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, 2018
☐	TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐  No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 31, 2018. 5,125,476 shares.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLUMAS BANCORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

	September 30, 2018			December 31, 2017
Assets
Cash and cash equivalents	$	35,256		$	87,537
Investment securities available for sale		156,734			137,466
Loans, less allowance for loan losses of $6,846 at September 30, 2018 and $6,669 at December 31, 2017		535,998			482,248
Real estate acquired through foreclosure		1,088			1,344
Premises and equipment, net		13,748			11,346
Bank owned life insurance		12,774			12,866
Accrued interest receivable and other assets		15,150			12,620
Total assets	$	770,748		$	745,427
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing	$	289,859		$	282,239
Interest bearing		392,983			380,418
Total deposits		682,842			662,657
Repurchase agreements		8,210			10,074
Accrued interest payable and other liabilities		7,020			6,686
Junior subordinated deferrable interest debentures		10,310			10,310
Total liabilities		708,382			689,727
Commitments and contingencies (Note 5)
Shareholders’ equity:
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,125,476 shares at September 30, 2018 and 5,064,972 at December 31, 2017		6,854			6,415
Retained earnings		59,357			49,855
Accumulated other comprehensive loss, net		(3,845	)		(570	)
Total shareholders’ equity		62,366			55,700
Total liabilities and shareholders’ equity	$	770,748		$	745,427

See notes to unaudited condensed consolidated financial statements.

1

 PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

	For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,
	2018		2017		2018			2017
Interest Income:
Interest and fees on loans	$	7,693	$	6,560	$	21,680		$	19,101
Interest on investment securities		1,037		618		2,873			1,782
Other		113		223		402			402
Total interest income		8,843		7,401		24,955			21,285
Interest Expense:
Interest on deposits		159		149		462			429
Interest on note payable		-		-		-			28
Interest on junior subordinated deferrable interest debentures		131		103		370			295
Other		2		1		5			4
Total interest expense		292		253		837			756
Net interest income before provision for loan losses		8,551		7,148		24,118			20,529
Provision for Loan Losses		300		200		800			600
Net interest income after provision for loan losses		8,251		6,948		23,318			19,929
Non-Interest Income:
Service charges		628		617		1,919			1,841
Interchange revenue		572		521		1,619			1,470
Gain on sale of loans		564		557		1,763			1,870
Gain on equity securities with no readily determinable fair value		-		-		209			-
Loss on sale of investments		-		-		(8	)		(17	)
Other		520		488		1,538			1,449
Total non-interest income		2,284		2,183		7,040			6,613
Non-Interest Expenses:
Salaries and employee benefits		3,049		2,822		9,086			8,613
Occupancy and equipment		721		713		2,127			2,136
Other		1,658		1,597		4,893			4,357
Total non-interest expenses		5,428		5,132		16,106			15,106
Income before provision for income taxes		5,107		3,999		14,252			11,436
Provision for Income Taxes		1,411		1,551		3,830			4,383
Net income	$	3,696	$	2,448	$	10,422		$	7,053
Basic earnings per share	$	0.72	$	0.48	$	2.04		$	1.41
Diluted earnings per share	$	0.71	$	0.47	$	2.00		$	1.36

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,
	2018			2017			2018			2017
Net income	$	3,696		$	2,448		$	10,422		$	7,053
Other comprehensive income:
Change in net unrealized gain/loss		(1,285	)		139			(4,657	)		1,422
Reclassification adjustments for net losses included in net income		-			-			8			17
Net unrealized holding (loss) gain		(1,285	)		139			(4,649	)		1,439
Related tax effect:
Change in net unrealized gain/loss		380			(57	)		1,376			(586	)
Reclassification of net losses included in net income		-			-			(2	)		(7	)
Income tax effect		380			(57	)		1,374			(593	)
Other comprehensive (loss) income		(905	)		82			(3,275	)		846
Total comprehensive income	$	2,791		$	2,530		$	7,147		$	7,899

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,
	2018			2017
Cash Flows from Operating Activities:
Net income	$	10,422		$	7,053
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		800			600
Change in deferred loan origination costs/fees, net		(1,232	)		(636	)
Depreciation and amortization		749			775
Stock-based compensation expense		148			122
Loss on sale of investments		8			17
Amortization of investment security premiums		518			451
Gain on equity securities with no readily determinable fair value		(209	)		-
Gain on sale of OREO and other vehicles		(80	)		(15	)
Gain on sale of loans held for sale		(1,763	)		(1,870	)
Loans originated for sale		(34,289	)		(27,236	)
Proceeds from loan sales		37,327			31,435
Provision from change in OREO valuation		38			106
Earnings on bank-owned life insurance		(246	)		(253	)
Increase in accrued interest receivable and other assets		(74	)		(1,081	)
Increase (decrease) in accrued interest payable and other liabilities		334			(783	)
Net cash provided by operating activities		12,451			8,685
Cash Flows from Investing Activities:
Proceeds from principal repayments from available-for-sale government-sponsored mortgage-backed securities		11,349			9,387
Purchases of available-for-sale securities		(40,286	)		(27,811	)
Proceeds from sale of available-for-sale securities		4,157			4,221
Net increase in loans		(55,871	)		(21,454	)
Proceeds from Bank owned life insurance		338			-
Proceeds from sale of OREO		568			83
Proceeds from sale of other vehicles		400			171
Purchase of premises and equipment		(3,079	)		(226	)
Net cash used in investing activities		(82,424	)		(35,629	)

Continued on next page.

4

PLUMAS BANCORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

	For the Nine Months
	Ended September 30,
	2018			2017
Cash Flows from Financing Activities:
Net increase in demand, interest bearing and savings deposits	$	26,307		$	70,314
Net decrease in time deposits		(6,122	)		(2,817	)
Principal payment on note payable		-			(2,375	)
Net (decrease) increase in securities sold under agreements to repurchase		(1,864	)		1,172
Cash dividends paid on common stock		(920	)		(691	)
Proceeds from exercise of stock options		291			226
Net cash provided by financing activities		17,692			65,829
(Decrease) increase in cash and cash equivalents		(52,281	)		38,885
Cash and Cash Equivalents at Beginning of Year		87,537			62,646
Cash and Cash Equivalents at End of Period	$	35,256		$	101,531
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense	$	842		$	757
Income taxes	$	3,336		$	5,220
Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure	$	646		$	475
Non-Cash Financing Activities:
Common stock retired in connection with the exercise of stock options	$	29		$	10
Common stock issued in connection with the cashless exercise of stock warrant	$	-		$	787

See notes to unaudited condensed consolidated financial statements.  

5

PLUMAS BANCORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. THE BUSINESS OF PLUMAS BANCORP

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation and Basis of Presentation

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

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

Reclassifications

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

Segment Information

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

6

Revenue from Contracts with Customers

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

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

Income Taxes

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

Recently Adopted Accounting Pronouncements

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

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

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

7

Pending Accounting Pronouncements

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

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

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

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

8

In July 2018, the FASB issued ASU No. 2018-11, Leases - Targeted Improvements. ASU No. 2018-11 provides entities with relief from the costs of implementing certain aspects of the new leasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company expects to elect both transition options. ASU 2018-11 is 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 September 30, 2018 and December 31, 2017 consisted of the following, in thousands:

Available-for-Sale	September 30, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential	$	125,168	$	-	$	(4,498	)	$	120,670
Obligations of states and political subdivisions		37,024		32		(992	)		36,064
	$	162,192	$	32	$	(5,490	)	$	156,734

Net unrealized loss on available-for-sale investment securities totaling $5,458,000 were recorded, net of $1,613,000 in tax benefit, as accumulated other comprehensive loss within shareholders' equity at September 30, 2018. During the nine months ended September 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 September 30, 2018. 

Available-for-Sale	December 31, 2017
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential	$	104,935	$	26	$	(1,173	)	$	103,788
Obligations of states and political subdivisions		33,340		482		(144	)		33,678
	$	138,275	$	508	$	(1,317	)	$	137,466

Unrealized loss on available-for-sale investment securities totaling $809,000 were recorded, net of $239,000 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 2017. During the 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 sale from four of these securities totaling $4,000 and a loss on sale on three securities of $21,000. No securities were sold during the three months ended September 30, 2017.

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

9

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

September 30, 2018	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential	$	75,524	$	2,103	$	45,146	$	2,395	$	120,670	$	4,498
Obligations of states and political subdivisions		27,704		632		4,697		360		32,401		992
	$	103,228	$	2,735	$	49,843	$	2,755	$	153,071	$	5,490

December 31, 2017	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential	$	60,070	$	441	$	31,213	$	732	$	91,283	$	1,173
Obligations of states and political subdivisions		2,621		31		3,403		113		6,024		144
	$	62,691	$	472	$	34,616	$	845	$	97,307	$	1,317

At September 30, 2018, the Company held 203 securities of which 188 were in a loss position. Of the securities in a loss position, 126 were in a loss position for less than twelve months. Of the 203 securities 89 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 114 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate conditions. All the securities continue to pay as scheduled. When analyzing an issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Company’s intent and ability to hold the security to recovery. As of September 30, 2018, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis. Based on the Company’s evaluation of the above and other relevant factors, the Company does not believe the securities that are in an unrealized loss position as of September 30, 2018 are other than temporarily impaired.

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

	Amortized Cost		Estimated Fair Value
Within one year	$	-	$	-
After one year through five years		3,060		3,029
After five years through ten years		17,299		16,906
After ten years		16,665		16,129
Investment securities not due at a single maturity date:
Government-sponsored mortgage-backed securities		125,168		120,670
	$	162,192	$	156,734

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 $87,579,000 and $82,059,000 and estimated fair values totaling $84,152,000 and $81,006,000 at September 30, 2018 and December 31, 2017, respectively, were pledged to secure deposits and repurchase agreements. 

10

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below, in thousands:

	September 30,			December 31,
	2018			2017
Commercial	$	46,762		$	39,620
Agricultural		70,917			58,908
Real estate – residential		15,674			16,624
Real estate – commercial		253,154			240,257
Real estate – construction and land development		38,454			25,181
Equity lines of credit		39,165			41,798
Auto		71,875			60,438
Other		3,846			3,808
Total loans		539,847			486,634
Deferred loan costs, net		2,997			2,283
Allowance for loan losses		(6,846	)		(6,669	)
Total net loans	$	535,998		$	482,248

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

	September 30,			December 31,
	2018			2017
Balance, beginning of year	$	6,669		$	6,549
Provision charged to operations		800			600
Losses charged to allowance		(988	)		(879	)
Recoveries		365			399
Balance, end of period	$	6,846		$	6,669

The recorded investment in impaired loans totaled $2,332,000 and $2,270,000 at September 30, 2018 and December 31, 2017, respectively. The Company had specific allowances for loan losses of $79,000 on impaired loans of $554,000 at September 30, 2018 as compared to specific allowances for loan losses of $82,000 on impaired loans of $475,000 at December 31, 2017. The balance of impaired loans in which no specific reserves were required totaled $1,778,000 and $1,795,000 at September 30, 2018 and December 31, 2017, respectively. The average recorded investment in impaired loans for the nine months ended September 30, 2018 and September 30, 2017 was $1,738,000 and $4,982,000, respectively. The Company recognized $56,000 and $100,000 in interest income for impaired loans during the nine months ended September 30, 2018 and 2017, respectively. No interest was recognized on nonaccrual loans accounted for on a cash basis during the nine months ended September 30, 2018 and 2017.

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

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

The carrying value of troubled debt restructurings at September 30, 2018 and December 31, 2017 was $1,089,000 and $1,111,000, respectively. The Company has allocated $54,000 and $63,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2018 and December 31, 2017. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at September 30, 2018 and December 31, 2017.

There were no troubled debt restructurings that occurred during the nine months ending September 30, 2018 or September 30, 2017. 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, 2018 and 2017, respectively. 

11

At September 30, 2018 and December 31, 2017, nonaccrual loans totaled $1,244,000 and $1,226,000, respectively. Interest foregone on nonaccrual loans totaled $36,000 and $141,000 for the nine months ended September 30, 2018 and 2017, respectively. Interest foregone on nonaccrual loans totaled $7,000 and $52,000 for the three months ended September 30, 2018 and 2017, respectively. At December 31, 2017 there were three loans to one customer totaling $1.8 million that were 90 days past due and still accruing interest. These loans were well secured and in process of collection at December 31, 2017. The Company has received payment, in full, of principal and interest on these loans.

Salaries and employee benefits totaling $1,937,000 and $1,393,000 have been deferred as loan origination costs during the nine months ended September 30, 2018 and 2017, respectively. Salaries and employee benefits totaling $703,000 and $457,000 have been deferred as loan origination costs during the three months ended September 30, 2018 and 2017, respectively.

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

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

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

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

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

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

12

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

September 30, 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	$	46,184	$	70,664	$	15,260	$	249,576	$	38,360	$	38,724	$	458,768
Special Mention		544		253		120		3,447		-		-		4,364
Substandard		34		-		294		131		94		441		994
Doubtful		-		-		-		-		-		-		-
Total	$	46,762	$	70,917	$	15,674	$	253,154	$	38,454	$	39,165	$	464,126

December 31, 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	$	38,851	$	56,859	$	16,218	$	239,944	$	25,081	$	41,636	$	418,589
Special Mention		238		253		125		26		-		-		642
Substandard		531		1,796		281		287		100		162		3,157
Doubtful		-		-		-		-		-		-		-
Total	$	39,620	$	58,908	$	16,624	$	240,257	$	25,181	$	41,798	$	422,388

	Consumer Credit Exposure						Consumer Credit Exposure
	Credit Risk Profile Based on Payment Activity						Credit Risk Profile Based on Payment Activity
	September 30, 2018						December 31, 2017
	Auto		Other		Total		Auto		Other		Total
Grade:
Performing	$	71,596	$	3,841	$	75,437	$	60,060	$	3,788	$	63,848
Non-performing		279		5		284		378		20		398
Total	$	71,875	$	3,846	$	75,721	$	60,438	$	3,808	$	64,246

13

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

Nine months ended 9/30/18:	Commercial			Agricultural			Real Estate- Residential			Real Estate- Commercial			Real Estate- Construction			Equity LOC			Auto			Other			Total
Allowance for Loan Losses
Beginning balance	$	725		$	623		$	231		$	2,729		$	783		$	533		$	946		$	99		$	6,669
Charge-offs		(325	)		-			-			-			-			-			(628	)		(35	)		(988	)
Recoveries		23			-			93			19			3			4			213			10			365
Provision		345			(26	)		(124	)		(124	)		122			(48	)		635			20			800
Ending balance	$	768		$	597		$	200		$	2,624		$	908		$	489		$	1,166		$	94		$	6,846
Three months ended 9/30/18:
Allowance for Loan Losses
Beginning balance	$	853		$	546		$	195		$	2,699		$	780		$	481		$	1,044		$	100		$	6,698
Charge-offs		(59	)		-			-			-			-			-			(152	)		(14	)		(225	)
Recoveries		8			-			2			1			1			1			58			2			73
Provision		(34	)		51			3			(76	)		127			7			216			6			300
Ending balance	$	768		$	597		$	200		$	2,624		$	908		$	489		$	1,166		$	94		$	6,846
Nine months ended 9/30/17:
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
September 30, 2018:
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	-		$	-		$	42		$	-		$	12		$	25		$	-		$	-		$	79
Ending balance: collectively evaluated for impairment	$	768		$	597		$	158		$	2,624		$	896		$	464		$	1,166		$	94		$	6,767
Loans
Ending balance	$	46,762		$	70,917		$	15,674		$	253,154		$	38,454		$	39,165		$	71,875		$	3,846		$	539,847
Ending balance: individually evaluated for impairment	$	14		$	253		$	997		$	131		$	213		$	441		$	279		$	4		$	2,332
Ending balance: collectively evaluated for impairment	$	46,748		$	70,664		$	14,677		$	253,023		$	38,241		$	38,724		$	71,596		$	3,842		$	537,515
December 31, 2017:
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	2		$	-		$	48		$	-		$	32		$	-		$	-		$	-		$	82
Ending balance: collectively evaluated for impairment	$	723		$	623		$	183		$	2,729		$	751		$	533		$	946		$	99		$	6,587
Loans
Ending balance	$	39,620		$	58,908		$	16,624		$	240,257		$	25,181		$	41,798		$	60,438		$	3,808		$	486,634
Ending balance: individually evaluated for impairment	$	14		$	253		$	934		$	287		$	224		$	162		$	377		$	19		$	2,270
Ending balance: collectively evaluated for impairment	$	39,606		$	58,655		$	15,690		$	239,970		$	24,957		$	41,636		$	60,061		$	3,789		$	484,364

14

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

							Total
September 30, 2018	30-89 Days		90 Days and Still				Past Due and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total
Commercial	$	16	$	-	$	-	$	16	$	46,746	$	46,762
Agricultural		647		-		-		647		70,270		70,917
Real estate – residential		157		-		294		451		15,223		15,674
Real estate – commercial		-		-		131		131		253,023		253,154
Real estate - construction & land		-		-		94		94		38,360		38,454
Equity Lines of Credit		227		-		441		668		38,497		39,165
Auto		1,128		-		280		1,408		70,467		71,875
Other		25		-		4		29		3,817		3,846
Total	$	2,200	$	-	$	1,244	$	3,444	$	536,403	$	539,847

							Total
December 31, 2017	30-89 Days		90 Days and Still				Past Due and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total
Commercial	$	1,869	$	-	$	-	$	1,869	$	37,751	$	39,620
Agricultural		-		1,796		-		1,796		57,112		58,908
Real estate – residential		130		-		281		411		16,213		16,624
Real estate - commercial		-		-		287		287		239,970		240,257
Real estate - construction & land		38		-		100		138		25,043		25,181
Equity Lines of Credit		345		-		162		507		41,291		41,798
Auto		1,047		-		377		1,424		59,014		60,438
Other		20		-		19		39		3,769		3,808
Total	$	3,449	$	1,796	$	1,226	$	6,471	$	480,163	$	486,634

15

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

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of September 30, 2018:	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	14	$	14			$	14	$	1
Agricultural		253		264				253		14
Real estate – residential		817		817				688		30
Real estate – commercial		131		131				136		-
Real estate – construction & land		94		94				97		-
Equity Lines of Credit		186		186				48		-
Auto		279		279				196		-
Other		4		4				1		-
With an allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		-		-		-		-		-
Real estate – residential		180		180		42		181		5
Real estate – commercial		-		-		-		-		-
Real estate – construction & land		119		119		12		121		6
Equity Lines of Credit		255		255		25		3		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total:
Commercial	$	14	$	14	$	-	$	14	$	1
Agricultural		253		264		-		253		14
Real estate – residential		997		997		42		869		35
Real estate – commercial		131		131		-		136		-
Real estate – construction & land		213		213		12		218		6
Equity Lines of Credit		441		441		25		51		-
Auto		279		279		-		196		-
Other		4		4		-		1		-
Total	$	2,332	$	2,343	$	79	$	1,738	$	56

16

			Unpaid			Average		Interest
	Recorded		Principal		Related	Recorded		Income
As of December 31, 2017:	Investment		Balance		Allowance	Investment		Recognized
With no related allowance recorded:
Commercial	$	-	$	-		$	-	$	-
Agricultural		253		253			255		19
Real estate – residential		697		708			548		38
Real estate – commercial		287		287			184		-
Real estate – construction & land		-		-			-		-
Equity Lines of Credit		162		162			180		-
Auto		377		377			144		-
Other		19		19			1		-
With an allowance recorded: