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 30, 2014
☐	TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

California	75-2987096
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
35 S. Lindan Avenue, Quincy, California	95971
(Address of Principal Executive Offices)	(Zip Code)
Registrant’s Telephone Number, Including Area Code (530) 283-7305

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 3, 2014. 4,795,139 shares

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLUMAS BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

	September 30, 2014			December 31, 2013
Assets
Cash and cash equivalents	$	62,219		$	49,917
Investment securities available for sale		84,304			90,343
Loans, less allowance for loan losses of $5,251 at September 30, 2014 and $5,517 at December 31, 2013		359,171			334,374
Premises and equipment, net		11,796			12,519
Bank owned life insurance		11,762			11,504
Real estate and vehicles acquired through foreclosure		3,951			6,459
Accrued interest receivable and other assets		9,894			10,609
Total assets	$	543,097		$	515,725
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing	$	181,875		$	162,816
Interest bearing		290,339			286,623
Total deposits		472,214			449,439
Repurchase agreements		11,466			9,109
Note payable		1,000			3,000
Subordinated debenture		7,414			7,295
Accrued interest payable and other liabilities		6,005			5,979
Junior subordinated deferrable interest debentures		10,310			10,310
Total liabilities		508,409			485,132
Commitments and contingencies (Note 5)
Shareholders’ equity:
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 4,795,139 shares at September 30, 2014 and 4,787,739 at December 31, 2013		6,328			6,249
Retained earnings		28,901			25,507
Accumulated other comprehensive loss		(541	)		(1,163	)
Total shareholders’ equity		34,688			30,593
Total liabilities and shareholders’ equity	$	543,097		$	515,725

See notes to unaudited condensed consolidated financial statements.

1

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
	2014		2013			2014		2013
Interest Income:
Interest and fees on loans	$	4,898	$	4,687		$	14,265	$	13,583
Interest on investment securities		368		301			1,122		826
Other		36		38			92		86
Total interest income		5,302		5,026			15,479		14,495
Interest Expense:
Interest on deposits		126		151			390		459
Interest on note payable		34		-			98		-
Interest on subordinated debenture		191		191			568		351
Interest on junior subordinated deferrable interest debentures		79		76			228		235
Other		2		3			4		54
Total interest expense		432		421			1,288		1,099
Net interest income before provision for loan losses		4,870		4,605			14,191		13,396
Provision for Loan Losses		300		100			750		1,200
Net interest income after provision for loan losses		4,570		4,505			13,441		12,196
Non-Interest Income:
Service charges		1,064		1,029			3,122		2,847
Gain on sale of loans		304		170			1,081		1,126
Gain on sale of investments		128		-			128		-
Other		399		332			1,145		956
Total non-interest income		1,895		1,531			5,476		4,929
Non-Interest Expenses:
Salaries and employee benefits		2,287		2,244			7,049		6,545
Occupancy and equipment		699		695			2,235		2,118
Other		1,302		1,414			4,029		4,366
Total non-interest expenses		4,288		4,353			13,313		13,029
Income before provision for income taxes		2,177		1,683			5,604		4,096
Provision for Income Taxes		850		676			2,210		1,581
Net Income		1,327		1,007			3,394		2,515
Discount on Redemption of Preferred Stock		-		4			-		534
Preferred Stock Dividends and Discount Accretion		-		(49	)		-		(330	)
Net income available to common shareholders	$	1,327	$	962		$	3,394	$	2,719
Basic earnings per share	$	0.28	$	0.20		$	0.71	$	0.57
Diluted earnings per share	$	0.27	$	0.20		$	0.68	$	0.56

See notes to unaudited condensed consolidated financial statements.

2

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2014			2013			2014			2013
Net income	$	1,327		$	1,007		$	3,394		$	2,515
Other comprehensive income (loss) :
Change in net unrealized gains		(334	)		110			1,188			(1,875	)
Less: reclassification adjustments for net gains included in net income		(128	)		-			(128	)		-
Net unrealized holding gains (losses)		(462	)		110			1,060			(1,875	)
Income tax effect		191			(45	)		(438	)		774
Other comprehensive income (loss)		(271	)		65			622			(1,101	)
Total comprehensive income	$	1,056		$	1,072		$	4,016		$	1,414

See notes to unaudited condensed consolidated financial statements.

3

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	For the Nine Months
	Ended September 30,
	2014			2013
Cash Flows from Operating Activities:
Net income	$	3,394		$	2,515
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		750			1,200
Change in deferred loan origination costs/fees, net		(545	)		(568	)
Depreciation and amortization		977			1,082
Stock-based compensation expense		57			29
Amortization of investment security premiums		369			330
Gain on sale of investments		(128	)		-
Gain on sale of other vehicles		(34	)		(6	)
Gain on sale of OREO		(100	)		(160	)
Gain on sale of loans held for sale		(1,081	)		(1,126	)
Loans originated for sale		(15,371	)		(11,737	)
Proceeds from loan sales		16,574			17,026
Provision from change in OREO valuation		226			372
Earnings on bank-owned life insurance		(258	)		(258	)
Decrease in accrued interest receivable and other assets		62			1,813
Increase (decrease) in accrued interest payable and other liabilities		26			(46	)
Net cash provided by operating activities		4,918			10,466
Cash Flows from Investing Activities:
Proceeds from matured and called available-for-sale investment securities		16,044			13,000
Proceeds from principal repayments from available-for-sale government-sponsored mortgage-backed securities		7,163			6,493
Purchases of available-for-sale securities		(32,667	)		(27,958	)
Proceeds from sale of available-for-sale securities		16,325			-
Net increase in loans		(25,717	)		(19,481	)
Proceeds from sale of OREO		2,981			1,900
Proceeds from sale of other vehicles		202			122
Purchase of premises and equipment		(101	)		(186	)
Net cash used in investing activities		(15,770	)		(26,110	)

Continued on next page.

4

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

	For the Nine Months
	Ended September 30,
	2014			2013
Cash Flows from Financing Activities:
Net increase in demand, interest bearing and savings deposits	$	28,319		$	56,289
Net decrease in time deposits		(5,544	)		(6,497	)
Issuance of subordinated debenture, net of discount		-			7,182
Issuance of common stock warrant		-			318
Repurchase of common stock warrant		-			(234	)
Redemption of preferred stock		-			(8,282	)
Payment of dividends on preferred stock		-			(1,979	)
Payment on note payable		(2,000	)		-
Net increase (decrease) in securities sold under agreements to repurchase		2,357			(667	)
Proceeds from exercise of stock options		22			19
Net cash provided by financing activities		23,154			46,149
Increase in cash and cash equivalents		12,302			30,505
Cash and Cash Equivalents at Beginning of Year		49,917			44,675
Cash and Cash Equivalents at End of Period	$	62,219		$	75,180
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense	$	1,189		$	2,069
Income taxes		1,326			30
Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure	$	351		$	3,562

See notes to unaudited condensed consolidated financial statements.

5

PLUMAS BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. GENERAL

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. The Bank’s administrative headquarters is in Quincy, California. In addition, the Bank operates a loan administrative office in Reno, Nevada, lending offices specializing in government-guaranteed lending in Auburn, California and Beaverton, Oregon and a commercial/agricultural lending office in Chico, California. 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 STATEMENTS

The condensed consolidated financial statements include the accounts of the Company and the accounts of its wholly-owned subsidiary, Plumas Bank. Plumas Statutory Trust I and Plumas Statutory Trust II are not consolidated into the Company’s consolidated financial statements and, accordingly, are accounted for under the equity method. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at September 30, 2014 and the results of its operations and its cash flows for the three-month and nine month periods ended September 30, 2014 and 2013. Our condensed consolidated balance sheet at December 31, 2013 is derived from audited financial statements. Certain reclassifications have been made to prior period’s balances to conform to classifications used in 2014.

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 2013 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and nine-month periods ended September 30, 2014 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.

Management has determined that because 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% of the revenues of the Company or the Bank.

6

3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

The amortized cost and estimated fair value of investment securities at September 30, 2014 and December 31, 2013 consisted of the following, in thousands: 

	September 30, 2014
			Gross		Gross			Estimated
Available-for-Sale:	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies	$	7,003	$	2	$	(38	)	$	6,967
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential		67,743		25		(1,068	)		66,700
Obligations of states and political subdivisions		9,976		169		(8	)		10,137
Corporate debt securities		502		-		(2	)		500
	$	85,224	$	196	$	(1,116	)	$	84,304

Net unrealized loss on available-for-sale investment securities totaling $920,000 were recorded, net of $379,000 in tax benefits, as accumulated other comprehensive income within shareholders' equity at September 30, 2014. During the nine months ended September 30, 2014 the Company sold fourteen available-for-sale securities for $16,324,000, recording a $128,000 gain on sale.

	December 31, 2013
			Gross		Gross			Estimated
Available-for-Sale:	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies	$	27,132	$	40	$	(75	)	$	27,097
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential		63,807		22		(1,954	)		61,875
Obligations of states and political subdivisions		1,384		4		(17	)		1,371
	$	92,323	$	66	$	(2,046	)	$	90,343

Net unrealized loss on available-for-sale investment securities totaling $1,980,000 were recorded, net of $817,000 in tax benefits, as accumulated other comprehensive income within shareholders' equity at December 31, 2013. No securities were sold during the year ended December 31, 2013.

There were no transfers of available-for-sale investment securities during the nine months ended September 30, 2014 and twelve months ended December 31, 2013. There were no securities classified as held-to-maturity at September 30, 2014 or December 31, 2013.

7

Investment securities with unrealized losses at September 30, 2014 and December 31, 2013 are summarized and classified according to the duration of the loss period as follows, in thousands:

	Less than 12 Months				12 Months or More				Total
September 30, 2014	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Debt securities:
U.S. Government- sponsored agencies	$	3,003	$	13	$	2,973	$	25	$	5,976	$	38
U.S. Government agencies collateralized by mortgage obligations-residential		21,788		87		36,862		981		58,650		1,068
Obligations of states and political subdivisions		1,048		8		-		-		1,048		8
Corporate debt securities		500		2		-		-		500		2
	$	26,339	$	110	$	39,835	$	1,006	$	66,174	$	1,116
December 31, 2013
Debt securities:
U.S. Government- sponsored agencies	$	5,930	$	75	$	-	$	-	$	5,930	$	75
U.S. Government agencies collateralized by mortgage obligations-residential		53,603		1,700		4,317		254		57,920		1,954
Obligations of states and political subdivisions		928		17		-		-		928		17
	$	60,461	$	1,792	$	4,317	$	254	$	64,778	$	2,046

At September 30, 2014, the Company held 107 securities of which 61 were in a loss position. Of the securities in a loss position, 27 were in a loss position for less than twelve months. Of the 61 securities 6 are U.S. Government-sponsored agencies, 49 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations 5 were obligations of states and political subdivisions and 1 is a corporate debt security. 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, 2014, 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, 2014 are other than temporarily impaired.

The amortized cost and estimated fair value of investment securities at September 30, 2014 by contractual maturity are shown below, in thousands.

	Amortized Cost		Estimated Fair Value
Within one year	$	-	$	-
After one year through five years		7,505		7,467
After five years through ten years		7,152		7,268
After ten years		2,824		2,869
Investment securities not due at a single maturity date:
Government-sponsored mortgage-backed securities		67,743		66,700
	$	85,224	$	84,304

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 $57,804,000 and $54,373,000 and estimated fair values totaling $57,085,000 and $53,493,000 September 30, 2014 and December 31, 2013, respectively, were pledged to secure deposits and repurchase agreements.

8

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below, in thousands: 

	September 30,			December 31,
	2014			2013
Commercial	$	33,583		$	32,612
Agricultural		34,624			30,647
Real estate - residential		28,321			31,322
Real estate – commercial		162,184			155,942
Real estate – construction and land development		21,356			17,793
Equity lines of credit		37,665			35,800
Auto		40,754			30,305
Other		4,244			4,130
		362,731			338,551
Deferred loan costs, net		1,691			1,340
Allowance for loan losses		(5,251	)		(5,517	)
	$	359,171		$	334,374

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

	September 30,			December 31,
	2014			2013
Balance, beginning of year	$	5,517		$	5,686
Provision charged to operations		750			1,400
Losses charged to allowance		(1,702	)		(1,915	)
Recoveries		686			346
Balance, end of year	$	5,251		$	5,517

The recorded investment in impaired loans totaled $7,919,000 and $9,815,000 at September 30, 2014 and December 31, 2013, respectively. The Company had specific allowances for loan losses of $676,000 on impaired loans of $2,008,000 at September 30, 2014 as compared to specific allowances for loan losses of $629,000 on impaired loans of $2,322,000 at December 31, 2013. The balance of impaired loans in which no specific reserves were required totaled $5,911,000 and $7,493,000 at September 30, 2014 and December 31, 2013, respectively. The average recorded investment in impaired loans for the nine months ended September 30, 2014 and September 30, 2013 was $7,949,000 and $10,340,000, respectively. The Company recognized $94,000 and $229,000 in interest income on a cash basis for impaired loans during the nine months ended September 30, 2014 and 2013, respectively. During the three months ended September 30, 2014 and 2013 the Company recognized $30,000 and $19,000 in interest income on a cash basis for impaired loans, respectively.

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, 2014 and December 31, 2013 was $6,001,000 and $7,616,000, respectively. The Company has allocated $384,000 and $284,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2014 and December 31, 2013, respectively. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at September 30, 2014 and December 31, 2013.

9

During the three and nine month periods ended September 30, 2014, one loan was modified as a troubled debt restructuring.

The following table presents information related to the one loan modified as a troubled debt restructuring during the three and nine months ending September 30, 2014, dollars in thousands:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings:
Auto		1	$	10	$	10
Total		1	$	10	$	10

The troubled debt restructuring described above resulted in no allowance for loan losses or charge-offs during the nine months ending September 30, 2014. 

During the three and nine month periods ended September 30, 2013, the terms of certain loans were modified as troubled debt restructurings. Modifications involving a reduction of the stated interest rate of the loan was for periods ranging from 1 month to 10 years and those with decreases in rates ranged from 0% to 1.5%.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine months ending September 30, 2013, dollars in thousands:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings:
Auto		1	$	8	$	7
Other		1		9		9
Total		2	$	17	$	16

The troubled debt restructurings described above resulted in no allowance for loan losses or charge-offs during the nine months ending September 30, 2013.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three months ending September 30, 2013, dollars in thousands:

	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Recorded Investment
Troubled Debt Restructurings:
Other		1	$	9	$	9
Total		1	$	9	$	9

The troubled debt restructuring described above resulted in no allowance for loan losses or charge-offs during the nine months ending September 30, 2013.

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, 2014.

10

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default within twelve months following the modification during the nine months ended September 30, 2013, dollars in thousands:

	Number of		Recorded
	Loans		Investment
Troubled Debt Restructurings:
Real estate – construction		1	$	1,152
Total		1	$	1,152

The troubled debt restructuring described above increased the allowance for loan losses by $154,000 and resulted in no charge offs during the nine months ended September 30, 2013. There were no loans for which there was a payment default within twelve months following the modification during the three months ended September 30, 2013.

The terms of certain other loans were modified during the nine months ending September 30, 2014 and year ending December 31, 2013 that did not meet the definition of a troubled debt restructuring. These loans have a total recorded investment as of September 30, 2014 and December 31, 2013 of $22 million and $14 million, respectively.

These loans which were modified during the nine months ended September 30, 2014 and year ended December 31, 2013 did not meet the definition of a troubled debt restructuring as the modification was a delay in a payment ranging from 30 days to 3 months that was considered to be insignificant or the borrower was not considered to be experiencing financial difficulties. 

At September 30, 2014 and December 31, 2013, nonaccrual loans totaled $5,943,000 and $5,519,000, respectively. Interest foregone on nonaccrual loans totaled $286,000 and $290,000 for the nine months ended September 30, 2014 and 2013, respectively. Interest foregone on nonaccrual loans totaled $82,000 and $120,000 for the three months ended September 30, 2014 and 2013, respectively. Loans past due 90 days or more and on accrual status totaled $2,000 and $17,000 at September 30, 2014 and December 31, 2013, respectively.

Salaries and employee benefits totaling $1,081,000 and $993,000 have been deferred as loan origination costs during the nine months ended September 30, 2014 and 2013, respectively. Salaries and employee benefits totaling $406,000 and $321,000 have been deferred as loan origination costs during the three months ended September 30, 2014 and 2013, respectively.

The Company assigns a risk rating to all loans, 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 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 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.

11

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.

12 

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

September 30, 2014                    

	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	$	32,268	$	33,844	$	27,032	$	155,162	$	20,085	$	36,829	$	305,220
Watch		922		381		277		3,550		-		146		5,276
Substandard		393		399		1,013		3,471		1,271		690		7,237
Doubtful		-		-		-		-		-		-		-
Total	$	33,583	$	34,624	$	28,322	$	162,183	$	21,356	$	37,665	$	317,733

December 31, 2013

	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	$	30,477	$	30,213	$	30,007	$	147,605	$	17,733	$	34,742	$	290,777
Watch		1,420		345		346		3,484		-		157		5,752
Substandard		665		89		969		4,853		60		890		7,526
Doubtful		50		-		-		-		-		11		61
Total	$	32,612	$	30,647	$	31,322	$	155,942	$	17,793	$	35,800	$	304,116

		Consumer Credit Exposure							Consumer Credit Exposure
	Credit Risk Profile Based on Payment Activity							Credit Risk Profile Based on Payment Activity
		September 30, 2014							December 31, 2013
		Auto		Other		Total			Auto		Other		Total
Grade:
Performing		$	40,663	$	4,230	$	44,893		$	30,228	$	4,113	$	34,341
Non-performing			91		14		105			77		17		94
Total		$	40,754	$	4,244	$	44,998		$	30,305	$	4,130	$	34,435

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

	Commercial			Agricultural			Real Estate-Residential			Real Estate-Commercial			Real Estate-Construction			Equity LOC			Auto			Other			Total
Nine months ended September 30, 2014:
Allowance for Loan Losses
Beginning balance	$	785		$	164		$	638		$	1,774		$	944		$	613		$	449		$	150		$	5,517
Charge-offs		(191	)		-			(145	)		(887	)		-			(142	)		(253	)		(84	)		(1,702	)
Recoveries		50			-			29			5			491			15			33			63			686
Provision		(33	)		54			(114	)		636			(238	)		137			311			(3	)		750
Ending balance	$	611		$	218		$	408		$	1,528		$	1,197		$	623		$	540		$	126		$	5,251
Three months ended September 30, 2014:
Allowance for Loan Losses
Beginning balance	$	703		$	211		$	423		$	1,686		$	1,140		$	603		$	466		$	126		$	5,358
Charge-offs		(98	)		-			-			(208	)		-			-			(148	)		(27	)		(481	)
Recoveries		23			-			2			4			-			2			12			31			74
Provision		(17	)		7			(17	)		46			57			18			210			(4	)		300
Ending balance	$	611		$	218		$	408		$	1,528		$	1,197		$	623		$	540		$	126		$	5,251
Nine months ended September 30, 2013:
Allowance for Loan Losses
Beginning balance	$	855		$	159		$	894		$	1,656		$	950		$	736		$	289		$	147		$	5,686
Charge-offs		(389	)		-			(244	)		(133	)		(735	)		(21	)		(82	)		(125	)		(1,729	)
Recoveries		62			-			1			13			-			1			45			26			148
Provision		203			(3	)		(26	)		45			667			91			125			98			1,200
Ending balance	$	731		$	156		$	625		$	1,581		$	882		$	807		$	377		$	146		$	5,305
Three months ended September 30, 2013:
Allowance for Loan Losses
Beginning balance	$	720		$	183		$	604		$	1,655		$	886		$	704		$	351		$	160		$	5,263
Charge-offs		(36	)		-			(23	)		(1	)		-			-			(33	)		(27	)		(120	)
Recoveries		34			-			1			2			-			-			17			8			62
Provision		13			(27	)		43			(75	)		(4	)		103			42			5			100
Ending balance	$	731		$	156		$	625		$	1,581		$	882		$	807		$	377		$	146		$	5,305

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	Commercial		Agricultural		Real Estate - Residential		Real Estate -Commercial		Real Estate -Construction		Equity LOC		Auto			Other		Total
September 30, 2014:
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	22	$	-	$	99	$	50	$	342	$	163	$	-		$	-	$	676
Ending balance: collectively evaluated for impairment	$	589	$	218	$	309	$	1,478	$	855	$	460	$	540		$	126	$	4,575
Loans
Ending balance	$	33,583	$	34,624	$	28,321	$	162,184	$	21,356	$	37,665	$	40,754		$	4,244	$	362,731
Ending balance: individually evaluated for impairment	$	133	$	605	$	2,539	$	2,474	$	1,413	$	652	$	91		$	12	$	7,919
Ending balance: collectively evaluated for impairment	$	33,450	$	34,019	$	25,782	$	159,710	$	19,943	$	37,013	$	40,663		$	4,232	$	354,812
December 31, 2013:															&n