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 September 30, 2016 and December 31, 2015 and for the nine and three month periods ended September 30, 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 - NINE MONTHS ENDED SEPTEMBER 30, 2016
Net income increased by $1.2 million from $4.2 million during the nine months ended September 30, 2015 to $5.4 million during the current nine month period. Earnings benefited from increases of $1.9 million in net interest income and a decline of $300 in the provision for loan losses. Partially offsetting these items was a decline in non-interest income of $212 thousand and increases in non-interest expense of $29 thousand and income tax expense of $731 thousand. Diluted earnings per share increased to $1.06 for the nine months ended September 30, 2016 up from $0.82 during the nine months ended September 30, 2015.
Total assets at September 30, 2016 were $657 million, an increase of $56.6 million from December 31, 2015. Loan growth was exceptionally strong during the first nine months of 2016 with net loans increasing by $45.6 million from $397 million at December 31, 2015 to $442 million at September 30, 2016. Cash and cash equivalents increased by $8.8 million from $68.2 million at December 31, 2015 to $77.0 million at September 30, 2016.
Deposits totaled $581.4 million at September 30, 2016, an increase of $54.1 million from $527.3 million at December 31, 2015. Increases included $29.3 million in non-interest bearing demand deposits, $20.0 million in savings and money market accounts and $7.5 million in NOW accounts. Time deposits declined by $2.7 million. 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 annualized return on average assets was 1.18% for the nine months ended September 30, 2016 up from 0.99% for the nine months ended September 30, 2015. The annualized return on average equity increased from 14.3% during the first nine months of 2015 to 15.7% during the current nine month period.
The following is a detailed discussion of each component affecting change in net income and the composition of our balance sheet.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
Net interest income before provision for loan losses.
Net interest income, on a nontax-equivalent basis, for the nine months ended September 30, 2016 was $17.7 million, an increase of $1.9 million from the $15.8 million earned during the same period in 2015. The increase in net interest income includes an increase of $1.7 million in interest income and a decline of $176 thousand in interest expense. Mostly related to a 9 basis points decline in the average rate paid on interest bearing liabilities, net interest margin increased to 4.22%, up from 4.13% for the same period in 2015.
Interest income increased by 10% to $18.5 million for the nine months ended September 30, 2016, up from $16.8 million during the same period in 2015. Related to an increase in loan balances, interest and fees on loans increased by $1.4 million to $16.8 million for the nine months ended September 30, 2016; compared to $15.4 million during the first nine months of 2015. The Company’s average loan balances were $420 million during the nine months ended September 30, 2016, up $36 million, or 9%, from $384 million during the same period in 2015.
The following table compares loan balances by type at September 30, 2016 and 2015.
|
(dollars in thousands)
|
|
Balance at End of
Period
|
|
|
Percent of Loans
in Each Category
Total Loans
|
|
|
Balance at End of
Period
|
|
|
Percent of Loans
in Each Category
Total Loans
|
|
|
|
|
09/30/16
|
|
|
09/30/16
|
|
|
09/30/15
|
|
|
09/30/15
|
|
|
Commercial
|
|
$
|
41,942
|
|
|
|
9.4
|
%
|
|
$
|
32,898
|
|
|
|
8.4
|
%
|
|
Agricultural
|
|
|
49,046
|
|
|
|
11.0
|
%
|
|
|
39,819
|
|
|
|
10.2
|
%
|
|
Real estate – residential
|
|
|
22,987
|
|
|
|
5.1
|
%
|
|
|
26,201
|
|
|
|
6.7
|
%
|
|
Real estate – commercial
|
|
|
215,166
|
|
|
|
48.2
|
%
|
|
|
182,728
|
|
|
|
46.8
|
%
|
|
Real estate – construction
|
|
|
18,952
|
|
|
|
4.2
|
%
|
|
|
20,479
|
|
|
|
5.2
|
%
|
|
Equity Lines of Credit
|
|
|
41,743
|
|
|
|
9.3
|
%
|
|
|
37,872
|
|
|
|
9.7
|
%
|
|
Auto
|
|
|
53,464
|
|
|
|
12.0
|
%
|
|
|
48,012
|
|
|
|
12.3
|
%
|
|
Other
|
|
|
3,613
|
|
|
|
0.8
|
%
|
|
|
2,777
|
|
|
|
0.7
|
%
|
|
Total Gross Loans
|
|
$
|
446,913
|
|
|
|
100
|
%
|
|
$
|
390,786
|
|
|
|
100
|
%
|
The average rate earned on the Company’s loan balances deceased by one basis point to 5.36% during the first nine months of 2016 compared to 5.37% during the first nine months of 2015. We attribute this decrease in yield to extremely competitive loan pricing in our service area.
Interest on investment securities increased by $172 thousand as a result of an increase in yield of 6 basis points from 1.83% during the first nine months of 2015 to 1.89% during the nine months ended September 30, 2016 and an increase in the average balance in investment securities from $90.0 million during the first nine months of 2015 to $99.3 million during the nine months ended September 30, 2016. During the current period yield benefited from an increase in municipal securities as a percentage of total securities. At September 30, 2016 municipal securities totaled $25.3 million or 25% of the investment portfolio compared to $17.1 million or 19% of the portfolio at September 30, 2015.
Interest expense on deposits increased by $14 thousand, or 4%, to $397 thousand for the nine months ended September 30, 2016, up from $383 thousand during the 2015 period. This increase relates to an increase in the average balance of NOW, Money Market and Savings accounts partially offset by decreases in the average balance and rate paid on time deposits.
Interest on time deposits declined by $18 thousand. Average time deposits declined by $3.6 million from $54.8 million during the nine months ended September 30, 2015 to $51.2 million during the current period. We attribute much of the reduction in time deposit to the unusually low interest rate environment as we have seen a movement out of time into more liquid deposit types. The average rate paid on time deposits decreased from 0.33% during the nine months ended September 30, 2015 to 0.31% during the current period. This decrease primarily relates to the maturity of higher rate time deposits.
The largest increase in interest expense on deposits was a $19 thousand increase in interest on savings accounts related to growth in this deposit category. Average savings balances increased from $116.3 million during the nine months ended September 30, 2015 to $129.9 million during the current nine month period. Plumas Bank’s savings accounts provide an attractive interest rate, in the current rate environment, and we have seen continued growth in savings accounts for the last few years. The average rate paid on savings accounts was 16 basis points during both periods.
Interest expense on other interest-bearing liabilities decreased by $190 thousand from $556 thousand during the nine months ended September 30, 2015 to $366 thousand during the current nine month period. On April 15, 2013, to help fund the repurchase of preferred stock during 2013, the Company issued a $7.5 million subordinated debenture. On April 16, 2015 we paid off the subordinated debenture resulting in a reduction in interest expense related to this debt of $219 thousand.
Interest expense on the Company’s note payable increased by $2 thousand to $108 thousand during the nine months ended September 30, 2016. Average borrowings on this note were $3.5 million during the 2015 period and $3.6 million during the current period. The average rate paid on the note payable was 4.1% during 2016 and 2015.
Interest expense on junior subordinated debentures, which increased by $28 thousand to $255 thousand, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR) rate.
The following table presents for the nine-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
Nine
Months Ended
September
30,
2016
|
|
|
For the
Nine
Months Ended
September
30,
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)
|
|
$
|
420,020
|
|
|
$
|
16,859
|
|
|
|
5.36
|
%
|
|
$
|
383,652
|
|
|
$
|
15,415
|
|
|
|
5.37
|
%
|
|
Investment securities (1)
|
|
|
99,324
|
|
|
|
1,407
|
|
|
|
1.89
|
%
|
|
|
89,994
|
|
|
|
1,235
|
|
|
|
1.83
|
%
|
|
Interest-bearing deposits
|
|
|
40,730
|
|
|
|
191
|
|
|
|
0.63
|
%
|
|
|
38,291
|
|
|
|
114
|
|
|
|
0.40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
560,074
|
|
|
|
18,457
|
|
|
|
4.40
|
%
|
|
|
511,937
|
|
|
|
16,764
|
|
|
|
4.38
|
%
|
|
Cash and due from banks
|
|
|
16,866
|
|
|
|
|
|
|
|
|
|
|
|
17,243
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
32,634
|
|
|
|
|
|
|
|
|
|
|
|
33,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
609,574
|
|
|
|
|
|
|
|
|
|
|
$
|
562,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
$
|
91,678
|
|
|
|
63
|
|
|
|
0.09
|
%
|
|
$
|
86,734
|
|
|
|
58
|
|
|
|
0.09
|
%
|
|
Money market deposits
|
|
|
53,280
|
|
|
|
57
|
|
|
|
0.14
|
%
|
|
|
46,131
|
|
|
|
49
|
|
|
|
0.14
|
%
|
|
Savings deposits
|
|
|
129,929
|
|
|
|
158
|
|
|
|
0.16
|
%
|
|
|
116,309
|
|
|
|
139
|
|
|
|
0.16
|
%
|
|
Time deposits
|
|
|
51,176
|
|
|
|
119
|
|
|
|
0.31
|
%
|
|
|
54,768
|
|
|
|
137
|
|
|
|
0.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
326,063
|
|
|
|
397
|
|
|
|
0.16
|
%
|
|
|
303,942
|
|
|
|
383
|
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
3,555
|
|
|
|
108
|
|
|
|
4.06
|
%
|
|
|
3,476
|
|
|
|
106
|
|
|
|
4.08
|
%
|
|
Subordinated debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
%
|
|
|
2,874
|
|
|
|
219
|
|
|
|
10.19
|
%
|
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
255
|
|
|
|
3.30
|
%
|
|
|
10,310
|
|
|
|
227
|
|
|
|
2.94
|
%
|
|
Other interest-bearing liabilities
|
|
|
5,656
|
|
|
|
3
|
|
|
|
0.07
|
%
|
|
|
6,410
|
|
|
|
4
|
|
|
|
0.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
345,584
|
|
|
|
763
|
|
|
|
0.29
|
%
|
|
|
327,012
|
|
|
|
939
|
|
|
|
0.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
211,995
|
|
|
|
|
|
|
|
|
|
|
|
190,312
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,227
|
|
|
|
|
|
|
|
|
|
|
|
5,862
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
45,768
|
|
|
|
|
|
|
|
|
|
|
|
39,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & equity
|
|
$
|
609,574
|
|
|
|
|
|
|
|
|
|
|
$
|
562,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of funding interest-earning assets (4)
|
|
|
|
|
|
|
|
|
|
|
0.18
|
%
|
|
|
|
|
|
|
|
|
|
|
0.25
|
%
|
|
Net interest income and margin (5)
|
|
|
|
|
|
$
|
17,694
|
|
|
|
4.22
|
%
|
|
|
|
|
|
$
|
15,825
|
|
|
|
4.13
|
%
|
|
(1)
|
Not computed on a tax-equivalent basis.
|
|
(2)
|
Average nonaccrual loan balances of $4.
0 million for 2016 and $5.7 million for 2015 are included in average loan balances for computational purposes.
|
|
(3)
|
Net loan costs included in loan interest income for the nine-month periods ended September 30, 2016 and 2015 were $509,000 and $498,000, 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 nine-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 nine months ended September 30
|
|
|
|
|
(in thousands)
|
|
|
|
|
Volume (1)
|
|
|
Rate (2)
|
|
|
Mix (3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
1,463
|
|
|
$
|
(30
|
)
|
|
$
|
11
|
|
|
$
|
1,444
|
|
|
Investment securities
|
|
|
128
|
|
|
|
39
|
|
|
|
5
|
|
|
|
172
|
|
|
Interest bearing deposits
|
|
|
7
|
|
|
|
65
|
|
|
|
5
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
1,598
|
|
|
|
74
|
|
|
|
21
|
|
|
|
1,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
|
3
|
|
|
|
2
|
|
|
|
-
|
|
|
|
5
|
|
|
Money market deposits
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8
|
|
|
Savings deposits
|
|
|
17
|
|
|
|
2
|
|
|
|
-
|
|
|
|
19
|
|
|
Time deposits
|
|
|
(9
|
)
|
|
|
(10
|
)
|
|
|
1
|
|
|
|
(18
|
)
|
|
Note payable
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
Subordinated debentures
|
|
|
(219
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(219
|
)
|
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
28
|
|
|
|
-
|
|
|
|
28
|
|
|
Other
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
-
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(198
|
)
|
|
|
21
|
|
|
|
1
|
|
|
|
(176
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,796
|
|
|
$
|
53
|
|
|
$
|
20
|
|
|
$
|
1,869
|
|
|
(1)
|
The volume change in net interest income represents the change in average balance multiplied by the previous year’s rate.
|
|
|
|
|
(2)
|
The rate change in net interest income represents the change in rate multiplied by the previous year’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 nine months ended September 30, 2016 we recorded a provision for loan losses of $600 thousand down $300 thousand from the $900 thousand provision recorded during the nine months ended September 30, 2015. See “Analysis of Asset Quality and Allowance for Loan Losses” for further 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 collectability 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 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 nine months ended September 30, 2016 non-interest income totaled $5.7 million a decline of $212 thousand from the nine months ended September 30, 2015. The largest components of this change were decreases of $194 thousand in gain on sale of SBA loans, $55 thousand in other income related to a decrease of $79 thousand in Federal Home Loan Bank of San Francisco (FHLB) dividends and $53 thousand in loss/gain on sale of securities. During the current period, we sold $21.4 million in guaranteed portions of SBA loans, resulting in a gain on sale of $1.4 million. During the same period in 2015 we sold $21.3 million in guaranteed portions of SBA loans recording a gain of sale $1.6 million
. We attribute the decline in gain on sale of SBA loans to a decline in the average of the rate paid on loans sold as well as a reduction in SBA loan sale premiums related to market conditions. The decline in FHLB dividends was related to a $88 thousand one-time special dividend from the FHLB paid in June, 2015. During the nine months ended September 30, 2016 we sold fourteen investment securities recording a net loss of $32 thousand. During the same period in 2015 we sold fifteen available-for-sale investment securities recording a $21
,000 net gain on sale. Partially offsetting these items was an increase in service charge income of $34 and an increase in loan servicing fees of $56 thousand. Loan servicing income represents servicing income received on the guaranteed portion of SBA loans sold into the secondary market. At September 30, 2016 we were servicing over $95 million in guaranteed portions of loans an increase of $9 million from over $86 million at September 30, 2015.
The following table describes the components of non-interest income for the nine-month periods ended September 30, 2016 and 2015, dollars in thousands:
|
|
|
For the Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
Service charges on deposit accounts
|
|
$
|
2,992
|
|
|
$
|
2,958
|
|
|
$
|
34
|
|
|
|
1.1
|
%
|
|
Gain on sale of loans, net
|
|
|
1,397
|
|
|
|
1,591
|
|
|
|
(194
|
)
|
|
|
(12.2
|
)%
|
|
Loan servicing fees
|
|
|
464
|
|
|
|
408
|
|
|
|
56
|
|
|
|
13.7
|
%
|
|
Earnings on life insurance policies
|
|
|
256
|
|
|
|
256
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
(Loss) gain on sale of investments
|
|
|
(32
|
)
|
|
|
21
|
|
|
|
(53
|
)
|
|
|
(252.4
|
)%
|
|
Other
|
|
|
624
|
|
|
|
679
|
|
|
|
(55
|
)
|
|
|
(8.1
|
)%
|
|
Total non-interest income
|
|
$
|
5,701
|
|
|
$
|
5,913
|
|
|
$
|
(212
|
)
|
|
|
(3.6
|
)%
|
Non-interest expense.
During the nine months ended September 30, 2016 non-interest expense increased by $29 thousand to $14.0 million. The largest components of this increase were increases of $104 thousand in advertising and shareholder relation costs, $81 thousand in occupancy and equipment costs, a $77 thousand decline in gain on sale of OREO, a $61 thousand increase in telephone and data communications costs and a $58 thousand increase in outside service fees. Significant declines in non-interest expense include a decrease of $166 thousand in OREO costs, a decline of $84 thousand in professional fees, a $70 reduction in the provision from change in OREO valuation and a $51 thousand decline in deposit insurance expense.
The increase in advertising costs is mostly related to our Reno, Nevada branch which opened in December, 2015. We have developed an aggressive marketing plan for this branch which includes print and radio advertising as well as various efforts to reach out to the community. The increase in occupancy and equipment costs also relates to the Reno branch. During the nine months ended September 30, 2015 we sold 7 OREO properties for total proceeds of $1.6 million recording a net gain on sale of $73 thousand. This compares to net proceeds of $392 thousand on the sale of 3 properties and a net loss on sale of $4 thousand during the nine months ended September 30, 2016. Of the $61 thousand increase in telephone and data communications $27 thousand relates to our Reno branch while the remainder is primarily related to an upgrade in our data communication network. The largest component of the increase in outside service fees is $27 thousand in costs associated with the outsourcing of our email processing beginning in February, 2016.
OREO costs which declined from $153 thousand during the nine months ended September 30, 2015 to credit of $13 thousand during the current nine month period benefited from a reduction in OREO properties, a reimbursement of previously incurred costs and $54 thousand in rental income on a new OREO property. The largest single decline in OREO costs was a decrease in OREO maintenance costs of $63 thousand from $91 thousand during the nine months ended September 30, 2015 to $28 during the nine months ended September 30, 2016. The decrease in professional fees is mostly related to a decline in legal expense related to loan collection activities as our two largest collection cases were resolved in 2016. One case resulted in a loan loss recovery of $330 thousand while the other case resulted in foreclosure on a commercial property.
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. The provision from change in OREO valuation declined from $79 thousand during the nine months ended September 30, 2015 to $9 thousand during the current period. During the nine months ended September 30, 2016 we recorded a $9 thousand provision related to a decline in value on one OREO property. The decline in deposit insurance expense is related to a decline in the rate charged by the FDIC.
The largest category of non-interest expense is salary and benefits expense. The two largest increases in this category were $147 thousand in salary expense and $123 thousand in bonus expense. Bonus expense increased from $450 thousand during the nine months ended September 30, 2015 to $573 thousand during the current period. Offsetting the increase in salary and bonus expense was an increase of $402 thousand in the deferral of loan origination costs related to an increase in loan production.
The following table describes the components of non-interest expense for the nine-month periods ended September 30, 2016 and 2015, dollars in thousands:
|
|
|
For the Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
Salaries and employee benefits
|
|
$
|
7,713
|
|
|
$
|
7,728
|
|
|
$
|
(15
|
)
|
|
|
(0.2
|
)
%
|
|
Occupancy and equipment
|
|
|
2,163
|
|
|
|
2,082
|
|
|
|
81
|
|
|
|
3.9
|
%
|
|
Outside service fees
|
|
|
1,564
|
|
|
|
1,506
|
|
|
|
58
|
|
|
|
3.9
|
%
|
|
Professional fees
|
|
|
488
|
|
|
|
572
|
|
|
|
(84
|
)
|
|
|
(14.7
|
)
%
|
|
Telephone and data communication
|
|
|
337
|
|
|
|
276
|
|
|
|
61
|
|
|
|
22.1
|
%
|
|
Advertising and shareholder relations
|
|
|
316
|
|
|
|
212
|
|
|
|
104
|
|
|
|
49.1
|
%
|
|
Director compensation and retirement
|
|
|
252
|
|
|
|
227
|
|
|
|
25
|
|
|
|
11.0
|
%
|
|
Business development
|
|
|
248
|
|
|
|
251
|
|
|
|
(3
|
)
|
|
|
(1.2
|
)
%
|
|
Deposit insurance
|
|
|
227
|
|
|
|
278
|
|
|
|
(51
|
)
|
|
|
(18.3
|
)
%
|
|
Armored car and courier
|
|
|
184
|
|
|
|
175
|
|
|
|
9
|
|
|
|
5.1
|
%
|
|
Loan and collection expenses
|
|
|
130
|
|
|
|
161
|
|
|
|
(31
|
)
|
|
|
(19.3
|
)
%
|
|
Stationery and supplies
|
|
|
90
|
|
|
|
82
|
|
|
|
8
|
|
|
|
9.8
|
%
|
|
Insurance expense
|
|
|
60
|
|
|
|
72
|
|
|
|
(12
|
)
|
|
|
(16.7
|
)
%
|
|
Postage
|
|
|
29
|
|
|
|
30
|
|
|
|
(1
|
)
|
|
|
(3.3
|
)
%
|
|
Provision from change in OREO valuation
|
|
|
9
|
|
|
|
79
|
|
|
|
(70
|
)
|
|
|
(88.6
|
)
%
|
|
Loss (gain) on sale of OREO
|
|
|
4
|
|
|
|
(73
|
)
|
|
|
77
|
|
|
|
105.5
|
%
|
|
OREO costs
|
|
|
(13
|
)
|
|
|
153
|
|
|
|
(166
|
)
|
|
|
(108.5
|
)
%
|
|
Other
|
|
|
222
|
|
|
|
183
|
|
|
|
39
|
|
|
|
21.3
|
%
|
|
Total non-interest expense
|
|
$
|
14,023
|
|
|
$
|
13,994
|
|
|
$
|
29
|
|
|
|
0.2
|
%
|
Provision for income taxes.
The Company recorded an income tax provision of $3.4 million, or 38.8% of pre-tax income for the nine months ended September 30, 2016. This compares to an income tax provision of $2.7 million, or 39.1% of pre-tax income for the nine months ended September 30, 2015. The percentages for 2016 and 2015 differ from the statutory rate as tax exempt income such as earnings on Bank owned life insurance and municipal investment income decrease the tax provision.
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 September 30, 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016
Net Income.
The Company recorded net income of $2.0 million for the three months ended September 30, 2016 up $357 thousand from net income of $1.6 million for the three months ended September 30, 2015. An increase of $596 thousand in net interest income and a decline of $100 thousand in the loan loss provision were partially offset by increases of $51 thousand in non-interest expense and $235 thousand in the provision for income taxes and a decline of $53 thousand in non-interest income.
The following is a detail discussion of each component of the change in net income.
Net interest income before provision for loan losses.
Net interest income, on a nontax-equivalent basis, was $6.1 million for the three months ended September 30, 2016 an increase of $596 thousand, or 11%, from $5.5 million for the same period in 2015. The increase in net interest income includes an increase of $587 thousand in interest income and a decline of $9 thousand in interest expense. Net interest margin for the three months ended September 30, 2016 was 4.20% an increase of 12 basis points from 4.08% during the three months ended September 30, 2015.
Interest income increased by 10%, to $6.4 million for the three months ended September 30, 2016, up from $5.8 million during the same period in 2015. Related to an increase in average loan balances, interest and fees on loans increased $525 thousand to $5.8 million for the three months ended September 30, 2016 as compared to $5.3 million during the third quarter of 2015. The Company’s average loan balances were $438 million for the three months ended September 30, 2016, up $45 million, or 11%, from $393 million for the same period in 2015.
The average yield on loans was 5.32% during the third quarter of 2016 down from 5.38% for same quarter in 2015. We attribute much of the decrease in yield to price competition in our service area.
Interest on investment securities increased by $44 thousand as a result of an increase in average balance from $89.3 million in 2015 to $99.5 million in 2016. Yield on investment securities declined slightly from 1.86% during the third quarter of 2015 to 1.85% during the current quarter.
Interest expense on deposits increased by $1 thousand to $135 thousand for the three months ended September 30, 2016, up from $134 thousand during the 2015 quarter. This increase relates to an increase in the average balance of NOW, Money Market and Savings accounts partially offset by decreases in the average balance and rate paid on time deposits.
Interest on time deposits declined by $7 thousand. Average time deposits declined by $4.1 million from $54.6 million during the three months ended September 30, 2015 to $50.5 million during the current quarter. We attribute much of the reduction in time deposits to the unusually low interest rate environment as we have seen a movement out of time into more liquid deposit types. The average rate paid on time deposits decreased from 0.33% during the three months ended September 30, 2015 to 0.31% during the current quarter. This decrease primarily relates to the maturity of higher rate deposits.
Interest expense on other interest-bearing liabilities decreased by $10 thousand from $129 thousand during the three months ended September 30, 2015 to $119 thousand during the current quarter. Interest expense on the Company’s note payable decreased by $20 thousand to $31 thousand during the three months ended September 30, 2016. This decrease was related to a decrease in average borrowings on this note from $5.0 million during the third quarter of 2015 to $2.6 million during the three months ended September 30, 2016. The average rate paid on the note payable was 4.70% during the three months ended September 30, 2016 and 4.05% during the third quarter of 2015. The increase in yield was related to the assessment of a $6 thousand loan fee related to the Company’s revolving line of credit during the third quarter of 2016.
Interest expense on junior subordinated debentures, which increased by $10 thousand to $87 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 expressed in both dollars and annualized yield percentages, 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
September
30, 2016
|
|
|
For the Three Months Ended
September
30, 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)
|
|
$
|
437,818
|
|
|
$
|
5,850
|
|
|
|
5.32
|
%
|
|
$
|
392,523
|
|
|
$
|
5,325
|
|
|
|
5.38
|
%
|
|
Investment securities (1)
|
|
|
99,470
|
|
|
|
462
|
|
|
|
1.85
|
%
|
|
|
89,301
|
|
|
|
418
|
|
|
|
1.86
|
%
|
|
Other
|
|
|
43,282
|
|
|
|
68
|
|
|
|
0.63
|
%
|
|
|
55,966
|
|
|
|
50
|
|
|
|
0.35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
580,570
|
|
|
|
6,380
|
|
|
|
4.37
|
%
|
|
|
537,790
|
|
|
|
5,793
|
|
|
|
4.27
|
%
|
|
Cash and due from banks
|
|
|
18,578
|
|
|
|
|
|
|
|
|
|
|
|
17,797
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
33,562
|
|
|
|
|
|
|
|
|
|
|
|
32,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
632,710
|
|
|
|
|
|
|
|
|
|
|
$
|
588,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
$
|
93,412
|
|
|
|
21
|
|
|
|
0.09
|
%
|
|
$
|
89,885
|
|
|
|
20
|
|
|
|
0.09
|
%
|
|
Money market deposits
|
|
|
55,464
|
|
|
|
20
|
|
|
|
0.14
|
%
|
|
|
48,026
|
|
|
|
17
|
|
|
|
0.14
|
%
|
|
Savings deposits
|
|
|
133,543
|
|
|
|
55
|
|
|
|
0.16
|
%
|
|
|
124,628
|
|
|
|
51
|
|
|
|
0.16
|
%
|
|
Time deposits
|
|
|
50,480
|
|
|
|
39
|
|
|
|
0.31
|
%
|
|
|
54,630
|
|
|
|
46
|
|
|
|
0.33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
332,899
|
|
|
|
135
|
|
|
|
0.16
|
%
|
|
|
317,169
|
|
|
|
134
|
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note payable
|
|
|
2,622
|
|
|
|
31
|
|
|
|
4.70
|
%
|
|
|
5,000
|
|
|
|
51
|
|
|
|
4.05
|
%
|
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
87
|
|
|
|
3.36
|
%
|
|
|
10,310
|
|
|
|
77
|
|
|
|
2.96
|
%
|
|
Other interest-bearing liabilities
|
|
|
6,371
|
|
|
|
1
|
|
|
|
0.06
|
%
|
|
|
4,873
|
|
|
|
1
|
|
|
|
0.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
352,202
|
|
|
|
254
|
|
|
|
0.29
|
%
|
|
|
337,352
|
|
|
|
263
|
|
|
|
0.31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits
|
|
|
226,484
|
|
|
|
|
|
|
|
|
|
|
|
205,134
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,292
|
|
|
|
|
|
|
|
|
|
|
|
5,588
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
47,732
|
|
|
|
|
|
|
|
|
|
|
|
40,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities & equity
|
|
$
|
632,710
|
|
|
|
|
|
|
|
|
|
|
$
|
588,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of funding interest-earning assets (4)
|
|
|
|
|
|
|
|
|
|
|
0.17
|
%
|
|
|
|
|
|
|
|
|
|
|
0.19
|
%
|
|
Net interest income and margin (5)
|
|
|
|
|
|
$
|
6,126
|
|
|
|
4.20
|
%
|
|
|
|
|
|
$
|
5,530
|
|
|
|
4.08
|
%
|
|
(1)
|
Not computed on a tax-equivalent basis.
|
|
(2)
|
Average nonaccrual loan balances of $2.9 million for 2016 and $5.1 million for 2015 are included in average loan balances for computational purposes.
|
|
(3)
|
Net loan costs included in loan interest income for the three-month periods ended September 30, 2016 and 2015 were $180,000 and $144,000, 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 September 30
|
|
|
|
|
(in thousands)
|
|
|
|
|
Volume (1)
|
|
|
Rate (2)
|
|
|
Mix (3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
613
|
|
|
$
|
(66
|
)
|
|
$
|
(22
|
)
|
|
$
|
525
|
|
|
Investment securities
|
|
|
47
|
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
44
|
|
|
Interest bearing deposits
|
|
|
(11
|
)
|
|
|
38
|
|
|
|
(9
|
)
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
649
|
|
|
|
(30
|
)
|
|
|
(32
|
)
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1
|
|
|
Money market deposits
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
Savings deposits
|
|
|
4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4
|
|
|
Time deposits
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
(7
|
)
|
|
Note payable
|
|
|
(24
|
)
|
|
|
8
|
|
|
|
(4
|
)
|
|
|
(20
|
)
|
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
10
|
|
|
|
-
|
|
|
|
10
|
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
(19
|
)
|
|
|
14
|
|
|
|
(4
|
)
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
668
|
|
|
$
|
(44
|
)
|
|
$
|
(28
|
)
|
|
$
|
596
|
|
|
(1)
|
The volume change in net interest income represents the change in average balance divided by the previous year’s rate.
|
|
|
|
|
(2)
|
The rate change in net interest income represents the change in rate divided by the previous year’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 September 30, 2016 we recorded a provision for loan losses of $200 thousand, down $100 thousand from the $300 thousand provision recorded during the third 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.
Non-interest income.
During the three months ended September 30, 2016 non-interest income totaled $2.0 million a decrease of $53 thousand from the three months ended September 30, 2015. The largest component of this decrease was a decrease in gain on sale of SBA loans of $112 thousand from $617 thousand during the 2015 quarter to $505 thousand during the three months ended September 30, 2016. This decline was mostly related to a decline in loans sold from $8.8 million during the three months ended September 30, 2015 to $7.6 million during the current quarter. The effect of the decline in gain on sale of SBA loans was partially offset by increases of $14 thousand in service charge income, $15 thousand in loan servicing fees and $30 thousand in other.
The following table describes the components of non-interest income for the three-month periods ended September 30, 2016 and 2015, dollars in thousands:
|
|
|
For the Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended September 30
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
Service charges on deposit accounts
|
|
$
|
1,027
|
|
|
$
|
1,013
|
|
|
$
|
14
|
|
|
|
1.4
|
%
|
|
Gain on sale of loans, net
|
|
|
505
|
|
|
|
617
|
|
|
|
(112
|
)
|
|
|
(18.2
|
)%
|
|
Loan serving fees
|
|
|
161
|
|
|
|
146
|
|
|
|
15
|
|
|
|
10.3
|
%
|
|
Earnings on life insurance policies
|
|
|
85
|
|
|
|
85
|
|
|
|
-
|
|
|
|
-
|
%
|
|
Other
|
|
|
215
|
|
|
|
185
|
|
|
|
30
|
|
|
|
16.2
|
%
|
|
Total non-interest income
|
|
$
|
1,993
|
|
|
$
|
2,046
|
|
|
$
|
(53
|
)
|
|
|
(2.6
|
)
%
|
Non-interest expense.
Non-interest expense totaled $4.7 million during the three months ended September 30, 2016 an increase of $51 thousand from the same period in 2015. The three largest increases were $77 thousand in occupancy and equipment costs, $67 thousand in advertising and shareholder relations expense and a $62 thousand decline in gain on sale of OREO. The increase in occupancy and equipment expense includes costs related our new Reno, Nevada branch and the upgrading of personal computers. The increase in advertising and shareholders relations expense is related to marketing efforts in support of our new Reno, Nevada branch. During the three months ended September 30, 2016 we sold one OREO with no gain or loss on sale. This compares to the sale of three properties during the third quarter of 2015 recording a net gain on sale of $62 thousand.
These increases in non-interest expense were partially offset by a $74 thousand decline in OREO costs and a $70 thousand decline in professional fees. The decline in OREO costs includes a reduction in OREO properties and $47 thousand in rental income on a new OREO property. The decline in professional fees is largely related to a decline in legal expense related to loan collection activities.
The following table describes the components of non-interest expense for the three-month periods ended September 30, 2016 and 2015, dollars in thousands:
|
|
|
For the Three Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
|
Salaries and employee benefits
|
|
$
|
2,547
|
|
|
$
|
2,584
|
|
|
$
|
(37
|
)
|
|
|
(1.4
|
)
%
|
|
Occupancy and equipment
|
|
|
779
|
|
|
|
702
|
|
|
|
77
|
|
|
|
11.0
|
%
|
|
Outside service fees
|
|
|
508
|
|
|
|
521
|
|
|
|
(13
|
)
|
|
|
(2.5
|
)
%
|
|
Professional fees
|
|
|
147
|
|
|
|
217
|
|
|
|
(70
|
)
|
|
|
(32.3
|
)
%
|
|
Advertising and shareholder relations
|
|
|
131
|
|
|
|
64
|
|
|
|
67
|
|
|
|
104.7
|
%
|
|
Telephone and data communication
|
|
|
128
|
|
|
|
94
|
|
|
|
34
|
|
|
|
36.2
|
%
|
|
Business development
|
|
|
86
|
|
|
|
86
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
Director compensation and retirement
|
|
|
82
|
|
|
|
78
|
|
|
|
4
|
|
|
|
5.1
|
%
|
|
Armored car and courier
|
|
|
66
|
|
|
|
61
|
|
|
|
5
|
|
|
|
8.2
|
%
|
|
Loan and collection expenses
|
|
|
57
|
|
|
|
31
|
|
|
|
26
|
|
|
|
83.9
|
%
|
|
Deposit insurance
|
|
|
53
|
|
|
|
90
|
|
|
|
(37
|
)
|
|
|
(41.1
|
)
%
|
|
Stationery and supplies
|
|
|
28
|
|
|
|
28
|
|
|
|
-
|
|
|
|
0.0
|
%
|
|
Insurance expense
|
|
|
15
|
|
|
|
22
|
|
|
|
(7
|
)
|
|
|
(31.8
|
)
%
|
|
Postage
|
|
|
9
|
|
|
|
10
|
|
|
|
(1
|
)
|
|
|
(10.0
|
)
%
|
|
Provision from change in OREO valuation
|
|
|
-
|
|
|
|
36
|
|
|
|
(36
|
)
|
|
|
(100.0
|
)
%
|
|
Gain on sale of OREO
|
|
|
-
|
|
|
|
(62
|
)
|
|
|
62
|
|
|
|
100.0
|
%
|
|
OREO costs
|
|
|
(20
|
)
|
|
|
54
|
|
|
|
(74
|
)
|
|
|
(137.0
|
)
%
|
|
Other
|
|
|
93
|
|
|
|
42
|
|
|
|
51
|
|
|
|
121.4
|
%
|
|
Total non-interest expense
|
|
$
|
4,709
|
|
|
$
|
4,658
|
|
|
$
|
51
|
|
|
|
1.1
|
%
|
Provision for income taxes.
The Company recorded income tax expense of $1.3 million, or 39.0% of pre-tax income for the three months ended September 30, 2016. This compares to income tax expense of $1.0 million, or 38.9% of pre-tax income for the three months ended September 30, 2015. The percentages for 2016 and 2015 differ from the statutory rate as tax exempt income such as earnings on Bank owned life insurance and municipal loan and investment income decrease taxable income.
FINANCIAL CONDITION
Loan Portfolio.
Net loans increased by $45.6 million or at an annualized rate of 15%, from $397 million at December 31, 2015 to $442 million at September 30, 2016. The largest areas of growth were $23.1 million in commercial real estate loans and $9.2 million in agricultural loans. The largest decrease in any loan category was a decline of $2.5 million in residential real estate 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, agricultural loans,
commercial loans and equity lines of credit.
|
(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
|
|
|
|
|
9/30/16
|
|
|
9/30/16
|
|
|
12/31/15
|
|
|
12/31/15
|
|
|
Commercial
|
|
$
|
41,942
|
|
|
|
9.4
|
%
|
|
$
|
37,084
|
|
|
|
9.2
|
%
|
|
Agricultural
|
|
|
49,046
|
|
|
|
11.0
|
%
|
|
|
39,856
|
|
|
|
9.9
|
%
|
|
Real estate – residential
|
|
|
22,987
|
|
|
|
5.1
|
%
|
|
|
25,474
|
|
|
|
6.4
|
%
|
|
Real estate – commercial
|
|
|
215,166
|
|
|
|
48.2
|
%
|
|
|
192,095
|
|
|
|
47.9
|
%
|
|
Real estate - construction & land
|
|
|
18,952
|
|
|
|
4.2
|
%
|
|
|
16,188
|
|
|
|
4.0
|
%
|
|
Equity Lines of Credit
|
|
|
41,743
|
|
|
|
9.3
|
%
|
|
|
38,327
|
|
|
|
9.6
|
%
|
|
Auto
|
|
|
53,464
|
|
|
|
12.0
|
%
|
|
|
48,365
|
|
|
|
12.1
|
%
|
|
Other
|
|
|
3,613
|
|
|
|
0.8
|
%
|
|
|
3,582
|
|
|
|
0.9
|
%
|
|
Total Gross Loans
|
|
$
|
446,913
|
|
|
|
100
|
%
|
|
$
|
400,971
|
|
|
|
100
|
%
|
Construction and land development loans represented 4.2% and 4.0% of the loan portfolio as of September 30, 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 72% of the total loan portfolio at September 30, 2016. Moreover, the business activities of the Company currently are focused in the California counties of Plumas, Nevada, Placer, Lassen, Modoc, Shasta, and 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 September 30, 2016 and December 31, 2015, approximately 73% and 72%, respectively of the Company's loan portfolio was comprised of variable rate loans. At September 30, 2016 and December 31, 2015, 45% 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 September 30, 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 $49 million at September 30, 2016 and $40 million at December 31, 2015. In 2016 we hired a new agricultural/commercial loan officer located in Klamath Falls, Oregon. The increase in agricultural loans during 2016 is mostly attributable to his efforts.
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 Nine Months
Ended September 30,
|
|
|
For the Year Ended December 31
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
|
|
(dollars in thousands)
|
|
|
Balance at beginning of period
|
|
$
|
6,078
|
|
|
$
|
5,451
|
|
|
$
|
5,451
|
|
|
$
|
5,517
|
|
|
$
|
5,686
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
|
200
|
|
|
|
91
|
|
|
|
91
|
|
|
|
191
|
|
|
|
401
|
|
|
Real estate mortgage
|
|
|
252
|
|
|
|
132
|
|
|
|
132
|
|
|
|
1,015
|
|
|
|
419
|
|
|
Real estate construction & land
|
|
|
5
|
|
|
|
54
|
|
|
|
55
|
|
|
|
106
|
|
|
|
735
|
|
|
Consumer (includes Equity Lines of Credit & Auto)
|
|
|
300
|
|
|
|
395
|
|
|
|
549
|
|
|
|
601
|
|
|
|
360
|
|
|
Total charge-offs
|
|
|
757
|
|
|
|
672
|
|
|
|
827
|
|
|
|
1,913
|
|
|
|
1,915
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
|
23
|
|
|
|
108
|
|
|
|
173
|
|
|
|
89
|
|
|
|
140
|
|
|
Real estate mortgage
|
|
|
42
|
|
|
|
6
|
|
|
|
8
|
|
|
|
19
|
|
|
|
109
|
|
|
Real estate construction & land
|
|
|
359
|
|
|
|
-
|
|
|
|
-
|
|
|
|
491
|
|
|
|
-
|
|
|
Consumer (includes Equity Lines of Credit & Auto)
|
|
|
132
|
|
|
|
124
|
|
|
|
173
|
|
|
|
148
|
|
|
|
97
|
|
|
Total recoveries
|
|
|
556
|
|
|
|
238
|
|
|
|
354
|
|
|
|
747
|
|
|
|
346
|
|
|
Net charge-offs
|
|
|
(201
|
)
|
|
|
(434
|
)
|
|
|
(473
|
)
|
|
|
(1,166
|
)
|
|
|
(1,569
|
)
|
|
Provision for loan losses
|
|
|
600
|
|
|
|
900
|
|
|
|
1,100
|
|
|
|
1,100
|
|
|
|
1,400
|
|
|
Balance at end of period
|
|
$
|
6,477
|
|
|
$
|
5,917
|
|
|
$
|
6,078
|
|
|
$
|
5,451
|
|
|
$
|
5,517
|
|
|
Net charge-offs during the period to average loans (annualized for the nine month periods)
|
|
|
0.06
|
%
|
|
|
0.15
|
%
|
|
|
0.12
|
%
|
|
|
0.33
|
%
|
|
|
0.49
|
%
|
|
Allowance for loan losses to total loans
|
|
|
1.45
|
%
|
|
|
1.51
|
%
|
|
|
1.52
|
%
|
|
|
1.47
|
%
|
|
|
1.63
|
%
|
During the nine months ended September 30, 2016 we recorded a provision for loan losses of $600 thousand down $300 thousand from the $900 thousand provision recorded during the nine months ended September 30, 2015. Net charge-offs totaled $201 thousand a decrease of $233 thousand from $434 thousand during the nine months ended September 30, 2015.
The following table provides a breakdown of the allowance for loan losses at September 30, 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
|
|
|
2016
|
|
|
2015
|
|
|
2015
|
|
|
Commercial and agricultural
|
|
$
|
1,158
|
|
|
|
20.4
|
%
|
|
$
|
933
|
|
|
|
19.1
|
%
|
|
Real estate mortgage
|
|
|
2,915
|
|
|
|
53.3
|
%
|
|
|
2,866
|
|
|
|
54.3
|
%
|
|
Real estate construction & land
|
|
|
895
|
|
|
|
4.2
|
%
|
|
|
874
|
|
|
|
4.0
|
%
|
|
Consumer (includes Equity Lines of Credit & Auto)
|
|
|
1,509
|
|
|
|
22.1
|
%
|
|
|
1,405
|
|
|
|
22.6
|
%
|
|
Total
|
|
$
|
6,477
|
|
|
|
100.0
|
%
|
|
$
|
6,078
|
|
|
|
100.0
|
%
|
The allowance for loan losses totaled $6.5 million at September 30, 2016 and $6.1 million at December 31, 2015. Specific reserves related to impaired loans decreased by $271 thousand from $751 thousand at December 31, 2015 to $480 thousand at September 30, 2016. This decline primarily results from one loan which was transferred to OREO during June 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 $6.0 million at September 30, 2016 and $5.3 million at December 31, 2015. The allowance for loan losses as a percentage of total loans decreased from 1.52% at December 31, 2015 to 1.45% at September 30, 2016; however, the percentage of general reserves to unimpaired loans increased slightly to 1.36% at September 30, 2016 from 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 $2.8 million at September 30, 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
September
30,
|
|
|
At December 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
2013
|
|
|
2012
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
3,100
|
|
|
$
|
4,546
|
|
|
$
|
6,625
|
|
|
$
|
5,519
|
|
|
$
|
13,683
|
|
|
Loans past due 90 days or more and still accruing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17
|
|
|
|
15
|
|
|
Total nonperforming loans
|
|
|
3,100
|
|
|
|
4,546
|
|
|
|
6,625
|
|
|
|
5,536
|
|
|
|
13,698
|
|
|
Other real estate owned
|
|
|
2,517
|
|
|
|
1,756
|
|
|
|
3,590
|
|
|
|
6,399
|
|
|
|
5,295
|
|
|
Other vehicles owned
|
|
|
22
|
|
|
|
30
|
|
|
|
13
|
|
|
|
60
|
|
|
|
41
|
|
|
Total nonperforming assets
|
|
$
|
5,639
|
|
|
$
|
6,332
|
|
|
$
|
10,228
|
|
|
$
|
11,995
|
|
|
$
|
19,034
|
|
|
Interest income forgone on nonaccrual loans
|
|
$
|
157
|
|
|
$
|
303
|
|
|
$
|
345
|
|
|
$
|
280
|
|
|
$
|
646
|
|
|
Interest income recorded on a cash basis on nonaccrual loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
31
|
|
|
$
|
22
|
|
|
$
|
192
|
|
|
Nonperforming loans to total loans
|
|
|
0.69
|
%
|
|
|
1.13
|
%
|
|
|
1.79
|
%
|
|
|
1.64
|
%
|
|
|
4.35
|
%
|
|
Nonperforming assets to total assets
|
|
|
0.86
|
%
|
|
|
1.06
|
%
|
|
|
1.90
|
%
|
|
|
2.33
|
%
|
|
|
3.98
|
%
|
Nonperforming loans at September 30, 2016 were $3.1 million, a decrease of $1.4 million from the $4.5 million balance at December 31, 2015. The two largest decreases from the December 31, 2015 balance were the return to accrual status of one loan with a balance of $618 thousand at December 31, 2015 and the transfer of one loan to OREO which had a balance of $1.1 million at December 31, 2015. Specific reserves on nonaccrual loans totaled $411 thousand at September 30, 2016 and $683 thousand at December 31, 2015, respectively. Performing loans past due thirty to eighty-nine days were $1.9 million at September 30, 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 $2.2 million from $6.0 million at December 31, 2015 to $3.8 million at September 30, 2016. Loans classified as watch decreased by $2.0 million from $4.1 million at December 31, 2015 to $2.1 million at September 30, 2016. At September 30, 2016, $0.8 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 September 30, 2016 and December 31, 2015, the Company's recorded investment in impaired loans totaled $5.8 million and $6.5 million, respectively. The specific allowance for loan losses related to impaired loans totaled $480 thousand and $751 thousand at September 30, 2016 and December 31, 2015, respectively. Additionally, $0.7 million has been charged off against the impaired loans at September 30, 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 September 30, 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 seven properties totaling $2.5 million at September 30, 2016 and seven properties totaling $1.8 million at December 31, 2015. Nonperforming assets as a percentage of total assets were 0.86% at September 30, 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 nine months ended September 30, 2016 and 2015, dollars in thousands:
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
#
|
|
|
2016
|
|
|
#
|
|
|
2015
|
|
|
Beginning Balance
|
|
|
7
|
|
|
$
|
1,756
|
|
|
|
15
|
|
|
$
|
3,590
|
|
|
Additions
|
|
|
3
|
|
|
|
1,166
|
|
|
|
4
|
|
|
|
329
|
|
|
Dispositions
|
|
|
(3
|
)
|
|
|
(396
|
)
|
|
|
(7
|
)
|
|
|
(1,575
|
)
|
|
Provision from change in OREO valuation
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
(79
|
)
|
|
Ending Balance
|
|
|
7
|
|
|
$
|
2,517
|
|
|
|
12
|
|
|
$
|
2,265
|
|
Investment Portfolio and Federal Funds Sold.
Total investment securities were $100.6 million at September 30, 2016 and $96.7 million as of December 31, 2015. During the nine months ended September 30, 2016 the Company sold fourteen available-for-sale investment securities for total proceeds of $14.6 million recording a $32 thousand net loss on sale. During the nine months ended September 30, 2015 we sold fifteen available-for-sale investment securities for total proceeds of $12.3 million recording a net gain on sale of $21 thousand. The investment portfolio at September 30, 2016 consisted of $75.3 million in securities of U.S. Government-sponsored agencies and 93 municipal securities totaling $25.3 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 September 30, 2016 and December 31, 2015; however, the Bank maintained interest earning balances at the Federal Reserve Bank of San Francisco totaling $49.5 million at September 30, 2016 and $47.6 million at December 31, 2015. The interest rate earned on the balances at September 30, 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 $581.4 million at September 30, 2016, an increase of $54.1 million from $527.3 million at December 31, 2015. Increases included $29.3 million in non-interest bearing demand deposits, $20.0 million in savings and money market accounts and $7.5 million in NOW accounts. Time deposits declined by $2.7 million. 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 September 30, 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
|
|
|
|
|
9/30/16
|
|
|
9/30/16
|
|
|
12/31/15
|
|
|
12/31/15
|
|
|
Non-interest bearing
|
|
$
|
238,312
|
|
|
|
41.0
|
%
|
|
$
|
209,044
|
|
|
|
39.6
|
%
|
|
NOW
|
|
|
98,724
|
|
|
|
17.0
|
%
|
|
|
91,225
|
|
|
|
17.3
|
%
|
|
Money Market
|
|
|
56,568
|
|
|
|
9.7
|
%
|
|
|
48,848
|
|
|
|
9.3
|
%
|
|
Savings
|
|
|
138,227
|
|
|
|
23.8
|
%
|
|
|
125,896
|
|
|
|
23.9
|
%
|
|
Time
|
|
|
49,590
|
|
|
|
8.5
|
%
|
|
|
52,263
|
|
|
|
9.9
|
%
|
|
Total Deposits
|
|
$
|
581,421
|
|
|
|
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 FHLB. There were no brokered deposits at September 30, 2016 or December 31, 2015.
Short-term Borrowing Arrangements.
The Company is a member of the FHLB and can borrow up to $105 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $187 million. The Company is required to hold FHLB stock as a condition of membership. At September 30, 2016 and December 31, 2015, the Company held $2,438,000 and $2,380,000, respectively of FHLB stock which is recorded as a component of other assets. Based on the Company’s stock holdings at September 30, 2016, the Company can borrow up to $90.3 million. To borrow the $105 million in available credit the Company would need to purchase $410 thousand 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 September 30, 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. This note was renewed on October 1, 2016 with the following changes in terms:
|
|
1.)
|
The maturity date was extended to October 1, 2017
|
|
|
2.)
|
The maximum amount outstanding at any one time on this note and the term loan described below cannot exceed $5 million.
|
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. Additional covenant modifications were made on renewal of the Note on October 1, 2016. The Bank was in compliance with all such covenants related to the Note and the Term Loan at September 30, 2016 and December 31, 2015. Interest expense related to the Note and the Term Loan for the nine months ended September 30, 2016 and 2015 totaled $108 thousand and $106 thousand, 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 September 30, 2016. On April 21, 2016 Plumas Bancorp made a $2 million payment on the Term Loan. The payment was funded through a $3 million dividend from Plumas Bank. The balance of the Term Loan was $2,500,000 and $4,875,000 at September 30, 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 September 30, 2016 was $8.2 million, an increase of $0.5 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 nine months ended September 30, 2015 was $219,000.
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. These items were partially offset by the repurchase of a portion of a warrant. In May of 2016 the Company repurchased a portion of the warrant, representing the right to purchase 150,000 shares of the registrant’s common stock at a cost of $0.9 million. The remaining warrant represents the right to purchase 150,000 shares of Plumas Bancorp common stock at an exercise price 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 $317,000 and $165,000, 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 4.26% (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 2.33% (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 nine months ended September 30, 2016 and 2015 related to the junior subordinated debentures was $255,000 and $227,000, respectively.
Capital Resources
Shareholders’ equity increased by $5.8 million from $42.5 million at December 31, 2015 to $48.3 million at September 30, 2016. The $5.8 million increase was related to earnings during the nine month period of $5.4 million, an increase in net unrealized gains on investment securities of $1.1 million and an increase of $0.2 million representing stock option activity. The items were partially offset by the repurchase of a portion of the warrant as descripted previously.
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. The Company is subject to various restrictions on the payment of dividends.
On October 20, 2016 the Company announced that its Board of Directors approved the reinstatement of a semi-annual cash dividend. The dividend in the amount of $0.10 per share will be payable on November 21, 2016 to shareholders of record at the close of business day on November 7, 2016.
Capital 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
|
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Ratio
|
|
$
|
58,796
|
|
|
|
12.1
|
%
|
|
$
|
21,877
|
|
|
|
4.5
|
%
|
|
$
|
31,599
|
|
|
|
6.5
|
%
|
|
Tier 1 Leverage Ratio
|
|
|
58,796
|
|
|
|
9.3
|
%
|
|
|
25,196
|
|
|
|
4.0
|
%
|
|
|
31,495
|
|
|
|
5.0
|
%
|
|
Tier 1 Risk-Based Capital Ratio
|
|
|
58,796
|
|
|
|
12.1
|
%
|
|
|
29,169
|
|
|
|
6.0
|
%
|
|
|
38,892
|
|
|
|
8.0
|
%
|
|
Total Risk-Based Capital Ratio
|
|
|
64,880
|
|
|
|
13.3
|
%
|
|
|
38,892
|
|
|
|
8.0
|
%
|
|
|
48,615
|
|
|
|
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 September 30, 2016, the Company had $87.5 million in unfunded loan commitments and $625 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 $87.5 million in unfunded loan commitments, $48.9 million and $38.6 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at September 30, 2016, $46.5 million were secured by real estate, of which $18.3 million was secured by commercial real estate and $28.2 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 $234,000 and $181,000 during the nine months ended September 30, 2016 and 2015, respectively. The increase in rental expense in 2016 mostly 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 2021.
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 $105 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $187 million. 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 September 30, 2016 or December 31, 2015.
Customer deposits are the Company’s primary source of funds. Total deposits were $581.4 million at September 30, 2016, an increase of $54.1 million from $527.3 million at December 31, 2015. 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.