ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Quarterly Report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, (1) significant increases in competitive pressures in the financial services industry; (2) changes in the interest rate environment resulting in reduced margins; (3) general economic conditions, either nationally or regionally, maybe less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in regulatory environment; (5) loss of key personnel; (6) fluctuations in the real estate market; (7) changes in business conditions and inflation; (8) operational risks including data processing systems failures or fraud; and (9) changes in securities markets. Therefore, the information set forth herein should be carefully considered when evaluating the business prospects of Plumas Bancorp (the “Company”).
When the Company uses in this Quarterly Report the words “anticipate”, “estimate”, “expect”, “project”, “intend”, “commit”, “believe” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and stockholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
INTRODUCTION
The following discussion and analysis sets forth certain statistical information relating to the Company as of March 31, 2016 and December 31, 2015 and for the three month periods ended March 31, 2016 and 2015. This discussion should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes thereto included in Plumas Bancorp’s Annual Report filed on Form 10-K for the year ended December 31, 2015.
Plumas Bancorp trades on The NASDAQ Capital Market under the ticker symbol “PLBC”.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes to the Company’s critical accounting policies from those disclosed in the Company’s 2015 Annual Report to Shareholders on Form 10-K.
This discussion should be read in conjunction with our unaudited condensed consolidated financial statements, including the notes thereto, appearing elsewhere in this report.
OVERVIEW
Net income increased by $358 thousand from $1.2 million during the first quarter of 2015 to $1.6 million during the current quarter. Earnings benefited from increases of $761 thousand in net interest income and decreases of $100 thousand in the provision for loan losses and $72 thousand in non-interest expense. Partially offsetting these items was a decline in non-interest income of $392 thousand and an increase in income tax expense of $183 thousand. Diluted earnings per share increased to $0.31 during the three months ended March 31, 2016 compared to $0.24 during the first quarter of 2015.
Total assets at March 31, 2016 were $595 million, a decrease of $4.0 million from $599 million at December 31, 2015. This decrease includes declines in cash and cash equivalents of $12.4 million and other assets of $2.7 million. These were partially offset by increases in net loans of $8.1 million and investment securities of $2.9 million. Net loan balances increased from $397 million at December 31, 2015 to $405 million at March 31, 2016. Cash and cash equivalents totaled $55.8 million at March 31, 2016.
Deposits totaled $525.2 million at March 31, 2016, a decrease of $2.1 million from $527.3 million at December 31, 2015. Declines included $7.5 million in non-interest bearing demand deposits and $0.9 million in time deposits. These were mostly offset by increases of $0.3 million in interest bearing transaction accounts (NOW) accounts and $6.0 million in savings and money market accounts. Shareholders’ equity increased by $2.5 million from $42.5 million at December 31, 2015 to $45.0 million at March 31, 2016.
The annualized return on average assets was 1.06% for the three months ended March 31, 2016 up from 0.90% for the three months ended March 31, 2015. The annualized return on average common equity increased from 13.0% during the first quarter of 2015 to 14.3% during the current quarter.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2016
Net interest income before provision for loan losses.
Net interest income, on a nontax-equivalent basis, was $5.7 million for the three months ended March 31, 2016, an increase of $761 thousand, or 15%, from $5.0 million for the same period in 2015. The increase in net interest income includes an increase of $624 thousand in interest income and a decline of $137 thousand in interest expense. Net interest margin for the three months ended March 31, 2016 increased 14 basis points, or 3%, to 4.20%, up from 4.06% for the same period in 2015.
Interest income increased by $624 thousand, or 12%, to $6.0 million for the three months ended March 31, 2016, up from $5.4 million during the same period in 2015. Interest and fees on loans increased $512 thousand to $5.4 million for the three months ended March 31, 2016 as compared to $4.9 million during the first quarter of 2015 mostly related to an increase in average loan balances. The Company’s average loan balances were $402 million for the three months ended March 31, 2016, up $31.1 million, or 8%, from $371 million for the same period in 2015. The average yield on loans was 5.45% during the first quarter of 2016 up from 5.40% for same quarter in 2015.
The following table compares loan balances by type at March 31, 2016 and 2015.
(dollars in thousands)
|
|
Balance at End of Period
|
|
|
Percent of Loans in Each Category to Total Loans
|
|
|
Balance at End of Period
|
|
|
Percent of Loans in Each Category to Total Loans
|
|
|
|
03
/3
1
/1
6
|
|
|
03
/3
1
/1
6
|
|
|
03
/3
1
/1
5
|
|
|
03
/3
1
/1
5
|
|
Commercial
|
|
$
|
37,346
|
|
|
|
9.1
|
%
|
|
$
|
32,193
|
|
|
|
8.4
|
%
|
Agricultural
|
|
|
38,730
|
|
|
|
9.5
|
%
|
|
|
34,640
|
|
|
|
9.0
|
%
|
Real estate - residential
|
|
|
24,750
|
|
|
|
6.0
|
%
|
|
|
28,813
|
|
|
|
7.5
|
%
|
Real estate – commercial
|
|
|
201,593
|
|
|
|
49.3
|
%
|
|
|
174,508
|
|
|
|
45.6
|
%
|
Real estate – construction & land
|
|
|
15,758
|
|
|
|
3.9
|
%
|
|
|
24,936
|
|
|
|
6.5
|
%
|
Equity Lines of Credit
|
|
|
38,509
|
|
|
|
9.4
|
%
|
|
|
38,251
|
|
|
|
10.0
|
%
|
Auto
|
|
|
49,173
|
|
|
|
12.0
|
%
|
|
|
46,571
|
|
|
|
12.2
|
%
|
Other
|
|
|
3,288
|
|
|
|
0.8
|
%
|
|
|
3,124
|
|
|
|
0.8
|
%
|
Total Gross Loans
|
|
$
|
409,147
|
|
|
|
100
|
%
|
|
$
|
383,036
|
|
|
|
100
|
%
|
Interest on investment securities increased by $74 thousand as a result of an increase in yield and growth in the investment portfolio. The average yield on investment securities increased by 12 basis points from 1.81% during the first quarter of 2015 to 1.93% during the three months ended March 31, 2016. The average balance in investment securities increased by $9.0 million from $89.3 million during the first quarter of 2015 to $98.3 million during the current quarter. During the current quarter yield benefited from an increase in municipal securities as a percentage of total securities and a reduction in securities of U.S. Government-sponsored agencies. At March 31, 2016 municipal securities totaled $24.5 million or 25% of the investment portfolio compared to $13.5 million or 15% of the portfolio at March 31, 2015. U.S. Government-sponsored agencies were $3.0 million at March 31, 2016 and $6.5 million at March 31, 2015.
Interest expense on deposits increased by $8 thousand to $132 thousand for the three months ended March 31, 2016, up from $124 thousand during the 2015 quarter. This increase mostly relates to increases in the average balance of NOW, Money Market and Savings accounts partially offset by a decline in average balance and rate paid on time deposits.
Interest expense on other interest-bearing liabilities decreased by $145 thousand from $275 thousand during the three months ended March 31, 2015 to $130 thousand during the current quarter related to the redemption of the Company’s subordinated debenture on April 16, 2015. Interest expense related to the subordinated debenture decreased by $188 thousand. Partially offsetting this savings was an increase in interest expense on the Company’s note payable of $35 thousand to $46 thousand during the three months ended March 31, 2016. This increase is related to an increase in average borrowings on this note from $1 million during the first quarter of 2015 to $4.9 million during the three months ended March 31, 2016. The average rate paid on the note payable was 3.80% during the three months ended March 31, 2016 and 4.46% during the first quarter of 2015.
Interest expense on junior subordinated debentures, which increased by $9 thousand to $83 thousand, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate.
The following table presents for the three-month periods indicated the distribution of consolidated average assets, liabilities and shareholders' equity. It also presents the amounts of interest income from interest-earning assets and the resultant annualized yields, as well as the amounts of interest expense on interest-bearing liabilities and the resultant cost expressed in both dollars and annualized rate percentages. Average balances are based on daily averages. Nonaccrual loans are included in the calculation of average loans while nonaccrued interest
thereon is excluded from the computation of yields earned:
|
|
For the Three Months Ended March 31, 2016
|
|
|
For the Three Months Ended March 31, 2015
|
|
|
|
Average Balance
(in thousands)
|
|
|
Interest
(in thousands)
|
|
|
Yield/
Rate
|
|
|
Average Balance
(in thousands)
|
|
|
Interest
(in thousands)
|
|
|
Yield/
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) (2) (3)
|
|
$
|
402,400
|
|
|
$
|
5,455
|
|
|
|
5.45
|
%
|
|
$
|
371,275
|
|
|
$
|
4,943
|
|
|
|
5.40
|
%
|
Investment securities (1)
|
|
|
98,258
|
|
|
|
472
|
|
|
|
1.93
|
%
|
|
|
89,299
|
|
|
|
398
|
|
|
|
1.81
|
%
|
Interest-bearing deposits
|
|
|
48,348
|
|
|
|
73
|
|
|
|
0.61
|
%
|
|
|
36,757
|
|
|
|
35
|
|
|
|
0.39
|
%
|
Total interest-earning assets
|
|
|
549,006
|
|
|
|
6,000
|
|
|
|
4.40
|
%
|
|
|
497,331
|
|
|
|
5,376
|
|
|
|
4.38
|
%
|
Cash and due from banks
|
|
|
15,753
|
|
|
|
|
|
|
|
|
|
|
|
16,406
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
32,724
|
|
|
|
|
|
|
|
|
|
|
|
33,281
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
597,483
|
|
|
|
|
|
|
|
|
|
|
$
|
547,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
$
|
91,273
|
|
|
|
21
|
|
|
|
0.09
|
%
|
|
$
|
84,479
|
|
|
|
19
|
|
|
|
0.09
|
%
|
Money market deposits
|
|
|
51,089
|
|
|
|
18
|
|
|
|
0.14
|
%
|
|
|
45,017
|
|
|
|
16
|
|
|
|
0.14
|
%
|
Savings deposits
|
|
|
127,748
|
|
|
|
52
|
|
|
|
0.16
|
%
|
|
|
108,867
|
|
|
|
43
|
|
|
|
0.16
|
%
|
Time deposits
|
|
|
51,870
|
|
|
|
41
|
|
|
|
0.32
|
%
|
|
|
55,882
|
|
|
|
46
|
|
|
|
0.33
|
%
|
Total deposits
|
|
|
321,980
|
|
|
|
132
|
|
|
|
0.16
|
%
|
|
|
294,245
|
|
|
|
124
|
|
|
|
0.17
|
%
|
Note payable
|
|
|
4,872
|
|
|
|
46
|
|
|
|
3.80
|
%
|
|
|
1,000
|
|
|
|
11
|
|
|
|
4.46
|
%
|
Subordinated debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
|
|
7,470
|
|
|
|
188
|
|
|
|
10.21
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
83
|
|
|
|
3.24
|
%
|
|
|
10,310
|
|
|
|
74
|
|
|
|
2.91
|
%
|
Other interest-bearing liabilities
|
|
|
6,332
|
|
|
|
1
|
|
|
|
0.06
|
%
|
|
|
9,000
|
|
|
|
2
|
|
|
|
0.09
|
%
|
Total interest-bearing liabilities
|
|
|
343,494
|
|
|
|
262
|
|
|
|
0.31
|
%
|
|
|
322,025
|
|
|
|
399
|
|
|
|
0.50
|
%
|
Non-interest bearing deposits
|
|
|
203,452
|
|
|
|
|
|
|
|
|
|
|
|
180,979
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,360
|
|
|
|
|
|
|
|
|
|
|
|
6,244
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
44,177
|
|
|
|
|
|
|
|
|
|
|
|
37,770
|
|
|
|
|
|
|
|
|
|
Total liabilities & equity
|
|
$
|
597,483
|
|
|
|
|
|
|
|
|
|
|
$
|
547,018
|
|
|
|
|
|
|
|
|
|
Cost of funding interest-earning assets (4)
|
|
|
|
|
|
|
|
|
|
|
0.20
|
%
|
|
|
|
|
|
|
|
|
|
|
0.32
|
%
|
Net interest income and margin (5)
|
|
|
|
|
|
$
|
5,738
|
|
|
|
4.20
|
%
|
|
|
|
|
|
$
|
4,977
|
|
|
|
4.06
|
%
|
(1)
|
Not computed on a tax-equivalent basis.
|
(2)
|
Average nonaccrual loan balances of $4.6 million for 2016 and $6.3 million for 2015 are included in average loan balances for computational purposes.
|
(3)
|
Net costs included in loan interest income for the three-month periods ended March 31, 2016 and 2015 were $133,000 and $150,000, respectively.
|
(4)
|
Total annualized interest expense divided by the average balance of total earning assets.
|
(5)
|
Annualized net interest income divided by the average balance of total earning assets.
|
The following table sets forth changes in interest income and interest expense for the three-month periods indicated and the amount of change attributable to variances in volume, rates and the combination of volume and rates based on the relative changes of volume and rates:
|
|
2016 over 2015 change in net interest income
for the three months ended March 31
|
|
|
|
(in thousands)
|
|
|
|
Volume (1)
|
|
|
Rate (2)
|
|
|
Mix (3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
418
|
|
|
$
|
49
|
|
|
$
|
45
|
|
|
$
|
512
|
|
Investment securities
|
|
|
40
|
|
|
|
28
|
|
|
|
6
|
|
|
|
74
|
|
Interest bearing deposits
|
|
|
11
|
|
|
|
20
|
|
|
|
7
|
|
|
|
38
|
|
Total interest income
|
|
|
469
|
|
|
|
97
|
|
|
|
58
|
|
|
|
624
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Money market deposits
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Savings deposits
|
|
|
8
|
|
|
|
1
|
|
|
|
-
|
|
|
|
9
|
|
Time deposits
|
|
|
(3
|
)
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
(5
|
)
|
Note payable
|
|
|
43
|
|
|
|
(2
|
)
|
|
|
(6
|
)
|
|
|
35
|
|
Subordinated debentures
|
|
|
(188
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(188
|
)
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
8
|
|
|
|
1
|
|
|
|
9
|
|
Other
|
|
|
(1
|
)
|
|
|
0
|
|
|
|
-
|
|
|
|
(1
|
)
|
Total interest expense
|
|
|
(137
|
)
|
|
|
5
|
|
|
|
(5
|
)
|
|
|
(137
|
)
|
Net interest income
|
|
$
|
606
|
|
|
$
|
92
|
|
|
$
|
63
|
|
|
$
|
761
|
|
(1)
|
The volume change in net interest income represents the change in average balance multiplied by the previous quarter’s rate.
|
(2)
|
The rate change in net interest income represents the change in rate multiplied by the previous quarter’s average balance.
|
(3)
|
The mix change in net interest income represents the change in average balance multiplied by the change in rate.
|
Provision for loan losses.
During the three months ended March 31, 2016 we recorded a provision for loan losses of $200 thousand, down $100 thousand from the $300 thousand provision recorded during the first quarter of 2015. See “Analysis of Asset Quality and Allowance for Loan Losses” for a discussion of loan quality trends and the provision for loan losses.
The allowance for loan losses is maintained at a level that management believes will be appropriate to absorb probable incurred losses on existing loans based on an evaluation of the collectibility of the loans and prior loan loss experience. The evaluations take into consideration such factors as changes in the nature and volume of the portfolio, overall portfolio quality, review of specific problem loans, and current economic conditions that may affect the borrower's ability to repay their loan. The allowance for loan losses is based on estimates, and ultimate losses may vary from the current estimates. These estimates are reviewed not less than quarterly and, as adjustments become necessary, they are reported in earnings in the periods in which they become known.
Based on information currently available, management believes that the allowance for loan losses is appropriate to absorb probable incurred losses in the loan portfolio. However, no assurance can be given that the Company may not sustain charge-offs which are in excess of the allowance in any given period.
Non-interest income.
During the three months ended March 31, 2016 non-interest income totaled $1.7 million a decrease of $392 thousand from the three months ended March 31, 2015. This decrease was related to a $324 thousand reduction in gains on sale of SBA loans and a $32 thousand loss on sale of available-for-sale investment securities. Gain on the sale of government guaranteed SBA loans declined from a very strong $657 thousand during the three months ended March 31, 2015 to $333 thousand during the current quarter. Proceeds from SBA loan sales totaled $6.3 million during the current quarter and $9.5 million during the 2015 quarter. Loans originated for sale totaled $8.7 million during the three months ended March 31, 2016 and $9.1 million during the three months ended March 31, 2015. During the three months ended March 31, 2016 we sold fourteen investment securities recording a net loss of $32 thousand. While we recorded a net loss on this transaction, we used the proceeds from these sales to invest in higher yielding securities with the expectation of recovering the loss in a relatively short period of time in the form of an increase in interest income. During the first quarter of 2015 we recorded a gain on sale of $30 thousand from the sale of eight securities.
A $21 thousand increase in loan servicing fees was related to an increase in loans serviced. At March 31, 2016 we were servicing over $88 million in guaranteed portions of loans an increase of $7 million from over $81 million at March 31, 2015.
The following table describes the components of non-interest income for the three-month periods ended March 31, 2016 and 2015, dollars in thousands:
|
|
For the Three Months
|
|
|
|
|
|
|
|
|
|
|
|
Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
Service charges on deposit accounts
|
|
$
|
931
|
|
|
$
|
938
|
|
|
$
|
(7
|
)
|
|
|
-0.7
|
%
|
Gain on sale of loans, net
|
|
|
333
|
|
|
|
657
|
|
|
|
(324
|
)
|
|
|
-49.3
|
%
|
Loan servicing fees
|
|
|
148
|
|
|
|
127
|
|
|
|
21
|
|
|
|
16.5
|
%
|
Earnings on life insurance policies
|
|
|
86
|
|
|
|
85
|
|
|
|
1
|
|
|
|
1.2
|
%
|
(Loss) gain on sale of investments
|
|
|
(32
|
)
|
|
|
30
|
|
|
|
(62
|
)
|
|
|
-206.7
|
%
|
Other
|
|
|
187
|
|
|
|
208
|
|
|
|
(21
|
)
|
|
|
-10.1
|
%
|
Total non-interest income
|
|
$
|
1,653
|
|
|
$
|
2,045
|
|
|
$
|
(392
|
)
|
|
|
-19.2
|
%
|
Non-interest expense.
During the three months ended March 31, 2016, total non-interest expense declined by $72 thousand, or 2%, to $4.6 million, down from $4.7 million for the comparable period in 2015. The two largest declines were $110 thousand in salary and benefit expense and $83 thousand in loan collection expenses. These were partially offset by an increase in the provision from change in OREO valuation of $138 thousand from a credit of $129 thousand during the first quarter of 2015 to $9 thousand during the current quarter.
The decrease in salary and benefit expense includes a $70 thousand reduction in commission expense related to the reduction in SBA gains and a $57 thousand increase in deferral of loan origination costs. Salary expense was up by $18 thousand to $2.0 million. Reductions in salary expense include the retirement of the EVP and Operations Manager of Plumas Bank as well as open positons including a commercial lending officer position in our Redding, California location. The Company has chosen not to replace the EVP and Operations Manager of Plumas Bank. These were offset by merit and promotional increases and increases in personnel related to our new Reno, Nevada Branch.
The decrease in loan collection expense was mostly related to a $59 thousand increase, during the first quarter of 2015, in our reserve for losses on unfunded commitments which increased from $141 thousand to $200 thousand based on an analysis of this reserve. At March 31, 2016 the balance in the reserve was unchanged at $200 thousand.
The largest increase in non-interest expense was a $138 thousand increase in the provision from change in OREO valuation. OREO represents real property taken by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. When other real estate is acquired, any excess of the Bank’s recorded investment in the loan balance and accrued interest income over the estimated fair market value of the property less costs to sell is charged against the allowance for loan losses. A valuation allowance for losses on other real estate is maintained to provide for temporary declines in value. The allowance is established through a provision for subsequent losses on other real estate which is included in other expenses. Subsequent gains or losses on sales or from impairment are recorded as incurred. During the three months ended March 31, 2015 the Company recorded a credit of $129 thousand for the provision from change in OREO valuation. The credit resulted from a significant increase in value of one OREO property based on a current appraisal. During the first quarter of 2016 we recorded a $9 thousand provision related to a decline in value on one OREO property.
The following table describes the components of non-interest expense for the three-month periods ended March 31, 2016 and 2015, dollars in thousands:
|
|
For the Three
Months
Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
Salaries and employee benefits
|
|
$
|
2,608
|
|
|
$
|
2,718
|
|
|
$
|
(110
|
)
|
|
|
-4.0
|
%
|
Occupancy and equipment
|
|
|
707
|
|
|
|
700
|
|
|
|
7
|
|
|
|
1.0
|
%
|
Outside service fees
|
|
|
506
|
|
|
|
494
|
|
|
|
12
|
|
|
|
2.4
|
%
|
Professional fees
|
|
|
149
|
|
|
|
175
|
|
|
|
(26
|
)
|
|
|
-14.9
|
%
|
Telephone and data communication
|
|
|
99
|
|
|
|
89
|
|
|
|
10
|
|
|
|
11.2
|
%
|
Deposit insurance
|
|
|
86
|
|
|
|
95
|
|
|
|
(9
|
)
|
|
|
-9.5
|
%
|
Director compensation and expenses
|
|
|
85
|
|
|
|
76
|
|
|
|
9
|
|
|
|
11.8
|
%
|
Advertising and shareholder relations
|
|
|
85
|
|
|
|
67
|
|
|
|
18
|
|
|
|
26.9
|
%
|
Business development
|
|
|
75
|
|
|
|
83
|
|
|
|
(8
|
)
|
|
|
-9.6
|
%
|
Armored car and courier
|
|
|
58
|
|
|
|
55
|
|
|
|
3
|
|
|
|
5.5
|
%
|
Stationery and supplies
|
|
|
33
|
|
|
|
28
|
|
|
|
5
|
|
|
|
17.9
|
%
|
Insurance
|
|
|
23
|
|
|
|
29
|
|
|
|
(6
|
)
|
|
|
-20.7
|
%
|
OREO costs
|
|
|
21
|
|
|
|
53
|
|
|
|
(32
|
)
|
|
|
-60.4
|
%
|
Loan collection expenses
|
|
|
19
|
|
|
|
102
|
|
|
|
(83
|
)
|
|
|
-81.4
|
%
|
Postage
|
|
|
10
|
|
|
|
9
|
|
|
|
1
|
|
|
|
11.1
|
%
|
Provision from change in OREO valuation
|
|
|
9
|
|
|
|
(129
|
)
|
|
|
138
|
|
|
|
107.0
|
%
|
Other
|
|
|
61
|
|
|
|
62
|
|
|
|
(1
|
)
|
|
|
-1.6
|
%
|
Total non-interest expense
|
|
$
|
4,634
|
|
|
$
|
4,706
|
|
|
$
|
(72
|
)
|
|
|
-1.5
|
%
|
Provision for income taxes.
The Company recorded an income tax provision of $984 thousand, or 38.5% of pre-tax income for the three months ended March 31, 2016. This compares to an income tax provision of $801 thousand or 39.7% of pre-tax income during the first three months of 2015. The percentages for 2016 and 2015 differ from statutory rates as tax exempt items of income such as earnings on Bank owned life insurance and municipal loan and securities interest decrease taxable income.
Deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the reported amount of assets and liabilities and their tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The determination of the amount of deferred income tax assets which are more likely than not to be realized is primarily dependent on projections of future earnings, which are subject to uncertainty and estimates that may change given economic conditions and other factors. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is "more likely than not" that all or a portion of the deferred tax asset will not be realized. "More likely than not" is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Based upon the analysis of available evidence, management has determined that it is "more likely than not" that all deferred income tax assets as of March 31, 2016 and December 31, 2015 will be fully realized and therefore no valuation allowance was recorded. On the consolidated balance sheet, net deferred tax assets are included in accrued interest receivable and other assets.
FINANCIAL CONDITION
Loan Portfolio.
Net loans increased by $8.1 million or an annualized rate 8%, from $397 million at December 31, 2015 to $405 million at March 31, 2016. The largest area of growth in the Company’s loan portfolio was $9.5 million in commercial real estate loans. The largest decrease in any loan category was a decline of $1.1 million agricultural loans. The Company continues to manage the mix of its loan portfolio consistent with its identity as a community bank serving the financing needs of all sectors of the area it serves. Although the Company offers a broad array of financing options, it continues to concentrate its focus on small to medium sized commercial businesses. These loans offer diversification as to industries and types of businesses, thus limiting material exposure in any industry concentrations. The Company offers both fixed and floating rate loans and obtains collateral in the form of real property, business assets and deposit accounts, but looks to business and personal cash flows as its primary source of repayment.
As shown in the following table the Company's largest lending categories are commercial real estate loans, auto loans, equity lines of credit, agricultural loans and commercial loans.
(dollars in thousands)
|
|
Balance at
End of
Period
|
|
|
Percent of
Loans in
Each
Category to
Total Loans
|
|
|
Balance at
End of
Period
|
|
|
Percent of
Loans in
Each
Category to
Total Loans
|
|
|
|
3
/31/
16
|
|
|
3
/31/1
6
|
|
|
12/31/15
|
|
|
12/31/15
|
|
Commercial
|
|
$
|
37,346
|
|
|
|
9.1
|
%
|
|
$
|
37,084
|
|
|
|
9.2
|
%
|
Agricultural
|
|
|
38,730
|
|
|
|
9.5
|
%
|
|
|
39,856
|
|
|
|
9.9
|
%
|
Real estate - residential
|
|
|
24,750
|
|
|
|
6.0
|
%
|
|
|
25,474
|
|
|
|
6.4
|
%
|
Real estate – commercial
|
|
|
201,593
|
|
|
|
49.3
|
%
|
|
|
192,095
|
|
|
|
47.9
|
%
|
Real estate – construction & land
|
|
|
15,758
|
|
|
|
3.9
|
%
|
|
|
16,188
|
|
|
|
4.0
|
%
|
Equity Lines of Credit
|
|
|
38,509
|
|
|
|
9.4
|
%
|
|
|
38,327
|
|
|
|
9.6
|
%
|
Auto
|
|
|
49,173
|
|
|
|
12.0
|
%
|
|
|
48,365
|
|
|
|
12.1
|
%
|
Other
|
|
|
3,288
|
|
|
|
0.8
|
%
|
|
|
3,582
|
|
|
|
0.9
|
%
|
Total Gross Loans
|
|
$
|
409,147
|
|
|
|
100
|
%
|
|
$
|
400,971
|
|
|
|
100
|
%
|
Construction and land development loans represented 3.9% and 4.0% of the loan portfolio as of March 31, 2016 and December 31, 2015, respectively. The construction and land development portfolio component has been identified by Management as a higher-risk loan category. The quality of the construction and land development category is highly dependent on property values both in terms of the likelihood of repayment once the property is transacted by the current owner as well as the level of collateral the Company has securing the loan in the event of default. Loans in this category are characterized by the speculative nature of commercial and residential development properties and can include property in various stages of development from raw land to finished lots. The decline in these loans as a percentage of the Company’s loan portfolio from over 21% at December 31, 2007 to less than 7% during the last two years reflects management’s efforts, which began in 2009, to reduce its exposure to construction and land development loans.
The Company’s real estate related loans, including real estate mortgage loans, real estate construction and land development loans, consumer equity lines of credit, and agricultural loans secured by real estate comprised 73% of the total loan portfolio at March 31, 2016. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, Sierra and in Washoe County in Northern Nevada. Consequently, the results of operations and financial condition of the Company are dependent upon the general trends in these economies and, in particular, the residential and commercial real estate markets. In addition, the concentration of the Company's operations in these areas of Northeastern California and Northwestern Nevada exposes it to greater risk than other banking companies with a wider geographic base in the event of catastrophes, such as earthquakes, fires and floods in these regions.
The rates of interest charged on variable rate loans are set at specific increments in relation to the Company's lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indexes. The frequency in which variable rate loans reprice can vary from one day to several years. At March 31, 2016 and December 31, 2015, approximately 73% and 72%, respectively of the Company's loan portfolio was comprised of variable rate loans. At March 31, 2016 and December 31, 2015, 40% and 39%, respectively of the variable loans were at their respective floor rate. While real estate mortgage, commercial and consumer lending remain the foundation of the Company's historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types. The most significant change has been an increase in indirect auto lending with automobile loans increasing from 2.5% of gross loans at December 31, 2011 to 12.0% of gross loans at March 31, 2016. The automobile portfolio provides diversification to the loan portfolio in terms of rate, term and balance as these loans tend to have a much shorter term and balance than commercial real-estate loans and are fixed rate. In addition, the Company remains committed to the agricultural industry in Northeastern California and will continue to pursue high quality agricultural loans. Agricultural loans include both commercial and commercial real estate loans. The Company’s agricultural loan balances totaled $39 million at March 31, 2016 and $40 million at December 31, 2015.
Analysis of Asset Quality and Allowance for Loan Losses.
The Company attempts to minimize credit risk through its underwriting and credit review policies. The Company’s credit review process includes internally prepared credit reviews as well as contracting with an outside firm to conduct periodic credit reviews. The Company’s management and lending officers evaluate the loss exposure of classified and impaired loans on a quarterly basis, or more frequently as loan conditions change. The Management Asset Resolution Committee (MARC) reviews the asset quality of criticized and past due loans on a monthly basis and reports the findings to the full Board of Directors. In management's opinion, this loan review system helps facilitate the early identification of potential criticized loans.
The Company has implemented MARC to develop an action plan to significantly reduce nonperforming assets. It consists of the Bank’s Chief Executive Officer, Chief Financial Officer and Chief Credit Officer, and the activities are governed by a formal written charter. The MARC meets at least monthly and reports to the Board of Directors.
More specifically, a formal plan to effect repayment and/or disposition of every significant nonperforming loan relationship is developed and documented for review and on-going oversight by the MARC. Some of the strategies used include but are not limited to: 1) obtaining additional collateral, 2) obtaining additional investor cash infusion, 3) sale of the promissory note to an outside party, 4) proceeding with foreclosure on the underlying collateral, and 5) legal action against borrower/guarantors to encourage settlement of debt and/or collect any deficiency balance owed. Each step includes a benchmark timeline to track progress.
MARC also provides guidance for the maintenance and timely disposition of OREO properties; including developing financing and marketing programs to incent individuals to purchase OREO.
The allowance for loan losses is established through charges to earnings in the form of the provision for loan losses. Loan losses are charged to and recoveries are credited to the allowance for loan losses. The allowance for loan losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. The adequacy of the allowance for loan losses is based upon management's continuing assessment of various factors affecting the collectability of loans; including current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the existing allowance for loan losses, independent credit reviews, current charges and recoveries to the allowance for loan losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants retained by the Company. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The collectability of a loan is subjective to some degree, but must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy.
Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics. Loss factors are based on the Company’s historical loss experience as adjusted for changes in the business cycle and may be adjusted for significant factors that, in management's judgment, affect the collectability of the portfolio as of the evaluation date. Historical loss data from the beginning of the latest business cycle are incorporated in the loss factors.
The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.
The following table provides certain information for the dates indicated with respect to the Company's allowance for loan losses as well as charge-off and recovery activity.
|
|
For the
Three Months Ended
March
31,
|
|
|
|
For the Year Ended
December 31
|
|
|
|
201
6
|
|
|
201
5
|
|
|
201
5
|
|
|
201
4
|
|
|
201
3
|
|
|
|
(dollars in thousands)
|
|
Balance at beginning of period
|
|
$
|
6,078
|
|
|
$
|
5,451
|
|
|
$
|
5,451
|
|
|
$
|
5,517
|
|
|
$
|
5,686
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
|
73
|
|
|
|
40
|
|
|
|
91
|
|
|
|
191
|
|
|
|
401
|
|
Real estate mortgage
|
|
|
-
|
|
|
|
6
|
|
|
|
132
|
|
|
|
1,015
|
|
|
|
419
|
|
Real estate construction & land
|
|
|
-
|
|
|
|
1
|
|
|
|
55
|
|
|
|
106
|
|
|
|
735
|
|
Consumer (includes equity LOC & Auto)
|
|
|
147
|
|
|
|
128
|
|
|
|
549
|
|
|
|
601
|
|
|
|
360
|
|
Total charge-offs
|
|
|
220
|
|
|
|
175
|
|
|
|
827
|
|
|
|
1,913
|
|
|
|
1,915
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
|
11
|
|
|
|
82
|
|
|
|
173
|
|
|
|
89
|
|
|
|
140
|
|
Real estate mortgage
|
|
|
35
|
|
|
|
1
|
|
|
|
8
|
|
|
|
19
|
|
|
|
109
|
|
Real estate construction & land
|
|
|
29
|
|
|
|
-
|
|
|
|
-
|
|
|
|
491
|
|
|
|
-
|
|
Consumer (includes equity LOC & Auto)
|
|
|
65
|
|
|
|
63
|
|
|
|
173
|
|
|
|
148
|
|
|
|
97
|
|
Total recoveries
|
|
|
140
|
|
|
|
146
|
|
|
|
354
|
|
|
|
747
|
|
|
|
346
|
|
Net charge-offs
|
|
|
80
|
|
|
|
29
|
|
|
|
473
|
|
|
|
1,166
|
|
|
|
1,569
|
|
Provision for loan losses
|
|
|
200
|
|
|
|
300
|
|
|
|
1,100
|
|
|
|
1,100
|
|
|
|
1,400
|
|
Balance at end of period
|
|
$
|
6,198
|
|
|
$
|
5,722
|
|
|
$
|
6,078
|
|
|
$
|
5,451
|
|
|
$
|
5,517
|
|
Net charge-offs during the period to average loans (annualized for the three month periods)
|
|
|
0.08
|
%
|
|
|
0.03
|
%
|
|
|
0.12
|
%
|
|
|
0.33
|
%
|
|
|
0.49
|
%
|
Allowance for loan losses to total loans
|
|
|
1.51
|
%
|
|
|
1.49
|
%
|
|
|
1.52
|
%
|
|
|
1.47
|
%
|
|
|
1.63
|
%
|
During the three months ended March 31, 2016 we recorded a provision for loan losses of $200 thousand down $100 thousand from the $300 thousand provision recorded during the quarter ended March 31, 2015. Net charge-offs totaled $80 thousand an increase of $51 thousand from $29 thousand during the three months ended March 31, 2015.
The following table provides a breakdown of the allowance for loan losses at March 31, 2016 and December 31, 2015:
(dollars in thousands)
|
|
Balance at
End of Period
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
Balance at
End of Period
|
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
|
2016
|
|
|
201
6
|
|
|
2015
|
|
|
2015
|
|
Commercial and agricultural
|
|
$
|
948
|
|
|
|
18.6
|
%
|
|
$
|
933
|
|
|
|
19.1
|
%
|
Real estate mortgage
|
|
|
3,080
|
|
|
|
55.3
|
%
|
|
|
2,866
|
|
|
|
54.3
|
%
|
Real estate construction & land
|
|
|
800
|
|
|
|
3.9
|
%
|
|
|
874
|
|
|
|
4.0
|
%
|
Consumer (includes equity LOC & Auto)
|
|
|
1,370
|
|
|
|
22.2
|
%
|
|
|
1,405
|
|
|
|
22.6
|
%
|
Total
|
|
$
|
6,198
|
|
|
|
100.0
|
%
|
|
$
|
6,078
|
|
|
|
100.0
|
%
|
The allowance for loan losses totaled $6.2 million at March 31, 2016 and $6.1 million at December 31, 2015. Specific reserves related to impaired loans increased by $104 thousand from $751 thousand at December 31, 2015 to $855 thousand at March 31, 2016. At least quarterly the Company evaluates each specific reserve and if it determines that the loss represented by the specific reserve is uncollectable it records a charge-off for the uncollectable portion. General reserves were $5.3 million at March 31, 2016 and December 31, 2015. The allowance for loan losses as a percentage of total loans decreased slightly from 1.52% at December 31, 2015 to 1.51% at March 31, 2016. The percentage of general reserves to unimpaired loans totaled 1.33% at March 31, 2016 and 1.35% at December 31, 2015.
The Company places loans 90 days or more past due on nonaccrual status unless the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 90 days. When a loan is placed on nonaccrual status the Company's general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans is subsequently recognized only to the extent that cash is received and future collection of principal is deemed by management to be probable. Where the collectability of the principal or interest on a loan is considered to be doubtful by management, it is placed on nonaccrual status prior to becoming 90 days delinquent.
Impaired loans are measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. The amount of impaired loans is not directly comparable to the amount of nonperforming loans disclosed later in this section. The primary difference between impaired loans and nonperforming loans is that impaired loan recognition considers not only loans 90 days or more past due, restructured loans and nonaccrual loans but also may include identified problem loans other than delinquent loans where it is considered probable that we will not collect all amounts due to us (including both principal and interest) in accordance with the contractual terms of the loan agreement.
A restructuring of a debt constitutes a troubled debt restructuring (TDR) if the Company, for economic or legal reasons related to the debtor's financial difficulties, grants a concession to the debtor that it would not otherwise consider. Restructured workout loans typically present an elevated level of credit risk as the borrowers are not able to perform according to the original contractual terms. Loans that are reported as TDRs are considered impaired and measured for impairment as described above.
Loans restructured (TDRs) and not included in nonperforming loans in the following table totaled $1.9 million at March 31, 2016 and $2.0 million, $2.0 million, $4.5 million and $5.4 million at December 31, 2015, 2014, 2013 and 2012, respectively.
The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated.
|
|
At March 31,
|
|
|
At December 31,
|
|
|
|
201
6
|
|
|
201
5
|
|
|
201
4
|
|
|
2013
|
|
|
2012
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
4,602
|
|
|
$
|
4,546
|
|
|
$
|
6,625
|
|
|
$
|
5,519
|
|
|
$
|
13,683
|
|
Loans past due 90 days or
more and still accruing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
15
|
|
Total nonperforming loans
|
|
|
4,602
|
|
|
|
4,546
|
|
|
|
6,625
|
|
|
|
5,536
|
|
|
|
13,698
|
|
Other real estate owned
|
|
|
1,760
|
|
|
|
1,756
|
|
|
|
3,590
|
|
|
|
6,399
|
|
|
|
5,295
|
|
Other vehicles owned
|
|
|
15
|
|
|
|
30
|
|
|
|
13
|
|
|
|
60
|
|
|
|
41
|
|
Total nonperforming assets
|
|
$
|
6,377
|
|
|
$
|
6,332
|
|
|
$
|
10,228
|
|
|
$
|
11,995
|
|
|
$
|
19,034
|
|
Interest income forgone on
nonaccrual loans
|
|
$
|
75
|
|
|
$
|
303
|
|
|
$
|
345
|
|
|
$
|
280
|
|
|
$
|
646
|
|
Interest income recorded on a
cash basis on nonaccrual loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
31
|
|
|
$
|
22
|
|
|
$
|
192
|
|
Nonperforming loans to total loans
|
|
|
1.12
|
%
|
|
|
1.13
|
%
|
|
|
1.79
|
%
|
|
|
1.64
|
%
|
|
|
4.35
|
%
|
Nonperforming assets to total assets
|
|
|
1.07
|
%
|
|
|
1.06
|
%
|
|
|
1.90
|
%
|
|
|
2.33
|
%
|
|
|
3.98
|
%
|
Nonperforming loans at March 31, 2016 were $4.6 million, an increase of $56 thousand from the $4.5 million balance at December 31, 2015. Specific reserves on nonaccrual loans totaled $786 thousand at March 31, 2016 and $683 thousand at December 31, 2015, respectively. Performing loans past due thirty to eighty-nine days were $1.9 million at March 31, 2016 and $1.5 million at December 31, 2015.
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. Total substandard loans decreased by $169 thousand from $6.0 million at December 31, 2015 to $5.8 million at March 31, 2016. Loans classified as watch decreased by $579 thousand from $4.1 million at December 31, 2015 to $3.5 million at March 31, 2016. At March 31, 2016, $0.9 million of performing loans were classified as substandard. Further deterioration in the credit quality of individual performing substandard loans or other adverse circumstances could result in the need to place these loans on nonperforming status.
At March 31, 2016 and December 31, 2015, the Company's recorded investment in impaired loans totaled $6.5 million. The specific allowance for loan losses related to impaired loans totaled $855 thousand and $751 thousand at March 31, 2016 and December 31, 2015, respectively. Additionally, $0.7 million has been charged off against the impaired loans at March 31, 2016 and December 31, 2015.
It is the policy of management to make additions to the allowance for loan losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance at March 31, 2016 is appropriate. However, the determination of the amount of the allowance is judgmental and subject to economic conditions which cannot be predicted with certainty. Accordingly, the Company cannot predict whether charge-offs of loans in excess of the allowance may occur in future periods.
OREO represents real property acquired by the Bank either through foreclosure or through a deed in lieu thereof from the borrower. Repossessed assets include vehicles and other commercial assets acquired under agreements with delinquent borrowers. OREO holdings represented eight properties totaling $1.8 million at March 31, 2016 and seven properties totaling $1.8 million at December 31, 2015. Nonperforming assets as a percentage of total assets were 1.07% at March 31, 2016 and 1.06% at December 31, 2015.
The following table provides a summary of the change in the number and balance of OREO properties for the three months ended March 31, 2016 and 2015, dollars in thousands:
|
|
Three Months Ended March
31,
|
|
|
|
#
|
|
|
201
6
|
|
|
#
|
|
|
201
5
|
|
Beginning Balance
|
|
|
7
|
|
|
$
|
1,756
|
|
|
|
15
|
|
|
$
|
3,590
|
|
Additions
|
|
|
1
|
|
|
|
13
|
|
|
|
2
|
|
|
|
232
|
|
Dispositions
|
|
|
-
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
(297
|
)
|
Provision from change in OREO valuation
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
129
|
|
Ending Balance
|
|
|
8
|
|
|
$
|
1,760
|
|
|
|
15
|
|
|
$
|
3,654
|
|
I
nvestment Portfolio and Federal Funds Sold.
Total investment securities were $99.6 million at March 31, 2016 and $96.7 million as of December 31, 2015. During the three months ended March 31, 2016 the Company sold fourteen available-for-sale investment securities for total proceeds of $14.6 million recording a $32,000 net loss on sale. During the three months ended March 31, 2015 we sold eight available-for-sale investment securities having a value of $6.7 million and recorded a net gain of $30 thousand. The investment portfolio at March 31, 2016 consisted of $75.1 million in securities of U.S. Government-sponsored agencies and 90 municipal securities totaling $24.5 million. Included in the $96.7 million at December 31, 2015 were $74.3 million in securities of U.S. Government-sponsored agencies and 83 municipal securities totaling $22.4 million.
There were no Federal funds sold at March 31, 2016 and December 31, 2015; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $34.7 million at March 31, 2016 and $47.6 million at December 31, 2015. The interest rate earned on the balances at March 31, 2016 and December 31, 2015 was 0.5%.
The Company classifies its investment securities as available-for-sale or held-to-maturity. Currently all securities are classified as available-for-sale. Securities classified as available-for-sale may be sold to implement the Company's asset/liability management strategies and in response to changes in interest rates, prepayment rates and similar factors.
Deposits.
Deposits totaled $525.2 million at March 31, 2016, a decrease of $2.1 million from $527.3 million at December 31, 2015. Declines included $7.5 million in non-interest bearing demand deposits and $0.9 million in time deposits. These were mostly offset by increases of $0.3 million in NOW accounts and $6.0 million in savings and money market accounts. The Company continues to manage the mix of its deposits consistent with its identity as a community bank serving the financial needs of its customers.
The following table shows the distribution of deposits by type at March 31, 2016 and December 31, 2015.
(dollars in thousands)
|
|
Balance at
End of
Period
|
|
|
Percent of
Deposits in Each
Category to
Total Deposits
|
|
|
Balance at
End of
Period
|
|
|
Percent of
Deposits in Each
Category to
Total Deposits
|
|
|
|
3
/31/1
6
|
|
|
3
/31/1
6
|
|
|
12/31/15
|
|
|
12/31/15
|
|
Non-interest bearing
|
|
$
|
201,579
|
|
|
|
38.4
|
%
|
|
$
|
209,044
|
|
|
|
39.6
|
%
|
NOW
|
|
|
91,527
|
|
|
|
17.4
|
%
|
|
|
91,225
|
|
|
|
17.3
|
%
|
Money Market
|
|
|
52,765
|
|
|
|
10.0
|
%
|
|
|
48,848
|
|
|
|
9.3
|
%
|
Savings
|
|
|
127,928
|
|
|
|
24.4
|
%
|
|
|
125,896
|
|
|
|
23.9
|
%
|
Time
|
|
|
51,407
|
|
|
|
9.8
|
%
|
|
|
52,263
|
|
|
|
9.9
|
%
|
Total Deposits
|
|
$
|
525,206
|
|
|
|
100
|
%
|
|
$
|
527,276
|
|
|
|
100
|
%
|
Deposits represent the Bank's primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. The Company experiences, to a small degree, some seasonality with the slower growth period between November through April, and the higher growth period from May through October. In order to assist in meeting any funding demands, the Company maintains a secured borrowing arrangement with the Federal Home Loan Bank of San Francisco (FHLB). There were no brokered deposits at March 31, 2016 or December 31, 2015.
Short-term Borrowing Arrangements.
The Company is a member of the FHLB and can borrow up to $155,000,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $239,000,000. The Company is required to hold FHLB stock as a condition of membership. At March 31, 2016 and December 31, 2015, the Company held $2,380,000 of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings at March 31, 2016, the Company can borrow up to $88,159,000. To borrow the $155,000,000 in available credit the Company would need to purchase $1,808,000 in additional FHLB stock. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings to the FHLB or the correspondent banks under these agreements at March 31, 2016 and December 31, 2015.
Note Payable and Term Loan.
On October 24, 2013 the Company issued a $3.0 million promissory note (the “Note”) payable to an unrelated commercial bank. As originally issued, the Note provided for an interest rate of U.S. “Prime Rate” plus three-quarters percent per annum, 4.00% at December 31, 2014 and 2013, had a term of 18 months and subjected the Bank to several negative and affirmative covenants including, but not limited to providing timely financial information, maintaining specified levels of capital, restrictions on additional borrowings, and meeting or exceeding certain capital and asset quality ratios. The Note is secured by 100 shares of the Bank’s stock representing the 100% of the Company's ownership interest in the Bank.
On July 28, 2014, the Company and the borrower modified the Note to (1) extend the maturity date to October 24, 2015, (2) increase the maximum principal amount to $7.5 million and (3) permit the Company to borrow, repay and reborrow up to the maximum principal amount of the Note, among other things.
On October 1, 2015, the Company and the borrower further modified the Note to (1) extend the maturity date to October 1, 2016, (2) reduce the maximum principal amount to $2.5 million and (3) change the interest rate to U.S. "Prime Rate" plus one-half percent per annum.
Concurrently, with entering into the second modification of the note on October 1, 2015, the Company entered into a $5.0 million term loan (the “Term Loan”), which matures on October 1, 2018. The Term Loan requires quarterly principal payments of $125,000 plus accrued interest. Both the Term Loan and the Note bear interest at a rate of the U.S. "Prime Rate" plus one-half percent per annum and are secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank.
Under the Term Loan and the Note, the Bank is subject to several negative and affirmative covenants similar to the covenants under the original Note but in several cases less restrictive. The Bank was in compliance with all such covenants related to the Note and the Term Loan at March 31, 2016 and December 31, 2015. Interest expense related to the Note and the Term Loan for the three months ended March 31, 2016 and 2015 totaled $46,000 and $11,000, respectively. The ending balance of the Note at December 31, 2014 was $1,000,000. There was no balance outstanding on the Note at December 31, 2015 or March 31, 2016. The balance of the Term Loan was $4,750,000 and $4,875,000 at March 31, 2016 and December 31, 2015, respectively.
Repurchase Agreements.
In 2011 the Bank introduced a new product for its larger business customers which use repurchase agreements as an alternative to interest-bearing deposits. The balance in this product at March 31, 2016 was $4.2 million, a decrease of $3.5 million from the December 31, 2015 balance of $7.7 million. Interest paid on this product is similar to that which is paid on the Bank’s premium money market account; however, these are not deposits and are not FDIC insured.
Subordinated Debentures.
On April 15, 2013 the Company issued a $7.5 million subordinated debenture (“subordinated debt”). The subordinated debt was issued to an unrelated third-party pursuant to a subordinated debenture purchase agreement, subordinated debenture note, and stock purchase warrant. On April 16, 2015 the Company paid off the subordinated debt. Interest expense related to the subordinated debt for the three months ended March 31, 2015 was $188,000.
The subordinated debt had an interest rate of 7.5% per annum and a term of 8 years with no prepayment allowed during the first two years and was made in conjunction with an eight-year warrant to purchase up to 300,000 shares of the Bancorp’s common stock, no par value at an exercise price, subject to anti-dilution adjustments, of $5.25 per share.
Junior Subordinated Deferrable Interest Debentures.
Plumas Statutory Trust I and II are business trust subsidiaries formed by the Company with capital of $313,000 and $164,000, respectively, for the sole purpose of issuing trust preferred securities fully and unconditionally guaranteed by the Company.
During 2002, Trust I issued 6,000 Floating Rate Capital Trust Pass-Through Securities ("Trust Preferred Securities"), with a liquidation value of $1,000 per security, for gross proceeds of $6,000,000. During 2005, Trust II issued 4,000 Trust Preferred Securities with a liquidation value of $1,000 per security, for gross proceeds of $4,000,000. The entire proceeds were invested by Trust I in the amount of $6,186,000 and Trust II in the amount of $4,124,000 in Floating Rate Junior Subordinated Deferrable Interest Debentures (the "Subordinated Debentures") issued by the Company, with identical maturity, repricing and payment terms as the Trust Preferred Securities. The Subordinated Debentures represent the sole assets of Trusts I and II.
Trust I’s Subordinated Debentures mature on September 26, 2032, bear a current interest rate of 4.03% (based on 3-month LIBOR plus 3.40%), with repricing and payments due quarterly. Trust II’s Subordinated Debentures mature on September 28, 2035, bear a current interest rate of 2.11% (based on 3-month LIBOR plus 1.48%), with repricing and payments due quarterly. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures.
Interest expense recognized by the Company for the three months ended March 31, 2016 and 2015 related to the subordinated debentures was $83,000 and $74,000, respectively.
Capital Resources
Total shareholders’ equity increased by $2.5 million from $42.5 million at December 31, 2015 to $45.0 million at March 31, 2016. The $2.5 million includes earnings during the three month period totaling $1.6 million and an increase in net unrealized gains on investment securities of $0.8 million with the balance of $0.1 million representing stock option activity.
It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors. The Board will periodically, but on no regular schedule, review the appropriateness of a cash dividend payment. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. No common cash dividends were paid during the last seven years.
The Company is subject to various restrictions on the payment of dividends.
C
apital Standards.
The Company uses a variety of measures to evaluate its capital adequacy. Management reviews these capital measurements on a monthly basis and takes appropriate action to ensure that they are within established internal and external guidelines. The FDIC has promulgated risk-based capital guidelines for all state non-member banks such as the Bank. These guidelines establish a risk-adjusted ratio relating capital to different categories of assets and off-balance sheet exposures.
In July, 2013, the federal bank regulatory agencies approved the final rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks. The phase-in period for the final rules began on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Company and the Bank. The rules include a new common equity Tier 1 capital to risk-weighted assets ratio of 4.5% and a capital conservation buffer of 2.5% of risk-weighted assets. The final rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and require a minimum leverage ratio of 4.0%. The final rules also implement strict eligibility criteria for regulatory capital instruments.
The Board of Governors of the Federal Reserve System has adopted final amendments to the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) ( the “Policy Statement”) that, among other things, raised from $500 million to $1 billion the asset threshold to qualify for the Policy Statement. Plumas Bancorp qualifies for treatment under the Policy Statement and is no longer subject to consolidated capital rules at the bank holding company level.
The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Amount of Capital Required
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be Well-Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
|
Under Prompt
|
|
|
|
Actual
|
|
|
Adequacy Purposes
|
|
|
Corrective Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
March
31, 201
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Ratio
|
|
$
|
57,787
|
|
|
|
13.0
|
%
|
|
$
|
20,061
|
|
|
|
4.5
|
%
|
|
$
|
28,977
|
|
|
|
6.5
|
%
|
Tier 1 Leverage Ratio
|
|
|
57,787
|
|
|
|
9.7
|
%
|
|
|
23,842
|
|
|
|
4.0
|
%
|
|
|
29,802
|
|
|
|
5.0
|
%
|
Tier 1 Risk-Based Capital Ratio
|
|
|
57,787
|
|
|
|
13.0
|
%
|
|
|
26,748
|
|
|
|
6.0
|
%
|
|
|
35,665
|
|
|
|
8.0
|
%
|
Total Risk-Based Capital Ratio
|
|
|
63,369
|
|
|
|
14.2
|
%
|
|
|
35,665
|
|
|
|
8.0
|
%
|
|
|
44,581
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Ratio
|
|
$
|
56,300
|
|
|
|
12.7
|
%
|
|
$
|
19,908
|
|
|
|
4.5
|
%
|
|
$
|
28,756
|
|
|
|
6.5
|
%
|
Tier 1 Leverage Ratio
|
|
|
56,300
|
|
|
|
9.4
|
%
|
|
|
23,999
|
|
|
|
4.0
|
%
|
|
|
29,999
|
|
|
|
5.0
|
%
|
Tier 1 Risk-Based Capital Ratio
|
|
|
56,300
|
|
|
|
12.7
|
%
|
|
|
26,544
|
|
|
|
6.0
|
%
|
|
|
35,392
|
|
|
|
8.0
|
%
|
Total Risk-Based Capital Ratio
|
|
|
61,839
|
|
|
|
14.0
|
%
|
|
|
35,392
|
|
|
|
8.0
|
%
|
|
|
44,240
|
|
|
|
10.0
|
%
|
Management believes that Plumas Bank currently meets all its capital adequacy requirements.
The current and projected capital positions of the Bank and the impact of capital plans and long-term strategies are reviewed regularly by management. The Company policy is to maintain the Bank’s ratios above the prescribed well-capitalized ratios at all times.
Off-Balance Sheet Arrangements
Loan Commitments.
In the normal course of business, there are various commitments outstanding to extend credits that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of March 31, 2016, the Company had $88.9 million in unfunded loan commitments and $100 thousand in letters of credit. This compares to $83.0 million in unfunded loan commitments and $265 thousand in letters of credit at December 31, 2015. Of the $88.9 million in unfunded loan commitments, $50.3 million and $38.6 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at March 31, 2016, $47.2 million were secured by real estate, of which $18.9 million was secured by commercial real estate and $28.3 million was secured by residential real estate in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines and overdraft protection lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements.
Operating Leases.
The Company leases two depository branches and four lending offices and two non-branch automated teller machine locations. Total rental expenses under all operating leases were $73,000 and $52,000 during the three months ended March, 31, 2016 and 2015, respectively. The increase in rental expense in 2016 relates to the rental of our Redding, California Branch. The expiration dates of the leases vary, with the first such lease expiring during 2016 and the last such lease expiring during 2020.
Recent Developments.
On April 21, 2016 Plumas Bancorp made a $2 million payment on its term loan reducing the outstanding balance to $2.75 million.
The payment was funded through a $3 million dividend from Plumas Bank.
Liquidity
The Company manages its liquidity to provide the ability to generate funds to support asset growth, meet deposit withdrawals (both anticipated and unanticipated), fund customers' borrowing needs, satisfy maturity of short-term borrowings and maintain reserve requirements. The Company’s liquidity needs are managed using assets or liabilities, or both. On the asset side, in addition to cash and due from banks, the Company maintains an investment portfolio which includes unpledged U.S. Government-sponsored agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by charging competitive offering rates on deposit products and the use of established lines of credit.
The Company is a member of the FHLB and can borrow up to $155,000,000 from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $239,000,000. See “Short-term Borrowing Arrangements” for additional information on our FHLB borrowing capacity. In addition to its FHLB borrowing line, the Company has unsecured short-term borrowing agreements with three of its correspondent banks in the amounts of $20 million, $11 million and $10 million. There were no outstanding borrowings under the FHLB or the correspondent bank borrowing lines at March 31, 2016 or December 31, 2015.
Customer deposits are the Company’s primary source of funds. Total deposits decreased by $2.1 million from $527 million at December 31, 2015 to $525 million at March 31, 2016. Deposits are held in various forms with varying maturities. The Company’s securities portfolio, Federal funds sold, FHLB advances, and cash and due from banks serve as the primary sources of liquidity, providing adequate funding for loans during periods of high loan demand. During periods of decreased lending, funds obtained from the maturing or sale of investments, loan payments, and new deposits are invested in short-term earning assets, such as cash held at the FRB, Federal funds sold and investment securities, to serve as a source of funding for future loan growth. Management believes that the Company’s available sources of funds, including borrowings, will provide adequate liquidity for its operations in the foreseeable future.