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, 2019 and December 31, 2018 and for the three- and nine-month periods ended September 30, 2019 and 2018. 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, 2018.
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 2018 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, 2019
Net income increased by $1.2 million from $10.4 million during the nine months ended September 30, 2018 to $11.6 million during the current nine-month period. Earnings benefited from an increase of $4.0 million in net interest income partially offset by a decline in non-interest income of $919 thousand and increases in the provision for loan losses of $100 thousand, non-interest expense of $1.2 million and $572 thousand in income tax expense. Diluted earnings per share increased to $2.22 for the nine months ended September 30, 2019 compared to $2.00 during the nine months ended September 30, 2018.
Total assets at September 30, 2019 were $888 million, an increase of $64 million from $824 million at December 31, 2018. The increase in assets includes increases of $35.5 million in net loans, $31.2 million in cash and cash equivalents, and $2.0 million in investment securities. At September 30, 2019, cash and cash equivalents totaled $77.9 million, net loans were $598.0 million and investment securities totaled $169.5 million.
Total deposits increased by $49.6 million from $727 million at December 31, 2018 to $776 million at September 30, 2019. Shareholders’ equity increased by $14.9 million from $66.9 million at December 31, 2018 to $81.8 million at September 30, 2019.
The annualized return on average assets was 1.84% for the nine months ended September 30, 2019 and 1.87% for the nine months ended September 30, 2018. The annualized return on average equity decreased from 23.7% during the first nine months of 2018 to 20.8% during the current nine-month period.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019
Net interest income before provision for loan losses. Net interest income for the nine months ended September 30, 2019 was $28.1 million, an increase of $4.0 million from the $24.1 million earned during the same period in 2018. The increase in net interest income includes an increase of $4.5 million in interest income partially offset by an increase of $503 thousand in interest expense. Net interest margin, which benefited from an 18 basis points increase in average yield on interest-earning assets, increased 12 basis points to 4.80%, up from 4.68% for the same period in 2018.
Interest income increased by 18% to $29.5 million for the nine months ended September 30, 2019, up from $25.0 million during the same period in 2018. Related to increases in average loan balances and loan yield, interest and fees on loans increased by $4.0 million to $25.7 million for the nine months ended September 30, 2019; compared to $21.7 million during the first nine months of 2018. The Company’s average loan balances were $584 million for the nine months ended September 30, 2019, up $77 million, or 15%, from $507 million for the same period in 2018. The average rate earned on the Company’s loan balances increased by 16 basis points to 5.88% during the first nine months of 2019 compared to 5.72% during the first nine months of 2018. We attribute this increase in yield primarily to an increase in the average prime interest rate during this period. Loan pricing continues to be extremely competitive in our service area.
The following table compares loan balances by type at September 30, 2019 and 2018.
(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
|
|
|
|
09/30/19
|
|
|
09/30/19
|
|
|
09/30/18
|
|
|
09/30/18
|
|
Commercial
|
|
$
|
45,818
|
|
|
|
7.6
|
%
|
|
$
|
46,762
|
|
|
|
8.7
|
%
|
Agricultural
|
|
|
77,529
|
|
|
|
12.9
|
%
|
|
|
70,917
|
|
|
|
13.1
|
%
|
Real estate – residential
|
|
|
14,960
|
|
|
|
2.5
|
%
|
|
|
15,674
|
|
|
|
2.9
|
%
|
Real estate – commercial
|
|
|
292,461
|
|
|
|
48.6
|
%
|
|
|
253,154
|
|
|
|
46.9
|
%
|
Real estate – construction & land
|
|
|
42,727
|
|
|
|
7.1
|
%
|
|
|
38,454
|
|
|
|
7.1
|
%
|
Equity Lines of Credit
|
|
|
37,067
|
|
|
|
6.2
|
%
|
|
|
39,165
|
|
|
|
7.3
|
%
|
Auto
|
|
|
86,727
|
|
|
|
14.4
|
%
|
|
|
71,875
|
|
|
|
13.3
|
%
|
Other
|
|
|
4,467
|
|
|
|
0.7
|
%
|
|
|
3,846
|
|
|
|
0.7
|
%
|
Total Gross Loans
|
|
$
|
601,756
|
|
|
|
100
|
%
|
|
$
|
539,847
|
|
|
|
100
|
%
|
Interest on investment securities increased by $480 thousand related to an increase in yield of 4 basis points, from 2.56% during the nine months ended September 30, 2018 to 2.60% during the nine months ended September 30, 2019, and an increase in average balance from $150.3 million during the nine months ended September 30, 2018 to $172.7 million during the nine months ended September 30, 2019. We attribute the increase in yield during the current period primarily to market conditions. See “Investment Portfolio and Federal Funds Sold” for additional information related to the Company’s investment portfolio.
Interest earned on other interest earning assets increased by $43 thousand to $445 thousand during the nine months ended September 30, 2019 as an increase in yield of 57 basis points from 1.70% during the nine months ended September 30, 2018 to 2.27% during the current nine-month period was partially offset by a decrease in average balances from $31.6 million during the nine months ended September 30, 2018 to $26.2 million during the current nine month period. Other interest earning assets mostly related to balances held at the Federal Reserve Bank of San Francisco.
Interest expense on deposits increased by $461 thousand from $462 thousand for the nine months ended September 30, 2018, to $923 thousand during the current period. This increase mostly relates to an increase in interest expense on money market accounts and time deposits related to the purchase of our Carson City, Nevada branch on October 26, 2018. The average rate paid on the Carson City money market and time deposits exceeds that which Plumas Bank pays in other markets. To date we have maintained the rates on the money market accounts at this branch but have experienced a decrease in deposits mostly related to the maturity of time deposits which were yielding significantly higher rates than our offering rates. In total, time deposits at the Carson City Branch declined by $12.4 million from $18.5 million on acquisition to $6.1 million at September 30, 2019. We expect some additionally runoff on these accounts as they reprice over time. During the nine months ended September 30, 2019 money market accounts housed at our Carson City branch averaged $15.1 million and time deposits at this branch averaged $13.4 million. Interest expense on money market accounts increased by $231 thousand to $304 thousand related to an increase in average rate paid of 32 basis points and an increase in average balances of $19.0 million from $66.6 million during the nine months ended September 30, 2018 to $85.6 million during the nine-month period. Interest on time deposits increased by $222 thousand from $99 thousand during the nine months ended September 30, 2018 to $321 thousand during the 2019 nine month period. During this same period average time deposits increased by $9.5 million and the average rate paid on time deposit increased by 52 basis points.
Interest expense on other interest-bearing liabilities increased by $42 thousand from $375 thousand during the nine months ended September 30, 2018 to $417 thousand during the current period mostly related to an increase in rate paid on junior subordinated debentures. Interest on the debentures, which totaled $406 thousand during the nine months ended September 30, 2019 and $370 thousand during the nine months ended September 30, 2018, fluctuates with changes in the 3-month London Interbank Offered Rate (LIBOR).
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, 2019
|
|
|
For the Nine Months Ended
September 30, 2018
|
|
|
|
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)
|
|
$
|
583,792
|
|
|
$
|
25,655
|
|
|
|
5.88
|
%
|
|
$
|
506,592
|
|
|
$
|
21,680
|
|
|
|
5.72
|
%
|
Investment securities (1)
|
|
|
172,671
|
|
|
|
3,353
|
|
|
|
2.60
|
%
|
|
|
150,285
|
|
|
|
2,873
|
|
|
|
2.56
|
%
|
Interest-bearing deposits
|
|
|
26,223
|
|
|
|
445
|
|
|
|
2.27
|
%
|
|
|
31,581
|
|
|
|
402
|
|
|
|
1.70
|
%
|
Total interest-earning assets
|
|
|
782,686
|
|
|
|
29,453
|
|
|
|
5.03
|
%
|
|
|
688,458
|
|
|
|
24,955
|
|
|
|
4.85
|
%
|
Cash and due from banks
|
|
|
21,848
|
|
|
|
|
|
|
|
|
|
|
|
21,306
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
39,878
|
|
|
|
|
|
|
|
|
|
|
|
37,323
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
844,412
|
|
|
|
|
|
|
|
|
|
|
$
|
747,087
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
$
|
105,538
|
|
|
|
75
|
|
|
|
0.10
|
%
|
|
$
|
102,939
|
|
|
|
72
|
|
|
|
0.09
|
%
|
Money market deposits
|
|
|
85,634
|
|
|
|
304
|
|
|
|
0.47
|
%
|
|
|
66,557
|
|
|
|
73
|
|
|
|
0.15
|
%
|
Savings deposits
|
|
|
179,174
|
|
|
|
223
|
|
|
|
0.17
|
%
|
|
|
175,739
|
|
|
|
218
|
|
|
|
0.17
|
%
|
Time deposits
|
|
|
51,633
|
|
|
|
321
|
|
|
|
0.83
|
%
|
|
|
42,098
|
|
|
|
99
|
|
|
|
0.31
|
%
|
Total deposits
|
|
|
421,979
|
|
|
|
923
|
|
|
|
0.29
|
%
|
|
|
387,333
|
|
|
|
462
|
|
|
|
0.16
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
406
|
|
|
|
5.26
|
%
|
|
|
10,310
|
|
|
|
370
|
|
|
|
4.80
|
%
|
Other interest-bearing liabilities
|
|
|
10,696
|
|
|
|
11
|
|
|
|
0.14
|
%
|
|
|
7,935
|
|
|
|
5
|
|
|
|
0.08
|
%
|
Total interest-bearing liabilities
|
|
|
442,985
|
|
|
|
1,340
|
|
|
|
0.40
|
%
|
|
|
405,578
|
|
|
|
837
|
|
|
|
0.28
|
%
|
Non-interest-bearing deposits
|
|
|
319,957
|
|
|
|
|
|
|
|
|
|
|
|
275,953
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,878
|
|
|
|
|
|
|
|
|
|
|
|
6,704
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
74,592
|
|
|
|
|
|
|
|
|
|
|
|
58,852
|
|
|
|
|
|
|
|
|
|
Total liabilities & equity
|
|
$
|
844,412
|
|
|
|
|
|
|
|
|
|
|
$
|
747,087
|
|
|
|
|
|
|
|
|
|
Cost of funding interest-earning assets (4)
|
|
|
|
|
|
|
|
|
|
|
0.23
|
%
|
|
|
|
|
|
|
|
|
|
|
0.17
|
%
|
Net interest income and margin (5)
|
|
|
|
|
|
$
|
28,113
|
|
|
|
4.80
|
%
|
|
|
|
|
|
$
|
24,118
|
|
|
|
4.68
|
%
|
|
(1)
|
Not computed on a tax-equivalent basis.
|
|
(2)
|
Average nonaccrual loan balances of $1.8 million for 2019 and $1.0 million for 2018 are included in average loan balances for computational purposes.
|
|
(3)
|
Net costs included in loan interest income for the nine-month periods ended September 30, 2019 and 2018 were $491,000 and $247,000, 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. It includes 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:
|
|
2019 over 2018 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
|
|
$
|
3,304
|
|
|
$
|
582
|
|
|
$
|
89
|
|
|
$
|
3,975
|
|
Investment securities
|
|
|
428
|
|
|
|
45
|
|
|
|
7
|
|
|
|
480
|
|
Interest bearing deposits
|
|
|
(68
|
)
|
|
|
134
|
|
|
|
(23
|
)
|
|
|
43
|
|
Total interest income
|
|
|
3,664
|
|
|
|
761
|
|
|
|
73
|
|
|
|
4,498
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
|
2
|
|
|
|
1
|
|
|
|
-
|
|
|
|
3
|
|
Money market deposits
|
|
|
21
|
|
|
|
163
|
|
|
|
47
|
|
|
|
231
|
|
Savings deposits
|
|
|
4
|
|
|
|
1
|
|
|
|
-
|
|
|
|
5
|
|
Time deposits
|
|
|
22
|
|
|
|
163
|
|
|
|
37
|
|
|
|
222
|
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
36
|
|
|
|
-
|
|
|
|
36
|
|
Other
|
|
|
2
|
|
|
|
3
|
|
|
|
1
|
|
|
|
6
|
|
Total interest expense
|
|
|
51
|
|
|
|
367
|
|
|
|
85
|
|
|
|
503
|
|
Net interest income
|
|
$
|
3,613
|
|
|
$
|
394
|
|
|
$
|
(12
|
)
|
|
$
|
3,995
|
|
(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 nine months ended September 30, 2019 and 2018 we recorded a provision for loan losses of $900 thousand and $800 thousand, respectively. 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 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 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 nine months ended September 30, 2019, non-interest income totaled $6.1 million, a decrease of $919 thousand from the nine months ended September 30, 2018. The largest component of this decrease was a decline of $975 thousand in gains on sale of SBA loans from $1.8 million during the nine months ended September 30, 2018 to $788 thousand during the current period. Proceeds from SBA loan sales totaled $17.9 million during the current nine-month period and $37.3 million during the nine months ended September 30, 2018. Loans originated for sale totaled $16.8 million during the nine months ended September 30, 2019 and $34.3 million during the nine months ended September 30, 2018. We attribute some of the decline in originations to the government shutdown during the first quarter of 2019. During the shutdown we were unable to provide SBA guaranteed loans. In addition, higher market rates have resulted in a decrease in demand; competition in the SBA lending market remains intense. Partially offsetting the decline in gain on sale of SBA loans were increases of $77 thousand in service charge income, $120 thousand in interchange income, $28 thousand in gain on sale of securities and an increase in various other categories of non-interest income totaling $66 thousand. Non-interest income benefited during the 2018 period from a $209 thousand gain recorded upon the prospective adoption of a newly effective accounting pronouncement impacting the measurement of equity securities, which in our case consists of stock in our correspondent banks, without a readily determinable fair market value. No gain or loss was recorded on these securities during the current period.
The following table describes the components of non-interest income for the nine-month periods ended September 30, 2019 and 2018 (dollars in thousands):
|
|
For the Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
Service charges on deposit accounts
|
|
|
1,996
|
|
|
|
1,919
|
|
|
|
77
|
|
|
|
4.0
|
%
|
Interchange income
|
|
|
1,739
|
|
|
|
1,619
|
|
|
|
120
|
|
|
|
7.4
|
%
|
Gain on sale of loans, net
|
|
|
788
|
|
|
|
1,763
|
|
|
|
(975
|
)
|
|
|
-55.3
|
%
|
Loan servicing fees
|
|
|
561
|
|
|
|
587
|
|
|
|
(26
|
)
|
|
|
-4.4
|
%
|
Earnings on life insurance policies
|
|
|
246
|
|
|
|
246
|
|
|
|
-
|
|
|
|
-
|
%
|
Gain (loss) on sale of investments
|
|
|
20
|
|
|
|
(8
|
)
|
|
|
28
|
|
|
|
350.0
|
%
|
Gain on equity securities (1)
|
|
|
-
|
|
|
|
209
|
|
|
|
(209
|
)
|
|
|
-100.0
|
%
|
Other
|
|
|
771
|
|
|
|
705
|
|
|
|
66
|
|
|
|
9.4
|
%
|
Total non-interest income
|
|
$
|
6,121
|
|
|
$
|
7,040
|
|
|
$
|
(919
|
)
|
|
|
-13.1
|
%
|
|
(1)
|
With no readily determinable fair market value.
|
Non-interest expense. During the nine months ended September 30, 2019 non-interest expense increased by $1.2 million, or 7% to $17.3 million, up from $16.1 million during the same period in 2018. Total non-interest expense related to our Carson City, Nevada branch was $692 thousand for the nine months ended September 30, 2019. Excluding the effect of the Carson City branch, non-interest expense would have increased by 4% for the nine months ended September 30, 2019.
The Company’s single largest expense is salary and benefit costs. During the nine months ended September 30, 2019 salary and benefit expense increased by $657 thousand, or 7%, to $9.7 million. The increase in salary and benefit costs includes annual merit and promotional increases and an increase in personnel including five FTE at our Carson City, Nevada branch. Other significant increases in non-interest expense include $355 thousand in occupancy and equipment expense, $201 thousand in amortization of core deposit intangible, $135 thousand in director compensation and expense and $127 thousand in outside service fees. The largest decreases in non-interest expense were reductions in professional fees of $127 thousand, other non-interest expense of $122 thousand and deposit insurance expense of $112 thousand.
Of the $355 thousand increase in occupancy and equipment costs, $140 thousand relates to the Carson City, Nevada branch. Of the remaining increase the three largest items were increases of $60 thousand in equipment depreciation, $65 thousand in software costs and $26 thousand in property taxes. The increase in amortization of core deposit intangible is related to the amortization of the core deposit intangible recorded on the acquisition of the Carson City branch. Director compensation and expense was abnormally low during the 2018 period as it included the reversal of accrued retirement costs related to our former director John Flournoy who elected not to run for reelection in 2018 and instead allowed his board term to expire as of May 16, 2018. Mr. Flournoy did not meet the minimum years of service required under his agreement to receive benefits. In addition, during 2019 we have added two new Board members. The increase in outside services primarily relates to growth in the Bank.
Professional fees during the current period benefited from a reduction in consulting costs of $74 thousand. Consulting costs were somewhat high during the 2018 period as they included an external review of our compliance management system and $24 thousand related to our acquisition of the Carson City, Nevada branch. In addition, included in professional fees during the 2018 period were $40 thousand in legal expense related to the Carson City branch acquisition. Other non-interest expense during the 2018 period was also higher than normal as it included a $50 thousand increase in the reserve for undisbursed loan commitments and costs associated with the pending termination of our lease at our Tahoe City, California branch. During 2018 we purchased a building in Tahoe City which, after remodeling is complete, will become the new home of our Tahoe City branch. Our lease obligation at our current location includes a termination penalty that during 2018 has been accrued into other expense. Deposit insurance costs during the current period benefit from assessment credits we were able to apply to our deposit insurance billings. Plumas Bank was awarded assessment credits totaling $177 thousand which became available once the Deposit Insurance Fund Reserve Ratio reached at least 1.38. During the third quarter we were notified that the reserve ratio was 1.40 on June 30, 2019 and that our credits would be available to offset insurance assessments beginning with the April 1, 2019 assessment period.
The following table describes the components of non-interest expense for the nine-month periods ended September 30, 2019 and 2018, dollars in thousands:
|
|
For the Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
Salaries and employee benefits
|
|
$
|
9,743
|
|
|
$
|
9,086
|
|
|
$
|
657
|
|
|
|
7.2
|
%
|
Occupancy and equipment
|
|
|
2,482
|
|
|
|
2,127
|
|
|
|
355
|
|
|
|
16.7
|
%
|
Outside service fees
|
|
|
1,877
|
|
|
|
1,750
|
|
|
|
127
|
|
|
|
7.3
|
%
|
Professional fees
|
|
|
545
|
|
|
|
672
|
|
|
|
(127
|
)
|
|
|
-18.9
|
%
|
Telephone and data communication
|
|
|
400
|
|
|
|
397
|
|
|
|
3
|
|
|
|
0.8
|
%
|
Business development
|
|
|
362
|
|
|
|
296
|
|
|
|
66
|
|
|
|
22.3
|
%
|
Director compensation and expense
|
|
|
318
|
|
|
|
183
|
|
|
|
135
|
|
|
|
73.8
|
%
|
Armored car and courier
|
|
|
302
|
|
|
|
245
|
|
|
|
57
|
|
|
|
23.3
|
%
|
Advertising and shareholder relations
|
|
|
295
|
|
|
|
323
|
|
|
|
(28
|
)
|
|
|
-8.7
|
%
|
Amortization of Core Deposit Intangible
|
|
|
206
|
|
|
|
5
|
|
|
|
201
|
|
|
|
4,020.0
|
%
|
Loan collection expenses
|
|
|
172
|
|
|
|
200
|
|
|
|
(28
|
)
|
|
|
-14.0
|
%
|
Stationery and supplies
|
|
|
87
|
|
|
|
86
|
|
|
|
1
|
|
|
|
1.2
|
%
|
Deposit insurance
|
|
|
65
|
|
|
|
177
|
|
|
|
(112
|
)
|
|
|
-63.3
|
%
|
OREO expenses
|
|
|
43
|
|
|
|
47
|
|
|
|
(4
|
)
|
|
|
-8.5
|
%
|
Provision from change in OREO valuation
|
|
|
-
|
|
|
|
38
|
|
|
|
(38
|
)
|
|
|
-100.0
|
%
|
Gain on Sale of OREO
|
|
|
(9
|
)
|
|
|
(62
|
)
|
|
|
53
|
|
|
|
-85.5
|
%
|
Other
|
|
|
414
|
|
|
|
536
|
|
|
|
(122
|
)
|
|
|
-22.8
|
%
|
Total non-interest expense
|
|
$
|
17,302
|
|
|
$
|
16,106
|
|
|
$
|
1,196
|
|
|
|
7.4
|
%
|
Provision for income taxes. The Company recorded an income tax provision of $4.4 million, or 27.5% of pre-tax income for the nine months ended September 30, 2019. This compares to an income tax provision of $3.8 million or 26.9% of pre-tax income during the first nine months of 2018. The percentages for 2019 and 2018 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. In addition, the 2019 and 2018 provision include income tax benefits related to the exercise of stock options of $24 thousand and $99 thousand, respectively.
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, 2019 and December 31, 2018 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, 2019
Net Income. The Company recorded net income of $4.0 million for the three months ended September 30, 2019 up $306 thousand from net income of $3.7 million for the three months ended September 30, 2018. An increase of $1.0 million in net interest income was partially offset by increases of $447 thousand in non-interest expense and $125 thousand in income tax expense and a decrease of $138 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 was $9.6 million for the three months ended September 30, 2019 an increase of $1.0 million, or 12%, from $8.6 million for the same period in 2018. The increase in net interest income includes an increase of $1.2 million in interest income; the largest component of which was an increase in interest and fees on loans of $1.1 million. Net interest margin for the three months ended September 30, 2019 decreased by 6 basis points from 4.78% during the third quarter of 2018 to 4.72% during the current quarter.
Interest income increased by 13%, to $10.0 million for the three months ended September 30, 2019, up from $8.8 million during the same period in 2018. This was related mostly to an increase in average loan balances interest and fees on loans which increased $1.1 million to $8.8 million for the three months ended September 30, 2019 as compared to $7.7 million during the third quarter of 2018. The Company’s average loan balances were $599 million for the three months ended September 30, 2019, up $70 million, or 13%, from $529 million for the same period in 2018. The average yield on loans was 5.80% during the third quarter of 2019, up slightly from 5.77% for same quarter in 2018. Net loan costs increased by $146 thousand from $116 thousand during the third quarter of 2018 to $262 thousand during the current quarter. Net loan costs during the third quarter of 2018 were lower than normal as we benefited from several prepayment penalties.
Interest on investment securities increased by $38 thousand related to an increase in average balance from $158.3 million in 2018 to $172.2 million in 2019. Yield on investment securities was 2.48% during the current quarter and 2.60% during the three months ended September 30, 2018.
Interest expense on deposits increased by $145 thousand to $304 thousand for the three months ended September 30, 2019, up from $159 thousand during the 2018 quarter. This increase mostly relates to an increase in interest expense on money market accounts and time deposits related to the purchase of our Carson City branch on October 26, 2018. Interest on money market accounts increased by $85 thousand. Average money market accounts increased $19.6 million from $68.1 million during the three months ended September 30, 2018 to $87.7 million during the current quarter. The average rate paid on money market accounts increased by 35 basis points to 0.50% during the three-months ended September 30, 2019 up from 0.15% during the 2018 quarter. Interest on time deposits increased by $59 thousand from $34 thousand during the three months ended September 30, 2018 to $93 thousand during the current quarter. Average time deposits increased by $6.3 million from $40.5 million during the three months ended September 30, 2018 to $46.8 million during the current quarter. The average rate paid on time deposits was 0.33% during the three-months ended September 30, 2018 and 0.79% during the current quarter.
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, 2019
|
|
|
For the Three Months Ended
September 30, 2018
|
|
|
|
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)
|
|
$
|
598,899
|
|
|
$
|
8,761
|
|
|
|
5.80
|
%
|
|
$
|
529,100
|
|
|
$
|
7,693
|
|
|
|
5.77
|
%
|
Investment securities (1)
|
|
|
172,184
|
|
|
|
1,075
|
|
|
|
2.48
|
%
|
|
|
158,316
|
|
|
|
1,037
|
|
|
|
2.60
|
%
|
Interest-bearing deposits
|
|
|
32,355
|
|
|
|
171
|
|
|
|
2.10
|
%
|
|
|
22,847
|
|
|
|
113
|
|
|
|
1.96
|
%
|
Total interest-earning assets
|
|
|
803,438
|
|
|
|
10,007
|
|
|
|
4.94
|
%
|
|
|
710,263
|
|
|
|
8,843
|
|
|
|
4.94
|
%
|
Cash and due from banks
|
|
|
22,449
|
|
|
|
|
|
|
|
|
|
|
|
21,303
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
40,100
|
|
|
|
|
|
|
|
|
|
|
|
39,434
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
865,987
|
|
|
|
|
|
|
|
|
|
|
$
|
771,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
$
|
106,584
|
|
|
|
26
|
|
|
|
0.10
|
%
|
|
$
|
104,565
|
|
|
|
25
|
|
|
|
0.09
|
%
|
Money market deposits
|
|
|
87,690
|
|
|
|
110
|
|
|
|
0.50
|
%
|
|
|
68,052
|
|
|
|
25
|
|
|
|
0.15
|
%
|
Savings deposits
|
|
|
179,986
|
|
|
|
75
|
|
|
|
0.17
|
%
|
|
|
179,224
|
|
|
|
75
|
|
|
|
0.17
|
%
|
Time deposits
|
|
|
46,778
|
|
|
|
93
|
|
|
|
0.79
|
%
|
|
|
40,487
|
|
|
|
34
|
|
|
|
0.33
|
%
|
Total deposits
|
|
|
421,038
|
|
|
|
304
|
|
|
|
0.29
|
%
|
|
|
392,328
|
|
|
|
159
|
|
|
|
0.16
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
131
|
|
|
|
5.04
|
%
|
|
|
10,310
|
|
|
|
131
|
|
|
|
5.04
|
%
|
Other interest-bearing liabilities
|
|
|
11,008
|
|
|
|
5
|
|
|
|
0.18
|
%
|
|
|
7,872
|
|
|
|
2
|
|
|
|
0.10
|
%
|
Total interest-bearing liabilities
|
|
|
442,356
|
|
|
|
440
|
|
|
|
0.39
|
%
|
|
|
410,510
|
|
|
|
292
|
|
|
|
0.28
|
%
|
Non-interest-bearing deposits
|
|
|
337,023
|
|
|
|
|
|
|
|
|
|
|
|
291,746
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
6,729
|
|
|
|
|
|
|
|
|
|
|
|
7,077
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
79,879
|
|
|
|
|
|
|
|
|
|
|
|
61,667
|
|
|
|
|
|
|
|
|
|
Total liabilities & equity
|
|
$
|
865,987
|
|
|
|
|
|
|
|
|
|
|
$
|
771,000
|
|
|
|
|
|
|
|
|
|
Cost of funding interest-earning assets (4)
|
|
|
|
|
|
|
|
|
|
|
0.22
|
%
|
|
|
|
|
|
|
|
|
|
|
0.16
|
%
|
Net interest income and margin (5)
|
|
|
|
|
|
$
|
9,567
|
|
|
|
4.72
|
%
|
|
|
|
|
|
$
|
8,551
|
|
|
|
4.78
|
%
|
(1)
|
Not computed on a tax-equivalent basis.
|
(2)
|
Average nonaccrual loan balances of $2.5 million for 2019 and $0.9 million for 2018 are included in average loan balances for computational purposes.
|
(3)
|
Net costs included in loan interest income for the three-month periods ended September 30, 2019 and 2018 were $262,000 and $116,000, 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:
|
|
2019 over 2018 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
|
|
$
|
1,015
|
|
|
$
|
47
|
|
|
$
|
6
|
|
|
$
|
1,068
|
|
Investment securities
|
|
|
91
|
|
|
|
(49
|
)
|
|
|
(4
|
)
|
|
|
38
|
|
Interest bearing deposits
|
|
|
47
|
|
|
|
8
|
|
|
|
3
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
1,153
|
|
|
|
6
|
|
|
|
5
|
|
|
|
1,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
|
-
|
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Money market deposits
|
|
|
8
|
|
|
|
60
|
|
|
|
17
|
|
|
|
85
|
|
Savings deposits
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Time deposits
|
|
|
5
|
|
|
|
46
|
|
|
|
8
|
|
|
|
59
|
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1
|
|
|
|
2
|
|
|
|
-
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
14
|
|
|
|
109
|
|
|
|
25
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
$
|
1,139
|
|
|
$
|
(103
|
)
|
|
$
|
(20
|
)
|
|
$
|
1,016
|
|
|
|
(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, 2019 and 2018 we recorded a provision for loan losses of $300 thousand. 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, 2019, non-interest income totaled $2.1 million, a decrease of $138 thousand from the three months ended September 30, 2018. The largest component of this decrease was a $251 thousand decrease in gains on sale of SBA loans from $564 thousand during the three months ended September 30, 2018 to $313 thousand during the current quarter. Proceeds from SBA loan sales totaled $7.1 million during the current quarter and $15.1 million during the 2018 quarter. Loans originated for sale totaled $6.9 million during the three months ended September 30, 2019 and $11.7 million during the three months ended September 30, 2018. The decline in gain on sale is consistent with the decrease in loans sold during the comparison periods. The decline in gains on sale of SBA loans was partially offset by increases in service charge income of $48 thousand and interchange income of $70 thousand.
The following table describes the components of non-interest income for the three-month periods ended September 30, 2019 and 2018, dollars in thousands:
|
|
For the Three Months
|
|
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Dollar Change
|
|
|
Percentage Change
|
|
Service charges on deposit accounts
|
|
$
|
676
|
|
|
$
|
628
|
|
|
$
|
48
|
|
|
|
7.6
|
%
|
Interchange income
|
|
|
642
|
|
|
|
572
|
|
|
|
70
|
|
|
|
12.2
|
%
|
Gain on sale of loans, net
|
|
|
313
|
|
|
|
564
|
|
|
|
(251
|
)
|
|
|
-44.5
|
%
|
Loan serving fees
|
|
|
184
|
|
|
|
200
|
|
|
|
(16
|
)
|
|
|
-8.0
|
%
|
Earnings on life insurance policies
|
|
|
82
|
|
|
|
82
|
|
|
|
-
|
|
|
|
-
|
%
|
Other
|
|
|
249
|
|
|
|
238
|
|
|
|
11
|
|
|
|
4.6
|
%
|
Total non-interest income
|
|
$
|
2,146
|
|
|
$
|
2,284
|
|
|
$
|
(138
|
)
|
|
|
-6.0
|
%
|
Non-interest expense. During the three months ended September 30, 2019, total non-interest expense increased by $447 thousand, or 8%, to $5.9 million, up from $5.4 million for the comparable period in 2018. Total non-interest expense related to our new Carson City, Nevada branch was $204 thousand for the three months ended September 30, 2019. Excluding the effect of the Carson City branch, non-interest expense would have increased by 6%.
The Company’s single largest expense is salary and benefit costs. During the three months ended September 30, 2019 salary and benefits increased by $390 thousand, or 13%, to $3.4 million. The increase in salary and benefit costs includes annual merit and promotional increases and an increase in personnel. Additionally, the deferral of loan origination costs declined by $192 thousand from $703 thousand during the third quarter of 2018 to $511 thousand during the current quarter.
Other significant increases in non-interest expense include $78 thousand in occupancy and equipment expense, $66 thousand in the amortization of core deposit intangibles and $52 thousand in outside service fees. The largest single decline in non-interest expense was $120 thousand in deposit insurance expense. Please see the nine-month discussion for additional information related to these changes.
The following table describes the components of non-interest expense for the three-month periods ended September 30, 2019 and 2018, dollars in thousands:
|
|
For the Three Months
|
|
|
|
|
|
|
|
|
|
|
|
Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Dollar
Change
|
|
|
Percentage
Change
|
|
Salaries and employee benefits
|
|
$
|
3,439
|
|
|
$
|
3,049
|
|
|
$
|
390
|
|
|
|
12.8
|
%
|
Occupancy and equipment
|
|
|
799
|
|
|
|
721
|
|
|
|
78
|
|
|
|
10.8
|
%
|
Outside service fees
|
|
|
646
|
|
|
|
594
|
|
|
|
52
|
|
|
|
8.8
|
%
|
Professional fees
|
|
|
201
|
|
|
|
235
|
|
|
|
(34
|
)
|
|
|
-14.5
|
%
|
Telephone and data communication
|
|
|
139
|
|
|
|
131
|
|
|
|
8
|
|
|
|
6.1
|
%
|
Business development
|
|
|
119
|
|
|
|
100
|
|
|
|
19
|
|
|
|
19.0
|
%
|
Armored car and courier
|
|
|
117
|
|
|
|
86
|
|
|
|
31
|
|
|
|
36.0
|
%
|
Director compensation and expense
|
|
|
114
|
|
|
|
98
|
|
|
|
16
|
|
|
|
16.3
|
%
|
Advertising and shareholder relations
|
|
|
89
|
|
|
|
113
|
|
|
|
(24
|
)
|
|
|
-21.2
|
%
|
Amortization of Core Deposit Intangible
|
|
|
68
|
|
|
|
2
|
|
|
|
66
|
|
|
|
3,300
|
%
|
Loan collection expenses
|
|
|
52
|
|
|
|
65
|
|
|
|
(13
|
)
|
|
|
-20.0
|
%
|
Stationery and supplies
|
|
|
30
|
|
|
|
34
|
|
|
|
(4
|
)
|
|
|
-11.8
|
%
|
OREO expenses
|
|
|
16
|
|
|
|
9
|
|
|
|
7
|
|
|
|
77.8
|
%
|
Gain on sale of OREO
|
|
|
-
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
-100
|
%
|
Deposit insurance
|
|
|
(62
|
)
|
|
|
58
|
|
|
|
(120
|
)
|
|
|
-206.9
|
%
|
Other
|
|
|
108
|
|
|
|
132
|
|
|
|
(24
|
)
|
|
|
-18.2
|
%
|
Total non-interest expense
|
|
$
|
5,875
|
|
|
$
|
5,428
|
|
|
$
|
447
|
|
|
|
8.2
|
%
|
Provision for income taxes. The Company recorded an income tax provision of $1.5 million, or 27.7% of pre-tax income for the three months ended September 30, 2019. This compares to an income tax provision of $1.4 million, or 27.6% of pre-tax income for the three months ended September 30, 2018. The percentages for 2019 and 2018 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.
FINANCIAL CONDITION
Loan Portfolio. Gross loans balances increased by $35.6 million, or 6%, from $566 million at December 31, 2018 to $602 million at September 30, 2019. The increase in loan balances includes increases of $20.7 million in commercial real estate loans, $9.6 million in automobile loans, $8.4 million in agricultural loans, $2.6 million in construction loans and $0.4 million in other loans. These increases were partially offset by declines of $3.8 million in commercial loans, $1.4 million in equity lines of credit and $0.9 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 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
|
|
|
|
9/30/19
|
|
|
9/30/19
|
|
|
12/31/18
|
|
|
12/31/18
|
|
Commercial
|
|
$
|
45,818
|
|
|
|
7.6
|
%
|
|
$
|
49,563
|
|
|
|
8.8
|
%
|
Agricultural
|
|
|
77,529
|
|
|
|
12.9
|
%
|
|
|
69,160
|
|
|
|
12.2
|
%
|
Real estate - residential
|
|
|
14,960
|
|
|
|
2.5
|
%
|
|
|
15,900
|
|
|
|
2.8
|
%
|
Real estate – commercial
|
|
|
292,461
|
|
|
|
48.6
|
%
|
|
|
271,710
|
|
|
|
48.0
|
%
|
Real estate – construction & land
|
|
|
42,727
|
|
|
|
7.1
|
%
|
|
|
40,161
|
|
|
|
7.1
|
%
|
Equity Lines of Credit
|
|
|
37,067
|
|
|
|
6.2
|
%
|
|
|
38,490
|
|
|
|
6.8
|
%
|
Auto
|
|
|
86,727
|
|
|
|
14.4
|
%
|
|
|
77,135
|
|
|
|
13.6
|
%
|
Other
|
|
|
4,467
|
|
|
|
0.7
|
%
|
|
|
4,080
|
|
|
|
0.7
|
%
|
Total Gross Loans
|
|
$
|
601,756
|
|
|
|
100
|
%
|
|
$
|
566,199
|
|
|
|
100
|
%
|
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 71% of the total loan portfolio at September 30, 2019. 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 and Carson City Counties 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, 2019 and December 31, 2018, approximately 74% and 75%, respectively of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate totaled approximately 26% of the Company’s loan portfolio; these loans reprice within one day to three months of a change in the prime rate. At September 30, 2019 and December 31, 2018, 33% 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 14.4% of gross loans at September 30, 2019. 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 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 $78 million at September 30, 2019 and $69 million at December 31, 2018.
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 monthly 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. 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. MARC 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 monthly and reports to the Board of Directors.
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.
(dollars in thousands)
|
|
For the Nine Months Ended
September 30,
|
|
|
For the Year Ended
December 31
|
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Balance at beginning of period
|
|
$
|
6,958
|
|
|
$
|
6,669
|
|
|
$
|
6,669
|
|
|
$
|
6,549
|
|
|
$
|
6,078
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
|
186
|
|
|
|
325
|
|
|
|
325
|
|
|
|
202
|
|
|
|
268
|
|
Real estate mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
48
|
|
|
|
292
|
|
Real estate construction & land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5
|
|
Consumer (includes equity LOC & Auto)
|
|
|
688
|
|
|
|
663
|
|
|
|
841
|
|
|
|
629
|
|
|
|
414
|
|
Total charge-offs
|
|
|
874
|
|
|
|
988
|
|
|
|
1,191
|
|
|
|
879
|
|
|
|
979
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
|
21
|
|
|
|
23
|
|
|
|
83
|
|
|
|
89
|
|
|
|
53
|
|
Real estate mortgage
|
|
|
4
|
|
|
|
112
|
|
|
|
114
|
|
|
|
118
|
|
|
|
45
|
|
Real estate construction & land
|
|
|
-
|
|
|
|
3
|
|
|
|
3
|
|
|
|
-
|
|
|
|
389
|
|
Consumer (includes equity LOC & Auto)
|
|
|
217
|
|
|
|
227
|
|
|
|
280
|
|
|
|
192
|
|
|
|
163
|
|
Total recoveries
|
|
|
242
|
|
|
|
365
|
|
|
|
480
|
|
|
|
399
|
|
|
|
650
|
|
Net charge-offs
|
|
|
632
|
|
|
|
623
|
|
|
|
711
|
|
|
|
480
|
|
|
|
329
|
|
Provision for loan losses
|
|
|
900
|
|
|
|
800
|
|
|
|
1,000
|
|
|
|
600
|
|
|
|
800
|
|
Balance at end of period
|
|
$
|
7,226
|
|
|
$
|
6,846
|
|
|
$
|
6,958
|
|
|
$
|
6,669
|
|
|
$
|
6,549
|
|
Net charge-offs during the period to average loans (annualized for the nine-month periods)
|
|
|
0.14
|
%
|
|
|
0.16
|
%
|
|
|
0.14
|
%
|
|
|
0.10
|
%
|
|
|
0.08
|
%
|
Allowance for loan losses to total loans
|
|
|
1.20
|
%
|
|
|
1.27
|
%
|
|
|
1.23
|
%
|
|
|
1.37
|
%
|
|
|
1.42
|
%
|
During the nine months ended September 30, 2019 and 2018 we recorded a provision for loan losses of $900 thousand and $800 thousand, respectively. Net charge-offs totaled $632 thousand during the nine months ended September 30, 2019, an increase of $9 thousand from $623 thousand during the nine months ended September 30, 2018.
The following table provides a breakdown of the allowance for loan losses at September 30, 2019 and December 31, 2018:
(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
|
|
|
|
2019
|
|
|
2019
|
|
|
2018
|
|
|
2018
|
|
Commercial and agricultural
|
|
$
|
1,424
|
|
|
|
20.5
|
%
|
|
$
|
1,452
|
|
|
|
21.0
|
%
|
Real estate mortgage
|
|
|
3,261
|
|
|
|
51.1
|
%
|
|
|
2,900
|
|
|
|
50.8
|
%
|
Real estate construction & land
|
|
|
640
|
|
|
|
7.1
|
%
|
|
|
758
|
|
|
|
7.1
|
%
|
Consumer (includes equity LOC & Auto)
|
|
|
1,901
|
|
|
|
21.3
|
%
|
|
|
1,848
|
|
|
|
21.1
|
%
|
Total
|
|
$
|
7,226
|
|
|
|
100.0
|
%
|
|
$
|
6,958
|
|
|
|
100.0
|
%
|
The allowance for loan losses totaled $7.2 million at September 30, 2019 and $7.0 million at December 31, 2018. Specific reserves related to impaired loans increased by $54 thousand from $181 thousand at December 31, 2018 to $235 thousand at September 30, 2019. 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 $7.0 million at September 30, 2019 and $6.8 million at December 31, 2018. The allowance for loan losses as a percentage of total loans was 1.20% at September 30, 2019 and 1.23% at December 31, 2018. The percentage of general reserves to unimpaired loans totaled 1.17% at September 30, 2019 and 1.20% at December 31, 2018.
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 $0.9 million, $1.0 million, $1.1 million, $2.6 million and $2.0 million at September 30, 2019 and December 31, 2018, 2017, 2016, and 2015, respectively. For additional information related to restructured loans see Note 4 to the condensed consolidated financial statements contained within this Form 10-Q.
The following table sets forth the amount of the Company's nonperforming assets as of the dates indicated.
|
|
At
September
30,
|
|
|
At December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
2,598
|
|
|
$
|
1,117
|
|
|
$
|
1,226
|
|
|
$
|
2,724
|
|
|
$
|
4,546
|
|
Loans past due 90 days or more and still accruing
|
|
|
-
|
|
|
|
-
|
|
|
|
1,796
|
|
|
|
-
|
|
|
|
-
|
|
Total nonperforming loans
|
|
|
2,598
|
|
|
|
1,117
|
|
|
|
3,022
|
|
|
|
2,724
|
|
|
|
4,546
|
|
Other real estate owned
|
|
|
1,094
|
|
|
|
1,170
|
|
|
|
1,344
|
|
|
|
735
|
|
|
|
1,756
|
|
Other vehicles owned
|
|
|
46
|
|
|
|
53
|
|
|
|
35
|
|
|
|
12
|
|
|
|
30
|
|
Total nonperforming assets
|
|
$
|
3,738
|
|
|
$
|
2,340
|
|
|
$
|
4,401
|
|
|
$
|
3,471
|
|
|
$
|
6,332
|
|
Interest income forgone on nonaccrual loans
|
|
$
|
116
|
|
|
$
|
46
|
|
|
$
|
50
|
|
|
$
|
164
|
|
|
$
|
303
|
|
Interest income recorded on a cash basis on nonaccrual loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
29
|
|
|
$
|
-
|
|
Nonperforming loans to total loans
|
|
|
0.43
|
%
|
|
|
0.20
|
%
|
|
|
0.62
|
%
|
|
|
0.59
|
%
|
|
|
1.13
|
%
|
Nonperforming assets to total assets
|
|
|
0.42
|
%
|
|
|
0.28
|
%
|
|
|
0.59
|
%
|
|
|
0.53
|
%
|
|
|
1.06
|
%
|
Nonperforming loans at September 30, 2019 were $2.6 million, an increase of $1.5 million from the $1.1 million balance at December 31, 2018. Specific reserves on nonaccrual loans totaled $201 thousand at September 30, 2019 and $128 thousand at December 31, 2018, respectively. Performing loans past due thirty to eighty-nine days were $1.7 million at September 30, 2019 down from $2.6 million at December 31, 2018.
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 increased by $1.6 million from $741 thousand at December 31, 2018 to $2.4 million at September 30, 2019. Loans classified as special mention increased by $4.0 million from $4.3 million at December 31, 2018 to $8.3 million at September 30, 2019. At September 30, 2019, $22 thousand 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, 2019 and December 31, 2018, the Company's recorded investment in impaired loans totaled $2.6 million and $1.3 million, respectively. The specific allowance for loan losses related to impaired loans totaled $235 thousand and $181 thousand at September 30, 2019 and December 31, 2018, respectively. Additionally, $11 thousand had been charged off against the impaired loans at September 30, 2019 and December 31, 2018.
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, 2019 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 five properties totaling $1.1 million at September 30, 2019 and six properties totaling $1.2 million at December 31, 2018. Nonperforming assets as a percentage of total assets were 0.42% at September 30, 2019 and 0.28% at December 31, 2018.
The following table provides a summary of the change in the number and balance of OREO properties for the nine months ended September 30, 2019 and 2018 (dollars in thousands):
|
|
Nine Months Ended September 30,
|
|
|
|
#
|
|
|
2019
|
|
|
#
|
|
|
2018
|
|
Beginning Balance
|
|
|
6
|
|
|
$
|
1,170
|
|
|
|
6
|
|
|
$
|
1,344
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
|
|
288
|
|
Dispositions
|
|
|
1
|
|
|
|
76
|
|
|
|
(2
|
)
|
|
|
(506
|
)
|
Provision from change in OREO valuation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(38
|
)
|
Ending Balance
|
|
|
5
|
|
|
$
|
1,094
|
|
|
|
6
|
|
|
$
|
1,088
|
|
The dispositions in 2018 includes $377 thousand related to the sale of a portion of a property.
Investment Portfolio and Federal Funds Sold. Total investment securities were $169.5 million as of September 30, 2019 and $171.5 million as of December 31, 2018. Unrealized gains on available-for-sale investment securities totaling $3.0 million were recorded, net of $895 thousand in tax expense, as accumulated other comprehensive income within shareholders' equity at September 30, 2019. Unrealized losses on available-for-sale investment securities totaling $2.9 million were recorded, net of $846 thousand in tax benefits, as accumulated other comprehensive income within shareholders' equity at December 31, 2018.
During the three and nine months ended September 30, 2019 the Company sold forty available-for-sale investment securities for total proceeds of $11.4 million recording a $20 thousand gain on sale. During the nine months ended September 30, 2018 the Company sold eighteen available-for-sale investment securities for total proceeds of $4.2 million recording an $8 thousand loss on sale. No investment securities were sold during the three months ended September 30, 2019 and 2018.
The investment portfolio at September 30, 2019 consisted of $136.7 million in securities of U.S. Government-sponsored agencies and 87 municipal securities totaling $32.8 million. The investment portfolio at December 31, 2018 consisted of $132.7 million in securities of U.S. Government-sponsored agencies and 119 municipal securities totaling $38.8 million.
There were no Federal funds sold at September 30, 2019 and December 31, 2018; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $50.5 million at September 30, 2019 and $19.9 million at December 31, 2018. The balance, at September 30, 2019, earns interest at the rate of 1.80%.
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. Total deposits increased by $49.6 million from $727 million at December 31, 2018 to $776 million at September 30, 2019. This increase was driven by a $49.2 million increase in non-interest-bearing demand deposits. Additionally, money market accounts increased by $6.7 million, savings balances increased by $4.8 million and interest-bearing demand deposits increased by $3.6 million. Partially offsetting these increases was a decline in time deposits of $14.7 million. Much of the decline in time deposits is related to the maturity of higher rate time deposits at the Company’s Carson City, Nevada branch. 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, 2019 and December 31, 2018.
(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
|
|
|
|
9/30/19
|
|
|
9/30/19
|
|
|
12/31/18
|
|
|
12/31/18
|
|
Non-interest bearing
|
|
$
|
353,203
|
|
|
|
45.5
|
%
|
|
$
|
304,039
|
|
|
|
41.8
|
%
|
NOW
|
|
|
108,708
|
|
|
|
14.0
|
%
|
|
|
105,107
|
|
|
|
14.5
|
%
|
Money Market
|
|
|
89,451
|
|
|
|
11.5
|
%
|
|
|
82,743
|
|
|
|
11.4
|
%
|
Savings
|
|
|
182,565
|
|
|
|
23.5
|
%
|
|
|
177,710
|
|
|
|
24.5
|
%
|
Time
|
|
|
42,256
|
|
|
|
5.5
|
%
|
|
|
56,966
|
|
|
|
7.8
|
%
|
Total Deposits
|
|
$
|
776,183
|
|
|
|
100
|
%
|
|
$
|
726,565
|
|
|
|
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. 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 September 30, 2019 or December 31, 2018.
Short-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $222 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $359 million. The Company is required to hold FHLB stock as a condition of membership. At September 30, 2019 and December 31, 2018, the Company held $3.5 million and $3.0 million, respectively of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings at September 30, 2019, the Company can borrow up to $130.2 million. To borrow the $222 million in available credit the Company would need to purchase $2.5 million 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, 2019 and December 31, 2018.
Note Payable. On October 1, 2019 the Company renewed its line of credit, for a one-year term, with the same lender (the “Note”). The maximum amount outstanding at any one time on the Note cannot exceed $5 million. There were no borrowings on the Note during the nine months ended September 30, 2019 or the year ended December 31, 2018. The Note bears interest at a rate of the U.S. "Prime Rate" plus one-quarter percent per annum and is secured by 100 shares of Plumas Bank stock representing the Company's 100% ownership interest in Plumas Bank. Under the Note, the Bank is subject 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 Bank was in compliance with all such covenants related to the Note at September 30, 2019 and December 31, 2018.
Repurchase Agreements. In 2011 the Bank introduced a new product for its larger business customers which use securities sold under agreements to repurchase as an alternative to interest-bearing deposits. Securities sold under agreements to repurchase totaling $13.4 million and $13.1 million at September 30, 2019 and December 31, 2018, respectively are secured by U.S. Government agency securities with a carrying amount of $19.6 million and $21.8 million at September 30, 2019 and December 31, 2018, respectively. Interest paid on this product is similar to that which is paid on the Bank’s premium interest-bearing transaction accounts; however, these are not deposits and are not FDIC insured.
Junior Subordinated Deferrable Interest Debentures. Plumas Statutory Trust I and II are business trust subsidiaries formed by the Company with capital of $347,000 and $178,000, 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 5.51% (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 3.60% (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, 2019 and 2018 related to the subordinated debentures was $406 thousand and $370 thousand, respectively.
Capital Resources
Shareholders’ equity increased by $14.9 million from $66.9 million at December 31, 2018 to $81.8 million at September 30, 2019. The $14.9 million increase was related to earnings during the first nine months of 2019 of $11.6 million, an increase in unrealized gain on investment securities of $4.2 million and $0.3 million representing stock option activity. These items were partially offset by a semi-annual dividend which totaled $1.2 million.
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, reviews 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 was paid on November 21, 2016. On May 15, 2017 and November 15, 2017, the Company paid semi-annual cash dividends each of which totaled $0.14 per share. On May 15, 2018 and November 15, 2018, the Company paid semi-annual cash dividends each of which totaled $0.18 per share. On May 15, 2019 the Company paid a semi-annual cash dividend of $0.23 per share.
Capital Standards. 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, sometimes called “Basel III”. The phase-in period for the final rules began in 2015, with certain of the rules’ 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 new capital rules include a new minimum “common equity Tier 1” ratio of 4.5%, a Tier 1 capital ratio of 6.0% (increased from 4.0%), a total risk-based capital ratio of 8.0%, and a minimum leverage ratio of 4.0% (calculated as Tier 1 capital to average consolidated assets). The effective date of these requirements was January 1, 2015. In addition, the new capital rules include a capital conservation buffer of 2.5% above each of these levels (to be phased in over three years beginning at 0.625% on January 1, 2016 and increasing by that amount on each subsequent January 1, until reaching 2.5% on January 1, 2019) required for banking institutions to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the new capital rules would result in the following minimum ratios to be considered well capitalized: (i) a Tier 1 capital ratio of 8.5%, (ii) a common equity Tier 1 capital ratio of 7.0%, and (iii) a total capital ratio of 10.5%. The final rules also implement strict eligibility criteria for regulatory capital instruments.
Plumas Bancorp qualifies for treatment under the Small Bank Holding Company Policy Statement (Regulation Y, Appendix C) (the “Policy Statement”) and is thereby not subject to consolidated capital rules at the bank holding company level. On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Relief Act”) was signed into law. The Relief Act included a provision to increase the threshold for qualifying for the Policy Statement from $1 billion to $3 billion in total assets.
On September 17, 2019 the FDIC approved a final rule allowing community banks with a leverage capital ratio of at least 9% to be considered in compliance with Basel III capital requirements and exempt from the complex Basel calculation.
Under the final rule, banks with less than $10 billion in assets may elect the community bank leverage ratio framework (“CBLR”) if they meet the 9 percent ratio and if they hold 25 or less percent of assets in off-balance sheet exposures, and 5 percent or less of assets in trading assets and liabilities. For institutions that fall below the 9% capital requirement but remain above 8%, the final rule establishes a 2 quarter grace period to either meet the qualifying criteria again or comply with the generally applicable capital rule.
Eligible banks may opt-in to the CBLR beginning in the first quarter of 2020. Plumas Bank believes it meets all eligibility criteria required under the CBLR, but has not yet determined if it will opt-in.
The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Minimum Amount of Capital Required
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be Well-Capitalized
|
|
|
|
|
|
|
|
|
|
|
|
For Capital
|
|
|
Under Prompt
|
|
|
|
Actual
|
|
|
Adequacy Purposes (1)
|
|
|
Corrective Provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
September 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Ratio
|
|
$
|
87,570
|
|
|
|
13.0
|
%
|
|
$
|
30,383
|
|
|
|
4.5
|
%
|
|
$
|
43,887
|
|
|
|
6.5
|
%
|
Tier 1 Leverage Ratio
|
|
|
87,570
|
|
|
|
10.2
|
%
|
|
|
34,453
|
|
|
|
4.0
|
%
|
|
|
43,066
|
|
|
|
5.0
|
%
|
Tier 1 Risk-Based Capital Ratio
|
|
|
87,570
|
|
|
|
13.0
|
%
|
|
|
40,511
|
|
|
|
6.0
|
%
|
|
|
54,015
|
|
|
|
8.0
|
%
|
Total Risk-Based Capital Ratio
|
|
|
95,046
|
|
|
|
14.1
|
%
|
|
|
54,015
|
|
|
|
8.0
|
%
|
|
|
67,519
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Ratio
|
|
$
|
76,545
|
|
|
|
11.8
|
%
|
|
$
|
29,071
|
|
|
|
4.5
|
%
|
|
$
|
41,991
|
|
|
|
6.5
|
%
|
Tier 1 Leverage Ratio
|
|
|
76,545
|
|
|
|
9.3
|
%
|
|
|
32,765
|
|
|
|
4.0
|
%
|
|
|
40,956
|
|
|
|
5.0
|
%
|
Tier 1 Risk-Based Capital Ratio
|
|
|
76,545
|
|
|
|
11.8
|
%
|
|
|
38,761
|
|
|
|
6.0
|
%
|
|
|
51,681
|
|
|
|
8.0
|
%
|
Total Risk-Based Capital Ratio
|
|
|
83,753
|
|
|
|
13.0
|
%
|
|
|
51,681
|
|
|
|
8.0
|
%
|
|
|
64,602
|
|
|
|
10.0
|
%
|
(1) Does not include amounts required to maintain the capital conservation buffer under the new capital rules
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, 2019, the Company had $104.9 million in unfunded loan commitments and $431 thousand in letters of credit. This compares to $126.9 million in unfunded loan commitments and $417 thousand in letters of credit at December 31, 2018. Of the $104.9 million in unfunded loan commitments, $58.0 million and $46.9 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at September 30, 2019, $57.3 million were secured by real estate, of which $20.4 million was secured by commercial real estate and $36.9 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.
Leases. The Company leases three depository branches, four lending offices and two non-branch automated teller machine locations. Total rental expenses under all leases were $342 thousand and $275 thousand during the nine months ended September 30, 2019 and 2018, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2019 and the last such lease expiring during 2022.
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 $222 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $359 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, 2019 or December 31, 2018.
Customer deposits are the Company’s primary source of funds. Total deposits increased by $49.6 million from $727 million at December 31, 2018 to $776 million at September 30, 2019. 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.
Recent Developments. On October 16, 2019 the Company declared a semi-annual cash dividend totaling $0.23 per share, or approximately $1.2 million. The dividend is payable on November 15, 2019 to shareholders of record at the close of business day on November 1, 2019.