PLUMAS BANCORP - Quarter Report: 2019 September (Form 10-Q)

 

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, 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 October 25, 2019. 5,159,560 shares.

 

 

 

		September 30, 2019				December 31, 2018
Assets
Cash and cash equivalents		$	77,880			$	46,686
Investment securities available for sale			169,516				171,507
Loans, less allowance for loan losses of $7,226 at September 30, 2019 and $6,958 at December 31, 2018			598,001				562,498
Real estate acquired through foreclosure			1,094				1,170
Premises and equipment, net			14,554				14,287
Bank owned life insurance			13,102				12,856
Accrued interest receivable and other assets			14,404				15,394
Total assets		$	888,551			$	824,398
Liabilities and Shareholders’ Equity
Deposits:
Non-interest bearing		$	353,203			$	304,039
Interest bearing			422,980				422,526
Total deposits			776,183				726,565
Repurchase agreements			13,389				13,058
Accrued interest payable and other liabilities			6,890				7,533
Junior subordinated deferrable interest debentures			10,310				10,310
Total liabilities			806,772				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 September 30, 2019 and 5,137,476 at December 31, 2018			7,197				6,944
Retained earnings			72,449				62,005
Accumulated other comprehensive income (loss), net			2,133				(2,017	)
Total shareholders’ equity			81,779				66,932
Total liabilities and shareholders’ equity		$	888,551			$	824,398

 

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		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2019				2018				2019				2018
Interest Income:
Interest and fees on loans		$	8,761			$	7,693			$	25,655			$	21,680
Interest on investment securities			1,075				1,037				3,353				2,873
Other			171				113				445				402
Total interest income			10,007				8,843				29,453				24,955
Interest Expense:
Interest on deposits			304				159				923				462
Interest on junior subordinated deferrable interest debentures			131				131				406				370
Other			5				2				11				5
Total interest expense			440				292				1,340				837
Net interest income before provision for loan losses			9,567				8,551				28,113				24,118
Provision for Loan Losses			300				300				900				800
Net interest income after provision for loan losses			9,267				8,251				27,213				23,318
Non-Interest Income:
Service charges			676				628				1,996				1,919
Interchange revenue			642				572				1,739				1,619
Gain on sale of loans			313				564				788				1,763
Gain on equity securities with no readily determinable fair value			-				-				-				209
Gain (loss) on sale of investments			-				-				20				(8	)
Other			515				520				1,578				1,538
Total non-interest income			2,146				2,284				6,121				7,040
Non-Interest Expenses:
Salaries and employee benefits			3,439				3,049				9,743				9,086
Occupancy and equipment			799				721				2,482				2,127
Other			1,637				1,658				5,077				4,893
Total non-interest expenses			5,875				5,428				17,302				16,106
Income before provision for income taxes			5,538				5,107				16,032				14,252
Provision for Income Taxes			1,536				1,411				4,402				3,830
Net income		$	4,002			$	3,696			$	11,630			$	10,422
Basic earnings per share		$	0.78			$	0.72			$	2.26			$	2.04
Diluted earnings per share		$	0.77			$	0.71			$	2.22			$	2.00

 

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		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2019				2018				2019				2018
Net income		$	4,002			$	3,696			$	11,630			$	10,422
Other comprehensive income:
Change in net unrealized gain/loss			979				(1,285	)			5,912				(4,657	)
Reclassification adjustments for net (gains) losses included in net income			-				-				(20	)			8
Net unrealized holding gain (loss)			979				(1,285	)			5,892				(4,649	)
Related tax effect:
Change in net unrealized gain/loss			(289	)			380				(1,748	)			1,376
Reclassification of net gains (losses) included in net income			-				-				6				(2	)
Income tax effect			(289	)			380				(1,742	)			1,374
Other comprehensive income (loss)			690				(905	)			4,150				(3,275	)
Total comprehensive income		$	4,692			$	2,791			$	15,780			$	7,147

 

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		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											10,422								10,422
Other comprehensive loss															(3,275	)			(3,275	)
Cash dividends on common stock											(920	)							(920	)
Exercise of stock options and tax effect			60,504				291												291
Stock-based compensation expense							148												148
Balance, September 30, 2018			5,125,476			$	6,854			$	59,357			$	(3,845	)		$	62,366
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

 

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		For the Nine Months
		Ended September 30,
		2019				2018
Cash Flows from Operating Activities:
Net income		$	11,630			$	10,422
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			900				800
Change in deferred loan origination costs/fees, net			(553	)			(1,232	)
Depreciation and amortization			1,065				749
Stock-based compensation expense			150				148
(Gain) loss on sale of investments			(20	)			8
Amortization of investment security premiums			598				518
Gain on equity securities with no readily determinable fair value			-				(209	)
Gain on sale of OREO and other vehicles			(14	)			(80	)
Gain on sale of loans held for sale			(788	)			(1,763	)
Loans originated for sale			(16,766	)			(34,289	)
Proceeds from loan sales			17,887				37,327
Provision from change in OREO valuation			-				38
Earnings on bank-owned life insurance			(246	)			(246	)
Increase in accrued interest receivable and other assets			(297	)			(74	)
(Decrease) increase in accrued interest payable and other liabilities			(643	)			334
Net cash provided by operating activities			12,903				12,451
Cash Flows from Investing Activities:
Proceeds from principal repayments from available-for-sale government-sponsored mortgage-backed securities			16,946				11,349
Purchases of available-for-sale securities			(21,471	)			(40,286	)
Proceeds from sale of available-for-sale securities			11,379				4,157
Net increase in loans			(36,881	)			(55,871	)
Proceeds from Bank owned life insurance			-				338
Proceeds from sale of OREO			85				568
Proceeds from sale of other vehicles			420				400
Purchase of premises and equipment			(1,053	)			(3,079	)
Net cash used in investing activities			(30,575	)			(82,424	)

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		For the Nine Months
		Ended September 30,
		2019				2018
Cash Flows from Financing Activities:
Net increase in demand, interest bearing and savings deposits		$	64,328			$	26,307
Net decrease in time deposits			(14,710	)			(6,122	)
Net increase (decrease) in securities sold under agreements to repurchase			331				(1,864	)
Cash dividends paid on common stock			(1,186	)			(920	)
Proceeds from exercise of stock options			103				291
Net cash provided by financing activities			48,866				17,692
Increase (decrease) in cash and cash equivalents			31,194				(52,281	)
Cash and Cash Equivalents at Beginning of Year			46,686				87,537
Cash and Cash Equivalents at End of Period		$	77,880			$	35,256
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest expense		$	1,334			$	842
Income taxes		$	4,409			$	3,336
Non-Cash Investing Activities:
Real estate and vehicles acquired through foreclosure		$	409			$	646
Non-Cash Financing Activities:
Common stock retired in connection with the exercise of stock options		$	42			$	29

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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 $347,000 and Trust II of $178,000 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, 2019 and the results of its operations and its cash flows for the three-month and nine-month periods ended September 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 nine-month periods ended September 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.

 

 

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.

 

 

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. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact.

 

 

On 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.

 

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.

 

 

 

3.   INVESTMENT SECURITIES AVAILABLE FOR SALE

 

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

 

 

Net unrealized gain on available-for-sale investment securities totaling $3,028,000 were recorded, net of $895,000 in tax benefits, as accumulated other comprehensive income within shareholders' equity at September 30, 2019. During the 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 $39,000. No securities were sold during the three months ended September 30, 2019.

 

 

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 nine months ended September 30, 2018 the Company sold eighteen available-for-sale investment securities for total proceeds of $4,157,000 recording a $8,000 loss on sale. The Company realized a gain on sale from eight of these securities totaling $4,000 and a loss on sale on ten securities of $12,000. No securities were sold during the three months ended September 30, 2018. 

 

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

 

 

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

 

 

 

At September 30, 2019, the Company held 191 securities of which 50 were in a loss position. Of the securities in a loss position, 27 were in a loss position for less than twelve months. Of the 191 securities, 104 are U.S. Government-sponsored agencies collateralized by residential mortgage obligations and 87 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, 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 September 30, 2019 are other than temporarily impaired.

 

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

 

 

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 $84,586,000 and $92,166,000 and estimated fair values totaling $85,280,000 and $90,122,000 at September 30, 2019 and December 31, 2018, respectively, were pledged to secure deposits and repurchase agreements. 

  

 

 

4. LOANS AND THE ALLOWANCE FOR LOAN LOSSES

 

Outstanding loans are summarized below, in thousands:

 

 

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

 

 

The recorded investment in impaired loans totaled $2,642,000 and $1,275,000 at September 30, 2019 and December 31, 2018, respectively. The Company had specific allowances for loan losses of $235,000 on impaired loans of $633,000 at September 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 $2,009,000 and $851,000 at September 30, 2019 and December 31, 2018, respectively. The average recorded investment in impaired loans for the nine months ended September 30, 2019 and September 30, 2018 was $1,771,000 and $1,738,000, respectively. The Company recognized $45,000 and $56,000 in interest income for impaired loans during the nine months ended September 30, 2019 and 2018, respectively. No interest was recognized on nonaccrual loans accounted for on a cash basis during the nine months ended September 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 September 30, 2019 and December 31, 2018 was $1,046,000 and $1,080,000, respectively. The Company has allocated $34,000 and $53,000 of specific reserves on loans to customers whose loan terms have been modified in troubled debt restructurings as of September 30, 2019 and December 31, 2018, respectively. The Company has not committed to lend additional amounts on loans classified as troubled debt restructurings at September 30, 2019 and December 31, 2018.

  

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

 

 

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, 2019 and 2018, respectively.

 

At September 30, 2019 and December 31, 2018, nonaccrual loans totaled $2,598,000 and $1,117,000, respectively. Interest foregone on nonaccrual loans totaled $116,000 and $36,000 for the nine months ended September 30, 2019 and 2018, respectively. Interest foregone on nonaccrual loans totaled $47,000 and $7,000 for the three months ended September 30, 2019 and 2018, respectively. There were no loans past due 90 days or more and on accrual status at September 30, 2019 and December 31, 2018.

 

Salaries and employee benefits totaling $1,716,000 and $1,937,000 have been deferred as loan origination costs during the nine months ended September 30, 2019 and 2018, respectively. Salaries and employee benefits totaling $511,000 and $703,000 have been deferred as loan origination costs during the three months ended September 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.

 

 

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

 

 

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

 

 

 

 

 

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

 

 

 

 

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

 

 

 

The following tables show information related to impaired loans at December 31, 2018, in thousands: