Plumas Bancorp — Q3 2019 Form 10-Q
Business context and reporting period. Plumas Bancorp is a California bank holding company whose subsidiary, Plumas Bank, serves businesses and individuals primarily in northeastern California and northwestern Nevada. This unaudited filing covers the quarter and nine months ended September 30, 2019; income and cash-flow comparisons are with the corresponding 2018 periods, and balance-sheet comparisons are with December 31, 2018. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
- Q3 earnings: Net income was $4.0 million versus $3.7 million a year earlier; diluted EPS was $0.77 versus $0.71. Net interest income before provision was $9.6 million, up 12%; provision for loan losses was $0.3 million in both quarters.
- Nine-month earnings: Net income was $11.6 million versus $10.4 million; diluted EPS was $2.22 versus $2.00. Net interest income before provision rose to $28.1 million from $24.1 million. The provision was $0.9 million versus $0.8 million.
- Revenue, costs and margins: Nine-month interest income increased 18% to $29.5 million, while interest expense rose to $1.3 million from $0.8 million. Net interest margin increased to 4.80% from 4.68% for the nine-month period, but declined to 4.72% from 4.78% in Q3. Nine-month non-interest income fell 13% to $6.1 million; non-interest expense increased 7% to $17.3 million. The effective tax rate was 27.5% for the nine months.
- Assets and funding: Total assets were $888.6 million, up $64.2 million from year-end 2018. Net loans were $598.0 million, up $35.5 million; deposits were $776.2 million, up $49.6 million. Non-interest-bearing deposits rose $49.2 million to $353.2 million. Shareholders’ equity increased to $81.8 million from $66.9 million.
- Cash flow and liquidity: Nine-month operating cash flow was $12.9 million; investing cash flow was negative $30.6 million and financing cash flow was positive $48.9 million. Cash and cash equivalents increased $31.2 million to $77.9 million. No FHLB or correspondent-bank borrowings were outstanding at September 30; disclosed borrowing capacity was up to $130.2 million from the FHLB based on current stock holdings, plus $41 million in unsecured correspondent lines.
- Debt and capital: Junior subordinated debentures were $10.3 million. The Bank reported a 13.0% common equity Tier 1 ratio, 10.2% Tier 1 leverage ratio and 14.1% total risk-based capital ratio at September 30, 2019; management said the Bank met capital adequacy requirements.
- Returns: Annualized return on average assets was 1.84% for the first nine months, versus 1.87% in 2018; return on average equity was 20.8%, down from 23.7%.
Material changes, outlook and risks
- Loan growth and higher average loan yields drove most of the increase in net interest income. Average loans for the nine-month period rose 15% year over year. Management described loan pricing competition as intense.
- Gain on loan sales fell $975,000 year over year to $788,000 for the first nine months. Management attributed weaker SBA loan originations partly to the first-quarter government shutdown, higher market rates and intense competition.
- Deposit interest expense increased, partly reflecting the Carson City branch acquired in 2018. Time deposits at that branch declined from $18.5 million at acquisition to $6.1 million at September 30, 2019; management expected some further runoff as deposits reprice or mature.
- Asset quality weakened on some measures: nonaccrual loans rose to $2.6 million from $1.1 million at year-end; impaired loans increased to $2.6 million from $1.3 million; special-mention loans rose to $8.3 million from $4.3 million and substandard loans to $2.4 million from $0.7 million. Net charge-offs were $0.6 million for the nine months. The allowance was $7.2 million, or 1.20% of loans, versus 1.23% at year-end. No loans were 90 days past due and still accruing.
- Commercial real estate was 48.6% of gross loans; management reported that real-estate-related exposures, including specified agricultural loans, represented 71% of the portfolio. Geographic concentration exposes the Bank to local economic, real-estate and natural-disaster risks.
- The company had $104.9 million of unfunded loan commitments and $431,000 of standby letters of credit. Management said many commitments may expire undrawn and they do not necessarily represent future cash requirements. Ordinary-course legal proceedings were not expected by management to have a material adverse effect.
- Management cited competition, interest-rate changes, regional economic and credit conditions, real-estate markets, regulatory changes, personnel, operational failures or fraud, and securities markets among forward-looking risks. It provided no quantified earnings guidance. It believed liquidity was adequate for foreseeable operations.
- CECL implementation was underway; management expected the standard to affect the reserve for credit losses but had not determined the extent. The filing states the effective date for the company was delayed to fiscal years beginning after December 31, 2022. A $0.23-per-share semiannual dividend was declared October 16, payable November 15, 2019.
Important facts for investors to verify
- Whether the rise in nonaccrual, impaired, special-mention and substandard loans continues, and whether allowance coverage remains appropriate.
- Whether loan growth, pricing competition and funding-cost increases affect future net interest margin, especially given the Q3 margin decline.
- Whether SBA loan-sale volumes recover after the government shutdown and how much lower sale gains affect non-interest revenue.
- Deposit retention and pricing at Carson City, further time-deposit runoff, and actual access to disclosed borrowing capacity.
- The eventual CECL transition impact on credit-loss reserves and capital, and any changes in the company’s planned adoption timing.
- Ongoing exposure to commercial real estate and regional economic, market and catastrophe risks, as well as the ability to fund outstanding commitments.