Plumas Bancorp — Q2 2018 Form 10-Q
Business context and reporting period
Plumas Bancorp is a California bank holding company operating Plumas Bank, serving primarily small and middle-market businesses and individuals in northeastern California and northwestern Nevada. This unaudited filing covers the three and six months ended June 30, 2018; balance-sheet comparisons are with December 31, 2017. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q2 2018 / June 30, 2018 | Comparison |
|---|---|---|
| Net income | $3.445 million | Up from $2.541 million in Q2 2017 |
| Diluted EPS | $0.66 | $0.49 in Q2 2017 |
| Net interest income | $8.013 million | Up 17% from $6.875 million in Q2 2017 |
| Net interest margin | 4.75% | 4.51% in Q2 2017 |
| Total assets | $764.7 million | Up $19.3 million from year-end 2017 |
| Net loans | $512.0 million | Up $29.7 million from year-end 2017 |
| Deposits | $679.1 million | Up $16.4 million from year-end 2017 |
| Shareholders’ equity | $59.5 million | Up $3.8 million from year-end 2017 |
| Cash and cash equivalents | $52.7 million | Down $34.9 million from year-end 2017 |
For the first six months, net income was $6.725 million versus $4.605 million; diluted EPS was $1.29 versus $0.89. Net interest income rose to $15.566 million from $13.382 million, and net interest margin increased to 4.63% from 4.41%. Annualized return on average assets was 1.85% versus 1.40%; return on average equity was 23.6% versus 18.3%.
First-half operating cash flow was $5.307 million, investing cash outflow was $54.574 million, and financing cash inflow was $14.403 million. Cash fell by $34.864 million, largely alongside loan growth and purchases of investment securities. No cash-flow statement is provided for the three-month period separately.
At June 30, the allowance for loan losses was $6.698 million, or 1.30% of gross loans, compared with 1.37% at year-end. Six-month net charge-offs were $471,000, versus $94,000 in the prior-year period; the filing attributes the increase mainly to a commercial borrower bankruptcy and higher auto-loan charge-offs. Nonperforming assets were $1.867 million, or 0.24% of assets, versus $4.401 million, or 0.59%, at year-end. Special-mention loans increased to $4.543 million from $642,000.
Available-for-sale securities totaled $157.8 million. Their $4.294 million gross unrealized loss was reflected in accumulated other comprehensive loss, net of tax; management attributed losses principally to market rates, said securities continued to pay as scheduled, and did not intend or expect to be required to sell before recovery. Accumulated other comprehensive loss was $2.939 million at quarter-end.
Outstanding debt included $10.310 million of junior subordinated debentures and $8.724 million of repurchase agreements. There were no outstanding FHLB or correspondent-bank borrowings, and no balance on the company’s line of credit. The Bank reported capital ratios of 12.1% common equity Tier 1, 9.6% Tier 1 leverage, 12.1% Tier 1 risk-based, and 13.3% total risk-based; management said the Bank met capital requirements.
Changes versus comparable periods
- Q2 net income increased by $904,000 year over year. Higher net interest income and lower income-tax expense more than offset higher operating expenses and loan-loss provision and lower non-interest income.
- Q2 non-interest income fell 6.6% to $2.225 million, primarily because gains on SBA loan sales declined $253,000 to $533,000. First-half non-interest income nevertheless rose 7.4% to $4.757 million, including a $209,000 gain recorded on adoption of the new equity-security accounting standard.
- Q2 non-interest expense rose 6.9% to $5.229 million. First-half expense increased 7.1% to $10.679 million, including higher salaries, professional fees, consulting and legal costs, and other expenses.
- The effective income-tax rate declined to 26.8% for Q2 and 26.5% for the first half, from 39.0% and 38.1%, respectively, primarily reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act.
- Loans and securities grew from year-end, funded in part by higher deposits. Non-interest-bearing deposits were $288.1 million, approximately 42% of total deposits.
Outlook, management commentary, risks and unusual items
- No quantified earnings or financial guidance is provided. Management stated that available funding sources, including borrowing capacity, should provide adequate liquidity for the foreseeable future, and that the allowance for loan losses was appropriate; both assessments depend on estimates and conditions may change.
- Plumas Bank signed an agreement to acquire Mutual of Omaha Bank’s Carson City, Nevada branch. The transaction is expected to add approximately $50 million in deposits and less than $2 million in loans; regulatory approval had been received, with closing expected later in 2018.
- Loan commitments were $117.3 million, including $26.5 million of real-estate construction commitments expected to fund within twelve months; standby letters of credit were $417,000. Commitments may expire undrawn and are not necessarily future cash requirements.
- Credit risks include higher net charge-offs, increased special-mention balances, and exposure to real estate: real-estate-related lending, including associated categories identified in the filing, represented about 70% of loans. Construction and land-development lending is identified as higher risk. Approximately 75% of loans were variable rate.
- Regional concentration exposes the Bank to local economic and real-estate conditions and to disasters such as earthquakes, fires, and floods. Other stated risks include competition, interest-rate changes and margin pressure, regulatory changes, operational failures or fraud, and loss of key personnel.
- Legal proceedings arise in the ordinary course; management does not expect them to have a material adverse effect overall. The filing also describes litigation brought by a municipality against a borrower that could adversely affect the Bank’s collateral position.
- Other notable items include accrued costs related to terminating the Tahoe City branch lease after purchasing a replacement building, and a $209,000 accounting-adoption gain. The company said CECL adoption was expected to affect the financial statements, particularly the credit-loss reserve, but had not yet quantified the impact.
Important facts for investors to verify
- Whether loan growth, deposit growth, and improved net interest margin continue, and how rising rates affect funding costs and margins.
- Subsequent credit quality trends, including charge-offs, special-mention loans, nonperforming assets, the allowance, and the performance of commercial, auto, and real-estate exposures.
- The amount and timing of the Carson City branch acquisition, including deposit retention, integration costs, and actual loan and deposit balances transferred.
- Liquidity and capital after loan growth, securities purchases, dividends, and any funding of outstanding commitments.
- The effect of securities-market movements on unrealized losses and equity, and the eventual quantified effect and implementation status of CECL.