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 March 31, 2019
☐	TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

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

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

Yes ☐  No ☒

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

Title of Each Class:	Trading  Symbol	Name of Each Exchange on which Registered:
Common Stock, no par value	PLBC	The NASDAQ Stock Market LLC

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 26, 2019. 5,153,560 shares.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

	March 31, 2019			December 31, 2018
Assets
Cash and cash equivalents	$	44,753		$	46,686
Investment securities available for sale		173,227			171,507
Loans, less allowance for loan losses of $7,067 at March 31, 2019 and $6,958 at December 31, 2018		569,778			562,498
Real estate acquired through foreclosure		1,170			1,170
Premises and equipment, net		14,224			14,287
Bank owned life insurance		12,938			12,856
Accrued interest receivable and other assets		15,287			15,394
Total assets	$	831,377		$	824,398
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing	$	312,121		$	304,039
Interest bearing		418,802			422,526
Total deposits		730,923			726,565
Repurchase agreements		8,910			13,058
Accrued interest payable and other liabilities		8,527			7,533
Junior subordinated deferrable interest debentures		10,310			10,310
Total liabilities		758,670			757,466
Commitments and contingencies (Note 5)
Shareholders’ equity:
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,150,876 shares at March 31, 2019 and 5,137,476 at December 31, 2018		7,070			6,944
Retained earnings		65,823			62,005
Accumulated other comprehensive loss, net		(186	)		(2,017	)
Total shareholders’ equity		72,707			66,932
Total liabilities and shareholders’ equity	$	831,377		$	824,398

See notes to unaudited condensed consolidated financial statements.

1

 PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

	For the Three Months
	Ended March 31,
	2019		2018
Interest Income:
Interest and fees on loans	$	8,510	$	6,777
Interest on investment securities		1,137		856
Other		179		185
Total interest income		9,826		7,818
Interest Expense:
Interest on deposits		297		151
Interest on junior subordinated deferrable interest debentures		140		112
Other		3		2
Total interest expense		440		265
Net interest income before provision for loan losses		9,386		7,553
Provision for Loan Losses		400		200
Net interest income after provision for loan losses		8,986		7,353
Non-Interest Income:
Service charges		650		640
Interchange revenue		513		491
Gain on sale of loans		244		666
Gain on equity securities with no readily determinable fair value		-		209
Loss on sale of investments		-		(8	)
Other		558		533
Total non-interest income		1,965		2,531
Non-Interest Expenses:
Salaries and employee benefits		3,200		3,113
Occupancy and equipment		858		702
Other		1,626		1,634
Total non-interest expenses		5,684		5,449
Income before provision for income taxes		5,267		4,435
Provision for Income Taxes		1,449		1,155
Net income	$	3,818	$	3,280
Basic earnings per common share	$	0.74	$	0.65
Diluted earnings per common share	$	0.73	$	0.63

See notes to unaudited condensed consolidated financial statements.

2

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	For the Three Months
	Ended March 31,
	2019			2018
Net income	$	3,818		$	3,280
Other comprehensive income:
Change in net unrealized gain/loss		2,599			(2,589	)
Reclassification adjustments for net losses included in net income		-			8
Net unrealized holding gain (loss)		2,599			(2,581	)
Related tax effect:
Change in net unrealized gain/loss		(768	)		765
Reclassification of net losses included in net income		-			(2	)
Income tax effect		(768	)		763
Other comprehensive income (loss)		1,831			(1,818	)
Total comprehensive income	$	5,649		$	1,462

See notes to unaudited condensed consolidated financial statements.

3

PLUMAS BANCORP AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 

(in thousands, except shares)

	Common Stock				Retained		Accumulated Other Comprehensive (Loss) Income			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						3,280					3,280
Other comprehensive loss								(1,818	)		(1,818	)
Exercise of  stock options and tax effect		17,704		82							82
Stock-based compensation expense				47							47
Balance, March 31, 2018		5,082,676	$	6,544	$	53,135	$	(2,388	)	$	57,291
Balance, December  31, 2018		5,137,476	$	6,944	$	62,005	$	(2,017	)	$	66,932
Net Income						3,818					3,818
Other comprehensive income								1,831			1,831
Exercise of stock options and tax effect		13,400		76							76
Stock-based compensation expense				50							50
Balance, March 31, 2019		5,150,876	$	7,070	$	65,823	$	(186	)	$	72,707

See notes to unaudited condensed consolidated financial statements.

4

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	For the Three Months
	Ended March 31,
	2019			2018
Cash Flows from Operating Activities:
Net income	$	3,818		$	3,280
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		400			200
Change in deferred loan origination costs/fees, net		(266	)		(315	)
Depreciation and amortization		355			245
Stock-based compensation expense		50			47
Loss on sale of investments		-			8
Amortization of investment security premiums		180			169
Gain on equity securities with no readily determinable fair value		-			(209	)
Gain on sale of OREO and other vehicles		(9	)		(34	)
Gain on sale of loans held for sale		(244	)		(666	)
Loans originated for sale		(3,711	)		(12,612	)
Proceeds from loan sales		6,048			11,939
Earnings on bank-owned life insurance		(82	)		(83	)
Increase in accrued interest receivable and other assets		(627	)		(99	)
Increase in accrued interest payable and other liabilities		994			1,023
Net cash provided by operating activities		6,906			2,893
Cash Flows from Investing Activities:
Proceeds from principal repayments from available-for-sale government-sponsored mortgage-backed securities		4,211			3,159
Purchases of available-for-sale securities		(3,500	)		(20,788	)
Proceeds from sale of available-for-sale securities		-			4,157
Net increase in loans		(9,801	)		(1,896	)
Proceeds from Bank owned life insurance		-			338
Proceeds from sale of OREO		-			412
Proceeds from sale of other vehicles		167			112
Purchase of premises and equipment		(202	)		(51	)
Net cash used in investing activities		(9,125	)		(14,557	)

Continued on next page.

5

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

	For the Three Months
	Ended March 31,
	2019			2018
Cash Flows from Financing Activities:
Net increase (decrease) in demand, interest bearing and savings deposits	$	6,707		$	(6,263	)
Net decrease in time deposits		(2,349	)		(3,603	)
Net decrease in securities sold under agreements to repurchase		(4,148	)		(1,399	)
Proceeds from exercise of stock options		76			82
Net cash provided by (used in) financing activities		286			(11,183	)
Decrease in cash and cash equivalents		(1,933	)		(22,847	)
Cash and Cash Equivalents at Beginning of Year		46,686			87,537
Cash and Cash Equivalents at End of Period	$	44,753		$	64,690
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense	$	434		$	264
Income taxes	$	-		$	-
Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure	$	189		$	220

See notes to unaudited condensed consolidated financial statements.  

6

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. THE BUSINESS OF PLUMAS BANCORP

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

The Bank operates eleven branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City, and Truckee. In December 2015 the Bank opened a branch in Reno, Nevada; its first branch outside of California and in 2018 the Bank purchased a branch located in Carson City, Nevada. The Bank’s administrative headquarters is in Quincy, California. In addition, the Bank operates a lending office specializing in government-guaranteed lending in Auburn, California, and commercial/agricultural lending offices in Chico and Red Bluff, California and Klamath Falls, Oregon. The Bank's primary source of revenue is generated from providing loans to customers who are predominately small and middle market businesses and individuals residing in the surrounding areas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of the Company and the consolidated accounts of its wholly-owned subsidiary, Plumas Bank. All significant intercompany balances and transactions have been eliminated.

Plumas Statutory Trust I and Trust II are not consolidated into the Company's consolidated financial statements and, accordingly, are accounted for under the equity method. The Company's investment in Trust I of $341,000 and Trust II of $175,000 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.

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2018 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month period ended March 31, 2019 may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

Reclassifications

Certain reclassifications have been made to prior years’ balances to conform to the classifications used in 2019. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash and cash equivalents.

7

Segment Information

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

Revenue from Contracts with Customers

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

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

Recently Adopted Accounting Pronouncements

On February 25, 2016, the FASB issued ASU 2016-02, Leases. The most significant change for lessees is the requirement under the new guidance to recognize right-of-use assets and lease liabilities for all leases not considered short-term leases, which is generally defined as a lease term of less than 12 months. This change results in lessees recognizing right-of-use assets and lease liabilities for most leases currently accounted for as operating leases under prior lease accounting guidance. ASU 2016-02 is effective for interim and annual periods beginning after December 15, 2018. The Company has several lease agreements, including two branch locations, which are currently considered operating leases, and therefore, not recognized on the Company’s consolidated statements of condition. The Company adopted ASU No. 2016-02 on January 1, 2019 and recorded $565,000 in right-of-use assets and lease liabilities on adoption.

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

On March 30, 2017, the FASB issued ASU 2017-08, Receivables – Non-Refundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities. This ASU amends the amortization period for certain purchased callable debt securities held at a premium, shortening such period to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. ASU 2017-08 is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company adopted ASU No. 2017-08 on January 1, 2019. The provisions of ASU No. 2017-08 did not have a material impact on the Company’s Consolidated Financial Statements.

8

Pending Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has begun its implementation efforts by establishing an implementation team chaired by the Company’s Chief Lending Officer and composed of members of the Company’s credit administration and accounting departments. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor to assist in the transition to the CECL model. We expect to produce an initial CECL allowance calculation prior to June 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 August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement, Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The update is effective for interim and annual periods in fiscal years beginning after December 15, 2019, with early adoption permitted. Entities are also allowed to elect early adoption of the eliminated or modified disclosure requirements and delay adoption of the new disclosure requirements until their effective date. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

9

3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

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

Available-for-Sale	March 31, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential	$	132,756	$	652	$	(1,320	)	$	132,088
Obligations of states and political subdivisions		40,735		554		(150	)		41,139
	$	173,491	$	1,206	$	(1,470	)	$	173,227

Net unrealized loss on available-for-sale investment securities totaling $264,000 were recorded, net of $78,000 in tax benefits, as accumulated other comprehensive income within shareholders' equity at March 31, 2019. No investment securities were sold during the three months ended March 31, 2019.

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 three months ended March 31, 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.

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

10

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

March 31, 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	$	-	$	-	$	84,580	$	1,320	$	84,580	$	1,320
Obligations of states and political subdivisions		681		10		10,538		140		11,219		150
	$	681	$	10	$	95,118	$	1,460	$	95,799	$	1,470

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 March 31, 2019, the Company held 219 securities of which 107 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 219 securities, 97 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 122 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 March 31, 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 March 31, 2019 are other than temporarily impaired.

The amortized cost and estimated fair value of investment securities at March 31, 2019 by contractual maturity are shown below, in thousands.

	Amortized Cost		Estimated Fair Value
Within one year	$	-	$	-
After one year through five years		6,428		6,504
After five years through ten years		14,600		14,718
After ten years		19,707		19,917
Investment securities not due at a single maturity date:
Government-sponsored mortgage-backed securities		132,756		132,088
	$	173,491	$	173,227

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 $89,081,000 and $92,166,000 and estimated fair values totaling $88,234,000 and $90,122,000 at March 31, 2019 and December 31, 2018, respectively, were pledged to secure deposits and repurchase agreements. 

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4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below, in thousands:

	March 31,			December 31,
	2019			2018
Commercial	$	42,707		$	49,563
Agricultural		70,041			69,160
Real estate – residential		16,413			15,900
Real estate – commercial		282,533			271,710
Real estate – construction and land development		37,637			40,161
Equity lines of credit		37,519			38,490
Auto		82,737			77,135
Other		3,859			4,080
Total loans		573,446			566,199
Deferred loan costs, net		3,399			3,257
Allowance for loan losses		(7,067	)		(6,958	)
Total net loans	$	569,778		$	562,498

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

	March 31,			December 31,
	2019			2018
Balance, beginning of period	$	6,958		$	6,669
Provision charged to operations		400			1,000
Losses charged to allowance		(351	)		(1,191	)
Recoveries		60			480
Balance, end of period	$	7,067		$	6,958

The recorded investment in impaired loans totaled $1,738,000 and $1,275,000 at March 31, 2019 and December 31, 2018, respectively. The Company had specific allowances for loan losses of $229,000 on impaired loans of $897,000 at March 31, 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 $841,000 and $851,000 at March 31, 2019 and December 31, 2018, respectively. The average recorded investment in impaired loans for the three months ended March 31, 2019 and March 31, 2018 was $1,352,000 and $2,002,000, respectively. The Company recognized $18,000 in interest income for impaired loans during the three months ended March 31, 2019 and 2018. No interest was recognized on nonaccrual loans accounted for on a cash basis during the three months ended March 31, 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.

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 March 31, 2019 and December 31, 2018 was $1,071,000 and $1,080,000, respectively. The Company has allocated $53,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2019 and December 31, 2018. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at March 31, 2019 and December 31, 2018.

There were no troubled debt restructurings that occurred during the three months ending March 31, 2019 or March 31, 2018.

12

There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the three months ended March 31, 2019 and 2018, respectively.

At March 31, 2019 and December 31, 2018, nonaccrual loans totaled $1,457,000 and $1,117,000, respectively. Interest foregone on nonaccrual loans totaled $26,000 and $15,000 for the three months ended March 31, 2019 and 2018, respectively. There were no loans past due 90 days or more and on accrual status at March 31, 2019 and December 31, 2018.

Salaries and employee benefits totaling $598,000 and $498,000 have been deferred as loan origination costs during the three months ended March 31, 2019 and 2018, respectively.

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

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

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

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

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

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

13

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

March 31, 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	$	42,011	$	69,791	$	16,144	$	278,359	$	37,547	$	37,341	$	481,193
Special Mention		540		250		120		3,564		-		-		4,474
Substandard		156		-		149		610		90		178		1,183
Doubtful		-		-		-		-		-		-		-
Total	$	42,707	$	70,041	$	16,413	$	282,533	$	37,637	$	37,519	$	486,850

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
	March 31, 2019						December 31, 2018
	Auto		Other		Total		Auto		Other		Total
Grade:
Performing	$	82,430	$	3,859	$	86,289	$	76,734	$	4,071	$	80,805
Non-performing		307		-		307		401		9		410
Total	$	82,737	$	3,859	$	86,596	$	77,135	$	4,080	$	81,215

14

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

							Real			Real		Real
Three months ended March 31, 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		(16	)		-			-			-		-			-			(312	)		(23	)		(351	)
Recoveries		9			-			1			-		-			1			47			2			60
Provision		(111	)		4			(20	)		283		(117	)		(15	)		360			16			400
Ending balance	$	796		$	542		$	195		$	2,969	$	641		$	450		$	1,384		$	90		$	7,067
Three months ended March 31, 2018:
Allowance for Loan Losses
Beginning balance	$	725		$	623		$	231		$	2,729	$	783		$	533		$	946		$	99		$	6,669
Charge-offs		(265	)		-			-			-		-			-			(165	)		(19	)		(449	)
Recoveries		7			-			91			17		2			1			82			2			202
Provision		305			(129	)		(110	)		13		6			(24	)		114			25			200
Ending balance	$	772		$	494		$	212		$	2,759	$	791		$	510		$	977		$	107		$	6,622
March 31, 2019:
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	123		$	-		$	35		$	61	$	10		$	-		$	-		$	-		$	229
Ending balance: collectively evaluated for impairment		673			542			160			2,908		631			450			1,384			90			6,838
Ending balance	$	796		$	542		$	195		$	2,969	$	641		$	450		$	1,384		$	90		$	7,067
Loans
Ending balance: individually evaluated for impairment		123			250			639			611		115			-			-			-			1,738
Ending balance: collectively evaluated for impairment	$	42,584		$	69,791		$	15,774		$	281,922	$	37,522		$	37,519		$	82,737		$	3,859		$	571,708
Ending balance	$	42,707		$	70,041		$	16,413		$	282,533	$	37,637		$	37,519		$	82,737		$	3,859		$	573,446
December 31, 2018:
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

15

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

							Total
March 31, 2019	30-89 Days		90 Days and Still				Past Due and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total
Commercial	$	192	$	-	$	123	$	315	$	42,392	$	42,707
Agricultural		69		-		-		69		69,972		70,041
Real estate – residential		7		-		149		156		16,257		16,413
Real estate – commercial		154		-		610		764		281,769		282,533
Real estate - construction & land		-		-		90		90		37,547		37,637
Equity Lines of Credit		384		-		178		562		36,957		37,519
Auto		1,164		-		307		1,471		81,266		82,737
Other		42		-		-		42		3,817		3,859
Total	$	2,012	$	-	$	1,457	$	3,469	$	569,977	$	573,446

							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

16

The following tables show information related to impaired loans at March 31, 2019, in thousands:

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of March 31, 2019:	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		250		250		-		250		5
Real estate – residential		460		471		-		462		9
Real estate – commercial		131		144		-		131		-
Real estate – construction & land		-		-		-		-		-
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
With an allowance recorded:
Commercial	$	123	$	128	$	123	$	123	$	-
Agricultural		-		-		-		-		-
Real estate – residential		179		179		35		179		2
Real estate – commercial		480		480		61		91		-
Real estate – construction & land		115		115		10		116		2
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total:
Commercial	$	123	$	128	$	123	$	123	$	-
Agricultural		250		250		-		250		5
Real estate – residential		639		650		35		641		11
Real estate – commercial		611		624		61		222		-
Real estate – construction & land		115		115		10		116		2
Equity Lines of Credit		-		-		-		-		-
Auto		-		-		-		-		-
Other		-		-		-		-		-
Total	$	1,738	$	1,767	$	229	$	1,352	$	18

17

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

18

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 $118.2 million and $126.9 million and stand-by letters of credit of $417 thousand at March 31, 2019 and December 31, 2018.

Of the loan commitments outstanding at March 31, 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 March 31, 2019 or December 31, 2018.

6. RIGHT OF USE ASSETS AND LEASE LIABILITY

The Company leases four lending offices, three branch offices 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 March 31, 2019 the ROU assets and lease liabilities included on the condensed consolidated balance sheet in other assets and other liabilities, respectively totaled $478,000 consisting of total undiscounted remaining cash flows of $505,000 less a present value discount of $27,000.

The following table presents a maturity analysis of the operating lease liability at March 31, 2019, in thousands:

	Maturities of Lease Liabilities
Nine months ended December 31, 2019	$	220
Year ended December 31, 2020		163
Year ended December 31, 2021		63
Year ended December 31, 2022		59
		505
Less: Present value discount		(27	)
Lease Liability March 31, 2019	$	478

The weighted-average remaining lease term is 2.3 years.

Total lease costs for the three months ended March 31, 2019 was $109,000 consisting of $88,000 related to operating leases, $10,000 related to short-term leases and variable lease expense of $11,000. Variable lease expense consists primarily of maintenance expense paid to maintain common areas. Rent expense for the three months ended March 31, 2018, prior to the adoption of ASU 2016-02, was $92,000 which includes $10,000 related to variable lease expense.

  Cash paid on operating leases was $109,000 for the three months ended March 31, 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		-
	$	533,000

19

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
	Ended March 31,
(In thousands, except per share data)	2019		2018
Net Income:
Net income	$	3,818	$	3,280
Earnings Per Share:
Basic earnings per share	$	0.74	$	0.65
Diluted earnings per share	$	0.73	$	0.63