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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, 2020

 

 

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  October 31, 2020. 5,181,032 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,

 
  

2020

  

2019

 
         

Assets

        

Cash and cash equivalents

 $175,531  $46,942 

Investment securities available for sale

  158,002   159,320 

Loans, less allowance for loan losses of $9,600 at September 30, 2020 and $7,243 at December 31, 2019

  737,650   616,036 

Real estate acquired through foreclosure

  763   707 

Premises and equipment, net

  14,047   14,629 

Bank owned life insurance

  13,444   13,184 

Accrued interest receivable and other assets

  16,512   14,373 

Total assets

 $1,115,949  $865,191 
         

Liabilities and Shareholders’ Equity

        
         

Deposits:

        

Non-interest bearing

 $462,351  $331,619 

Interest bearing

  515,178   415,705 

Total deposits

  977,529   747,324 

Repurchase agreements

  15,159   16,013 

Accrued interest payable and other liabilities

  6,968   7,039 
Federal Home Loan Bank advances  10,000   - 

Junior subordinated deferrable interest debentures

  10,310   10,310 

Total liabilities

  1,019,966   780,686 
         

Commitments and contingencies (Note 5)

          
         

Shareholders’ equity:

        

Common stock, no par value; 22,500,000 shares authorized; issued and outstanding – 5,181,032 shares at September 30, 2020 and 5,165,760 at December 31, 2019

  7,586   7,312 

Retained earnings

  84,094   75,144 

Accumulated other comprehensive income, net

  4,303   2,049 

Total shareholders’ equity

  95,983   84,505 

Total liabilities and shareholders’ equity

 $1,115,949  $865,191 

 

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,

 
  

2020

  

2019

  

2020

  

2019

 

Interest Income:

                

Interest and fees on loans

 $8,978  $8,761  $26,080  $25,655 

Interest on investment securities

  799   1,075   2,615   3,353 

Other

  36   171   160   445 

Total interest income

  9,813   10,007   28,855   29,453 

Interest Expense:

                

Interest on deposits

  190   304   648   923 

Interest on junior subordinated deferrable interest debentures

  86   131   296   406 

Other

  2   5   7   11 

Total interest expense

  278   440   951   1,340 

Net interest income before provision for loan losses

  9,535   9,567   27,904   28,113 

Provision for Loan Losses

  800   300   2,800   900 

Net interest income after provision for loan losses

  8,735   9,267   25,104   27,213 

Non-Interest Income:

                

Service charges

  547   676   1,760   1,996 

Interchange revenue

  799   642   1,894   1,739 

Gain on sale of loans

  317   313   945   788 
Gain on sale of investments  -   -   -   20 

Other

  498   515   1,710   1,578 

Total non-interest income

  2,161   2,146   6,309   6,121 

Non-Interest Expenses:

                

Salaries and employee benefits

  3,125   3,439   9,571   9,743 

Occupancy and equipment

  840   799   2,542   2,482 

Other

  1,839   1,637   5,257   5,077 

Total non-interest expenses

  5,804   5,875   17,370   17,302 

Income before provision for income taxes

  5,092   5,538   14,043   16,032 

Provision for Income Taxes

  1,400   1,536   3,850   4,402 

Net income

 $3,692  $4,002  $10,193  $11,630 
                 

Basic earnings per share

 $0.71  $0.78  $1.97  $2.26 

Diluted earnings per share

 $0.71  $0.77  $1.95  $2.22 

 

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,

 
  

2020

  

2019

  

2020

  

2019

 
                 

Net income

 $3,692  $4,002  $10,193  $11,630 

Other comprehensive income:

                

Change in net unrealized gain on securities

  (184)  979   3,243   5,912 
Change in unrealized loss on cash flow hedge  54   -   (43)  - 

Reclassification adjustments for net gains included in net income

  -   -   -   (20)

Net unrealized holding (loss) gain

  (130)  979   3,200   5,892 

Related tax effect:

                

Change in net unrealized gain

  54   (289)  (959)  (1,748)
Change in unrealized loss on cash flow hedge  (16)  -   13   - 

Reclassification of net gains included in net income

  -   -   -   6 

Income tax effect

  38   (289)  (946)  (1,742)

Other comprehensive (loss) income

  (92)  690   2,254   4,150 

Total comprehensive income

 $3,600  $4,692  $12,447  $15,780 

    

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, 2018

  5,137,476  $6,944  $62,005  $(2,017) $66,932 

Net Income

         11,630      11,630 

Other comprehensive income

            4,150   4,150 
Cash dividends on common stock         (1,186)     (1,186)

Exercise of stock options and tax effect

  22,084   103         103 

Stock-based compensation expense

      150         150 

Balance, September 30, 2019

  5,159,560  $7,197  $72,449  $2,133  $81,779 
                     

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 

 

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,

 
  

2020

  

2019

 

Cash Flows from Operating Activities:

        

Net income

 $10,193  $11,630 

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

        

Provision for loan losses

  2,800   900 

Change in deferred loan origination costs/fees, net

  3,809   (553)

Depreciation and amortization

  1,077   1,065 

Stock-based compensation expense

  195   150 
Gain on sale of investments  -   (20)

Amortization of investment security premiums

  776   598 

Gain (loss) on sale of OREO and other vehicles

  11   (14)

Gain on sale of loans held for sale

  (945)  (788)
Gain on sale of building  (218)  - 

Loans originated for sale

  (18,647)  (16,766)

Proceeds from loan sales

  21,283   17,887 

Earnings on bank-owned life insurance

  (260)  (246)

Increase in accrued interest receivable and other assets

  (2,959)  (297)

Decrease in accrued interest payable and other liabilities

  (114)  (643)

Net cash provided by operating activities

  17,001   12,903 
         

Cash Flows from Investing Activities:

        

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

  30,247   16,946 

Proceeds from matured and called available-for-sale securities

  380   - 

Purchases of available-for-sale securities

  (26,790)  (21,471)
Proceeds from sale of available-for-sale securities  -   11,379 
Purchase of FHLB stock  (150)  - 

Net increase in loans

  (130,637)  (36,881)
Proceeds from sale of OREO  -   85 

Proceeds from sale of other vehicles

  370   420 
Proceed from sale of building  1,348   - 

Purchase of premises and equipment

  (1,367)  (1,053)

Net cash used in investing activities

  (126,599)  (30,575)

 

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,

 
  

2020

  

2019

 

Cash Flows from Financing Activities:

        

Net increase in demand, interest bearing and savings deposits

 $229,521  $64,328 

Net increase (decrease) in time deposits

  684   (14,710)

Net (decrease) increase in securities sold under agreements to repurchase

  (854)  331 
Cash dividends paid on common stock  (1,243)  (1,186)
Proceeds from FHLB advances  10,000   - 

Proceeds from exercise of stock options

  79   103 

Net cash provided by financing activities

  238,187   48,866 

Increase in cash and cash equivalents

  128,589   31,194 

Cash and Cash Equivalents at Beginning of Year

  46,942   46,686 

Cash and Cash Equivalents at End of Period

 $175,531  $77,880 
         

Supplemental Disclosure of Cash Flow Information:

        

Cash paid during the period for:

        

Interest expense

 $976  $1,334 

Income taxes

 $3,922  $4,409 
         

Non-Cash Investing Activities:

        

Real estate and vehicles acquired through foreclosure

 $381  $409 
         

Non-Cash Financing Activities:

        

Common stock retired in connection with the exercise of stock options

 $46  $42 

 

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 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 $356,000 and Trust II of $181,000 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, 2020 and the results of its operations and its cash flows for the three- and nine-month periods ended September 30, 2020 and 2019. Our condensed consolidated balance sheet at  December 31, 2019 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 2019 Annual Report to Shareholders on Form 10-K. The results of operations for the three- and nine-month periods ended September 30, 2020 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.

 

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

 

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.  As ASU No. 2018-13 only revises disclosure requirements, it 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. 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 2016-13 and have engaged the software vendor to assist in the transition to 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

 
 
 

3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

 

The amortized cost and estimated fair value of investment securities at September 30, 2020 and December 31, 2019 consisted of the following, in thousands:

 

Available-for-Sale

 

September 30, 2020

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Debt securities:

                

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

 $105,925  $4,086  $(2) $110,009 
U.S. Government-agencies collateralized by mortgage obligations-commercial  5,400   16   -   5,416 

Obligations of states and political subdivisions

  40,525   2,110   (58)  42,577 
  $151,850  $6,212  $(60) $158,002 

 

Unrealized gains on available-for-sale investment securities totaling $6,152,000 were recorded, net of $1,818,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at September 30, 2020No securities were sold during the nine months ended September 30, 2020.

 

Available-for-Sale

 

December 31, 2019

 
      

Gross

  

Gross

     
  

Amortized

  

Unrealized

  

Unrealized

  

Fair

 
  

Cost

  

Gains

  

Losses

  

Value

 

Debt securities:

                

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

 $123,940  $1,924  $(186) $125,678 

Obligations of states and political subdivisions

  32,470   1,201   (29)  33,642 
  $156,410  $3,125  $(215) $159,320 

 

Unrealized gains on available-for-sale investment securities totaling $2,910,000 were recorded, net of $861,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at December 31, 2019. During the three and nine months ended September 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 $39,000No 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, 2020 and twelve months ended December 31, 2019. There were no securities classified as held-to-maturity at September 30, 2020 or December 31, 2019.

 

10

 
 

Investment securities with unrealized losses at September 30, 2020 and December 31, 2019 are summarized and classified according to the duration of the loss period as follows, in thousands:

 

September 30, 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

 $3,849  $2  $-  $-  $3,849  $2 
U.S. Government-agencies collateralized by mortgage obligations-commercial  -   -   -   -   -   - 
Obligations of states and political subdivisions  3,368   58   -   -   3,368   58 
  $7,217  $60  $-  $-  $7,217  $60 

 

December 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

 $10,319  $31  $19,733  $155  $30,052  $186 

Obligations of states and political subdivisions

  2,965   29   -   -   2,965   29 
  $13,284  $60  $19,733  $155  $33,017  $215 

 

At September 30, 2020, the Company held 206 securities of which 9 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 206 securities, 100 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations, 2 are U.S. Government- agencies collateralized by commercial mortgage obligations  and 104 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, 2020, 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, 2020 are other than temporarily impaired.

 

The amortized cost and estimated fair value of investment securities at September 30, 2020 by contractual maturity are shown below, in thousands.

 

  

Amortized Cost

  

Estimated Fair Value

 

Within one year

 $120  $120 

After one year through five years

  3,903   4,076 

After five years through ten years

  5,552   5,893 

After ten years

  30,950   32,488 

Investment securities not due at a single maturity date:

        
Government- agencies commercial mortgage-backed securities  5,400   5,416 

Government-sponsored agencies residential mortage-backed securities

  105,925   110,009 
  $151,850  $158,002 

 

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 $104,625,000 and $83,596,000 and estimated fair values totaling $108,649,000 and $84,625,000 at September 30, 2020 and December 31, 2019, 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:

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 
         

Commercial

 $167,770  $47,892 

Agricultural

  74,209   78,785 

Real estate – residential

  12,848   14,530 

Real estate – commercial

  333,768   316,986 

Real estate – construction and land development

  27,886   31,181 

Equity lines of credit

  34,894   35,471 

Auto

  92,248   90,310 

Other

  4,262   4,563 

Total loans

  747,885   619,718 

Deferred loan (fees) costs, net

  (635)  3,561 

Allowance for loan losses

  (9,600)  (7,243)

Total net loans

 $737,650  $616,036 

 

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

 

  

September 30,

  

December 31,

 
  

2020

  

2019

 
         

Balance, beginning of period

 $7,243  $6,958 

Provision charged to operations

  2,800   1,500 

Losses charged to allowance

  (668)  (1,521)

Recoveries

  225   306 

Balance, end of period

 $9,600  $7,243 

 

The recorded investment in impaired loans totaled $2,083,000 and $2,244,000 at September 30, 2020 and December 31, 2019, respectively. The Company had specific allowances for loan losses of $153,000 on impaired loans of $535,000 at September 30, 2020 as compared to specific allowances for loan losses of $154,000 on impaired loans of $539,000 at December 31, 2019. The balance of impaired loans in which no specific reserves were required totaled $1,548,000 and $1,705,000 at September 30, 2020 and December 31, 2019, respectively. The average recorded investment in impaired loans for the nine months ended September 30, 2020 and September 30, 2019 was $2,111,000 and $1,771,000, respectively. The Company recognized $45,000 in interest income for impaired loans during the nine months ended September 30, 2020 and 2019. No interest was recognized on nonaccrual loans accounted on a cash basis during the nine months ended September 30, 2020 and 2019.

 

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. 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, 2020 and December 31, 2019 was $1,002,000 and $1,016,000, respectively. The Company has allocated  $32,000 and $33,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2020 and December 31, 2019. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at September 30, 2020 and December 31, 2019.

  

There were no troubled debt restructurings that occurred during the nine months ending September 30, 2020 or September 30, 2019.

 

12

 
 

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, 2020 and 2019, respectively.

 

At September 30, 2020 and December 31, 2019, nonaccrual loans totaled $2,445,000 and $2,050,000, respectively. Interest foregone on nonaccrual loans totaled $85,000 and $116,000 for the nine months ended September 30, 2020 and 2019, respectively. Interest foregone on nonaccrual loans totaled $22,000 and $47,000 for the three and nine months ended September 30, 2020 and 2019, respectively. There were no loans past due 90 days or more and on accrual status at September 30, 2020 and December 31, 2019.

 

Salaries and employee benefits totaling $1,788,000 and $1,716,000 have been deferred as loan origination costs during the nine months ended September 30, 2020 and 2019, respectively. Salaries and employee benefits totaling $588,000 and $511,000 have been deferred as loan origination costs during the three months ended September 30, 2020 and 2019, 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:

 

September 30, 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

 $167,515  $73,852  $12,644  $332,249  $27,808  $34,378  $648,446 

Special Mention

  252   357   -   653   -   -   1,262 

Substandard

  3   -   204   866   78   516   1,667 

Doubtful

  -   -   -   -   -   -   - 

Total

 $167,770  $74,209  $12,848  $333,768  $27,886  $34,894  $651,375 

 



 

December 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

 $47,334  $76,620  $14,253  $309,785  $31,097  $34,855  $513,944 

Special Mention

  478   2,165   -   4,954   -   -   7,597 

Substandard

  80   -   277   2,247   84   616   3,304 

Doubtful

  -   -   -   -   -   -   - 

Total

 $47,892  $78,785  $14,530  $316,986  $31,181  $35,471  $524,845 

 



 

  

Consumer Credit Exposure

  

Consumer Credit Exposure

 
  

Credit Risk Profile Based on Payment Activity

  

Credit Risk Profile Based on Payment Activity

 
  

September 30, 2020

  

December 31, 2019

 
  

Auto

  

Other

  

Total

  

Auto

  

Other

  

Total

 

Grade:

                        

Performing

 $91,507  $4,225  $95,732  $90,128  $4,559  $94,687 

Non-performing

  741   37   778   182   4   186 

Total

 $92,248  $4,262  $96,510  $90,310  $4,563  $94,873 

 

14

 
 

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

 

Nine Months Ended September 30, 2020:

 

Commercial

  

Agricultural

  

Real Estate-Residential

  

Real Estate-Commercial

  

Real Estate-Construction

  

Equity LOC

  

Auto

  

Other

  

Total

 

Allowance for Loan Losses

                                    

Beginning balance

 $617  $653  $163  $3,426  $481  $393  $1,409  $101  $7,243 

Charge-offs

  (131)  -   -   -   -   -   (457)  (80)  (668)

Recoveries

  21   -   3   6   -   3   185   7   225 

Provision

  450   93   8   1,345   87   94   642   81   2,800 

Ending balance

 $957  $746  $174  $4,777  $568  $490  $1,779  $109  $9,600 

Three Months Ended September 30, 2020:

                                    

Beginning balance

 $788  $691  $173  $4,405  $476  $474  $1,712  $116  $