Plumas Bancorp — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Plumas Bancorp is a California bank holding company; its subsidiary, Plumas Bank, serves customers primarily in northeastern California and northwestern Nevada. Financial amounts below are in U.S. dollars; balance-sheet and income-statement amounts are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income, before provision | $9.535m | $9.567m | $27.904m | $28.113m |
| Provision for loan losses | $0.800m | $0.300m | $2.800m | $0.900m |
| Non-interest income | $2.161m | $2.146m | $6.309m | $6.121m |
| Non-interest expense | $5.804m | $5.875m | $17.370m | $17.302m |
| Net income | $3.692m | $4.002m | $10.193m | $11.630m |
| Diluted EPS | $0.71 | $0.77 | $1.95 | $2.22 |
- Margins and returns: Net interest margin was 3.73% in Q3, versus 4.72% a year earlier; for the nine-month period it was 4.07%, versus 4.80%. Annualized return on assets and equity were 1.37% and 15.5% in Q3, and 1.40% and 14.9% for the nine months.
- Assets and funding (September 30): Total assets were $1.116bn, up $250.8m from year-end 2019. Net loans were $737.7m, deposits $977.5m, cash and equivalents $175.5m, and available-for-sale securities $158.0m. Shareholders’ equity was $96.0m.
- Cash flow (nine months): Operating activities provided $17.0m; investing activities used $126.6m; financing activities provided $238.2m. Cash increased $128.6m to $175.5m.
- Debt and liquidity: The balance sheet included $10.0m of FHLB advances, $10.31m of junior subordinated debentures, and $15.16m of repurchase agreements. The FHLB advances were reported at a zero interest rate, with $5m maturing in November 2020 and $5m in May 2021. Management stated available funding sources were expected to provide adequate liquidity. FHLB borrowing capacity was stated as up to $185m, subject to collateral and stock requirements; correspondent-bank lines totaled $41m and were undrawn.
- Capital: The Bank’s September 30 ratios included a 14.0% common equity Tier 1 ratio, 9.3% leverage ratio, and 15.3% total risk-based capital ratio. Management said the Bank exceeded well-capitalized thresholds.
Material changes versus comparable periods
- Q3 net income declined $310,000 year over year; nine-month net income declined $1.4m. The larger loan-loss provision was the principal factor: up $500,000 in Q3 and $1.9m for the nine months.
- Lower market rates reduced asset yields and net interest margin. Nine-month loan interest income increased $425,000 as average loan balances grew, but loan yield fell from 5.88% to 5.05%. Deposit and subordinated-debt interest costs declined and partly offset lower interest income.
- Gross loans grew $128.2m, or approximately 21%, from year-end 2019, substantially reflecting $119.1m of outstanding PPP loans. Deposits increased $230.2m; management attributed much of the increase to PPP-related balances, more cautious customers, and customer growth.
- The allowance for loan losses rose to $9.6m from $7.2m at year-end; allowance to total loans was 1.28%, or 1.53% excluding PPP loans. Net charge-offs for the nine months were $443,000, down from $632,000 a year earlier.
- Nonaccrual loans increased to $2.445m from $2.050m. Nonperforming assets were $3.208m, or 0.29% of assets. Special-mention and substandard balances declined from year-end levels.
Outlook, risks, contingencies, and unusual items
- COVID-19: Management said the pandemic’s full effects were uncertain and could adversely affect borrowers, credit quality, loan-loss provisions, income, liquidity, and collateral values. The company added a pandemic-related qualitative factor to its allowance methodology.
- Borrower relief and PPP: At September 30, 251 forbearance agreements covered approximately $65.9m of loans, with deferrals of up to six months. The company had funded 1,218 PPP loans with $119.1m of remaining principal and $4.0m of unearned fees; management expected a significant decline in PPP balances as loans were forgiven. The filing identifies potential PPP compliance, SBA-guarantee, litigation, and reputational risks.
- Interest-rate exposure: Two swaps entered into in May 2020 effectively fixed the LIBOR component on the $10m subordinated debentures at approximately 75 basis points for ten years. Management cited lower rates as a risk to net interest income and margin.
- Commitments: Unfunded loan commitments were $147.3m, including $43.6m of real-estate construction commitments expected to fund within 12 months; standby letters of credit were $631,000. The filing cautions that commitments may expire undrawn and do not necessarily represent future cash needs.
- Legal matters: The company reported ordinary-course claims and proceedings and said management did not expect them to materially affect financial condition or results.
- Unusual item: Nine-month non-interest income included a $218,000 gain on sale of an administrative building. The bank leased back the portion used for record storage.
- Accounting outlook: The company was implementing CECL, expected to affect credit-loss reserves, but had not determined the extent. As a smaller reporting company, it cited an effective date for fiscal years beginning after December 31, 2022.
- Guidance: The filing provides no specific earnings or financial guidance. It identifies risks including pandemic-related economic conditions, credit quality, real estate markets, competition, interest rates, regulation, operational disruptions, and key-personnel loss.
Investor verification priorities
- Track PPP forgiveness, the associated fee-recognition schedule, and any remaining SBA guarantee or compliance exposure.
- Monitor the performance and payment resumption of the $65.9m in forborne loans, alongside delinquencies, nonaccruals, criticized loans, charge-offs, and reserve adequacy.
- Assess whether loan and deposit growth is sustainable after PPP-related balances run off, and how that affects liquidity and loan-to-deposit funding.
- Verify the trajectory of net interest margin and asset yields as market rates remain low, including the effects of PPP loans and the subordinated-debt swaps.
- Follow the potential CECL transition impact on reserves and capital, and review the $147.3m of unfunded loan commitments and related liquidity needs.