PLUMAS BANCORP 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, may be 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 ofPlumas 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 ofMarch 31, 2023 andDecember 31, 2022 and for the three-month periods endedMarch 31, 2023 and 2022. 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 inPlumas Bancorp's Annual Report filed on Form 10-K for the year endedDecember 31, 2022 .
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no changes to the Company's critical accounting policies from those disclosed in the Company's 2022 Annual Report to Shareholders on Form 10-K.
23
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RESULTS OF OPERATIONS FOR THE three MONTHS ENDED
Net Income. The Company recorded net income of$7.6 million for the three months endedMarch 31, 2023 up$1.9 million from net income of$5.7 million for the three months endedMarch 31, 2022 . Increases of$5.1 million in net interest income and$275,000 in non-interest income were partially offset by increases of$1.6 million in non-interest expense,$1.2 million in the provision for credit losses and$725,000 in the provision for income taxes. The annualized return on average assets was 1.93% for the three months endedMarch 31, 2023 up from 1.42% for the three months endedMarch 31, 2022 . The annualized return on average equity increased from 17.6% during the first quarter of 2022 to 25.0% during the current quarter.
The following is a detailed discussion of each component of the change in net income.
Net interest income before provision for credit losses. Driven by an increase in market rates, net interest income increased by$5.1 million from$12.0 million during the three months endedMarch 31, 2022 , to$17.1 million for the three months endedMarch 31, 2023 . The increase in net interest income includes an increase of$5.5 million in interest income partially offset by an increase of$338,000 in interest expense. Interest and fees on loans increased by$2.3 million related both to an increase in average balance and an increase in yield. Average loan balances increased by$82 million , while the average yield on loans increased by 59 basis points from 5.03% during the first quarter of 2022 to 5.62% during the current quarter. The average prime interest rate increased from 3.29% during the first quarter of 2022 to 7.69% during the current quarter. Approximately 23% of the Company's loans are tied to the prime interest rate and most of these reprice within one to three months with a change in prime. Interest and fees on loans held for sale decreased by$264,000 related to a decrease in average balance of$20.9 million from$22.7 million for the three months endedMarch 31, 2022 to$1.8 million for the three months endedMarch 31, 2023 . Loans held for sale are tied to the prime interest rate and reprice quarterly. Yield on loans held for sale increased by 3.6% to 9.04%. Interest on investment securities increased by$2.2 million related to an increase in average investment securities of$155 million to$467 million and an increase in yield of 125 basis points to 3.24%. The increase in loan and investment yields is consistent with the increase in market rates during 2022 and into the first quarter of 2023. Interest on cash balances increased by$1.2 million related to an increase in the rate paid on these balances which increased from 0.19% during the first quarter of 2022 to 4.64% during the current quarter mostly related to an increase in the rate paid on balances held at theFederal Reserve Bank (FRB). The average rate earned on FRB balances increased from 0.19% during the first quarter of 2022 to 4.59% during the current quarter. Average interest-bearing cash balances decreased by$234 million to$119 million during the current quarter.
Net interest margin for the three months ended
24
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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, 2023 March 31, 2022
Average Average
Balance Interest Yield/ Balance Interest Yield/
(in thousands) (in thousands) Rate (in thousands) (in thousands) Rate Interest-earning assets: Loans (2) (3)
$ 912,989 $ 12,653
5.62 %
1,840 41 9.04 % 22,727 305 5.44 %
Taxable investment securities 341,958 2,814 3.34 % 214,609 997 1.88 %
Non-taxable investment securities
(1) 124,618 914 2.97 % 96,844 534 2.24 %
Interest-bearing deposits 119,221 1,365 4.64 % 353,155 168 0.19 %
Total interest-earning assets 1,500,626 17,787 4.81 % 1,518,624 12,315 3.29 %
Cash and due from banks 26,725 54,507
Other assets 75,184 60,704
Total assets $ 1,602,535 $ 1,633,835
Interest-bearing liabilities:
Money market deposits $ 235,857 $ 216 0.37 % $ 262,619 $ 66 0.10 %
Savings deposits 402,302 199 0.20 % 384,689 81 0.09 %
Time deposits 48,017 51 0.43 % 64,148 47 0.30 %
Total deposits 686,176 466 0.09 % 711,456 194 0.11 %
Junior subordinated debentures 9,302 141 6.15 % 10,310 88 3.46 %
Other borrowings 1,333 13 3.96 %
Repurchase agreements & other 18,485 18 0.39 % 13,861 18 0.53 %
Total interest-bearing liabilities 715,296 638 0.36 % 735,627 300 0.17 %
Non-interest-bearing deposits 749,361 754,285
Other liabilities 14,288 11,900
Shareholders' equity 123,590 132,023
Total liabilities & equity $ 1,602,535 $ 1,633,835
Cost of funding interest-earning
assets (4) 0.17 % 0.08 %
Net interest income and margin (5) $ 17,149 4.64 % $ 12,015 3.21 %
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(1) Not computed on a tax-equivalent basis.
(2) Average nonaccrual loan balances of
for 2022 are included in average loan balances for computational purposes.
(3) Net (costs) fees included in loan interest income for the three-month
period ended March 31, 2023 and 2022 were ($351,000 ) and $311,000 ,
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.
25
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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:
2023 over 2022 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 $ 1,013 $ 1,210 $ 119 $ 2,342
Loans held for sale (280 ) 201 (185 ) (264 )
Taxable investment securities 592 769 456 1,817
Non-taxable investment securities 153 176 51 380
Interest-bearing deposits (111 ) 3,875 (2,567 ) 1,197
Total interest income 1,367 6,231 (2,126 ) 5,472
Interest-bearing liabilities:
Money market deposits (6 ) 174 (18 ) 150
Savings deposits 4 109 5 118
Time deposits (12 ) 21 (5 ) 4
Junior subordinated debentures (9 ) 67 (6 ) 52
Other borrowings - - 13 13
Repurchase agreements & other 6 (4 ) (2 ) -
Total interest expense (17 ) 367 (13 ) 337
Net interest income $ 1,384 $ 5,864 $ (2,113 ) $ 5,135 --------------------------------------------------------------------------------
(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 credit losses. Upon adoption of CECL we recorded an increase in
the allowance for credit losses of $529,000 and an increase in the reserve for
unfunded commitments of $258,000 . During the first quarter of 2023 we recorded
a provision for credit losses of $1,525,000 an increase of $1,225,000 from
$300,000 during the three months ended March 31, 2022 . The provision for credit
losses during the current quarter consisted of a provision for credit losses -
loans of $1,250,000 and an increase in the reserve for unfunded commitments of
$275,000 . The increase in the reserves was principally related to an increase
in qualitative reserves related to the continuation of increases in market
interest rates and a reduction in economic activity. Additionally, we recorded a
$271,000 specific reserve on one collateral dependent loan. We are currently
working with the borrower on obtaining additional collateral for this loan. As
time progresses the results of economic conditions will require CECL model
assumption inputs to change and further refinements to the estimation process
may also be identified. See "Analysis of Asset Quality and Allowance for Loan
Losses" for a discussion of loan quality trends and the provision for credit
losses.
The following tables present the activity in the allowance for credit losses and
the reserve for unfunded commitments during the three months ended March 31,
2023 and 2022 (in thousands).
Allowance for Credit Losses March 31, 2023 March 31, 2022
Balance, beginning of period $ 10,717 $ 10,352
Impact of CECL adoption 529 -
Provision charged to operations 1,250 300
Losses charged to allowance (308 ) (373 )
Recoveries 142 123
Balance, end of period $ 12,330 $ 10,402 Reserve for Unfunded Commitments
341 $ 341
Impact of CECL adoption 258 -
Provision charged to operations 275 -
Balance, end of period $ 874 $ 341
Non-interest income. During the three months ended March 31, 2023 , non-interest
income totaled $3.9 million , an increase of $275,000 from the three months ended
March 31, 2022 . The largest component of this increase was a $1.7 million gain
on termination of our interest rate swaps. On May 26, 2020 we entered into two
separate interest rate swap agreements with notional amounts totaling $10
million , effectively converting $10 million in Subordinated Debentures related
to Trust Preferred Securities to fixed rate obligations. During the first
quarter of 2023 we terminated these swaps, redeemed the Trust Preferred
Securities and paid all principal and interest due under the debentures.
Mostly offsetting the gain on termination of the interest rate swaps was a
decline in gain on sale of SBA 7(a) loans. During the three months ended March
31, 2023 we sold $4.3 million in guaranteed portions of SBA 7(a) loans recording
a gain on sale of $230,000 . During the first quarter of 2022 gain on sale of
SBA 7(a) loans was abnormally high at $1.7 million . We did not sell SBA 7(a)
loans during the second and third quarters of 2021 resulting in an inventory of
loans held for sale of $31.3 million at December 31, 2021 . During the first
quarter of 2022 we sold $24.1 million in guaranteed portions of SBA 7(a) loans.
During the fourth quarter of 2022 and continuing into the first quarter of 2023
we experienced a significant decline in premiums received on the sale of SBA
loans; in response we chose to portfolio SBA 7(a) loans which do not meet a
minimum premium on sale. During the current period we chose not to sell $4.1
million in salable guaranteed portions of SBA 7(a) loans as they did not meet
our minimum premium on sale. Additionally, the SBA 7(a) loan product that is
salable in the open market is variable rate tied to prime and we have seen a
decline in interest in this product given the recent increases in the prime
rate. While we continue to produce SBA 7(a) loans for sale, we have started
funding fixed rate SBA 7(a) loans which we portfolio.
26--------------------------------------------------------------------------------
The following table describes the components of non-interest income for the
three-month periods ended
For the Three Months Ended
March 31,
Percentage
2023 2022 Dollar Change Change
Gain on termination of interest rate swaps 1,707 - 1,707 100.0 %
Interchange income 718 762 (44 ) (5.8 )%
Service charges on deposit accounts 617 566 51 9.0 %
Loan servicing fees 236 209 27 12.9 %
Gain on sale of loans, net 230 1,701 (1,471 ) (86.5 )%
Earnings on life insurance policies 104 93 11 11.8 %
Other 313 319 (6 ) (1.9 )%
Total non-interest income $ 3,925 $ 3,650 $ 275 7.5 %
Non-interest expense. During the three months ended March 31, 2023 , total
non-interest expense increased by $1.5 million from $7.7 million during the
first quarter of 2022 to $9.2 million during the current quarter. The largest
components of this increase were increases in salary and benefit expense of
$985,000 an increase in occupancy and equipment costs of $203,000 and an
increase in director expense of $101,000 . The increase in salary and benefit
expense primarily relates to an increase in salary expense and a reduction in
the deferral of loan origination costs. Salary expense increased by $288,000
which we attribute to both growth in headcount and merit and promotional salary
increases. The largest single component of the increase in salary and benefit
expense was a $500,000 reduction in the deferral of loan origination expense as
we have seen a reduction in loan demand given the current economic environment.
Occupancy and equipment costs increased by $203,000 , much of which relates to
snow removal and other costs attributable to an unusually harsh winter in our
service area. The increase in director expense was mostly related to three
directors qualifying for director retirement benefits and an increase in the
benefits under the director retirement agreements to $15,000 per year from
$10,000 per year.
The following table describes the components of non-interest expense for the
three-month periods ended
For the Three Months Ended
March 31,
Percentage
2023 2022 Dollar Change Change
Salaries and employee benefits $ 5,067 $ 4,082 $ 985 24.1 %
Occupancy and equipment 1,340 1,137 203 17.9 %
Outside service fees 994 908 86 9.5 %
Professional fees 342 279 63 22.6 %
Director compensation and expense 242 141 101 71.6 %
Telephone and data communication 200 191 9 4.7 %
Deposit insurance 188 197 (9 ) (4.6 )%
Advertising and shareholder relations 179 112 67 59.8 %
Armored car and courier 165 148 17 11.5 %
Business development 139 115 24 20.9 %
Loan collection expenses 130 68 62 91.2 %
Amortization of Core Deposit Intangible 60 72 (12 ) (16.7 )%
Other 178 223 (45 ) (20.2 )%
Total non-interest expense $ 9,224 $ 7,673 $ 1,551 20.2 %
Provision for income taxes. The Company recorded an income tax provision of $2.7
million , or 26.2% of pre-tax income for the three months ended March 31, 2023 .
This compares to an income tax provision of $2.0 million , or 25.7% of pre-tax
income for the three months ended March 31, 2022 . The percentages for 2023
and 2022 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.
27--------------------------------------------------------------------------------
FINANCIAL CONDITION Total assets atMarch 31, 2023 were$1.6 billion , a decrease of$42.6 million fromDecember 31, 2022 . Investment securities increased by$39.7 million from$444.7 million atDecember 31, 2022 , to$484.4 million atMarch 31, 2023 . Net loans increased by$2 million from$904.0 million atDecember 31, 2022 to$906 million atMarch 31, 2023 . These increases were offset by a decrease in cash and equivalents of$77.7 million to$105.7 million , and a decrease in all other assets of$6.6 million . Deposits totaled$1.4 billion atMarch 31, 2023 , a decrease of$51.1 million fromDecember 31, 2022 . Shareholders' equity increased by$9.8 million from$119.0 million atDecember 31, 2022 , to$128.8 million atMarch 31, 2023 . Loan Portfolio. Gross loans totaled$915.6 million , an increase of$3.7 million fromDecember 31, 2022 . The largest areas of growth in the Company's loan portfolio were$5.8 million in commercial real estate loans and$3.9 million in automobile loans. The largest decline in loan balances was$4.8 million in agricultural loans. 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, agricultural loans, commercial loans and auto 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 03/31/2023 03/31/2023 12/31/2022 12/31/2022 Commercial $ 76,738 8.4 % $ 76,680 8.4 % Agricultural 118,089 12.9 % 122,873 13.5 % Real estate - residential 14,734 1.6 % 15,324 1.7 % Real estate - commercial 521,884 57.0 % 516,107 56.6 % Real estate - construction & land 42,726 4.7 % 43,420 4.8 % Equity Lines of Credit 35,805 3.9 % 35,891 3.9 % Auto 100,670 11.0 % 96,750 10.6 % Other 4,958 0.5 % 4,904 0.5 % Total Gross Loans$ 915,604 100 %$ 911,949 100 % 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 76% of the total loan portfolio atMarch 31, 2023 . Moreover, the business activities of the Company currently are focused in theCalifornia counties of Plumas,Nevada ,Placer ,Lassen ,Modoc ,Shasta ,Sierra , andSutter and inWashoe andCarson City Counties inNorthern 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 commercial real estate markets. In addition, the concentration of the Company's operations in these areas ofNortheastern California andNorthwestern 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 orU.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. AtMarch 31, 2023 andDecember 31, 2022 , approximately 80% of the Company's loan portfolio was comprised of variable rate loans. Loans indexed to the prime interest rate were approximately 23% of the Company's loan portfolio? these loans reprice within one day to three months of a change in the prime rate. Most of the Company's commercial real estate loans are tied toU.S. Treasury rates and reprice every five years. While real estate mortgage, agricultural, 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. 28
-------------------------------------------------------------------------------- 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 nonaccrual 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 andChief Credit Officer , and the activities are governed by a formal written charter. The MARC meets monthly and reports to the Board of Directors. OnJanuary 1, 2023 , the Company adopted ASU 2016-03 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for the reporting periods beginning afterJanuary 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration (PCD) that were previously classified as purchase credit impaired (PCI) and accounted for under ASC 310-30. In accordance with the Standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining noncredit discount (based on the adjusted amortized costs basis) will be accreted into interest income at the effective interest rate as of adoption. The Company recognized an increase in the ACL for loans totaling$529,000 , as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of$156,000 in taxes. Additionally, the Company recognized an increase in the reserve for unfunded commitments of$257,000 , as a cumulative effect adjustment from change in accounting policies, with a corresponding decrease in retained earnings, net of$76,000 in taxes. The allowance for credit losses is established through charges to earnings in the form of the provision for credit losses. Loan losses are charged to, and recoveries are credited to the allowance for credit losses. The allowance for credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in the loan portfolio. To estimate expected losses the Company generally utilizes historical loss trends and the remaining contractual lives of the loan portfolios to determine estimated credit losses through a reasonable and supportable forecast period. Individual loan credit quality indicators including loan grade and borrower repayment performance have been statistically correlated with historical credit losses and various econometrics, includingCalifornia unemployment rates, California Housing Prices,California gross domestic product, California Retail Trade Earnings and Wall Street Journal Prime Rate. Model forecasts may be adjusted for inherent limitations or biases that have been identified through independent validation and back-testing of model performance to actual realized results. At bothJanuary 1, 2023 , the adoption and implementation date of ASC Topic 326, andMarch 31, 2023 , the Company utilized a reasonable and supportable forecast period of approximately four quarters and obtained the forecast data from publicly available sources. The Company also considered the impact of portfolio concentrations, changes in underwriting practices, imprecision in its economic forecasts, and other risk factors that might influence its loss estimation process. Management believes that the allowance for credit losses atMarch 31, 2023 appropriately reflected expected credit losses inherent in the loan portfolio at that date. In determining the allowance for credit losses, accruing loans with similar risk characteristics are generally evaluated collectively. The Company's policy is that loans designated as nonaccrual no longer share risk characteristics similar to other loans an evaluated collectively and as such, all nonaccrual loans are individually evaluated for reserves. As ofMarch 31, 2023 , the Bank's nonaccrual loans comprised the entire population of loans individually evaluated. The Company's policy is that nonaccrual loans also represent the subset of loans where borrowers are experiencing financial difficulty where an evaluation of the source of repayment is required to determine if the nonaccrual loans should be categorized as collateral dependent. The implementation of CECL also impacted the Company's ACL on unfunded loan commitments, as the ACL now represents expected credit losses over the contractual life of commitments not identified as unconditionally cancellable by the Company. The Reserve for Unfunded Commitments is estimated using the same reserve or coverage rates calculated on collectively evaluated loans following the application of a funding rate to the amount of the unfunded commitment.
The
funding rate represents management's estimate of the amount of the current unfunded commitment that will be funded over the remaining contractual life of of the commitment and is based on historical data. Under CECL the ACL on unfunded loan commitments remains in Other Liabilities while and related provision expense is included in the provision for credit loss expense.
29
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The following table provides certain information for the dates indicated with
respect to the Company's allowance for credit 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,
2023 2022 2022 2021 2020
Balance at beginning of period $ 10,717 $ 10,352 $ 10,352 $ 9,902 $ 7,243
Impact of CECL Adoption 529 - - - -
Adjusted balance 11,246 10,352 10,352 9,902 7,243
Charge-offs:
Commercial - 19 207 188 131
Agricultural - - - - -
Real estate - residential - - - - -
Real estate - commercial - - 19 - -
Real estate - construction & land - - - - -
Equity Lines of Credit - - - - -
Auto 293 335 1,195 703 574
Other 15 19 40 47 82
Total charge-offs 308 373 1,461 938 787
Recoveries:
Commercial 6 6 27 72 34
Agricultural - - - - -
Real estate - residential 1 - 3 3 15
Real estate - commercial 1 - 2 8 8
Real estate - construction & land - - - - -
Equity Lines of Credit - - - 4 4
Auto 131 114 482 136 200
Other 3 3 12 40 10
Total recoveries 142 123 526 263 271
Net charge-offs 166 250 935 675 516
Provision for credit losses 1,250 300 1,300 1,125 3,175
Balance at end of period $ 12,330 $ 10,402 $ 10,717 $ 10,352 $ 9,902
Net charge-offs during the period to
average loans (annualized for the
three-month periods) 0.07 % 0.12 % 0.11 % 0.09 % 0.07 %
Allowance for credit losses to total loans 1.35 % 1.24 % 1.18 % 1.23 % 1.40 %
The following table provides a breakdown of the allowance for credit losses at
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
3/31/2023 3/31/2023 12/31/2022 12/31/2022
Commercial $ 1,475 8.4 % $ 892 8.4 %
Agricultural 1,307 12.9 % 1,086 13.5 %
Real estate - residential 162 1.6 % 138 1.7 %
Real estate - commercial 6,740 57.0 % 4,980 56.6 %
Real estate - construction & land development 763 4.7 % 1,500 4.8 %
Equity Lines of Credit 330 3.9 % 687 3.9 %
Auto 1,504 11.0 % 1,289 10.6 %
Other 49 0.5 % 145 0.5 %
Total $ 12,330 100 % $ 10,717 100 %
The allowance for credit losses totaled $12.3 million at March 31, 2023 and
$10.7 million at December 31, 2022 . 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. Specific reserves related to collateral dependent loans totaled
$271,000 at March 31, 2023 . There were no specific reserves related to
collateral dependent loans at December 31, 2022 . The allowance for credit
losses as a percentage of total loans was 1.35% at March 31, 2023 and 1.18% at
December 31, 2022 .
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.
30--------------------------------------------------------------------------------
The following table sets forth the amount of the Company's nonperforming assets
as of the dates indicated.
At
March 31, At December 31,
2023 2022 2021 2020
(dollars in thousands)
Nonaccrual loans $ 3,603 $ 1,172 $ 4,863 $ 2,536
Loans past due 90 days or more and still
accruing 368 - - -
Total nonperforming loans 3,971 1,172 4,863 2,536
Other real estate owned 83 - 487 403
Other vehicles owned 99 18 47 31
Total nonperforming assets $ 4,153 $ 1,190 $ 5,397 $ 2,970
Interest income forgone on nonaccrual
loans $ 79 $ 121 $ 381 $ 119
Interest income recorded on a cash basis
on nonaccrual loans $ - $ - $ - $ -
Nonperforming loans to total loans 0.43 % 0.13 % 0.58 % 0.36 %
Nonperforming assets to total assets 0.26 % 0.07 % 0.33 % 0.27 %
Nonperforming loans at
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$15.7 million from$3.4 million atDecember 31, 2022 to$19.1 million atMarch 31, 2023 . Loans classified as special mention decreased by$9.8 million from$22.8 million atDecember 31, 2022 to$13.0 million atMarch 31, 2023 . The increase in substandard loans is primarily related to agricultural loans to one borrower. AtMarch 31, 2023 the loans to this borrower are on accrual status; however, they could move to nonaccrual if the borrowers financial condition worsens, the Bank's collateral position in respect to these loans deteriorates, or if the borrower is unable to meet their payment obligations. It is the policy of management to make additions to the allowance for credit losses so that it remains appropriate to absorb the inherent risk of loss in the portfolio. Management believes that the allowance atMarch 31, 2023 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. Loans Held for Sale. Included in the loan portfolio are loans which are 75% to 90% guaranteed by theSmall Business Administration (SBA),US Department of Agriculture Rural Business Cooperative Service (RBS) andFarm Services Agency (FSA). The guaranteed portion of these loans may be sold to a third party, with the Bank retaining the unguaranteed portion. The Company can receive a premium in excess of the adjusted carrying value of the loan at the time of sale. As ofDecember 31, 2022 the Company had$2.3 million in SBA government guaranteed loans held for sale. There were no loans held for sale onMarch 31, 2023 . Loans held for sale are recorded at the lower of cost or fair value and therefore may be reported at fair value on a non-recurring basis. The fair values for loans held for sale are based on either observable transactions of similar instruments or formally committed loan sale prices. 31 -------------------------------------------------------------------------------- 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 one property totaling$83,000 atMarch 31, 2023 and 3 properties totaling$487 thousand atMarch 31, 2022 . There were no OREO properties atDecember 31, 2022 . Nonperforming assets as a percentage of total assets were 0.26% atMarch 31, 2023 and 0.07% atDecember 31, 2022 . The following table provides a summary of the change in the number and balance of OREO properties for the three months endedMarch 31, 2023 and 2022 (dollars in thousands): Three Months Ended March 31, # 2023 # 2022 Beginning Balance - $ - 3$ 487 Additions 1 83 - - Dispositions - - - - Provision from change in OREO valuation - - - - Ending Balance 1$ 83 3$ 487 Investment Portfolio and Federal Funds Sold. Total investment securities were$484.4 million as ofMarch 31, 2023 and$444.7 million as ofDecember 31, 2022 . Net unrealized losses on available-for-sale investment securities totaling$46.5 million were recorded, net of$13.8 million in tax benefit, as accumulated other comprehensive loss within shareholders' equity atMarch 31, 2023 . Net unrealized losses on available-for-sale investment securities totaling$54.2 million were recorded, net of$16.0 million in tax benefit, as accumulated other comprehensive income within shareholders' equity atDecember 31, 2022 . No securities were sold during the three months endedMarch 31, 2023 and 2022. The investment portfolio atMarch 31, 2023 consisted of$9.8 million inU.S. Treasury securities,$236.7 million in securities ofU.S. Government -sponsored agencies,$110.6 million in securities ofU.S. Government -agencies and 240 municipal securities totaling$127.3 million . The investment portfolio atDecember 31, 2022 consisted of$9.7 million inU.S. Treasury securities,$214.4 million in securities ofU.S. Government -sponsored agencies,$99.6 million in securities ofU.S. Government -agencies and 239 municipal securities totaling$121.0 million . There were no Federal funds sold atMarch 31, 2023 andDecember 31, 2022 ; however, the Bank maintained interest earning balances at theFederal Reserve Bank totaling$76.5 million atMarch 31, 2023 and$154.4 million atDecember 31, 2022 . The balance, atMarch 31, 2023 , earns interest at the rate of 4.9%. 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 decreased by$51.1 million from$1.5 billion atDecember 31, 2022 to$1.4 billion atMarch 31, 2023 . The decrease in deposits includes decreases of$24.8 million in demand deposits,$16.3 million in money market accounts,$9.8 million in savings accounts and$176,000 in time accounts. We attribute much of the decrease to the current interest rate environment as we have seen some deposits leave for higher rates and some customers reluctant to borrow to fund operating expense and instead have drawn down their excess deposit balances. 32
-------------------------------------------------------------------------------- The following table shows the distribution of deposits by type atMarch 31, 2023 andDecember 31, 2022 . 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
03/31/2023 03/31/2023 12/31/2022 12/31/2022
Non-interest bearing $ 741,754 52.7 % $ 766,549 52.6 %
Money Market 221,676 15.8 % 237,924 16.3 %
Savings 394,305 28.0 % 404,150 27.7 %
Time 49,010 3.5 % 49,186 3.4 %
Total Deposits $ 1,406,745 100 % $ 1,457,809 100 %
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 several
borrowing agreements as described below. There were no brokered deposits at
March 31, 2023 or December 31, 2022 .
Repurchase Agreements. The Bank offers a repurchase agreement product for its
larger customers which use securities sold under agreements to repurchase as an
alternative to interest-bearing deposits. Securities sold under agreements to
repurchase totaling $16.9 million and $18.6 million at March 31, 2023 and
December 31, 2022 , respectively are secured by U.S. Government agency securities
with a carrying amount of $29.0 million and $29.6 million at March 31, 2023 and
December 31, 2022 , respectively. Interest paid on this product is similar to,
but less than, that which is paid on the Bank's money market accounts; however,
these are not deposits and are not FDIC insured.
Short-term Borrowing Arrangements. The Company is a member of the Federal Home
Loan Bank of San Francisco (FHLB) and can borrow up to $240 million from the
FHLB secured by commercial and residential mortgage loans with carrying values
totaling $397 million . The Company is required to hold FHLB stock as a condition
of membership. At March 31, 2023 the Company held $5.0 million of FHLB stock
which is recorded as a component of other assets. Based on this level of stock
holdings the Company can borrow up to $183.8 million . To borrow the full $240
million in available credit the Company would need to purchase $1.5 million in
additional FHLB stock.
The Company is also eligible to participate in the Bank Term Lending Program.
The Federal Reserve Board , on March 12, 2023 , announced the creation of a new
Bank Term Funding Program (BTFP). The BTFP offers loans of up to one year in
length to banks, savings associations, credit unions, and other eligible
depository institutions pledging U.S. Treasuries, agency debt and
mortgage-backed securities, and other qualifying assets as collateral. These
assets will be valued at par. In April, 2023 the Company pledged as collateral
under the BTFP securities with a par value of $96 million .
In addition to its FHLB borrowing line and the BTFP, the Company has unsecured
short-term borrowing agreements with two of its correspondent banks in the
amounts of $50 million and $20 million . There were no outstanding borrowings to
the FHLB, FRB or the correspondent banks at March 31, 2023 and March 31, 2022
Note Payable. During 2021 and until January 25, 2022 , the Company maintained a
$15 million line of credit facility with one of its correspondent banks (the
"Note"). Interest on the Note was payable at the "Prime Rate". There were no
borrowings on the Note.
On January 25, 2022 the Company replaced this facility with a $15 million Loan
Agreement (the "Loan Agreement") and Promissory Note (the "Term Note"). The Term
Note matures on January 25, 2035 and can be prepaid at any time. During the
initial three years of the Loan Agreement the Term Note functions as an interest
only revolving line of credit. Beginning on year four the Term Note converts
into a term loan requiring semi-annual principal and interest payments and no
further advances can be made. The proceeds of this lending facility shall be
used by the Company for general corporation purposes, and to provide capital
injections into the Bank. The Term Note bears interest at a fixed rate of 3.85%
for the first 5 years and then at a floating interest rate linked to WSJ Prime
Rate for the remaining eight-year term. The Loan Agreement provides for a
$187,500 loan fee. The Note is secured by the common stock of the Bank. The Loan
Agreement contains certain financial and non-financial covenants, which include,
but are not limited to, a minimum leverage ratio at the Bank, a minimum total
risk-based capital ratio at the Bank, a maximum Texas Ratio at the Bank, a
minimum level of Tier 1 capital at the Bank and a return on average assets
needed to generate a 1.25X debt service coverage ratio. The Loan Agreement also
contains customary events of default, including, but not limited to, failure to
pay principal or interest, the commencement of certain bankruptcy proceedings,
and certain adverse regulatory events affecting the Company or the Bank. Upon
the occurrence of an event of default under the Loan Agreement, the Company's
obligations under the Loan Agreement may be accelerated. The Company was in
compliance with all covenants related to the Term Note at March 31, 2022 . In
March 2023 the Company borrowed $10 million on this note and used the proceeds
to redeem it Trust Preferred securities as described below.
Junior Subordinated Deferrable Interest Debentures/ Trust Preferred Securities.
On February 9, 2023 , Plumas Bancorp submitted redemption notices to redeem
$6,000,000 of trust preferred securities of Plumas Statutory Trust I ("Trust I")
and $4,000,000 of trust preferred securities of Plumas Statutory Trust II
("Trust II"). The trust preferred securities are being redeemed, along with an
aggregate of $310,000 in common securities issued by the trusts and held by the
Company and 100% of the Company's junior subordinated debentures due 2032 held
by Trust I and 100% of the Company's junior subordinated debentures due 2035
held by Trust II underlying the trust preferred securities.
The trust preferred securities of Plumas Statutory Trust II were redeemed on
March 15, 2023 and the trust preferred securities of Plumas Statutory Trust I
were redeemed on March 27, 2023 . The redemption prices for the junior
subordinated debentures was equal to 100% of the respective principal amounts,
which total $10,000,000 , plus accrued interest up to the redemption date. The
proceeds from the redemption of the junior subordinated debentures were
simultaneously applied to redeem all of the outstanding common securities and
the outstanding trust preferred securities at a price of 100% of the aggregate
principal amount of the trust preferred securities plus accumulated but unpaid
distributions up to the redemption date. Funding for the redemption was provided
from borrowings on our Term Note as described above.
Interest expense recognized by the Company for the three months ended March 31,
2023 and 2022 related to the subordinated debentures was $141,000 and $88,000 ,
respectively.
33--------------------------------------------------------------------------------
Interest Rate Swaps From time to time, we may use interest rate swaps or other instruments to manage our interest rate exposure and reduce the impact of future interest rate changes. These financial instruments are not used for trading or speculative purposes. OnMay 26, 2020 we entered into two separate interest rate swap agreements, effectively converting our$10 million in Subordinated Debentures to fixed obligations. During the current quarter we terminated these swaps recording a$1.7 million gain on termination. Capital Resources Shareholders' equity increased by$9.8 million from$119.0 million atDecember 31, 2022 to$128.8 million atMarch 31, 2023 . The$9.8 million increase was related to net income during the three months endedMarch 31, 2023 of$7.6 million , a decline in accumulated other comprehensive loss of$4.0 million and stock option activity of$236,000 partially offset by shareholder dividends of$1.5 million and$554 thousand related to the cumulative change from adoption of ASU 2016-13. It is the policy of the Company to periodically distribute excess retained earnings to the shareholders through the payment of cash dividends. Such dividends help promote shareholder value and capital adequacy by enhancing the marketability of the Company's stock. All authority to provide a return to the shareholders in the form of a cash or stock dividend or split rests with the Board of Directors. The Board will periodically, but on no regular schedule, review the appropriateness of a cash dividend payment. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. The Company is subject to various restrictions on the payment of dividends. The Company paid a quarterly cash dividend of$0.25 per share onFebruary 15, 2023 and a quarterly cash dividend of$0.16 per share onFebruary 15, 2022 ,May 16, 2022 ,August 15, 2022 , andNovember 15, 2022 , and a quarterly cash dividend of14 cents per share onFebruary 15, 2021 ,May 17, 2021 ,August 16, 2021 , andNovember 15, 2021 . 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. TheFDIC 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 theBasel Committee on Banking Supervision's capital guidelines forU.S. depository organizations, sometimes called "Basel III," that increased the minimum regulatory capital requirements for bank holding companies and depository institutions 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 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%. AtMarch 31, 2023 andDecember 31, 2022 , the Bank's capital ratios exceeded the thresholds necessary to be considered "well capitalized" under the Basel III framework. Under theFRB's Small Bank Holding Company andSavings 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 Basel III 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 Basel III capital rules continue to apply to the Bank. In 2019, the federal bank regulators 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$10 billion in assets may elect to use in lieu of the generally applicable leverage and risk-based capital requirements under Basel III. A qualifying banking organization that elects to use the new ratio will be considered to have met all applicable federal regulatory capital and leverage requirements, including the minimum capital levels required to be considered "well capitalized, " if it maintains a community bank leverage ratio capital exceeding 9%. The new rule became effective onJanuary 1, 2020 .Plumas Bank has chosen not to opt into the community bank leverage ratio at this time.
The following table sets forth the Bank's actual capital amounts and ratios (dollar amounts in thousands):
Minimum Amount of Capital Required
To be Well-Capitalized
For Capital Under Prompt
Actual Adequacy Purposes (1) Corrective Provisions
Amount Ratio Amount Ratio Amount RatioMarch 31, 2023 Common Equity Tier 1 Ratio$ 162,134 14.8 %$ 49,178 4.5 %$ 71,035 6.5 % Tier 1 Leverage Ratio 162,134 9.8 % 65,855 4.0 % 82,318 5.0 %
Tier 1 Risk-Based Capital Ratio 162,134 14.8 % 65,571
6.0 % 87,428 8.0 %
Total Risk-Based Capital Ratio 175,337 16.0 % 87,428
8.0 % 109,285 10.0 %
December 31, 2022
Common Equity Tier 1 Ratio $ 157,361 14.7 % $ 48,218 4.5 % $ 69,648 6.5 %
Tier 1 Leverage Ratio 157,361 9.2 % 68,078 4.0 % 85,098 5.0 %
Tier 1 Risk-Based Capital Ratio 157,361 14.7 % 64,291
6.0 % 85,721 8.0 %
Total Risk-Based Capital Ratio 168,419 15.7 % 85,721
8.0 % 107,151 10.0 %
(1) Does not include amounts required to maintain the capital conservation buffer under the new capital rules
Management believes that
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.
34
--------------------------------------------------------------------------------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 ofMarch 31, 2023 , the Company had$194.3 million in unfunded loan commitments and$108,000 in letters of credit. This compares to$178.7 million in unfunded loan commitments and no letters of credit atDecember 31, 2022 . Of the$194.3 million in unfunded loan commitments,$131.3 million and$63.0 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments atMarch 31, 2023 ,$122.1 million were secured by real estate, of which$68.6 million was secured by commercial real estate and$53.5 million was secured by residential real estate mostly in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines and overdraft protection lines. Since some of the commitments are expected to expire without being drawn upon the total commitment amounts do not necessarily represent future cash requirements. Operating Leases. The Company leases three depository branches, one of which is a land lease on which we own the building, three lending offices, three administrative offices and two non-branch automated teller machine locations. The expiration dates of the leases vary, with the first such lease expiring during 2024 and the last such lease expiring during 2044. Including variable lease expense, total rent expense was$169,000 and$154,000 during the three months endedMarch 31, 2023 and 2022, respectively. 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 and satisfy maturity of short-term borrowings. 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 unpledgedU.S. Government -sponsored agency securities that are classified as available-for-sale. On the liability side, liquidity needs are managed by offering 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$240 million from the FHLB secured by commercial and residential mortgage loans with carrying values totaling$397 million . The Company is also eligible to participate in the Bank Term Lending Program. The Company has pledged as collateral under the BTFP securities with a par value of$96 million . In addition to its FHLB borrowing line and the BTFP, the Company has unsecured short-term borrowing agreements with two of its correspondent banks in the amounts of$50 million and$20 million . There were no outstanding borrowings to the FHLB, FRB or the correspondent banks atMarch 31, 2023 , andMarch 31, 2022 . Customer deposits are the Company's primary source of funds. Total deposits decreased by$51.1 million from$1.5 billion atDecember 31, 2022 , to$1.4 billion atMarch 31, 2023 . 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. 35
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