality of individual performing substandard loans or other adverse circumstances could result in the need to place these loans on nonperforming status.

 

At SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company's recorded investment in impaired loans totaled $5.7$2.4 million and $5.4$1.3 million, respectively. The specific allowance for loan losses related to impaired loans totaled $463$110 thousand and $366$181 thousand at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. Additionally, $0.7 million has$11 thousand had been charged off against the impaired loans at SeptemberJune 30, 20172019 and December 31, 2016.2018.


 

It is the policy of management to make additions to the allowance for loan losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance at SeptemberJune 30, 20172019 is appropriate. However, the determination of the amount of the allowance is judgmental and subject to economic conditions which cannot be predicted with certainty. Accordingly, the Company cannot predict whether charge-offs of loans in excess of the allowance may occur in future periods.

 

OREO represents real property acquired by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers. OREO holdings represented sixfive properties totaling $828 thousand$1.1 million at SeptemberJune 30, 20172019 and six properties totaling $735 thousand$1.2 million at December 31, 2016.2018. Nonperforming assets as a percentage of total assets were 0.64%0.42% at SeptemberJune 30, 20172019 and 0.53%0.28% at December 31, 2016.2018.

 

The following table provides a summary of the change in the number and balance of OREO properties for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, dollars in thousands:

 

 

Nine Months Ended September 30,

  

Six Months Ended June 30,

 
 

#

  

2017

  

#

  

                                      2016

  

#

  

2019

  

#

  

2018

 

Beginning Balance

  6  $735   7  $1,756   6  $1,170   6  $1,344 

Additions

  2   282   3   1,166   -   -   1   133 

Dispositions

  (2

)

  (83

)

  (3

)

  (396

)

  1   76   (1

)

  (486

)

Provision from change in OREO valuation

      (106

)

      (9

)

  -   -   -   (38

)

Ending Balance

  6  $828   7  $2,517   5  $1,094   6  $953 

The dispositions in 2018 includes $377 thousand related to the sale of a portion of a property.

 

Investment Portfolio and Federal Funds Sold. Total investment securities were $116.5$173.7 million as of SeptemberJune 30, 20172019 and $101.6$171.5 million as of December 31, 2016. Net unrealized loss2018. Unrealized gains on available-for-sale investment securities totaling $215,000$2.0 million were recorded, net of $89,000$605 thousand in tax benefit,expense, as accumulated other comprehensive lossincome within shareholders' equity at SeptemberJune 30, 2017. Net unrealized loss2019. Unrealized losses on available-for-sale investment securities totaling $1.7$2.9 million were recorded, net of $682$846 thousand in tax benefits, as accumulated other comprehensive lossincome within shareholders' equity at December 31, 2016.2018.

 

During the ninethree and six months ended SeptemberJune 30, 20172019 the Company sold sevenforty available-for-sale investment securities for total proceeds of $11.4 million recording a $20 thousand gain on sale. During the six months ended June 30, 2018 the Company sold eighteen available-for-sale investment securities for total proceeds of $4.2 million recording a $17$8 thousand loss on sale. DuringNo investment securities were sold during the ninethree months ended SeptemberJune 30, 2016 the Company sold fourteen available-for-sale investment securities for total proceeds of $14.6 million recording a $32 thousand loss on sale.2018.

 

The investment portfolio at SeptemberJune 30, 20172019 consisted of $84.2$143.4 million in securities of U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 11282 municipal securities totaling $32.3$30.3 million. The investment portfolio at December 31, 20162018 consisted of $74.9$132.7 million in securities of U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 99119 municipal securities totaling $26.7$38.8 million.

 

There were no Federal funds sold at SeptemberJune 30, 20172019 and December 31, 2016;2018; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $75.0$9.5 million at SeptemberJune 30, 20172019 and $32.4$19.9 million at December 31, 2016.2018. The balancesbalance, at SeptemberJune 30, 2017 earn2019, earns interest at the rate of 1.25%2.35%.


 

The Company classifies its investment securities as available-for-sale or held-to-maturity. Currently all securities are classified as available-for-sale. Securities classified as available-for-sale may be sold to implement the Company's asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors. 

 

Deposits. Deposits totaled $649.9 million at September 30, 2017, an increase of $67.5 Total deposits increased by $10.6 million from $582.4$727 million at December 31, 2016. Increases included $38.62018 to $737 million at June 30, 2019. This increase was driven by a $14.3 million increase in non-interest bearingnon-interest-bearing demand deposits, $24.4 million in savings anddeposits. Additionally, money market accounts increased by $5.6 million and $7.3 millionsavings balances increased by $0.2 million. Partially offsetting these increases were declines in NOW accounts. Timeaccounts of $2.2 million and time deposits declined by $2.8of $7.3 million. The Company continues to manage the mix of its deposits consistent with its identity as a community bank serving the financial needs of its customers.


 

The following table shows the distribution of deposits by type at SeptemberJune 30, 20172019 and December 31, 2016.2018.

 

(dollars in thousands)

 

Balance at

End of

Period

  

Percent of

Deposits in

Each

Category to

Total

Deposits

  

Balance at

End of

Period

  

Percent of

Deposits in

Each

Category to

Total

Deposits

  

Balance at

End of

Period

  

Percent of

Deposits in

Each

Category to

Total

Deposits

  

Balance at

End of

Period

  

Percent of

Deposits in

Each

Category to

Total

Deposits

 
 

9/30/17

  

9/30/17

  

12/31/16

  

12/31/16

  

6/30/19

  

6/30/19

  

12/31/18

  

12/31/18

 

Non-interest bearing

 $275,353   42.4

%

 $236,779   40.7

%

 $318,336   43.2

%

 $304,039   41.8

%

NOW

  98,613   15.2

%

  91,289   15.7

%

  102,880   14.0

%

  105,107   14.5

%

Money Market

  62,392   9.6

%

  57,208   9.8

%

  88,395   12.0

%

  82,743   11.4

%

Savings

  166,707   25.6

%

  147,474   25.3

%

  177,906   24.1

%

  177,710   24.5

%

Time

  46,785   7.2

%

  49,603   8.5

%

  49,694   6.7

%

  56,966   7.8

%

Total Deposits

 $649,850   100

%

 $582,353   100

%

 $737,211   100

%

 $726,565   100

%

 

Deposits represent the Bank's primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relativelyrelatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. The Company experiences, to a small degree, some seasonality with the slower growth period between November through April, and the higher growth period from May through October. In order toTo assist in meeting any funding demands, the Company maintains a secured borrowing arrangement with the Federal Home Loan Bank of San Francisco (FHLB).FHLB. There were no brokered deposits at SeptemberJune 30, 20172019 or December 31, 2016.2018.

 

Short-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $216$213 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $329$346 million. The Company is required to hold FHLB stock as a condition of membership. At SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company held $2,685,000$3.5 million and $2,438,000,$3.0 million, respectively of FHLB stock which is recorded as a component of other assets. Based on thethis level of stock holdings at SeptemberJune 30, 2017,2019, the Company can borrow up to $99.4$130.2 million. To borrow the full $216$213 million in available credit the Company would need to purchase $3.1$2.2 million in additional FHLB stock. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings to the FHLB or the correspondent banks under these agreements at SeptemberJune 30, 20172019 and December 31, 2016.2018.

 

Note Payable and Term LoanPayable.. On October 1, 2015, the Company entered into a $5.0 million term loan (the “Term Loan”), which was scheduled to mature on October 1, 2018. On April 20, 2017 Plumas Bancorp paid off the $2,250,000 remaining balance on the Term Loan. The payment was funded through a $4 million dividend from Plumas Bank. The balance of this Term Loan was $2,375,000 at December 31, 2016.

On October 1, 20162018 the Company renewed its line of credit, for a one yearone-year term, with the same lender (the “Note”). The maximum amount outstanding at any one time on the Note and the Term Loan cannot exceed $5 million. There were no balances outstandingborrowings on the Note as of Septemberduring the six months ended June 30, 20172019 or the year ended December 31, 2016.2018. The Note bears interest at a rate of the U.S. "Prime Rate" plus one-halfone-quarter percent per annum and is secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Under the Note, the Bank is subject to several negative and affirmative covenants including, but not limited to providing timely financial information, maintaining specified levels of capital, restrictions on additional borrowings, and meeting or exceeding certain capital and asset quality ratios. The CompanyBank was in compliance with all such covenants under the Term Loan andrelated to the Note at SeptemberJune 30, 20172019 and December 31, 2016. On October 1, 2017 the Company renewed its line of credit, for a one year term, with the same lender. This Line of Credit has similar terms and conditions as the Note and has a $5 million borrowing capacity.2018.


 

Repurchase Agreements. In 2011 the Bank introduced a new product for its larger business customers which use securities sold under agreements to repurchase as an alternative to interest-bearing deposits. The balance in this productSecurities sold under agreements to repurchase totaling $7.9 million and $13.1 million at SeptemberJune 30, 2017 was $8.7 million, an increase of $1.1 million from the2019 and December 31, 2016 balance2018, respectively are secured by U.S. Government agency securities with a carrying amount of $7.6 million.$20.7 million and $21.8 million at June 30, 2019 and December 31, 2018, respectively. Interest paid on this product is similar to that which is paid on the Bank’s premium money market account;interest-bearing transaction accounts; however, these are not deposits and are not FDIC insured.

 

Junior Subordinated Deferrable Interest Debentures. Plumas Statutory Trust I and II are business trust subsidiaries formed by the Company with capital at September 30, 2017 of $326,000$344,000 and $168,000,$176,000, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company.


 

During 2002, Trust I issued 6,000 Floating Rate Capital Trust Pass-Through Securities ("Trust Preferred Securities"), with a liquidation value of $1,000 per security, for gross proceeds of $6,000,000. During 2005, Trust II issued 4,000 Trust Preferred Securities with a liquidation value of $1,000 per security, for gross proceeds of $4,000,000. The entire proceeds were invested by Trust I in the amount of $6,186,000 and Trust II in the amount of $4,124,000 in Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of Trusts I and II.

 

Trust I’sI’s Subordinated Debentures mature on September 26, 2032, bear a current interest rate of 4.73%5.73% (based on 3-month LIBOR plus 3.40%), with repricing and payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035, bear a current interest rate of 2.80%3.89% (based on 3-month LIBOR plus 1.48%), with repricing and payments due quarterly. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures.

 

Interest expense recognized by the Company for the ninesix months ended SeptemberJune 30, 20172019 and 20162018 related to the subordinated debentures was $295$276 thousand and $255$239 thousand, respectively.

Warrant. On April 15, 2013 the Company issued a $7.5 million subordinated debenture (“subordinated debt”). The subordinated debt was issued to an unrelated third-party pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant. On April 16, 2015 the Company paid off the subordinated debt. The subordinated debt had an interest rate of 7.5% per annum and a term of 8 years with no prepayment allowed during the first two years and was made in conjunction with an eight-year warrant to purchase up to 300,000 shares of the Bancorp’s common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $5.25 per share. In May of 2016 the Company repurchased a portion of the warrant, representing the right to purchase 150,000 shares of the registrant’s common stock at a cost of $862 thousand. The remaining warrant represented the right to purchase 150,000 shares of Plumas Bancorp common stock at an exercise price of $5.25 per share was scheduled to expire on April 15, 2021. In May, 2017 the warrant was exercised in a cashless exercise resulting in the issuance of 108,111 common shares.


 

Capital Resources

  

Shareholders’Shareholders’ equity increased by $7.6$10.1 million from $48.0$66.9 million at December 31, 20162018 to $55.6$77.0 million at SeptemberJune 30, 2017.2019. The $7.6$10.1 million increase was related to earnings during the nine monthsfirst half of $7.12019 of $7.6 million, a decreasean increase in the unrealized lossgain on investment securities of $0.9$3.5 million and $0.3$0.2 million representing stock option activity. These items were partially offset by a $0.14 per share semi-annual cash dividend totaling $0.7 million paid on May 15, 2017.which totaled $1.2 million.

 

It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’sCompany’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors. The Board will periodically, but on no regular schedule, reviews the appropriateness of a cash dividend payment. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. The Company is subject to various restrictions on the payment of dividends.

 

On October 20, 2016 the Company announced that its Board of Directors approved the reinstatement of a semi-annual cash dividend. The dividend in the amount of $0.10 per share was paid on November 21, 2016 to shareholders of record at the close of business day on2016. On May 15, 2017 and November 7, 2016. On April 19,15, 2017, the Company declaredpaid semi-annual cash dividends each of which totaled $0.14 per share. On May 15, 2018 and November 15, 2018, the Company paid semi-annual cash dividends each of which totaled $0.18 per share. On May 15, 2019 the Company paid a semi-annual cash dividend totaling $0.14of $0.23 per share payable on May 15, 2017 to shareholders of record at the close of business day on May 1, 2017. On October 18, 2017 the Company declared a semi-annual cash dividend totaling $0.14 per share payable on November 15, 2017 to shareholders of record at the close of business day on November 1, 2017.share.

 

Capital Standards. The Company uses a variety of measures to evaluate its capital adequacy. Management reviews these capital measurements on a monthly basis and takes appropriate action to ensure that they are within established internal and external guidelines. The FDIC has promulgated risk-based capital guidelines for all state non-member banks such as the Bank. These guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.

In July 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision’sSupervision’s capital guidelines for U.S. banks, sometimes called “Basel III”. The phase-in period for the final rules began in 2015, with certain of the rules’ requirements phased in over a multi-year schedule. Under the final rules minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The new capital rules include a new minimum “common equity Tier 1” ratio of 4.5%, a Tier 1 capital ratio of 6.0% (increased from 4.0%), a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The effective date of these requirements was January 1, 2015. In addition, the new capital rules include a capital conservation buffer of 2.5% above each of these levels (to be phased in over three years which beginning at 0.625% on January 1, 2016 and increasing by that amount on each subsequent January 1, until reaching 2.5% on January 1, 2019) will be required for banking institutions to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the New Capital Rulesnew capital rules would result in the following minimum ratios to be considered well capitalized: (i) a Tier 1 capital ratio of 8.5%, (ii) a common equity Tier 1 capital ratio of 7.0%, and (iii) a total capital ratio of 10.5%. The final rules also implement strict eligibility criteria for regulatory capital instruments.

 

The Board of Governors of the Federal Reserve System has adopted final amendments toPlumas Bancorp qualifies for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) ( the(the “Policy Statement”) that, among other things, raised from $500 million to $1 billion the asset threshold to qualify for the Policy Statement. Plumas Bancorp qualifies for treatment under the Policy Statement and is no longerthereby not subject to consolidated capital rules at the bank holding company level. On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Relief Act”) was signed into law. The Relief Act included a provision to increase the threshold for qualifying for the Policy Statement from $1 billion to $3 billion in total assets.

 


The new capital rules continue to apply to the Bank. Consistent with the Relief Act, however, the federal banking agencies have proposed a new community bank leverage ratio that is intended to simply the regulatory capital requirements for qualifying community banking organizations. Under the proposal, a qualifying banking organization that so elects would be deemed to have met the well-capital capitalized ratio requirements under the prompt corrective action framework and would be exempt from the generally applicable new capital rules if it maintains a new “community bank leverage ratio” in excess of 9%. The proposed community bank leverage ratio would be equal to tangible equity (as defined the proposal) divided by average total consolidated assets. To qualify, a banking organization would have to have less than $10 billion in assets and limited off balance sheet exposures and other assets. We cannot predict whether or when this proposal will be adopted.

 

The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):

 

 

 

 

 

 

 

 

Amount of Capital Required

 

         

Minimum Amount of Capital Required

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To be Well-Capitalized

 

                 

To be Well-Capitalized

 

 

 

 

 

 

 

 

For Capital

 

 

Under Prompt

 

         

For Capital

  

Under Prompt

 

 

Actual

 

 

Adequacy Purposes

 

 

Corrective Provisions

 

 

Actual

  

Adequacy Purposes (1)

  

Corrective Provisions

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

 

Ratio

 

 

Amount

  

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

 

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

                        

Common Equity Tier 1 Ratio

 

$

63,779

 

12.0

%

 

$

23,962

 

4.5

%

 

$

34,612

 

6.5

%

 $83,328   12.5

%

 $30,001   4.5

%

 $43,335   6.5

%

Tier 1 Leverage Ratio

 

 

63,779

 

9.0

%

 

 

28,425

 

4.0

%

 

 

35,531

 

5.0

%

  83,328   10.0

%

  33,406   4.0

%

  41,758   5.0

%

Tier 1 Risk-Based Capital Ratio

 

 

63,779

 

12.0

%

 

 

31,950

 

6.0

%

 

 

42,600

 

8.0

%

  83,328   12.5

%

  40,001   6.0

%

  53,335   8.0

%

Total Risk-Based Capital Ratio

 

 

70,439

 

13.2

%

 

 

42,600

 

8.0

%

 

 

53,250

 

10.0

%

  90,635   13.6

%

  53,335   8.0

%

  66,669   10.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                        

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

                        

Common Equity Tier 1 Ratio

 

$

60,521

 

12.1

%

 

$

22,597

 

4.5

%

 

$

32,641

 

6.5

%

 $76,545   11.8

%

 $29,071   4.5

%

 $41,991   6.5

%

Tier 1 Leverage Ratio

 

 

60,521

 

9.2

%

 

 

26,353

 

4.0

%

 

 

32,941

 

5.0

%

  76,545   9.3

%

  32,765   4.0

%

  40,956   5.0

%

Tier 1 Risk-Based Capital Ratio

 

 

60,521

 

12.1

%

 

 

30,130

 

6.0

%

 

 

40,173

 

8.0

%

  76,545   11.8

%

  38,761   6.0

%

  51,681   8.0

%

Total Risk-Based Capital Ratio

 

 

66,804

 

13.3

%

 

 

40,173

 

8.0

%

 

 

50,217

 

10.0

%

  83,753   13.0

%

  51,681   8.0

%

  64,602   10.0

%

 (1) Does not include amounts required to maintain the capital conservation buffer under the new capital rules

 

Management believes that Plumas Bank currently meets all its capital adequacy requirements.

 

The current and projected capital positions of the Bank and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company policy is to maintain the Bank’sBank’s ratios above the prescribed well-capitalized ratios at all times.

 

Off-Balance Sheet Arrangements

 

Loan Commitments. In the normal course of business, there are various commitments outstanding to extend credits that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of SeptemberJune 30, 2017,2019, the Company had $107.7$110.4 million in unfunded loan commitments and $465$431 thousand in letters of credit. This compares to $93.7$126.9 million in unfunded loan commitments and $625$417 thousand in letters of credit at December 31, 2016.2018. Of the $107.7$110.4 million in unfunded loan commitments, $65$63.4 million and $43$47.0 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at SeptemberJune 30, 2017, $632019, $63.4 million were secured by real estate, of which $30$26.5 million was secured by commercial real estate and $33$36.9 million was secured by residential real estate in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines and overdraft protection lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements.

 

Operating Leases. The Company leases twothree depository branches, and four lending offices and two non-branch automated teller machine locations. Total rental expenses under all operating leases were $255 thousand$224,000 and $234 thousand$183,000 during the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively. The expiration dates of the leases vary, with the first such lease expiring during 20172019 and the last such lease expiring during 2021.2022.


 

Liquidity

 

The Company manages its liquidity to provide the ability to generate funds to support asset growth, meet deposit withdrawals (both anticipated and unanticipated), fund customers' borrowing needs, satisfy maturity of short-term borrowings and maintain reserve requirements. The Company’sCompany’s liquidity needs are managed using assets or liabilities, or both. On the asset side, in addition to cash and due from banks, the Company maintains an investment portfolio which includes unpledged U.S. Government-sponsored agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by charging competitive offering rates on deposit products and the use of established lines of credit.


 

The Company is a member of the FHLB and can borrow up to $216$213 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $329$346 million. See “Short-term Borrowing Arrangements” for additional information on our FHLB borrowing capacity. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings under the FHLB or the correspondent bank borrowing lines at SeptemberJune 30, 20172019 or December 31, 2016.2018.

 

Customer deposits are the Company’sCompany’s primary source of funds. Deposits totaled $649.9 million at September 30, 2017, an increase of $67.5Total deposits increased by $10.6 million from $582.4$727 million at December 31, 2016.2018 to $737 million at June 30, 2019. Deposits are held in various forms with varying maturities. The Company’s securities portfolio, Federal funds sold, FHLB advances, and cash and due from banks serve as the primary sources of liquidity, providing adequate funding for loans during periods of high loan demand. During periods of decreased lending, funds obtained from the maturing or sale of investments, loan payments, and new deposits are invested in short-term earning assets, such as cash held at the FRB, Federal funds sold and investment securities, to serve as a source of funding for future loan growth. Management believes that the Company’s available sources of funds, including borrowings, will provide adequate liquidity for its operations in the foreseeable future.

Recent Developments. On April 17, 2019 the Company declared a semi-annual cash dividend totaling $0.23 per share, or approximately $1.2 million. The dividend was paid on May 15, 2019 to shareholders of record at the close of business day on May 1, 2019. 

 


 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company we are not required to provide the information required by this item.Not required.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

The Company'sCompany’s management, including the Chief Executive Officer and Chief Financial Officer, based on theirconducted an evaluation of the Company'seffectiveness of the Company’s disclosure controls and procedures as of the end of the Company’s fiscal quarter ended September 30, 2017 (as defined in Exchange Act Rule 13a—15(e), have concluded that the Company's disclosure controlsRules 13a-15(e) and procedures are adequate and effective for purposes of Rule 13a—15(e) in timely alerting them to material information relating to the Company required to be included in the Company's filings with the SEC15d-15(e) under the Securities Exchange Act of 1934.1934, as amended (the “Exchange Act”)) as of June 30, 2019.  The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2019.

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended SeptemberJune 30, 20172019 that have materially affected or are reasonably likely to materially affect the registrant'sCompany’s internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

From time to time, the Company and/or its subsidiary are a party to claims and legal proceedings arising in the ordinary course of business. In the opinion of the Company's management, the amount of ultimate liability with respect to such proceedings will not have a material adverse effect on the financial condition or results of operations of the Company taken as a whole.

 

Item 1A RISK FACTORS

 

There have been no material changes to the principal risks that we believe are material to our business, results of operations and financial condition, from the risk factors previously disclosed in the 2016 2018 Annual Report on Form 10-K. For a discussion on these risk factors, please see “Item 1A. Risk Factors” contained in the 20162018 Annual Report on Form 10-K.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

(a) None.

 

(b) None.

 

(c) None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 


 

ITEM 6. EXHIBITS

 

The following documents are included or incorporated by reference in this Quarterly Report on Form 10Q:

 

3.1

Articles of Incorporation as amended of Registrant included as exhibit 3.1 to the Registrant’sRegistrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein.

 

 

3.2

Bylaws of Registrant as amended on March 16, 2011 included as exhibit 3.2 to the Registrant’s Form 10-K for December 31, 2010, which is incorporated by this reference herein.

  

  

3.3

Amendment of the Articles of Incorporation of Registrant dated November 1, 2002, is included as exhibit 3.3 to the Registrant’s 10-Q for September 30, 2005, which is incorporated by this reference herein.

 

 

3.4

Amendment of the Articles of Incorporation of Registrant dated August 17, 2005, is included as exhibit 3.4 to the Registrant’s 10-Q for September 30, 2005, which is incorporated by this reference herein.

 

 

4

Specimen form of certificate for Plumas Bancorp included as exhibit 4 to the Registrant’sRegistrant’s Form S-4, File No. 333-84534, which is incorporated by reference herein.

 

 

10.1

Executive Salary Continuation Agreement of Andrew J. Ryback dated December 17, 2008, is included as exhibit 10.1 to the Registrant’sRegistrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.

 

 

10.2

Split Dollar Agreement of Andrew J. Ryback dated August 23, 2005, is included as Exhibit 10.2 to the Registrant’s 8-K filed on October 17, 2005, which is incorporated by this reference herein.

 

 

10.4

10.3 

Stock Purchase WarrantAmendment to Salary Continuation Agreement of Andrew J. Ryback dated April 15, 2013,1, 2019, is included as Exhibit 10.410.1 to the Registrant’s 10-Q8-K filed on May 10, 2013,April 2, 2019, which is incorporated by this reference herein.

10.4

Amendment to Salary Continuation Agreement of Richard L. Belstock dated April 1, 2019, is included as Exhibit 10.2 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

10.5

Amendment to Salary Continuation Agreement of BJ North dated April 1, 2019, is included as Exhibit 10.3 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

10.6

Salary Continuation Agreement of Aaron Boigon dated April 1, 2019, is included as Exhibit 10.4 to the Registrant’s 8-K filed on April 2, 2019, which is incorporated by this reference herein.

10.7

Promissory Note Dated October 24, 2013, is included as Exhibit 10.6 to the Registrant’sRegistrant’s 10-Q filed on  November 7, 2013, which is incorporated by this reference herein.

  

  

10.8

Director Retirement Agreement of John Flournoy dated March 21, 2007, is included as Exhibit 10.8 to Registrant’s 10-Q for March 31, 2007, which is incorporated by this reference herein.

10.9

Amendment to Salary Continuation Agreement of Andrew J. Ryback dated April 1, 2016, is included as Exhibit 10.1 to the Registrant’sRegistrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.

  

  

10.10

Salary Continuation Agreement of Richard L. Belstock dated April 1, 2016, is included as Exhibit 10.2 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.

  

  

10.11

Salary Continuation Agreement of Kerry D. Wilson dated AprilApril 1, 2016, is included as Exhibit 10.3 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.

  

  

10.12

Salary Continuation Agreement of BJ North dated April 1, 2016, is included as Exhibit 10.4 to the Registrant’s 8-K filed on April 4, 2016, which is incorporated by this reference herein.

  

  

10.13

Director Retirement Agreement of Steven M. Coldani dated December 21, 2016, is included as Exhibit 10.13 to the Registrant’s 10-K filed on March 17, 2017, which is incorporated by this reference herein.

  

10.18

Amended and Restated Director Retirement Agreement of Daniel E. West dated May 10, 2000, is included as Exhibit 10.18 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.


 

10.19

Consulting Agreement of Daniel E. West dated May 10, 2000, is included as Exhibit 10.19 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.


10.24

Amended and Restated Director Retirement Agreement of Gerald W. Fletcher dated May 10, 2000, is included as Exhibit 10.24 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

  

10.25

Consulting Agreement of Gerald W. Fletcher dated May 10, 2000, is included as Exhibit 10.25 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

  

  

10.33

Amended and Restated Director Retirement Agreement of Terrance J. Reeson dated April 19, 2000, is included as Exhibit 10.33 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

  

  

10.34

Consulting Agreement of Terrance J. Reeson dated May 10, 2000, is included as Exhibit 10.34 to the Registrant’s 10-QSB for June 30, 2002, which is incorporated by this reference herein.

  

  

10.41

Form of Indemnification Agreement (Plumas Bancorp) is included as Exhibit 10.41 to the Registrant’s 10-Q for March 31, 2009, which is incorporated by this reference herein.

  

 

10.42

Form of Indemnification Agreement (Plumas Bank) is included as Exhibit 10.42 to the Registrant’sRegistrant’s 10-Q for March 31, 2009, which is incorporated by this reference herein.

 

 

10.47

 

2013 Stock Option Plan is included as exhibit 99.1 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.

  

  

10.48

Specimen Form of Incentive Stock Option Agreement under the 2013 Stock Option Plan is included as exhibit 99.2 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.

  

  

10.49

Specimen Form of Nonqualified Stock Option Agreement under the 2013 Stock Option Plan is includedincluded as exhibit 99.3 of the Form S-8 filed September 12, 2013, which is incorporated by this reference herein.

  

  

10.51

First Amendment to Split Dollar Agreement of Andrew J. Ryback, is included as exhibit 10.51 to the Registrant’sRegistrant’s 10-K for December 31, 2008, which is incorporated by this reference herein.

  

10.66

Director Retirement Agreement of Robert McClintock, is included as Exhibit 10.66 to the Registrant’sRegistrant’s 10-K filed on March 23, 2012, which is incorporated by this reference herein.

 

  

10.67

First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Terrance J. Reeson adopted on September 19, 2007, is included as Exhibit 10.67 to the Registrant’sRegistrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.

  

10.69

First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Daniel E. West adopted on September 19, 2007, is included as Exhibit 10.69 to the Registrant’sRegistrant’s 8-K filed on September 25, 2007, which is incorporated by this reference herein.

  

  

10.70

First Amendment to the Plumas Bank Amended and Restated Director Retirement Agreement for Gerald W. Fletcher adopted on October 9, 2007, is included as Exhibit 10.70 to the Registrant’sRegistrant’s 10-Q for September 30, 2007, which is incorporated by this reference herein.

   

  

31.1*

Rule 13a-14(a) [Section 302] Certification of Principal Financial Officer dated November 8, 2017.August 7, 2019.

  

  

31.2*

Rule 13a-14(a) [Section 302] Certification of Principal Executive Officer dated November 8, 2017.August 7, 2019.

  

  

32.1*

Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 8, 2017.August 7, 2019.

  

32.2*

Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated November 8, 2017.August 7, 2019.


101.INS*

  

101.INS*

XBRL Instance Document.

  

  

101.SCH*

XBRL Taxonomy Schema.

  

  

101.CAL*

XBRL Taxonomy Calculation Linkbase.

  

  

101.DEF*

XBRL Taxonomy Definition Linkbase.

  

  

101.LAB*

XBRL Taxonomy Label Linkbase.

  

  

101.PRE*

XBRL Taxonomy Presentation Linkbase.

 

 

*

Filed herewith

 


 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

PLUMAS BANCORP
(Registrant)

 

(Registrant)

 

Date: November 8, 2017August 7, 2019

/s/ Richard L. Belstock

Richard L. Belstock

Chief Financial Officer

/s/ Andrew J. Ryback

Andrew J. Ryback

Director, President and Chief Executive Officer

 

51

50