UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2019
☐	TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ___________

COMMISSION FILE NUMBER: 000-49883

PLUMAS BANCORP

(Exact Name of Registrant as Specified in Its Charter)

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

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

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

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

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

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

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

Yes ☐  No ☒

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

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

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

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

	June 30, 2019		December 31, 2018
Assets
Cash and cash equivalents	$	33,747	$	46,686
Investment securities available for sale		173,692		171,507
Loans, less allowance for loan losses of $7,058 at June 30, 2019 and $6,958 at December 31, 2018		588,600		562,498
Real estate acquired through foreclosure		1,094		1,170
Premises and equipment, net		14,355		14,287
Bank owned life insurance		13,020		12,856
Accrued interest receivable and other assets		14,750		15,394
Total assets	$	839,258	$	824,398
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing	$	318,336	$	304,039
Interest bearing		418,875		422,526
Total deposits		737,211		726,565
Repurchase agreements		7,944		13,058
Accrued interest payable and other liabilities		6,755		7,533
Junior subordinated deferrable interest debentures		10,310		10,310
Total liabilities		762,220		757,466
Commitments and contingencies (Note 5)
Shareholders’ equity:
Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,159,560 shares at June 30, 2019 and 5,137,476 at December 31, 2018		7,147		6,944
Retained earnings		68,447		62,005
Accumulated other comprehensive income (loss), net		1,444		(2,017	)
Total shareholders’ equity		77,038		66,932
Total liabilities and shareholders’ equity	$	839,258	$	824,398

See notes to unaudited condensed consolidated financial statements.

1

 PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

	For the Three Months				For the Six Months
	Ended June 30,				Ended June 30,
	2019		2018		2019		2018
Interest Income:
Interest and fees on loans	$	8,385	$	7,209	$	16,894	$	13,987
Interest on investment securities		1,140		980		2,278		1,836
Other		95		105		274		289
Total interest income		9,620		8,294		19,446		16,112
Interest Expense:
Interest on deposits		322		153		619		304
Interest on junior subordinated deferrable interest debentures		136		127		276		239
Other		3		1		6		3
Total interest expense		461		281		901		546
Net interest income before provision for loan losses		9,159		8,013		18,545		15,566
Provision for Loan Losses		200		300		600		500
Net interest income after provision for loan losses		8,959		7,713		17,945		15,066
Non-Interest Income:
Service charges		670		653		1,320		1,294
Interchange revenue		583		553		1,097		1,044
Gain on sale of loans		231		533		475		1,199
Gain on equity securities with no readily determinable fair value		-		-		-		209
Gain (loss) on sale of investments		20		-		20		(8	)
Other		507		486		1,064		1,019
Total non-interest income		2,011		2,225		3,976		4,757
Non-Interest Expenses:
Salaries and employee benefits		3,104		2,923		6,304		6,036
Occupancy and equipment		825		705		1,683		1,407
Other		1,814		1,601		3,440		3,236
Total non-interest expenses		5,743		5,229		11,427		10,679
Income before provision for income taxes		5,227		4,709		10,494		9,144
Provision for Income Taxes		1,417		1,264		2,866		2,419
Net income	$	3,810	$	3,445	$	7,628	$	6,725
Basic earnings per share	$	0.74	$	0.67	$	1.48	$	1.32
Diluted earnings per share	$	0.73	$	0.66	$	1.46	$	1.29

See notes to unaudited condensed consolidated financial statements.

2

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

	For the Three Months						For the Six Months
	Ended June 30,						Ended June 30,
	2019			2018			2019			2018
Net income	$	3,810		$	3,445		$	7,628		$	6,725
Other comprehensive income:
Change in net unrealized gain/loss		2,334			(783	)		4,933			(3,372	)
Reclassification adjustments for net (gains) losses included in net income		(20	)		-			(20	)		8
Net unrealized holding gain (loss)		2,314			(783	)		4,913			(3,364	)
Related tax effect:
Change in net unrealized gain/loss		(690	)		232			(1,458	)		997
Reclassification of net gains (losses) included in net income		6			-			6			(2	)
Income tax effect		(684	)		232			(1,452	)		995
Other comprehensive income (loss)		1,630			(551	)		3,461			(2,369	)
Total comprehensive income	$	5,440		$	2,894		$	11,089		$	4,356

See notes to unaudited condensed consolidated financial statements.

3

PLUMAS BANCORP AND SUBSIDIARY 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 

(in thousands, except shares)

	Common Stock				Retained			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’
	Shares		Amount		Earnings			(Net of Taxes)			Equity
Balance, December 31, 2017		5,064,972	$	6,415	$	49,855		$	(570	)	$	55,700
Net Income						6,725						6,725
Other comprehensive loss									(2,369	)		(2,369	)
Cash dividends on common stock						(920	)					(920	)
Exercise of stock options and tax effect		53,704		263								263
Stock-based compensation expense				98								98
Balance, June 30, 2018		5,118,676	$	6,776	$	55,660		$	(2,939	)	$	59,497
Balance, December 31, 2018		5,137,476	$	6,944	$	62,005		$	(2,017	)	$	66,932
Net Income						7,628						7,628
Other comprehensive income									3,461			3,461
Cash dividends on common stock						(1,186	)					(1,186	)
Exercise of stock options and tax effect		22,084		103								103
Stock-based compensation expense				100								100
Balance, June 30, 2019		5,159,560	$	7,147	$	68,447		$	1,444		$	77,038

See notes to unaudited condensed consolidated financial statements.   

4

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	For the Six Months
	Ended June 30,
	2019			2018
Cash Flows from Operating Activities:
Net income	$	7,628		$	6,725
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		600			500
Change in deferred loan origination costs/fees, net		(480	)		(948	)
Depreciation and amortization		722			489
Stock-based compensation expense		100			98
(Gain) loss on sale of investments		(20	)		8
Amortization of investment security premiums		371			343
Gain on equity securities with no readily determinable fair value		-			(209	)
Gain on sale of OREO and other vehicles		(18	)		(75	)
Gain on sale of loans held for sale		(475	)		(1,199	)
Loans originated for sale		(9,854	)		(22,584	)
Proceeds from loan sales		10,837			22,202
Provision from change in OREO valuation		-			38
Earnings on bank-owned life insurance		(164	)		(165	)
Increase in accrued interest receivable and other assets		(319	)		(350	)
(Decrease) increase in accrued interest payable and other liabilities		(778	)		434
Net cash provided by operating activities		8,150			5,307
Cash Flows from Investing Activities:
Proceeds from principal repayments from available-for-sale government-sponsored mortgage-backed securities		9,829			6,970
Purchases of available-for-sale securities		(19,297	)		(35,509	)
Proceeds from sale of available-for-sale securities		11,379			4,157
Net increase in loans		(27,242	)		(28,455	)
Proceeds from Bank owned life insurance		-			338
Proceeds from sale of OREO		85			550
Proceeds from sale of other vehicles		316			275
Purchase of premises and equipment		(608	)		(2,900	)
Net cash used in investing activities		(25,538	)		(54,574	)

Continued on next page.

5

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

	For the Six Months
	Ended June 30,
	2019			2018
Cash Flows from Financing Activities:
Net increase in demand, interest bearing and savings deposits	$	17,918		$	21,287
Net decrease in time deposits		(7,272	)		(4,878	)
Net decrease in securities sold under agreements to repurchase		(5,114	)		(1,349	)
Cash dividends paid on common stock		(1,186	)		(920	)
Proceeds from exercise of stock options		103			263
Net cash provided by financing activities		4,449			14,403
Decrease in cash and cash equivalents		(12,939	)		(34,864	)
Cash and Cash Equivalents at Beginning of Year		46,686			87,537
Cash and Cash Equivalents at End of Period	$	33,747		$	52,673
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense	$	895		$	549
Income taxes	$	3,376		$	2,856
Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure	$	330		$	375
Non-Cash Financing Activities:
Common stock retired in connection with the exercise of stock options	$	42		$	29

See notes to unaudited condensed consolidated financial statements.  

6

PLUMAS BANCORP AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. THE BUSINESS OF PLUMAS BANCORP

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation and Basis of Presentation

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

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

The accounting and reporting policies of Plumas Bancorp and subsidiary conform with accounting principles generally accepted in the United States of America and prevailing practices within the banking industry.  In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company’s financial position at June 30, 2019 and the results of its operations and its cash flows for the three-month and six-month periods ended June 30, 2019 and 2018. Our condensed consolidated balance sheet at December 31, 2018 is derived from audited financial statements.

The unaudited condensed consolidated financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting on Form 10-Q. Accordingly, certain disclosures normally presented in the notes to the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been omitted. The Company believes that the disclosures are adequate to make the information not misleading. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2018 Annual Report to Shareholders on Form 10-K. The results of operations for the three-month and six-month periods ended June 30, 2019 may not necessarily be indicative of future operating results. In preparing such financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods reported. Actual results could differ significantly from those estimates.

Reclassifications

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

7

Segment Information

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

Revenue from Contracts with Customers

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

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

Recently Adopted Accounting Pronouncements

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

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

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

8

Pending Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model does not apply to available-for-sale (“AFS”) debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the losses will be recognized as allowances rather than reductions in the amortized cost of the securities. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU No. 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption is permitted for interim and annual reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company has begun its implementation efforts by establishing an implementation team chaired by the Company’s Chief Lending Officer and composed of members of the Company’s credit administration and accounting departments. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor to assist in the transition to the CECL model. We expect to produce an initial CECL allowance calculation prior to September 30, 2019. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.  In July 2019, the FASB proposed changes to the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. The proposal would delay the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company and has not adopted provisions of the standard early, the proposed delay would be applicable to the Company, if it is approved by the FASB.

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

9

3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

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

Available-for-Sale	June 30, 2019
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential	$	142,298	$	1,553	$	(444	)	$	143,407
Obligations of states and political subdivisions		29,345		963		(23	)		30,285
	$	171,643	$	2,516	$	(467	)	$	173,692

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

Available-for-Sale	December 31, 2018
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations- residential	$	135,059	$	240	$	(2,621	)	$	132,678
Obligations of states and political subdivisions		39,311		121		(603	)		38,829
	$	174,370	$	361	$	(3,224	)	$	171,507

Unrealized loss on available-for-sale investment securities totaling $2,863,000 were recorded, net of $846,000 in tax benefits, as accumulated other comprehensive loss within shareholders' equity at December 31, 2018. During the six months ended June 30, 2018 the Company sold eighteen available-for-sale investment securities for total proceeds of $4,157,000 recording a $8,000 loss on sale. The Company realized a gain on sale from eight of these securities totaling $4,000 and a loss on sale on ten securities of $12,000. No securities were sold during the three months ended June 30, 2018.

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

10

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

June 30, 2019	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential	$	813	$	1	$	50,258	$	443	$	51,071	$	444
Obligations of states and political subdivisions		-		-		992		23		992		23
	$	813	$	1	$	51,250	$	466	$	52,063	$	467

December 31, 2018	Less than 12 Months				12 Months or More				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Debt securities:
U.S. Government-sponsored agencies collateralized by mortgage obligations-residential	$	26,478	$	269	$	77,476	$	2,352	$	103,954	$	2,621
Obligations of states and political subdivisions		19,270		284		5,672		319		24,942		603
	$	45,748	$	553	$	83,148	$	2,671	$	128,896	$	3,224

At June 30, 2019, the Company held 186 securities of which 58 were in a loss position. Of the securities in a loss position, 1 was in a loss position for less than twelve months. Of the 186 securities, 104 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 82 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate conditions. All of the securities continue to pay as scheduled. When analyzing an issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Company’s intent and ability to hold the security to recovery. As of June 30, 2019, management does not have the intent to sell these securities nor does it believe it is more likely than not that it will be required to sell these securities before the recovery of its amortized cost basis. Based on the Company’s evaluation of the above and other relevant factors, the Company does not believe the securities that are in an unrealized loss position as of June 30, 2019 are other than temporarily impaired.

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

	Amortized Cost		Estimated Fair Value
Within one year	$	-	$	-
After one year through five years		3,284		3,361
After five years through ten years		6,367		6,545
After ten years		19,694		20,379
Investment securities not due at a single maturity date:
Government-sponsored mortgage-backed securities		142,298		143,407
	$	171,643	$	173,692

Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties.

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

11

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

Outstanding loans are summarized below, in thousands:

	June 30,			December 31,
	2019			2018
Commercial	$	47,782		$	49,563
Agricultural		76,552			69,160
Real estate – residential		16,328			15,900
Real estate – commercial		285,996			271,710
Real estate – construction and land development		37,523			40,161
Equity lines of credit		38,533			38,490
Auto		85,174			77,135
Other		4,250			4,080
Total loans		592,138			566,199
Deferred loan costs, net		3,520			3,257
Allowance for loan losses		(7,058	)		(6,958	)
Total net loans	$	588,600		$	562,498

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

	June 30,			December 31,
	2019			2018
Balance, beginning of period	$	6,958		$	6,669
Provision charged to operations		600			1,000
Losses charged to allowance		(657	)		(1,191	)
Recoveries		157			480
Balance, end of period	$	7,058		$	6,958

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

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

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

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

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

12

There were no troubled debt restructurings for which there was a payment default within twelve months following the modification during the six months ended June 30, 2019 and 2018, respectively.

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

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

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

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

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

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

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

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

13

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

June 30, 2019	Commercial Credit Exposure
	Credit Risk Profile by Internally Assigned Grade
Grade:	Commercial		Agricultural		Real Estate-Residential		Real Estate-Commercial		Real Estate-Construction		Equity LOC		Total
Pass	$	47,255	$	73,873	$	16,064	$	280,025	$	37,435	$	37,688	$	492,340
Special Mention		505		2,679		120		5,109		-		-		8,413
Substandard		22		-		144		862		88		845		1,961
Doubtful		-		-		-		-		-		-		-
Total	$	47,782	$	76,552	$	16,328	$	285,996	$	37,523	$	38,533	$	502,714

December 31, 2018	Commercial Credit Exposure
	Credit Risk Profile by Internally Assigned Grade
Grade:	Commercial		Agricultural		Real Estate-Residential		Real Estate-Commercial		Real Estate-Construction		Equity LOC		Total
Pass	$	48,905	$	68,910	$	15,621	$	268,159	$	40,069	$	38,304	$	479,968
Special Mention		481		250		124		3,420		-		-		4,275
Substandard		177		-		155		131		92		186		741
Doubtful		-		-		-		-		-		-		-
Total	$	49,563	$	69,160	$	15,900	$	271,710	$	40,161	$	38,490	$	484,984

	Consumer Credit Exposure						Consumer Credit Exposure
	Credit Risk Profile Based on Payment Activity						Credit Risk Profile Based on Payment Activity
	June 30, 2019						December 31, 2018
	Auto		Other		Total		Auto		Other		Total
Grade:
Performing	$	84,787	$	4,227	$	89,014	$	76,734	$	4,071	$	80,805
Non-performing		387		23		410		401		9		410
Total	$	85,174	$	4,250	$	89,424	$	77,135	$	4,080	$	81,215

14

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

							Real			Real			Real
Six months ended June 30, 2019:	Commercial			Agricultural			Estate- Residential			Estate- Commercial			Estate- Construction			Equity LOC			Auto			Other			Total
Allowance for Loan Losses
Beginning balance	$	914		$	538		$	214		$	2,686		$	758		$	464		$	1,289		$	95		$	6,958
Charge-offs		(137	)		-			-			-			-			(5	)		(484	)		(31	)		(657	)
Recoveries		16			-			2			-			-			2			135			2			157
Provision		(72	)		89			(39	)		311			(161	)		7			432			33			600
Ending balance	$	721		$	627		$	177		$	2,997		$	597		$	468		$	1,372		$	99		$	7,058
Three months ended June 30, 2019:
Allowance for Loan Losses
Beginning balance	$	796		$	542		$	195		$	2,969		$	641		$	450		$	1,384		$	90		$	7,067
Charge-offs		(121	)		-			-			-			-			(5	)		(172	)		(8	)		(306	)
Recoveries		7			-			1			-			-			1			88			-			97
Provision		39			85			(19	)		28			(44	)		22			72			17			200
Ending balance	$	721		$	627		$	177		$	2,997		$	597		$	468		$	1,372		$	99		$	7,058
Six months ended June 30, 2018:
Allowance for Loan Losses
Beginning balance	$	725		$	623		$	231		$	2,729		$	783		$	533		$	946		$	99		$	6,669
Charge-offs		(266	)		-			-			-			-			-			(476	)		(21	)		(763	)
Recoveries		15			-			91			18			2			3			155			8			292
Provision		379			(77	)		(127	)		(48	)		(5	)		(55	)		419			14			500
Ending balance	$	853		$	546		$	195		$	2,699		$	780		$	481		$	1,044		$	100		$	6,698
Three months ended June 30, 2018:
Allowance for Loan Losses
Beginning balance	$	772		$	494		$	212		$	2,759		$	791		$	510		$	977		$	107		$	6,622
Charge-offs		(1	)		-			-			-			-			-			(311	)		(2	)		(314	)
Recoveries		8			-			-			1			-			2			73			6			90
Provision		74			52			(17	)		(61	)		(11	)		(31	)		305			(11	)		300
Ending balance	$	853		$	546		$	195		$	2,699		$	780		$	481		$	1,044		$	100		$	6,698
June 30, 2019:
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	-		$	-		$	25		$	63		$	22		$	-		$	-		$	-		$	110
Ending balance: collectively evaluated for impairment		721			627			152			2,934			575			468			1,372			99			6,948
Ending balance	$	721		$	627		$	177		$	2,997		$	597		$	468		$	1,372		$	99		$	7,058
Loans
Ending balance: individually evaluated for impairment		-			250			639			862			114			554			-			-			2,419
Ending balance: collectively evaluated for impairment	$	47,782		$	76,302		$	15,689		$	285,134		$	37,409		$	37,979		$	85,174		$	4,250		$	589,719
Ending balance	$	47,782		$	76,552		$	16,328		$	285,996		$	37,523		$	38,533		$	85,174		$	4,250		$	592,138

15

					Real		Real		Real
December 31, 2018:	Commercial		Agricultural		Estate- Residential		Estate- Commercial		Estate- Construction		Equity LOC		Auto		Other		Total
Allowance for Loan Losses
Ending balance: individually evaluated for impairment	$	128	$	-		41	$	-	$	12	$	-	$	-	$	-	$	181
Ending balance: collectively evaluated for impairment	$	786	$	538	$	173	$	2,686	$	746	$	464	$	1,289	$	95	$	6,777
Ending Balance	$	914	$	538	$	214	$	2,686	$	758	$	464	$	1,289	$	95	$	6,958
Loans
Ending balance: individually evaluated for impairment	$	128	$	250	$	649	$	131	$	117	$	-	$	-	$	-	$	1,275
Ending balance: collectively evaluated for impairment		49,435		68,910		15,251		271,579		40,044		38,490		77,135		4,080		564,924
Ending balance	$	49,563	$	69,160	$	15,900	$	271,710	$	40,161	$	38,490	$	77,135	$	4,080	$	566,199

16

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

							Total
June 30, 2019	30-89 Days		90 Days and Still				Past Due and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total
Commercial	$	258	$	-	$	-	$	258	$	47,524	$	47,782
Agricultural		97		-		-		97		76,455		76,552
Real estate – residential		179		-		144		323		16,005		16,328
Real estate – commercial		348		-		862		1,210		284,786		285,996
Real estate - construction & land		-		-		88		88		37,435		37,523
Equity Lines of Credit		714		-		845		1,559		36,974		38,533
Auto		1,412		-		387		1,799		83,375		85,174
Other		37		-		23		60		4,190		4,250
Total	$	3,045	$	-	$	2,349	$	5,394	$	586,744	$	592,138

							Total
December 31, 2018	30-89 Days		90 Days and Still				Past Due and
	Past Due		Accruing		Nonaccrual		Nonaccrual		Current		Total
Commercial	$	11	$	-	$	144	$	155	$	49,408	$	49,563
Agricultural		-		-		-		-		69,160		69,160
Real estate – residential		154		-		155		309		15,591		15,900
Real estate - commercial		-		-		131		131		271,579		271,710
Real estate - construction & land		-		-		92		92		40,069		40,161
Equity Lines of Credit		596		-		186		782		37,708		38,490
Auto		1,725		-		401		2,126		75,009		77,135
Other		85		-		8		93		3,987		4,080
Total	$	2,571	$	-	$	1,117	$	3,688	$	562,511	$	566,199

17

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

			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
As of June 30, 2019:	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-
Agricultural		250		250		-		250		8
Real estate – residential		461		461		-		465		17
Real estate – commercial		383		398		-		156		-
Real estate – construction & land		-		-		-		-		-
Equity Lines of Credit		554		565		-		93		-
Auto		-		-		-		-		-
Other		-		-