Plumas Bancorp — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Plumas Bancorp is a bank holding company whose subsidiary, Plumas Bank, serves small and middle-market businesses and individuals. The Bank operated branches in California and opened its first out-of-state branch in Reno, Nevada, in December 2015. Unless noted otherwise, amounts below are in millions.
Financial performance and condition
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net interest income, before loan-loss provision | $5.830 | $5.317 | $11.568 | $10.294 |
| Provision for loan losses | $0.200 | $0.300 | $0.400 | $0.600 |
| Non-interest income | $2.055 | $1.822 | $3.707 | $3.867 |
| Non-interest expense | $4.680 | $4.629 | $9.313 | $9.335 |
| Pre-tax income | $3.005 | $2.210 | $5.562 | $4.226 |
| Net income | $1.837 | $1.355 | $3.410 | $2.570 |
| Diluted earnings per share | $0.36 | $0.27 | $0.67 | $0.51 |
| Net interest margin | 4.26% | 4.26% | 4.23% | 4.16% |
- For the six months, management reported annualized return on average assets of 1.15%, versus 0.94% in 2015, and return on average equity of 15.3%, versus 13.5%.
- At June 30, total assets were $604.0 million, loans net of allowance were $426.7 million, available-for-sale securities were $99.4 million, and deposits were $534.6 million. Compared with December 31, 2015, net loans increased $29.8 million, deposits increased $7.3 million, and total assets increased $4.8 million.
- Six-month operating cash flow was $4.6 million, investing cash flow was negative $32.4 million, and financing cash flow was positive $0.6 million. Cash and cash equivalents fell $27.2 million to $41.0 million.
- Shareholders’ equity was $46.4 million, up $3.9 million from year-end. Bank regulatory capital ratios at June 30 included a 12.0% common equity Tier 1 ratio, 9.5% Tier 1 leverage ratio, and 13.3% total risk-based capital ratio; management stated the Bank met capital requirements.
- Outstanding debt included a $2.625 million term loan and $10.310 million of junior subordinated debentures. Repurchase agreements were $3.894 million. The term loan balance declined $2.250 million during the half-year; the company also repurchased part of a warrant for $0.862 million.
Changes and management commentary
- Six-month net income rose $0.840 million year over year. Management attributed the improvement principally to $1.3 million higher net interest income, lower loan-loss provision, and slightly lower non-interest expense; lower non-interest income and higher income taxes partly offset the gains.
- Loan growth was led by commercial real estate and agricultural lending. Commercial real estate represented 47.4% of gross loans; real estate-related lending, including agricultural loans secured by real estate, represented about 72%. The loan portfolio was 73% variable-rate, and 43% of variable-rate loans were at their rate floors.
- Nonperforming loans declined to $3.0 million from $4.5 million at year-end; nonperforming assets were $5.8 million, or 0.96% of assets, versus $6.3 million, or 1.06%. The allowance for loan losses was $6.430 million, or 1.49% of gross loans. Net charge-offs were $48,000 for the half-year.
- Other real estate owned increased to $2.817 million from $1.756 million. The company reported three OREO additions totaling $1.166 million and two dispositions totaling $96,000 during the first half.
- Management cited loan volume as the main driver of higher interest income. Six-month net interest margin improved 7 basis points, while Q2 margin was unchanged year over year. Management noted competitive loan pricing and low deposit rates; growth in savings balances continued.
- Non-interest income for the half-year decreased $160,000, including lower gains on SBA loan sales and a $32,000 loss on investment-security sales. Q2 non-interest income increased, primarily because of higher SBA loan-sale gains. The 2015 comparison included a one-time FHLB special dividend.
Liquidity, outlook, risks, and contingencies
- Management said available funding sources were adequate for foreseeable operations. These include deposits, cash, securities, FHLB borrowing capacity, and unsecured correspondent-bank lines. Based on FHLB stock held, borrowing capacity was up to $90.3 million; additional stock would be needed to access the full $161 million facility. No FHLB or correspondent-line borrowings were outstanding at quarter-end.
- Unfunded loan commitments were $87.925 million and standby letters of credit were $625,000 at June 30. Commitments are not necessarily expected to be fully drawn. The filing identifies $10.775 million of construction commitments expected to fund within twelve months.
- Management reported no material change in the principal risk factors from the 2015 Form 10-K. Risks include competition, interest-rate and margin changes, economic and credit conditions, regulatory changes, real-estate markets, operational failures or fraud, and regional catastrophes. The company’s lending and operations are concentrated in northeastern California and northwestern Nevada.
- Management considered the allowance adequate but cautioned that estimates are judgmental and future charge-offs could exceed the allowance. The filing also describes real-estate construction and land-development loans as higher risk. Four securities were in an unrealized-loss position; management attributed losses principally to market rates and said it did not intend to sell them or expect to be required to sell before recovery.
- Ordinary-course legal claims were not expected by management to have a material adverse effect. No material changes to risk factors or internal controls were reported. The filing provides no earnings or other financial guidance; interim results may not indicate future performance.
- The company was evaluating new accounting standards, including expected-credit-loss guidance (CECL), which was described as effective for periods beginning after December 15, 2019.
Important facts for investors to verify
- Whether strong loan growth can continue without weakening underwriting, credit quality, or capital ratios, particularly in commercial real estate and agricultural lending.
- Trends in nonperforming loans, impaired loans, OREO, charge-offs, and allowance coverage; note that OREO rose despite lower nonperforming loans.
- How lower cash balances and the $32.4 million investing cash outflow relate to loan growth, and whether deposit growth and available borrowing capacity remain sufficient.
- The sustainability of net interest margin and earnings, including exposure to rate floors, deposit pricing, SBA loan-sale gains, and variable-rate junior subordinated debt.
- The terms and remaining balance of the warrant after the $0.862 million repurchase, and the company’s future capital and dividend plans.