Plumas Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Plumas Bancorp is a bank holding company whose subsidiary, Plumas Bank, serves businesses and individuals, primarily in California and Nevada.
Financial performance and position
Unless noted otherwise, dollar figures are in millions.
| Metric | Q2 2023 | Six months 2023 | Comparison |
|---|---|---|---|
| Net interest income, before credit provision | $17.2 | $34.4 | Up 28% and 35%, respectively, year over year |
| Net interest margin | 4.69% | 4.66% | 3.57% and 3.39% in comparable 2022 periods |
| Net income | $6.7 | $14.3 | Up 17% and 25%, respectively, year over year |
| Diluted EPS | $1.12 | $2.41 | $0.96 and $1.93 in comparable 2022 periods |
| Provision for credit losses | $1.35 | $2.88 | $0.40 and $0.70 in comparable 2022 periods |
For the first half, annualized return on average assets was 1.81% versus 1.41%; return on average equity was 22.7% versus 18.3%. Net interest income growth reflected higher market rates, increased average loan balances and higher investment yields. Deposit interest expense also rose as deposit pricing adjusted upward.
- Assets and loans: Total assets were $1.573 billion, down $48.1 million from year-end 2022. Gross loans grew $23.3 million to $935.2 million; net loans were $924.7 million. Commercial real estate represented 55.3% of gross loans; real estate-related and agricultural loans together represented approximately 76%.
- Deposits and liquidity: Deposits fell $62.6 million to $1.395 billion. Non-interest-bearing deposits were 51.4% of deposits. Cash and cash equivalents declined $91.7 million to $91.8 million. Management cited deposit outflows in search of higher rates and customers using existing balances to fund expenses.
- Cash flows, first half: Operating activities provided $25.4 million, versus $38.0 million in 2022; investing activities used $53.2 million, versus $126.0 million; financing activities used $63.9 million, versus providing $25.1 million. Cash declined $91.7 million during the period.
- Debt and equity: The company borrowed $10 million under its term-note facility to redeem $10 million of junior subordinated debentures and dissolve its statutory trusts. Shareholders’ equity rose $9.6 million to $128.6 million. The Bank reported a 15.0% common equity Tier 1 ratio, 10.3% leverage ratio and 16.2% total risk-based capital ratio at June 30; it exceeded the stated well-capitalized thresholds.
- Investment securities: Available-for-sale securities were $468.9 million. Gross unrealized losses were $55.1 million; the company reported $54.5 million of net-of-tax unrealized losses on securities in accumulated other comprehensive loss. Management said losses principally reflected market rates, securities continued to pay as scheduled, and it did not intend, nor expect to be required, to sell securities before recovery.
Material changes and notable items
- Interest rate increases lifted first-half net interest margin by 1.27 percentage points year over year. Approximately 21% of loans were tied to prime and generally reprice within one to three months; about 79% of the loan portfolio was variable-rate.
- Non-interest income declined $0.2 million for the first half, as loan-sale gains fell $2.1 million, partly offset by a $1.7 million gain on termination of interest-rate swaps. Q2 non-interest income fell $0.5 million year over year; the company sold one loan totaling $0.7 million during the quarter.
- First-half non-interest expense rose $2.6 million, including higher salaries and benefits, occupancy and equipment costs. Management cited headcount and wage growth, lower deferral of loan-origination costs, unusually severe winter weather, and the new Chico branch, opened in April 2023.
- The company adopted CECL on January 1, 2023. Adoption increased the loan allowance by $0.529 million and the reserve for unfunded commitments by approximately $0.257 million, with corresponding after-tax reductions to retained earnings. First-half credit-loss provision was $2.875 million, including $0.325 million for unfunded commitments; management cited economic uncertainty, higher rates and specific reserves on three loans.
- A limited-time 4% seven- and eleven-month deposit promotion generated $46 million and ended June 30. Estimated uninsured deposits were approximately $460 million, including $101 million of collateralized deposits.
- Unrealized securities losses and deposit contraction reduced available liquidity flexibility, though the company cited access to a $231 million FHLB line, $96 million par value of securities pledged under the Bank Term Funding Program, and $70 million of unsecured correspondent-bank lines. No outstanding FHLB, Federal Reserve or correspondent-bank borrowings were reported at quarter-end.
Outlook, risks and contingencies
The filing provides no specific earnings, margin or growth guidance. Management said available funding sources were expected to provide adequate liquidity for the foreseeable future. It cautioned that interim results may not indicate future performance.
- Nonperforming loans were $9.5 million, up from $1.2 million at year-end 2022. This included $5.0 million owed by one customer, more than 90 days past due but still accruing; the filing says those loans were modified in June and brought current in July.
- Substandard loans increased to $18.9 million from $3.4 million, primarily due to agricultural loans to one borrower. Those loans remained on accrual at June 30, but could move to nonaccrual if the borrower’s condition, collateral position or payment performance worsens. The allowance for credit losses was $13.4 million, or 1.43% of total loans; net charge-offs were $0.4 million for the first half.
- Geographic and collateral concentration risks include substantial commercial real estate exposure and operations concentrated in northeastern California and northwestern Nevada. The company also cited sensitivity to interest rates, economic conditions, real estate markets, inflation, competition, regulation, personnel and operational risks.
- Loan commitments totaled $191.8 million, including $54.1 million of construction commitments expected to fund within twelve months; many other commitments may expire undrawn. The reserve for unfunded commitments was $0.924 million.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. The company reported compliance with term-note covenants, effective disclosure controls, and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $5.0 million customer exposure remained current after July and whether agricultural borrower conditions or collateral values changed.
- Subsequent deposit trends, deposit pricing and the stability of the approximately $460 million in estimated uninsured deposits.
- Whether net interest margin remains resilient as deposit costs rise and variable-rate loans reprice.
- Changes in credit quality, including nonaccruals, substandard loans, construction exposure, charge-offs and CECL reserve assumptions.
- Available liquidity and contingent borrowing capacity, including collateral requirements and the effect of pledged securities.
- The duration and potential recovery of securities’ unrealized losses, and any changes to management’s ability or intent to hold them.
- Whether higher operating costs, lower SBA loan-sale activity and the new branch affect future earnings and efficiency.