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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, 2021

 

 

☐

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.)

 

 

5525 Kietzke Lane, Suite 100, Reno, Nevada

89511

(Address of Principal Executive Offices)

(Zip Code)

 

 

Registrant’s Telephone Number, Including Area Code (775) 786-0907

 

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  November 5, 2021. 5,813,523 shares.

 

 
 

 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

  

September 30,

  

December 31,

 
  

2021

  

2020

 
         

Assets

        

Cash and cash equivalents

 $372,993  $184,909 

Investment securities available for sale

  275,061   179,613 

Loans held for sale

  28,364   693 

Loans, less allowance for loan losses of $10,305 at September 30, 2021 and $9,902 at December 31, 2020

  828,611   700,102 

Real estate acquired through foreclosure

  569   403 

Premises and equipment, net

  16,005   14,016 

Bank owned life insurance

  15,743   13,526 

Goodwill

  5,502   - 

Accrued interest receivable and other assets

  28,632   18,314 

Total assets

 $1,571,480  $1,111,576 
         

Liabilities and Shareholders’ Equity

        
         

Deposits:

        

Non-interest bearing

 $728,021  $516,682 

Interest bearing

  676,425   457,292 

Total deposits

  1,404,446   973,974 

Repurchase agreements

  13,450   13,878 

Accrued interest payable and other liabilities

  13,741   8,260 

Federal Home Loan Bank advances

  -   5,000 

Junior subordinated deferrable interest debentures

  10,310   10,310 

Total liabilities

  1,441,947   1,011,422 
         

Commitments and contingencies (Note 6)

          
         

Shareholders’ equity:

        

Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,810,556 shares at September 30, 2021 and 5,182,232 at December 31, 2020

  26,705   7,656 

Retained earnings

  100,992   87,753 

Accumulated other comprehensive income, net

  1,836   4,745 

Total shareholders’ equity

  129,533   100,154 

Total liabilities and shareholders’ equity

 $1,571,480  $1,111,576 

 

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

  

For the Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2021

  

2020

  

2021

  

2020

 

Interest Income:

                

Interest and fees on loans

 $12,603  $8,978  $31,470  $26,080 

Interest on investment securities

  1,157   799   3,103   2,615 

Other

  109   36   213   160 

Total interest income

  13,869   9,813   34,786   28,855 

Interest Expense:

                

Interest on deposits

  228   190   565   648 

Interest on junior subordinated deferrable interest debentures

  90   86   255   296 

Other

  1   2   6   7 

Total interest expense

  319   278   826   951 

Net interest income before provision for loan losses

  13,550   9,535   33,960   27,904 

Provision for Loan Losses

  250   800   875   2,800 

Net interest income after provision for loan losses

  13,300   8,735   33,085   25,104 

Non-Interest Income:

                

Interchange revenue

  839   799   2,367   1,894 

Service charges

  636   547   1,743   1,760 

Gain on sale of loans

  -   317   591   945 

Other

  526   498   1,530   1,710 

Total non-interest income

  2,001   2,161   6,231   6,309 

Non-Interest Expenses:

                

Salaries and employee benefits

  2,940   3,125   8,694   9,571 

Occupancy and equipment

  1,043   840   2,838   2,542 

Other

  2,618   1,839   6,693   5,257 

Total non-interest expenses

  6,601   5,804   18,225   17,370 

Income before provision for income taxes

  8,700   5,092   21,091   14,043 

Provision for Income Taxes

  2,122   1,400   5,585   3,850 

Net income

 $6,578  $3,692  $15,506  $10,193 
                 

Basic earnings per share

 $1.13  $0.71  $2.87  $1.97 

Diluted earnings per share

 $1.12  $0.71  $2.83  $1.95 

 

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

  

For the Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2021

  

2020

  

2021

  

2020

 
                 

Net income

 $6,578  $3,692  $15,506  $10,193 

Other comprehensive income:

                

Change in net unrealized gain on securities

  (2,569)  (184)  (4,548)  3,243 

Change in unrealized gain on cash flow hedge

  29   54   418   (43)

Net unrealized holding gain (loss)

  (2,540)  (130)  (4,130)  3,200 

Related tax effect:

                

Change in net unrealized gain

  760   54   1,344   (959)

Change in unrealized gain on cash flow hedge

  (9)  (16)  (123)  13 

Income tax effect

  751   38   1,221   (946)

Other comprehensive (loss) income

  (1,789)  (92)  (2,909)  2,254 

Total comprehensive income

 $4,789  $3,600  $12,597  $12,447 

 

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

  

Total Shareholders’

 
  

Shares

  

Amount

  

Earnings

  

(Net of Taxes)

  

Equity

 
                     

Balance, December 31, 2019

  5,165,760  $7,312  $75,144  $2,049  $84,505 

Net Income

         10,193      10,193 

Other comprehensive income

            2,254   2,254 

Cash dividends on common stock

         (1,243)     (1,243)

Exercise of stock options and tax effect

  15,272   79         79 

Stock-based compensation expense

      195         195 

Balance, September 30, 2020

  5,181,032  $7,586  $84,094  $4,303  $95,983 
                     

Balance, December 31, 2020

  5,182,232  $7,656  $87,753  $4,745  $100,154 

Net Income

         15,506      15,506 

Other comprehensive loss

            (2,909)  (2,909)

Cash dividends on common stock

         (2,267)     (2,267)

Issuance of common stock

  598,020   18,657         18,657 

Exercise of stock options and tax effect

  30,304   216         216 

Stock-based compensation expense

      176         176 

Balance, September 30, 2021

  5,810,556  $26,705  $100,992  $1,836  $129,533 

 

See notes to unaudited condensed consolidated financial statements.  

  

 

4
 
 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

  

For the Nine Months Ended

 
  

September 30,

 
  

2021

  

2020

 

Cash Flows from Operating Activities:

        

Net income

 $15,506  $10,193 

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

        

Provision for loan losses

  875   2,800 

Change in deferred loan origination costs/fees, net

  (1,488)  3,809 

Depreciation and amortization

  1,219   1,077 

Stock-based compensation expense

  176   195 

Amortization of investment security premiums

  832   776 

Provision from change in OREO valuation

  37   - 

Loss on sale of other vehicles

  -   11 

Gain on sale of loans held for sale

  (591)  (945)

Gain on sale of building

  -   (218)

Loans originated for sale

  (32,726)  (18,647)

Proceeds from loan sales

  8,254   21,283 

Earnings on bank-owned life insurance

  (279)  (260)

Increase in accrued interest receivable and other assets

  (2,346)  (2,959)

Increase (decrease) in accrued interest payable and other liabilities

  1,030   (114)

Net cash provided by operating activities

  (9,501)  17,001 
         

Cash Flows from Investing Activities:

        

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

  32,471   30,247 

Proceeds from matured and called available-for-sale securities

  500   380 

Purchases of available-for-sale securities

  (133,747)  (26,790)

Purchase of FHLB stock

  (231)  (150)

Purchase of FRB stock

  (706)  - 

Net decrease (increase) in loans

  29,340   (130,637)

Cash acquired in acquisition, net of consideration paid

  23,631   - 

Proceeds from sale of OREO

  56   - 

Proceeds from sale of other vehicles

  180   370 

Proceeds from sale of building

  -   1,348 

Purchase of premises and equipment

  (190)  (1,367)

Net cash used in investing activities

  (48,696)  (126,599)

 

Continued on next page.

 

5
 

 

PLUMAS BANCORP AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

(Continued)

 

  

For the Nine Months Ended

 
  

September 30,

 
  

2021

  

2020

 

Cash Flows from Financing Activities:

        

Net increase in demand, interest bearing and savings deposits

 $259,606  $229,521 

Net (decrease) increase in time deposits

  (5,846)  684 

Net decrease in securities sold under agreements to repurchase

  (428)  (854)

Cash dividends paid on common stock

  (2,267)  (1,243)

Proceeds from FHLB advances

  -   10,000 

Repayment of FHLB advances

  (5,000)  - 

Proceeds from exercise of stock options

  216   79 

Net cash provided by financing activities

  246,281   238,187 

Increase in cash and cash equivalents

  188,084   128,589 

Cash and Cash Equivalents at Beginning of Year

  184,909   46,942 

Cash and Cash Equivalents at End of Period

 $372,993  $175,531 
         

Supplemental Disclosure of Cash Flow Information:

        

Cash paid during the period for:

        

Interest expense

 $793  $976 

Income taxes

 $6,885  $3,922 

Assets acquired in acquisition plus goodwill recognized, net

 $204,960  $- 

Liabilities assumed in acquisition

 $181,565  $- 
         

Non-Cash Investing Activities:

        

Real estate and vehicles acquired through foreclosure

 $431  $381 
         

Non-Cash Financing Activities:

        

Common stock retired in connection with the exercise of stock options

 $119  $46 

 

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 twelve branches in California, including branches in Alturas, Chester, Fall River Mills, Greenville, Kings Beach, Portola, Quincy, Redding, Susanville, Tahoe City,  Truckee and Yuba City. 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 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. Business Combinations - ACQUISITION OF Feather River Bancorp, Inc.

 

On July 1, 2021, pursuant to a previously announced Agreement and Plan of Reorganization and Merger dated as of March 10, 2021 (the “Merger Agreement”) between the Company and Feather River Bancorp, Inc. (“FRB”), FRB merged with and into the Company with the Company continuing as the surviving corporation (the “Merger”). Immediately after the Merger, Bank of Feather River, the wholly owned bank subsidiary of FRB (“BFR”), merged with and into the Bank, with the Bank continuing as the surviving bank. The Merger and Bank Merger are collectively referred to as the “Transaction.”

 

As part of its business strategy, the Company regularly reviews its business strategies and opportunities to enhance the value of its franchise, including through acquisitions. The Transaction is consistent with the Company’s business strategy, which will (1) expand Plumas’s geographic presence into new markets in Northern California, (2) diversify and bring new expertise to Plumas’s agricultural lending business, and (3) strengthen the Company’s talent base.

 

Pursuant to the terms of the definitive merger agreement between the Company and FRB, each issued and outstanding share of common stock of FRB (the “Common Shares”), was converted into the right to receive, at the election of each holder of Common Shares, either (i) shares of common stock of the Company (“Plumas Common Stock”) or (ii) cash (the “Merger Consideration”). Shareholder elections were subject to proration such that aggregate Merger Consideration payable by the Company was comprised of (i) $4,738,583 in cash (the “Aggregate Cash Amount”) and (ii) 598,020 shares of Plumas Common Stock (the “Aggregate Plumas Share Amount”). Holders of Common Shares received either $19.14 in cash or 0.614 shares of Plumas Common Stock. The value of the total deal consideration was approximately $23.4 million, which is based upon volume-weighted average trading price of Plumas common stock for the 10 trading days ending on the last trading day immediately preceding July 1, 2021, the closing date of the Merger.

 

Immediately after the Transaction, the newly combined company, operating as Plumas Bancorp with its banking subsidiary, Plumas Bank, had total assets of approximately $1.5 billion.

 

The following table reflects the estimated fair values of the assets acquired and liabilities assumed related to the FRB Acquisition as of July 1, 2021 (in thousands):

 

Assets:

    

Cash and cash equivalents

 $28,369 

Loans

  160,409 

Core deposit intangible

  1,037 

Goodwill

  5,502 

Bank premises and equipment

  2,657 

Right of use asset

  2,359 

Other assets

  4,627 

Total assets acquired

 $204,960 
     

Liabilities:

    

Deposits:

    

Non-interest bearing

 $89,479 

Interest bearing

    

Savings accounts

  9,353 

Money market accounts

  45,600 

Time accounts

  32,279 

Total deposits

  176,711 
     

Lease Liabilities

  2,359 

Deferred tax liability

  402 

Other liabilities

  2,093 

Total liabilities assumed

 $181,565 

Merger consideration (cash payments of $4.7 million and $18.7 million in stock)

 $23,395 

                                                                                                                                                                                                                                                                                                                                                                                 
7
 

 

The following table presents the net assets acquired from FRB and the estimated fair value adjustments as of July 1, 2021 (in thousands):

 

Book value of net assets acquired from FRB

 $16,292 
     

Fair value adjustments:

    

Loans

  2,453 

Bank premises and equipment

  (1,218

)

Right of use asset

  2,359 

Lease liability

  (2,359

)

Core deposit intangible asset

  1,037 

Total purchase accounting adjustments

 $2,272 

Deferred tax liabilities (tax effect of purchase accounting adjustments at 29.56%)

  (671

)

Fair value of net assets acquired from FRB

 $17,893 
     

Merger consideration

  23,395 

Less: fair value of net assets acquired from FRB

  (17,893

)

Goodwill

  5,502 

 

As a result of the Acquisition, we recorded $5.5 million in goodwill, which represents the excess of the total purchase price paid over the fair value of the assets acquired, net of the fair values of liabilities assumed. Goodwill mainly reflects expected value created through the combined operations of Plumas Bank and Bank of Feather River.
 

3. 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 $363,000 and Trust II of $183,000 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  September 30, 2021 and the results of its operations and its cash flows for the three- and nine-month periods ended September 30, 2021 and 2020. Our condensed consolidated balance sheet at  December 31, 2020 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 2020 Annual Report to Shareholders on Form 10-K. The results of operations for the three- and nine-month periods ended September 30, 2021 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.

 

8
 

 

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.

 

Loans Held for Sale

 

Included in the loan portfolio are loans which are 75% to 90% guaranteed by the Small Business Administration (SBA), US Department of Agriculture Rural Business Cooperative Service (RBS) and Farm Services Agency (FSA). The guaranteed portion of these loans may be sold to a third party, with the Bank retaining the unguaranteed portion. The Company can receive a premium in excess of the adjusted carrying value of the loan at the time of sale.

 

As of  September 30, 2021 and December 31, 2020 the Company had $28.4 million and $693 thousand, respectively in SBA government guaranteed loans held for sale. Loans held for sale are recorded at the lower of cost or fair value and therefore may be reported at fair value on a non-recurring basis. The fair values for loans held for sale are based on either observable transactions of similar instruments or formally committed loan sale prices.

 

Goodwill and Other Intangible Assets

 

Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill  acquired in a purchase business combination and determined to have an indefinite useful life is not amortized, but test for impairment at least annually or move frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed.Core deposit intangible represents estimated future benefit of deposits related to an acquisition and is booked separately from the related deposits and is evaluated periodically for impairment. The core deposit intangible asset is amortized on an accelerated method over its estimated useful life of ten years.

 

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. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities delaying 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 delay is applicable to the Company. 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 2016-1.  During the second quarter of 2021 we engaged a consultant to perform a model validation of our CECL model and to assist us in documenting all aspects of the CECL model. 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.

 

9
 

 
 

4.   INVESTMENT SECURITIES AVAILABLE FOR SALE

 

The amortized cost and estimated fair value of investment securities at September 30, 2021 and December 31, 2020 consisted of the following, in thousands:

 

Available-for-Sale

 

September 30, 2021

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Debt securities:

                

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

 $145,653  $2,384  $(1,000) $147,037 

U.S. Government-agencies collateralized by mortgage obligations - commercial

  43,821   14   (739)  43,096 

Obligations of states and political subdivisions

  83,540   2,105   (717)  84,928 
  $273,014  $4,503  $(2,456) $275,061 

 

Unrealized gains on available-for-sale investment securities totaling $2,047,000 were recorded, net of $605,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at September 30, 2021.  No securities were sold during the nine months ended September 30, 2021.

 

Available-for-Sale

 

December 31, 2020

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Debt securities:

                

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

 $106,942  $3,749  $(17) $110,674 

U.S. Government-agencies collateralized by mortgage obligations - commercial

  10,400   72   -   10,472 

Obligations of states and political subdivisions

  55,676   2,792   (1)  58,467 
  $173,018  $6,613  $(18) $179,613 

 

Unrealized gains on available-for-sale investment securities totaling $6,595,000 were recorded, net of $1,950,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2020. No securities were sold during the nine months ended September 30, 2020.

 

There were no transfers of available-for-sale investment securities during the nine months ended September 30, 2021 and twelve months ended December 31, 2020. There were no securities classified as held-to-maturity at September 30, 2021 or December 31, 2020.

 

10
 

 

Investment securities with unrealized losses at September 30, 2021 and December 31, 2020 are summarized and classified according to the duration of the loss period as follows, in thousands:

 

September 30, 2021

 

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

 $71,856  $999  $37  $1  $71,893  $1,000 

U.S. Government-agencies collateralized by mortgage obligations - commercial

  34,161   739   -   -   34,161   739 

Obligations of states and political subdivisions

  31,381   687   502   30   31,883   717 
  $137,398  $2,425  $539  $31  $137,937  $2,456 

 

December 31, 2020

 

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

 $-  $-  $5,511  $17  $5,511  $17 

U.S. Government-agencies collateralized by mortgage obligations - commercial

  -   -   -   -   -   - 

Obligations of states and political subdivisions

  -   -   531   1   531   1 
  $-  $-  $6,042  $18  $6,042  $18 

 

At September 30, 2021, the Company held 308 securities of which 95 were in a loss position. All of the securities in a loss position were in a loss position for less than twelve months. Of the 308 securities, 117 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations, 16 are U.S. Government- agencies collateralized by commercial mortgage obligations  and 175 were obligations of states and political subdivisions. The unrealized losses relate principally to market rate conditions. All of the securities continue to pay as scheduled. When analyzing an issuer’s financial condition, management considers the length of time and extent to which the market value has been less than cost; the historical and implied volatility of the security; the financial condition of the issuer of the security; and the Company’s intent and ability to hold the security to recovery. As of September 30, 2021, 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, 2021 are other than temporarily impaired.

 

The amortized cost and estimated fair value of investment in debt securities at September 30, 2021 by contractual maturity are shown below, in thousands.

 

  

Amortized Cost

  

Estimated Fair Value

 

Within one year

 $-  $- 

After one year through five years

  4,230   4,358 

After five years through ten years

  8,518   8,942 

After ten years

  70,792   71,628 

Investment securities not due at a single maturity date:

        

Government- agencies commercial mortgage-backed securities

  43,821   43,096 

Government-sponsored agencies residential mortage-backed securities

  145,653   147,037 
  $273,014  $275,061 

 

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 $136,365,000 and $97,972,000 and estimated fair values totaling $137,510,000 and $101,685,000 at September 30, 2021 and December 31, 2020, respectively, were pledged to secure deposits and repurchase agreements. 

  

11
 

 
 

5. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

 

Outstanding loans are summarized below, in thousands:

 

  

September 30,

  

December 31,

 
  

2021

  

2020

 
         

Commercial

 $124,254  $117,192 

Agricultural

  134,638   72,911 

Real estate – residential

  10,139   11,399 

Real estate – commercial

  402,921   352,027 

Real estate – construction and land development

  39,085   25,306 

Equity lines of credit

  33,254   34,744 

Auto

  90,439   91,080 

Other

  4,213   4,587 

Total loans

  838,943   709,246 

Deferred loan (fees) costs, net

  (27)  758 

Allowance for loan losses

  (10,305)  (9,902)

Total net loans

 $828,611  $700,102 

 

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

 

  

September 30,

  

December 31,

 
  

2021

  

2020

 
         

Balance, beginning of period

 $9,902  $7,243 

Provision charged to operations

  875   3,175 

Losses charged to allowance

  (692)  (787)

Recoveries

  220   271 

Balance, end of period

 $10,305  $9,902 

 

The recorded investment in impaired loans totaled $4,950,000 and $2,214,000 at September 30, 2021 and December 31, 2020, respectively. The Company had specific allowances for loan losses of $29,000 on impaired loans of $276,000 at September 30, 2021 as compared to specific allowances for loan losses of $174,000 on impaired loans of $436,000 at December 31, 2020. The balance of impaired loans in which no specific reserves were required totaled $4,674,000 and $1,778,000 at September 30, 2021 and December 31, 2020, respectively. The average recorded investment in impaired loans for the nine months ended September 30, 2021 and September 30, 2020 was $2,610,000 and $2,111,000, respectively. The Company recognized  $45,000 in interest income for impaired loans during the nine months ended September 30, 2021 and 2020. No interest was recognized on nonaccrual loans accounted on a cash basis during the nine months ended September 30, 2021 and 2020.

 

Included in impaired loans are troubled debt restructurings. Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualifying loan modification or extension is exempt by law from classification as a Troubled Debt Restructuring ("TDR") pursuant to FASB ASC 340-10. Under Section 541 of the Consolidated Appropriations Act, 2021, Congress extended the Troubled Debt Restructurings relief for financial institutions through January 1, 2022.   In addition, FIL-36-2020 issued by the FDIC on April 7, 2020 provides more limited circumstances in which a loan modification or extension is not subject to classification as a TDR pursuant to FASB ASC 340-10.

 

The Company evaluates loan extensions or modifications not qualified under Section 4013 of the CARES Act or under FIL-36-2020 in accordance with FASB ASC 340-10 with respect to the classification of the loan as a TDR. Under ASC 340-10, if the Company grants a loan extension or modification to a borrower experiencing financial difficulties for other than an insignificant period of time that includes a below–market interest rate, principal forgiveness, payment forbearance or other concession intended to minimize the economic loss to the Company, the loan extension or loan modification is classified as a TDR. In cases where borrowers are granted new terms that provide for a reduction of either interest or principal then due and payable, management measures any impairment on the restructured loan in the same manner as for impaired loans as noted above. 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, 2021 and December 31, 2020 was $901,000 and $914,000, respectively. The Company has allocated  $29,000 and $31,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2021 and December 31, 2020. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at September 30, 2021 and December 31, 2020.

  

There were no troubled debt restructurings that occurred during the nine months ending September 30, 2021 or September 30, 2020. 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, 2021 and 2020, respectively.

 

 

12
 

 

 

 

At September 30, 2021 and December 31, 2020, nonaccrual loans totaled $4,873,000 and $2,536,000, respectively. Interest foregone on nonaccrual loans totaled$22,000 for the three months ended September 30, 2020. A net recovery of $4,000 in interest on nonacrual loans was recorded during the three months ended September 30, 2021.  Interest foregone on nonaccrual loans totaled $325,000 and $85,000 for the nine months ended September 30, 2021 and 2020, respectively. There were no loans past due 90 days or more and on accrual status at September 30, 2021 and December 31, 2020.

 

Salaries and employee benefits totaling $866,000 and $588,000 have been deferred as loan origination costs during the three months ended September 30, 2021 and 2020, respectively.  Salaries and employee, benefits totaling $2,379,000 and $1,788,000 have been deferred as loan origination costs during the nine months ended September 30, 2021 and 2020, 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.

 

Purchased Credit Impaired Loans (PCI):

 

Upon the acquisition of FRB the Company acquired loans, for which there was, at acquisition, evidence of deterioration of credit quality since origination and it was probable, at acquisition, that all contractually required payments would not be collected.  The carrying amount of those loans at September 30, 2021 was $507,000.  This amount reflects an outstanding  balance of $528,000 net of an unaccretable discount of $21,000.       

 

Accretable yield, or income expected to be collected, is as follows:           .

 

(in thousands)

 

 

 

Balance at December 31, 2020

 $- 

Additions

  33 

Removals 1

  (1)

Accretion

  (1)

Balance at September 30, 2021

 $31 

 

1 Represents the accretable difference that is relieved when a loan exits the PCI population due to payoff, full charge-off, or transfer to repossessed assets, etc.

 

 

13
 

 

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

 

September 30, 2021

 

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

 $124,115  $133,923  $10,043  $396,706  $39,013  $32,803  $736,603 

Special Mention

  139   182   -   1,211   -   -   1,532 

Substandard

  -   533   96   5,004   72   451   6,156 

Doubtful

  -   -   -   -   -   -   - 

Total

 $124,254  $134,638  $10,139  $402,921  $39,085  $33,254  $744,291 

 

 

December 31, 2020

 

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

 $116,824  $72,833  $11,208  $348,376  $25,229  $34,237  $608,707 

Special Mention

  211   78   -   2,779   -   -   3,068 

Substandard

  157   -   191   872   77   507   1,804 

Doubtful

  -   -   -   -   -   -   - 

Total

 $117,192  $72,911  $11,399  $352,027  $25,306  $34,744  $613,579 

 

 

  

Consumer Credit Exposure

  

Consumer Credit Exposure

 
  

Credit Risk Profile Based on Payment Activity

  

Credit Risk Profile Based on Payment Activity

 
  

September 30, 2021

  

December 31, 2020

 
  

Auto

  

Other

  

Total

  

Auto