PLUMAS BANCORP quarterly report, Q3 FY2018

Plumas Bancorp — Q3 2018 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2018. Plumas Bancorp is a California bank holding company whose subsidiary, Plumas Bank, operates in California and Nevada and primarily serves small and middle-market businesses and individuals. Amounts below are in U.S. dollars; financial statement amounts are generally shown in millions.

Financial performance and condition

Metric	Q3 2018	Prior-year comparison	Nine months 2018	Prior-year comparison
Net interest income, before provision	$8.55 million	$7.15 million; up 20%	$24.12 million	$20.53 million; up $3.59 million
Net income	$3.70 million	$2.45 million	$10.42 million	$7.05 million
Diluted earnings per share	$0.71	$0.47	$2.00	$1.36
Net interest margin	4.78%	4.31%	4.68%	4.37%

For Q3, total interest income was $8.84 million, provision for loan losses $0.30 million, non-interest income $2.28 million, non-interest expense $5.43 million, and income tax expense $1.41 million. For the nine months, the respective figures were $24.96 million, $0.80 million, $7.04 million, $16.11 million, and $3.83 million.
Nine-month annualized return on average assets was 1.87%, versus 1.39%; return on average equity was 23.7%, versus 18.1%. The nine-month effective tax rate was 26.9%, versus 38.3%, primarily reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act.
At September 30, total assets were $770.7 million, up $25.3 million from year-end 2017. Net loans were $536.0 million, up $53.8 million; available-for-sale securities were $156.7 million, up $19.3 million; deposits were $682.8 million, up $20.2 million; and shareholders’ equity was $62.4 million, up $6.7 million.
Cash and cash equivalents declined to $35.3 million from $87.5 million at year-end. Nine-month cash flows were $12.5 million provided by operating activities, $82.4 million used in investing, and $17.7 million provided by financing, resulting in a $52.3 million decrease in cash.
Debt included $10.3 million of junior subordinated debentures; no FHLB or correspondent-bank advances were outstanding. Repurchase agreements were $8.2 million. The Bank’s reported capital ratios were 12.1% common equity Tier 1, 9.7% Tier 1 leverage, 12.1% Tier 1 risk-based, and 13.2% total risk-based capital. Management stated the Bank met capital adequacy requirements.

Material changes and operating developments

Growth in average loan balances and yields drove higher interest income. Average loans for the first nine months rose 8% year over year to $506.6 million; average loan yield increased to 5.72% from 5.45%. Investment-security interest also increased with higher average balances and yields.
Loan growth was broad, including commercial real estate, construction, agricultural, commercial, and auto loans. Commercial real estate was the largest loan category at 46.9% of gross loans. Real-estate-related loans, including agricultural loans secured by real estate, represented 71% of the portfolio.
Non-interest expense rose 6.6% over nine months, principally from salaries and benefits, professional fees, and other expenses. Management cited staffing and wage changes, higher bonuses, compliance consulting, legal costs, and costs related to terminating the Tahoe City branch lease.
Available-for-sale securities increased in value on the balance sheet, but their net unrealized loss in accumulated other comprehensive income widened to $5.5 million from $0.8 million at year-end. Management attributed the unrealized losses primarily to market interest-rate conditions, stated securities continued to pay as scheduled, and did not expect to need to sell them before cost recovery.
On October 26, 2018, after quarter-end, the Bank completed its acquisition of Mutual of Omaha Bank’s Carson City, Nevada branch. It acquired $45.6 million in deposits and $1.8 million in loans and recorded $1.1 million in intangible assets.
The company declared a $0.18-per-share semiannual dividend on October 17, payable November 15, 2018. This was 29% higher than the $0.14-per-share dividend paid in November 2017.

Credit quality, outlook, and risks

The allowance for loan losses was $6.85 million, or 1.27% of gross loans, versus $6.67 million, or 1.37%, at year-end. Nine-month net charge-offs increased to $623,000 from $327,000; management attributed the increase mainly to a commercial borrower bankruptcy and higher auto-loan charge-offs.
Nonperforming loans were $1.24 million, or 0.23% of loans, compared with $3.02 million, or 0.62%, at year-end; nonperforming assets were $2.36 million, or 0.31% of assets. Special-mention loans increased to $4.36 million from $0.64 million, while substandard loans declined to $0.99 million from $3.16 million. Management considered the allowance appropriate but cautioned that future charge-offs could exceed it.
Unfunded loan commitments were $131.2 million, including $37.7 million of real-estate construction commitments expected to fund within 12 months; standby letters of credit were $417,000. Management noted commitments may expire unused and do not necessarily represent future cash needs. Legal proceedings in the ordinary course were not expected by management to have a material adverse effect.
Liquidity sources include customer deposits, available-for-sale securities, and borrowing lines. FHLB capacity was reported as $207 million subject to collateral and stock requirements; current stock holdings supported $112.1 million of capacity. Additional unsecured correspondent-bank lines totaled $41 million. Management said available funding sources were adequate for foreseeable operations.
The filing gives no specific earnings or margin guidance. Management identified risks including competition, interest-rate changes and margin pressure, weaker regional or national economic conditions and credit quality, real-estate market changes, regulation, key-personnel loss, operational failures or fraud, and securities-market fluctuations. The company also highlighted its regional concentration and exposure to local real-estate markets and events such as fires, floods, and earthquakes.
The company expects CECL, effective for it in 2020, to affect its financial statements, particularly the credit-loss reserve, but had not determined the extent. Lease-accounting changes were expected to add right-of-use assets and liabilities, with no material impact anticipated, although balance-sheet effects remained under evaluation.

Most important facts for investors to verify

Whether loan growth, net interest margin gains, and earnings improvement persist as interest rates and deposit costs change.
Whether the increase in special-mention loans and net charge-offs leads to higher provisions, nonperforming loans, or reserve needs.
The impact of the expanded securities unrealized loss on equity and capital, including any need to sell securities before recovery.
The integration, deposit retention, and financial contribution of the Carson City branch acquisition completed after quarter-end.
Actual cash and liquidity trends as loan commitments fund, and the effect of the declared dividend and future distributions on capital.
The eventual CECL reserve impact and any material implementation costs or balance-sheet effects from new accounting standards.