ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Certain matters discussed in this Quarterly Report are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward-looking statements. Such risks and uncertainties include, among others, (1) significant increases in competitive pressures in the financial services industry; (2) changes in the interest rate environment resulting in reduced margins; (3) general economic conditions, either nationally or regionally, maybe less favorable than expected, resulting in, among other things, a deterioration in credit quality; (4) changes in regulatory environment; (5) loss of key personnel; (6) fluctuations in the real estate market; (7) changes in business conditions and inflation; (8) operational risks including data processing systems failures or fraud; and (9) changes in securities markets. Therefore, the information set forth herein should be carefully considered when evaluating the business prospects of Plumas Bancorp (the “Company”).
When the Company uses in this Quarterly Report the words “anticipate”, “estimate”, “expect”, “project”, “intend”, “commit”, “believe” and similar expressions, the Company intends to identify forward-looking statements. Such statements are not guarantees of performance and are subject to certain risks, uncertainties and assumptions, including those described in this Quarterly Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, expected, projected, intended, committed or believed. The future results and stockholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company’s ability to control or predict. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
INTRODUCTION
The following discussion and analysis sets forth certain statistical information relating to the Company as of March 31, 2020 and December 31, 2019 and for the three- month period ended March 31, 2020 and 2019. 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, 2019.
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 2019 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.
COVID-19
On March 11, 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income, the provision for loan losses and non-interest income. Other financial impact could occur though such potential impact is unknown at this time.
COVID-19 Loan Forbearance Programs
Section 4013 of the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides that a qualified loan modification is exempt by law from classification as a Troubled Debt Restructuring pursuant to U.S. Generally Accepted Accounting Principles (GAAP). In addition, FIL -36-2020 issued by the FDIC on April 7, 2020 encourages financial institutions to work constructively with borrowers affected by COVID-19; states that the FDIC will not criticize institutions for prudent loan modifications; and views prudent loan modification programs to financial institution customers affected by COVID-19 as positive actions that can effectively manage or mitigate adverse impacts on borrowers due to COVID-19, and lead to improved loan performance and reduced credit risk. Pursuant to this new guidance, we have instituted loan forbearance programs to assist borrowers with managing cash flows disrupted due to COVID-19. As of April 30, 2020, we have entered into 357 loan forbearance agreements which allow for the deferral of up to 6 months in payments representing approximately $90 million in loan balances.
U.S. Small Business Administration Paycheck Protection Program
The CARES Act also provided for the Paycheck Protection Program (PPP) and we are actively participating in this program. In order to best service our customers we have limited applications to clients who had an active business relationship with us prior to February 15, 2020. As of April 30, 2020 we funded 365 PPP loans with a total principal balance of over $60 million and have approved an additional $51 million in loans which are expected to fund in May.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED March 31, 2020
Net Income. The Company recorded net income of $3.3 million for the three months ended March 31, 2020 down $502 thousand from net income of $3.8 million for the three months ended March 31, 2019. An increase of $260 thousand in non-interest income and a decline in income tax expense of $205 thousand were offset by a reduction in net interest income of $165 thousand and increases in the provision for loan losses of $350 thousand and non-interest expense of $452 thousand.
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 $9.2 million for the three months ended March 31, 2020 a decrease of $165 thousand, or 2%, from $9.4 million for the same period in 2019. The decrease in net interest income includes a decrease of $227 thousand in interest income partially offset by a decrease in interest expense of $62 thousand We attribute the decrease in interest income to a decline in market interest rates during the period. The average prime rate for the 3 months ending March 31, 2019 was 5.50% while for the current quarter the average prime rate declined to 4.42%. Net interest margin for the three months ended March 31, 2020 decreased by 38 basis points from 4.95% during the first quarter of 2019 to 4.57% during the current quarter.
Interest and fees on loans increased by $30 thousand as an increase in average loan balances of $52 million was offset by a decline in yield on loans of 54 basis points from 6.09% during the 2019 quarter to 5.55% during the current quarter. Included in interest and fees on loans during the quarter ended March 31, 2019 was $433 thousand in prepayment fees related to the payoff of loans from one client. This client prepaid a total of $11.6 million in loans; some which had significant prepayment penalties associated with them. Excluding the effect of the $433 thousand in prepayments fees, yield on loans would have been 5.78% for the three months ended March 31, 2019. Net loan fees/costs decreased by $381 thousand from net fees of $133 thousand during the first quarter of 2019 to net costs of $248 thousand during the current quarter.
Interest on investment securities decreased by $185 thousand related to a decrease in average balance from $171.3 million in 2019 to $158.1 million in 2020 and a decline in yield from 2.69% during the three months ended March 31, 2019 to 2.42% during the current quarter.
Interest expense on deposits decreased by $38 thousand to $259 thousand for the three months ended March 31, 2020, down from $297 thousand during the 2019 quarter. Interest expense on time deposit decreased by $58 thousand mostly related to a decrease in average balance in time deposits in our Carson City branch. The Carson City branch was acquired in October 2018; we have experienced a decrease in deposits at this branch 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 $13.4 million from $15.8 million at March 31, 2019 to $2.4 million at March 31, 2020. Partialy offsetting the decrease in interest on time deposits was a $15 thousand interest in interest expense on money market accounts. Average money market accounts increased by $10.1 million from $83.3 million during the three months ended March 31, 2019 to $93.4 million during the current quarter. The average rate paid on money market accounts increased by 2 basis points to 0.43 during the three-months ended March 31, 2020 .
Interest expense on other interest-bearing liabilities decreased by $24 thousand from $143 thousand during the three months ended March 31, 2019 to $119 thousand during the current quarter related to a decrease in rate paid on junior subordinated debentures. Interest on the debentures, which totaled $116 thousand during the first quarter of 2020, 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
|
|
|
For the Three Months Ended
|
|
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/
|
|
|
Balance
|
|
|
Interest
|
|
|
Yield/
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Rate
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans (1) (2) (3)
|
|
$
|
618,961
|
|
|
$
|
8,540
|
|
|
|
5.55
|
%
|
|
$
|
566,806
|
|
|
$
|
8,510
|
|
|
|
6.09
|
%
|
Investment securities (1)
|
|
|
158,112
|
|
|
|
952
|
|
|
|
2.42
|
%
|
|
|
171,268
|
|
|
|
1,137
|
|
|
|
2.69
|
%
|
Interest-bearing deposits
|
|
|
34,984
|
|
|
|
107
|
|
|
|
1.23
|
%
|
|
|
30,226
|
|
|
|
179
|
|
|
|
2.40
|
%
|
Total interest-earning assets
|
|
|
812,057
|
|
|
|
9,599
|
|
|
|
4.75
|
%
|
|
|
768,300
|
|
|
|
9,826
|
|
|
|
5.19
|
%
|
Cash and due from banks
|
|
|
22,007
|
|
|
|
|
|
|
|
|
|
|
|
21,435
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
39,234
|
|
|
|
|
|
|
|
|
|
|
|
39,927
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
873,298
|
|
|
|
|
|
|
|
|
|
|
$
|
829,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
$
|
107,667
|
|
|
|
26
|
|
|
|
0.10
|
%
|
|
$
|
104,053
|
|
|
|
24
|
|
|
|
0.09
|
%
|
Money market deposits
|
|
|
93,436
|
|
|
|
99
|
|
|
|
0.43
|
%
|
|
|
83,288
|
|
|
|
84
|
|
|
|
0.41
|
%
|
Savings deposits
|
|
|
186,084
|
|
|
|
76
|
|
|
|
0.16
|
%
|
|
|
179,324
|
|
|
|
73
|
|
|
|
0.17
|
%
|
Time deposits
|
|
|
37,698
|
|
|
|
58
|
|
|
|
0.62
|
%
|
|
|
55,669
|
|
|
|
116
|
|
|
|
0.85
|
%
|
Total deposits
|
|
|
424,885
|
|
|
|
259
|
|
|
|
0.25
|
%
|
|
|
422,334
|
|
|
|
297
|
|
|
|
0.29
|
%
|
Junior subordinated debentures
|
|
|
10,310
|
|
|
|
116
|
|
|
|
4.53
|
%
|
|
|
10,310
|
|
|
|
140
|
|
|
|
5.51
|
%
|
Other interest-bearing liabilities
|
|
|
12,596
|
|
|
|
3
|
|
|
|
0.10
|
%
|
|
|
12,638
|
|
|
|
3
|
|
|
|
0.10
|
%
|
Total interest-bearing liabilities
|
|
|
447,791
|
|
|
|
378
|
|
|
|
0.34
|
%
|
|
|
445,282
|
|
|
|
440
|
|
|
|
0.40
|
%
|
Non-interest-bearing deposits
|
|
|
330,588
|
|
|
|
|
|
|
|
|
|
|
|
307,533
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
|
7,186
|
|
|
|
|
|
|
|
|
|
|
|
7,228
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
87,733
|
|
|
|
|
|
|
|
|
|
|
|
69,619
|
|
|
|
|
|
|
|
|
|
Total liabilities & equity
|
|
$
|
873,298
|
|
|
|
|
|
|
|
|
|
|
$
|
829,662
|
|
|
|
|
|
|
|
|
|
Cost of funding interest-earning assets (4)
|
|
|
|
|
|
|
|
|
|
|
0.18
|
%
|
|
|
|
|
|
|
|
|
|
|
0.24
|
%
|
Net interest income and margin (5)
|
|
|
|
|
|
$
|
9,221
|
|
|
|
4.57
|
%
|
|
|
|
|
|
$
|
9,386
|
|
|
|
4.95
|
%
|
(1)
|
Not computed on a tax-equivalent basis.
|
(2)
|
Average nonaccrual loan balances of $2.1 million for 2020 and $1.1 million for 2019 are included in average loan balances for computational purposes.
|
(3)
|
Net (costs) fees included in loan interest income for the three-month periods ended March 31, 2020 and 2019 were ($248,000) and $133,000, 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:
|
|
2020 over 2019 change in net interest income
|
|
|
|
for the three months ended March 31,
|
|
|
|
(in thousands)
|
|
|
|
Volume (1)
|
|
|
Rate (2)
|
|
|
Mix (3)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
789
|
|
|
$
|
(760
|
)
|
|
$
|
1
|
|
|
$
|
30
|
|
Investment securities
|
|
|
(88
|
)
|
|
|
(115
|
)
|
|
|
18
|
|
|
|
(185
|
)
|
Interest bearing deposits
|
|
|
29
|
|
|
|
(88
|
)
|
|
|
(13
|
)
|
|
|
(72
|
)
|
Total interest income
|
|
|
730
|
|
|
|
(963
|
)
|
|
|
6
|
|
|
|
(227
|
)
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW deposits
|
|
|
1
|
|
|
|
1
|
|
|
|
-
|
|
|
|
2
|
|
Money market deposits
|
|
|
10
|
|
|
|
3
|
|
|
|
2
|
|
|
|
15
|
|
Savings deposits
|
|
|
3
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
Time deposits
|
|
|
(38
|
)
|
|
|
(31
|
)
|
|
|
11
|
|
|
|
(58
|
)
|
Junior subordinated debentures
|
|
|
-
|
|
|
|
(24
|
)
|
|
|
-
|
|
|
|
(24
|
)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total interest expense
|
|
|
(24
|
)
|
|
|
(51
|
)
|
|
|
13
|
|
|
|
(62
|
)
|
Net interest income
|
|
$
|
754
|
|
|
$
|
(912
|
)
|
|
$
|
(7
|
)
|
|
$
|
(165
|
)
|
|
(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 March 31, 2020 and 2019 we recorded a provision for loan losses of $750 thousand and $400 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.
Non-interest income. During the three months ended March 31, 2020, non-interest income totaled $2.2 million, an increase of $260 thousand from the three months ended March 31, 2019. The largest component of this increase was an increase in gains on sale of SBA loans of $220 thousand from $244 thousand during the three months ended March 31, 2019 to $464 thousand during the current quarter. Proceeds from SBA loan sales totaled $10.5 million during the current quarter and $6.0 million during the 2019 quarter. Loans originated for sale totaled $7.5 million during the three months ended March 31, 2020 and $3.7 million during the three months ended March 31, 2019. We attribute some of the decline in originations and sales during the 2019 quarter to the government shutdown beginning on December 22, 2018 and continuing until January 25, 2019. During the shutdown we were unable provide SBA guaranteed loans.
The following table describes the components of non-interest income for the three-month periods ended March 31, 2020 and 2019, dollars in thousands:
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Dollar Change
|
|
|
Percentage Change
|
|
Service charges on deposit accounts
|
|
$
|
705
|
|
|
$
|
650
|
|
|
$
|
55
|
|
|
|
8.5
|
%
|
Interchange income
|
|
|
539
|
|
|
|
513
|
|
|
|
26
|
|
|
|
5.1
|
%
|
Gain on sale of loans, net
|
|
|
464
|
|
|
|
244
|
|
|
|
220
|
|
|
|
90.2
|
%
|
Loan servicing fees
|
|
|
169
|
|
|
|
193
|
|
|
|
(24
|
)
|
|
|
-12.4
|
%
|
Earnings on life insurance policies
|
|
|
91
|
|
|
|
82
|
|
|
|
9
|
|
|
|
11.0
|
%
|
Other
|
|
|
257
|
|
|
|
283
|
|
|
|
(26
|
)
|
|
|
-9.2
|
%
|
Total non-interest income
|
|
$
|
2,225
|
|
|
$
|
1,965
|
|
|
$
|
260
|
|
|
|
13.2
|
%
|
Non-interest expense. During the three months ended March 31, 2020, total non-interest expense increased by $452 thousand, or 8%, to $6.1 million, up from $5.7 million for the comparable period in 2019. The largest components of this increase were increases of $329 in salary and benefit expense and $120 thousand in outside service fees. Salary expense increased by $264 thousand largely related to an increase in staffing levels and merit and promotional increases during the second quarter of 2019. In addition, deferred loan origination costs declined by $102 thousand, commission expense related to SBA loan sales and originations increased by $122 thousand, payroll taxes increased by $57 thousand and we increased our accrued vacation liability by $30 thousand related to increased staffing levels. These increases were partially offset by a decline in accrued bonus expense of $275 thousand from $383 thousand in the first quarter of 2019 to $108 thousand in the current quarter. The reduction in the bonus accrual includes the effect of the decline in market interest rates as well as the impact of the higher loan loss provision related to the pandemic.
The increase in outside service fees include costs associated with growth in our debit card transactions, an increase in costs related to the management of our computer network including the installation of a new advanced backup and recovery system and a $26 thousand employee recruitment fee.
The following table describes the components of non-interest expense for the three-month periods ended March 31, 2020 and 2019, dollars in thousands:
|
|
For the Three Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Dollar Change
|
|
|
Percentage Change
|
|
Salaries and employee benefits
|
|
$
|
3,529
|
|
|
$
|
3,200
|
|
|
$
|
329
|
|
|
|
10.3
|
%
|
Occupancy and equipment
|
|
|
865
|
|
|
|
858
|
|
|
|
7
|
|
|
|
0.8
|
%
|
Outside service fees
|
|
|
724
|
|
|
|
604
|
|
|
|
120
|
|
|
|
19.9
|
%
|
Telephone and data communication
|
|
|
143
|
|
|
|
120
|
|
|
|
23
|
|
|
|
19.2
|
%
|
Director compensation and expense
|
|
|
119
|
|
|
|
107
|
|
|
|
12
|
|
|
|
11.2
|
%
|
Advertising and shareholder relations
|
|
|
118
|
|
|
|
82
|
|
|
|
36
|
|
|
|
43.9
|
%
|
Professional fees
|
|
|
117
|
|
|
|
121
|
|
|
|
(4
|
)
|
|
|
-3.3
|
%
|
Business development
|
|
|
100
|
|
|
|
106
|
|
|
|
(6
|
)
|
|
|
-5.7
|
%
|
Armored car and courier
|
|
|
99
|
|
|
|
89
|
|
|
|
10
|
|
|
|
11.2
|
%
|
Loan collection expenses
|
|
|
60
|
|
|
|
53
|
|
|
|
7
|
|
|
|
13.2
|
%
|
Deposit insurance
|
|
|
58
|
|
|
|
65
|
|
|
|
(7
|
)
|
|
|
-10.8
|
%
|
Amortization of Core Deposit Intangible
|
|
|
51
|
|
|
|
69
|
|
|
|
(18
|
)
|
|
|
-26.1
|
%
|
Stationery and supplies
|
|
|
27
|
|
|
|
26
|
|
|
|
1
|
|
|
|
3.8
|
%
|
OREO expenses
|
|
|
4
|
|
|
|
23
|
|
|
|
(19
|
)
|
|
|
-82.6
|
%
|
Other
|
|
|
122
|
|
|
|
161
|
|
|
|
(39
|
)
|
|
|
-24.2
|
%
|
Total non-interest expense
|
|
$
|
6,136
|
|
|
$
|
5,684
|
|
|
$
|
452
|
|
|
|
8.0
|
%
|
Provision for income taxes. The Company recorded an income tax provision of $1.2 million, or 27.3% of pre-tax income for the three months ended March 31, 2020. This compares to an income tax provision of $1.4 million, or 27.5% of pre-tax income for the three months ended March 31, 2019. The percentages for 2020 and 2019 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 $4.0 million, from $620 million at December 31, 2019 to $624 million at March 31, 2020. The increase in loan balances includes increases of $15.3 million in commercial real estate loans, $2.5 million in automobile loans and $1.3 million in commercial loans. These increases were partially offset by declines of $11.5 million in construction loans, $2.7 million in agricultural loans, $0.7 million in residential real estate loans and $0.2 million in equity lines of credit. 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. Plumas Bank is participating in the SBA's Paycheck Protection Program (PPP) and expects to fund a significant amount of loans under this program. During April 2020 loans totaling $60.5 million were funded by the Bank under the PPP.
As shown in the following table the Company's largest lending categories are commercial real estate loans, auto loans, agricultural loans and commercial loans.
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
Loans in Each
|
|
|
|
|
|
|
Loans in Each
|
|
|
|
Balance at End
|
|
|
Category to
|
|
|
Balance at End
|
|
|
Category to
|
|
(dollars in thousands)
|
|
of Period
|
|
|
Total Loans
|
|
|
of Period
|
|
|
Total Loans
|
|
|
|
03/31/2020
|
|
|
03/31/2020
|
|
|
12/31/2019
|
|
|
12/31/2019
|
|
Commercial
|
|
$
|
49,246
|
|
|
|
7.9
|
%
|
|
$
|
47,892
|
|
|
|
7.7
|
%
|
Agricultural
|
|
|
76,044
|
|
|
|
12.2
|
%
|
|
|
78,785
|
|
|
|
12.7
|
%
|
Real estate – residential
|
|
|
13,820
|
|
|
|
2.2
|
%
|
|
|
14,530
|
|
|
|
2.3
|
%
|
Real estate – commercial
|
|
|
332,294
|
|
|
|
53.3
|
%
|
|
|
316,986
|
|
|
|
51.2
|
%
|
Real estate – construction & land
|
|
|
19,674
|
|
|
|
3.2
|
%
|
|
|
31,181
|
|
|
|
5.0
|
%
|
Equity Lines of Credit
|
|
|
35,262
|
|
|
|
5.6
|
%
|
|
|
35,471
|
|
|
|
5.7
|
%
|
Auto
|
|
|
92,862
|
|
|
|
14.9
|
%
|
|
|
90,310
|
|
|
|
14.6
|
%
|
Other
|
|
|
4,541
|
|
|
|
0.7
|
%
|
|
|
4,563
|
|
|
|
0.8
|
%
|
Total Gross Loans
|
|
$
|
623,743
|
|
|
|
100
|
%
|
|
$
|
619,718
|
|
|
|
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 March 31, 2020. 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 March 31, 2020 and December 31, 2019, approximately 74% of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate or an equivalent rate totaled approximately 24% of the Company’s loan portfolio; these loans reprice within one day to three months of a change in the prime rate. At March 31, 2020 and December 31, 2019, 37% and 32%, 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 14.9% of gross loans at March 31, 2020. 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 $76 million at March 31, 2020 and $79 million at December 31, 2019.
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. We have added a new specific pandemic qualitative factor to our allowance for loan loss calculation and have increased the qualitative factor related to economic conditions, these changes resulted in the need for an additional loan loss provision during the current quarter. See page 26 and Item 1A - Risk Factors for a discussion of the COVID-19 global pandemic and its potential affect on the Company's current and future financial position and results of operations.
In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’t measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model. The new model, referred to as the current expected credit loss (“CECL”) model, will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. We have purchased software to support the CECL calculation of the allowance for loan losses under ASU No 2016-13 and have engaged the software vendor to assist in the transition to the CECL model. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses. However, the Company continues to evaluate the extent of the potential impact. On October 16, 2019, the FASB approved a proposal to change the effective date of ASU No. 2016-13 for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities delaying the effective date to fiscal years beginning after December 31, 2022, including interim periods within those fiscal periods. As the Company is a smaller reporting company and has not adopted provisions of the standard early, the delay is applicable to the Company.
The following table provides certain information for the dates indicated with respect to the Company's allowance for loan losses as well as charge-off and recovery activity.
|
|
For the Three Months Ended
|
|
|
For the Year Ended
|
|
(dollars in thousands)
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of period
|
|
$
|
7,243
|
|
|
$
|
6,958
|
|
|
$
|
6,958
|
|
|
$
|
6,669
|
|
|
$
|
6,549
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
|
131
|
|
|
|
16
|
|
|
|
587
|
|
|
|
325
|
|
|
|
202
|
|
Real estate mortgage
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25
|
|
|
|
48
|
|
Real estate construction & land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Consumer (includes equity LOC & Auto)
|
|
|
137
|
|
|
|
335
|
|
|
|
934
|
|
|
|
841
|
|
|
|
629
|
|
Total charge-offs
|
|
|
268
|
|
|
|
351
|
|
|
|
1,521
|
|
|
|
1,191
|
|
|
|
879
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial and agricultural
|
|
|
2
|
|
|
|
9
|
|
|
|
26
|
|
|
|
83
|
|
|
|
89
|
|
Real estate mortgage
|
|
|
2
|
|
|
|
1
|
|
|
|
7
|
|
|
|
114
|
|
|
|
118
|
|
Real estate construction & land
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
-
|
|
Consumer (includes equity LOC & Auto)
|
|
|
75
|
|
|
|
50
|
|
|
|
273
|
|
|
|
280
|
|
|
|
192
|
|
Total recoveries
|
|
|
79
|
|
|
|
60
|
|
|
|
306
|
|
|
|
480
|
|
|
|
399
|
|
Net charge-offs
|
|
|
189
|
|
|
|
291
|
|
|
|
1,215
|
|
|
|
711
|
|
|
|
480
|
|
Provision for loan losses
|
|
|
750
|
|
|
|
400
|
|
|
|
1,500
|
|
|
|
1,000
|
|
|
|
600
|
|
Balance at end of period
|
|
$
|
7,804
|
|
|
$
|
7,067
|
|
|
$
|
7,243
|
|
|
$
|
6,958
|
|
|
$
|
6,669
|
|
Net charge-offs during the period to average loans (annualized for the nine-month periods)
|
|
|
0.12
|
%
|
|
|
0.25
|
%
|
|
|
0.21
|
%
|
|
|
0.14
|
%
|
|
|
0.10
|
%
|
Allowance for loan losses to total loans
|
|
|
1.25
|
%
|
|
|
1.23
|
%
|
|
|
1.17
|
%
|
|
|
1.23
|
%
|
|
|
1.37
|
%
|
During the three months ended March 31, 2020 and 2019 we recorded a provision for loan losses of $750 thousand and $400 thousand, respectively. The increase relates to an increase in the economic qualitative factor and the addition of a separate pandemic qualitative factor. Net charge-offs totaled $189 thousand during the three months ended March 31, 2020, a decrease of $102 thousand from $291 thousand during the three months ended March 31, 2019.
The following table provides a breakdown of the allowance for loan losses at March 31, 2020 and December 31, 2019:
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
Loans in Each
|
|
|
|
|
|
|
Loans in Each
|
|
|
|
Balance at End
|
|
|
Category to
|
|
|
Balance at End
|
|
|
Category to
|
|
(dollars in thousands)
|
|
of Period
|
|
|
Total Loans
|
|
|
of Period
|
|
|
Total Loans
|
|
|
|
2020
|
|
|
2020
|
|
|
2019
|
|
|
2019
|
|
Commercial and agricultural
|
|
$
|
1,336
|
|
|
|
20.1
|
%
|
|
$
|
1,270
|
|
|
|
20.4
|
%
|
Real estate mortgage
|
|
|
4,001
|
|
|
|
55.5
|
%
|
|
|
3,589
|
|
|
|
53.5
|
%
|
Real estate construction & land
|
|
|
397
|
|
|
|
3.2
|
%
|
|
|
481
|
|
|
|
5.0
|
%
|
Consumer (includes equity LOC & Auto)
|
|
|
2,070
|
|
|
|
21.2
|
%
|
|
|
1,903
|
|
|
|
21.1
|
%
|
Total
|
|
$
|
7,804
|
|
|
|
100.0
|
%
|
|
$
|
7,243
|
|
|
|
100.0
|
%
|
The allowance for loan losses totaled $7.8 million at March 31, 2020 and $7.2 million at December 31, 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 $7.7 million at March 31, 2020 and $7.1 million at December 31, 2019. The allowance for loan losses as a percentage of total loans was 1.25% at March 31, 2020 and 1.17% at December 31, 2019. The percentage of general reserves to unimpaired loans totaled 1.23% at March 31, 2020 and 1.15% at December 31, 2019.
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, $0.9 million, $1.0 million, $1.1 million and $2.6 million at March 31, 2020 and December 31, 2019, 2018, 2017, and 2016, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
At December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonaccrual loans
|
|
$
|
2,310
|
|
|
$
|
2,050
|
|
|
$
|
1,117
|
|
|
$
|
1,226
|
|
|
$
|
2,724
|
|
Loans past due 90 days or more and still accruing
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,796
|
|
|
|
-
|
|
Total nonperforming loans
|
|
|
2,310
|
|
|
|
2,050
|
|
|
|
1,117
|
|
|
|
3,022
|
|
|
|
2,724
|
|
Other real estate owned
|
|
|
707
|
|
|
|
707
|
|
|
|
1,170
|
|
|
|
1344
|
|
|
|
735
|
|
Other vehicles owned
|
|
|
62
|
|
|
|
56
|
|
|
|
53
|
|
|
|
35
|
|
|
|
12
|
|
Total nonperforming assets
|
|
$
|
3,079
|
|
|
$
|
2,813
|
|
|
$
|
2,340
|
|
|
$
|
4,401
|
|
|
$
|
3,471
|
|
Interest income forgone on nonaccrual loans
|
|
$
|
33
|
|
|
$
|
158
|
|
|
$
|
46
|
|
|
$
|
50
|
|
|
$
|
164
|
|
Interest income recorded on a cash basis on nonaccrual loans
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
29.00
|
|
Nonperforming loans to total loans
|
|
|
0.37
|
%
|
|
|
0.33
|
%
|
|
|
0.20
|
%
|
|
|
0.62
|
%
|
|
|
0.59
|
%
|
Nonperforming assets to total assets
|
|
|
0.35
|
%
|
|
|
0.33
|
%
|
|
|
0.28
|
%
|
|
|
0.59
|
%
|
|
|
0.53
|
%
|
Nonperforming loans at March 31, 2020 were $2.3 million, an increase of $260 thousand from the $2.1 million balance at December 31, 2019. Specific reserves on nonaccrual loans totaled $121 thousand at March 31, 2020 and December 31, 2019. Performing loans past due thirty to eighty-nine days were $2.9 million at March 31, 2020 down from $3.7 million at December 31, 2019.
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 $1.4 million from $3.3 million at December 31, 2019 to $1.9 million at March 31, 2020. Loans classified as special mention decreased by $112 thousand from $7.6 million at December 31, 2019 to $7.5 million at March 31, 2020.
At March 31, 2020 and December 31, 2019, the Company's recorded investment in impaired loans totaled $2.2 million. The specific allowance for loan losses related to impaired loans totaled $154 thousand at March 31, 2020 and December 31, 2019. Additionally, $11 thousand had been charged off against the impaired loans at March 31, 2020 and December 31, 2019.
It is the policy of management to make additions to the allowance for loan losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance at March 31, 2020 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 three properties totaling $0.7 million at March 31, 2020 and December 31, 2019. Nonperforming assets as a percentage of total assets were 0.35% at March 31, 2020 and 0.33% at December 31, 2019.
The following table provides a summary of the change in the number and balance of OREO properties for the three months ended March 31, 2020 and 2019 (dollars in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
#
|
|
|
2020
|
|
|
#
|
|
|
2019
|
|
Beginning Balance
|
|
|
3
|
|
|
$
|
707
|
|
|
|
6
|
|
|
$
|
1,170
|
|
Additions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Dispositions
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0
|
|
Ending Balance
|
|
|
3
|
|
|
|
707
|
|
|
|
6
|
|
|
|
1,170
|
|
Investment Portfolio and Federal Funds Sold. Total investment securities were $159.2 million as of March 31, 2020 and $159.3 million as of December 31, 2019. Unrealized gain on available-for-sale investment securities totaling $6,164,000 were recorded, net of $1,822,000 in tax expense, as accumulated other comprehensive income within shareholders' equity at March 31, 2020. Unrealized gain on available-for-sale investment securities totaling $2,910,000 were recorded, net of $861,000 in tax expense, as accumulated other comprehensive loss within shareholders' equity at December 31, 2019. No investment securities were sold during the three months ended March 31, 2020 and 2019.
The investment portfolio at March 31, 2020 consisted of $125.9 million in securities of U.S. Government-sponsored agencies and 87 municipal securities totaling $33.3 million. The investment portfolio at December 31, 2019 consisted of $125.7 million in securities of U.S. Government-sponsored agencies and 89 municipal securities totaling $33.6 million.
There were no Federal funds sold at March 31, 2020 and December 31, 2019; however, the Bank maintained interest earning balances at the Federal Reserve Bank totaling $32.1 million at March 31, 2020 and $20.5 million at December 31, 2019. The balance, at March 31, 2020, earns interest at the rate of 0.10%.
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 $15.6 million from $747 million at December 31, 2019 to $763 million at March 31, 2020. Increases of $4.8 million in non-interest-bearing demand deposits, $2.6 million in interest bearing demand deposits and $8.7 million in money market and savings accounts were partially offset by a decline in time deposits of $0.5 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 March 31, 2020 and December 31, 2019.
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
Percent of
|
|
|
|
|
|
|
|
Deposits in Each
|
|
|
|
|
|
|
Deposits in Each
|
|
|
|
Balance at End
|
|
|
Category to
|
|
|
Balance at End
|
|
|
Category to
|
|
(dollars in thousands)
|
|
of Period
|
|
|
Total Deposits
|
|
|
of Period
|
|
|
Total Deposits
|
|
|
|
03/31/2020
|
|
|
03/31/2020
|
|
|
12/31/2019
|
|
|
12/31/2019
|
|
Non-interest bearing
|
|
$
|
336,375
|
|
|
|
44.1
|
%
|
|
$
|
331,619
|
|
|
|
44.4
|
%
|
NOW
|
|
|
105,271
|
|
|
|
13.8
|
%
|
|
|
102,724
|
|
|
|
13.7
|
%
|
Money Market
|
|
|
93,427
|
|
|
|
12.2
|
%
|
|
|
90,853
|
|
|
|
12.2
|
%
|
Savings
|
|
|
190,085
|
|
|
|
24.9
|
%
|
|
|
183,934
|
|
|
|
24.6
|
%
|
Time
|
|
|
37,728
|
|
|
|
4.9
|
%
|
|
|
38,194
|
|
|
|
5.1
|
%
|
Total Deposits
|
|
$
|
762,886
|
|
|
|
100
|
%
|
|
$
|
747,324
|
|
|
|
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 March 31, 2020 or December 31, 2019.
Short-term Borrowing Arrangements. The Company is a member of the FHLB and can borrow up to $214 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $377 million. The Company is required to hold FHLB stock as a condition of membership. At March 31, 2020 and December 31, 2019, the Company held $3.5 million and of FHLB stock which is recorded as a component of other assets. Based on this level of stock holdings at March 31, 2020, the Company can borrow up to $130.2 million. To borrow the $214 million in available credit the Company would need to purchase $2.3 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 March 31, 2020 and December 31, 2019.
Note Payable. On March 9, 2020 the Company entered into a Renewal, Extension, and Modification of Loan Agreement (the “Agreement”) related to its promissory note dated October 24, 2013 (the “Note”) payable to TIB The Independent Bankersbank, N. A. an unrelated third party. This Agreement provides for the following:
|
1.
|
Revision of the maturity date of the Note from October 1, 2020 to March 2, 2021.
|
|
2.
|
An increase in the maximum amount of the Note from $5 million to $15 million.
|
|
3.
|
Elimination of the “Unused Portion” fee.
|
|
4.
|
A reduction in the Rate from the U. S. “Prime Rate” plus one-quarter of a percent to the U. S. “Prime Rate”.
|
There were no borrowings on the Note during the three months ended March 31, 2020 or the year ended December 31, 2019. The Note 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 March 31, 2020 and December 31, 2019.
Repurchase Agreements. The Bank offers a repurchase agreement 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 $8.4 million and $16.0 million at March 31, 2020 and December 31, 2019, respectively are secured by U.S. Government agency securities with a carrying amount of $21.2 million and $22.0 million at March 31, 2020 and December 31, 2019, 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 $352,000 and $180,000, 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 4.63% (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 2.22% (based on 3-month LIBOR plus 1.48%), with repricing and payments due quarterly. The interest rate of the Trust Preferred Securities issued by Trust I adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 3.40%. The Trust Preferred Securities issued by Trust II adjust on each quarterly anniversary date to equal the 3-month LIBOR plus 1.48%. Both Trusts I and II have the option to defer payment of the distributions for a period of up to five years, as long as the Company is not in default on the payment of interest on the Subordinated Debentures.
Interest expense recognized by the Company for the three months ended March 31, 2020 and 2019 related to the subordinated debentures was $116 thousand and $140 thousand, respectively.
Capital Resources
Shareholders’ equity increased by $5.7 million from $84.5 million at December 31, 2019 to $90.2 million at March 31, 2020. The $5.7 million increase was related to earnings during the first three months of 2020 of $3.3 million, an increase in unrealized gain on investment securities of $2.3 million and $0.1 million representing stock option activity.
It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company’s stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors. The Board will periodically, but on no regular schedule, 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 May 15, 2019 and November 15, 2019 the Company paid a semi-annual cash dividend of $0.23 per share.
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 adopted rules implementing the Basel Committee on Banking Supervision’s capital guidelines for U.S. banks, sometimes called “Basel III,” that increased the minimum regulatory capital requirements for bank holding companies and banks and implemented strict eligibility criteria for regulatory capital instruments. The Basel III capital rules include a minimum common equity Tier 1 ratio of 4.5%, a Tier 1 capital ratio of 6.0%, 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 minimum capital levels required to be considered “well capitalized” include a common equity Tier 1 ratio of 6.5%, a Tier 1 risk-based capital ratio of 8.0%, a total risk-based capital ratio of 10.0% and a leverage ratio of 5.0%. In addition, the Basel III capital rules require that banking organizations maintain an “a capital conservation buffer” of 2.5% above the minimum capital requirements in order to avoid restrictions on their ability to pay dividends, repurchase stock or pay discretionary bonuses. Including the capital conservation buffer of 2.5%, the Basel III capital rules require the following minimum ratios for a bank holding company or bank to be considered well capitalized: a common equity Tier 1 capital ratio of 7.0%; a Tier 1 capital ratio of 8.5%, and a total capital ratio of 10.5%. At December 31, 2019, the Company’s and the Bank’s capital ratios exceed the thresholds necessary to be considered “well capitalized” under the Basel III framework.
Under the FRB’s Small Bank Holding Company and Savings and Loan Holding company Policy Statement (the “Policy Statement”), qualifying bank holding companies with less than $3 billion in consolidated assets are exempt from the consolidated capital rules. The Company qualifies for treatment under the Policy Statement and is not currently subject to the Basel III consolidated capital rules at the bank holding company level. The new capital rules continue to apply to the Bank.
In 2019, the federal banking agencies, including the FDIC, issued a rule establishing a “community bank leverage ratio” (the ratio of a bank’s tier 1 capital to average total consolidated assets) that qualifying institutions with less than $10 billion in assets may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. A qualifying banking organization that elects to use new ratio will be considered to have met all applicable federal regulatory capital and leverage requirements, including the minimum capital levels required to be considered “well capitalized, ” if it maintains community bank leverage ratio capital exceeding 9%. The new rule became effective on January 1, 2020. Plumas Bank has chosen not to opt into the community bank leverage ratio at this time.
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
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Ratio
|
|
$
|
93,849
|
|
|
|
13.6
|
%
|
|
$
|
31,029
|
|
|
|
4.5
|
%
|
|
$
|
44,819
|
|
|
|
6.5
|
%
|
Tier 1 Leverage Ratio
|
|
|
93,849
|
|
|
|
10.8
|
%
|
|
|
34,677
|
|
|
|
4.0
|
%
|
|
|
43,347
|
|
|
|
5.0
|
%
|
Tier 1 Risk-Based Capital Ratio
|
|
|
93,849
|
|
|
|
13.6
|
%
|
|
|
41,371
|
|
|
|
6.0
|
%
|
|
|
55,162
|
|
|
|
8.0
|
%
|
Total Risk-Based Capital Ratio
|
|
|
101,902
|
|
|
|
14.8
|
%
|
|
|
55,162
|
|
|
|
8.0
|
%
|
|
|
68,952
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Equity Tier 1 Ratio
|
|
$
|
90,317
|
|
|
|
13.1
|
%
|
|
$
|
31,059
|
|
|
|
4.5
|
%
|
|
$
|
44,863
|
|
|
|
6.5
|
%
|
Tier 1 Leverage Ratio
|
|
|
90,317
|
|
|
|
10.4
|
%
|
|
|
34,897
|
|
|
|
4.0
|
%
|
|
|
43,622
|
|
|
|
5.0
|
%
|
Tier 1 Risk-Based Capital Ratio
|
|
|
90,317
|
|
|
|
13.1
|
%
|
|
|
41,412
|
|
|
|
6.0
|
%
|
|
|
55,216
|
|
|
|
8.0
|
%
|
Total Risk-Based Capital Ratio
|
|
|
97,810
|
|
|
|
14.2
|
%
|
|
|
55,216
|
|
|
|
8.0
|
%
|
|
|
69,020
|
|
|
|
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 March 31, 2020, the Company had $104.5 million in unfunded loan commitments and $126 thousand in letters of credit. This compares to $111.4 million in unfunded loan commitments and $126 thousand in letters of credit at December 31, 2019. Of the $104.5 million in unfunded loan commitments, $57.7 million and $46.8 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at March 31, 2020, $55.2 million were secured by real estate, of which $18.4 million was secured by commercial real estate and $36.8 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, three lending offices, two administrative offices and two non-branch automated teller machine locations. Including variable lease expense, total rent expense under all leases was $130 thousand and $109 thousand during the three months ended March 31, 2020 and 2019, respectively. The expiration dates of the leases vary, with the first such lease expiring during 2020 and the last such lease expiring during 2025.
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 $214 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling $377 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 March 31, 2020 or December 31, 2019. To provide funding for the SBA's Payroll Protection Program, the Company plans on utilizing its FHLB line as needed as well as funding provided by the Federal Reserve Bank.
Customer deposits are the Company’s primary source of funds. Total deposits increased by $15.6 million from $747 million at December 31, 2019 to $763 million at March 31, 2020. 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.